GoPro, Inc. Targets Mid-Range Consumers With the $299 HERO+ LCD

GoPro (GPRO 4.11%) recently unveiled a new mid-range action camera, the HERO+ LCD, which costs $300. That's pricier than the entry-level HERO, which launched for $130 last year, but cheaper than the $400 HERO4 Silver and the $500 HERO4 Black.

GoPro's HERO+ LCD. Source: GoPro.

Does the arrival of the HERO+ LCD indicate that competitive pressure is forcing GoPro to lower its prices? Or does it merely mean that GoPro wants to reach as many customers as possible with a tiered pricing strategy?

How the HERO+ LCD stands out
The HERO+ LCD can shoot 1080p video at 60fps and take 8-megapixel photos at five shots per second. By comparison, the entry-level HERO shoots 1080p video at 30fps and takes 5-megapixel photos at five shots per second. Both devices are waterproof up to 131 feet. Unlike the HERO, the HERO+ LCD has a touch display like the Silver and Black models.

At first glance, the HERO+ LCD seems like a good mid-range device that fills a gap between the entry-level model and the premium models. But when we compare the HERO and HERO+ LCD to other rivals in the market, it's unclear if it's the best value.

Source: Company and industry websites. *U.S. price range on Amazon.

The most dangerous competitor is Xiaomi's Yi Action Camera, which costs about $65 in China. Not only could it disrupt GoPro's expansion plans in China, but it could eventually threaten its market share in western markets through Xiaomi's new online stores in the U.S. and Europe. Those stores don't sell the Yi Action Camera yet, but if they do, it could dramatically lower price expectations across the market.

Xiaomi's Yi Action Camera. Source: Xiaomi.

Is cannibalization a threat?
Unlike the HERO, the HERO+ LCD isn't intended to challenge the entry-level Cube, Re Camera, or PixPro. Instead, it just lets GoPro offer a mid-range unit for new action camera users or HERO users looking for an incremental upgrade.

GoPro clearly knows that not everyone needs to record 4K videos at 30fps with the HERO4 Black. However, the $300 HERO+ LCD might cannibalize sales of the $400 HERO4 Silver. Both devices shoot video at the same max resolution and frame rate on LCD displays. The HERO4 Silver's main advantage is its ability to shoot 30 12-megapixel burst photos per second. However, it's unclear how many consumers are willing to pay $100 more for faster and higher resolution burst photos.

There's a widespread belief that cheaper cameras have lower margins. However, GoPro's $130 HERO is actually more profitable than most people think. A recent IHS teardown estimated that the total cost of direct materials and manufacturing for the device was just $47.11.

That doesn't include shipping, marketing, and retail costs, but it's safe to say that even GoPro's cheapest camera can be sold at double-digit margins. That's why GoPro's gross margin rose from 41% to 45% between the first quarters of 2014 and 2015, and how rivals can afford to sell similar cameras for under $100.

GoPro's HERO, HERO4 Silver, and HERO4 Black. Source: GoPro.

GoPro might make less money on each low- and mid-range camera, but it can sell more units to more customers, especially new ones who wouldn't pay $400 to $500 for an action camera.

Why GoPro investors shouldn't worry yet
Investors should remember that GoPro has a first-mover advantage in action cameras. As a result, it now controls over half of the global action cam market, according to IDC, causing many of its rivals to be branded as "GoPro knockoffs." This premium brand recognition gives it an edge as it expands into key markets like Europe and Asia, where GoPro posted a 66% annual jump in sales last quarter. Competitive pressure hasn't hurt GoPro's growth yet -- revenue rose 54% annually last quarter as net income nearly doubled.

GoPro's media network, which is hosted on YouTube and other platforms, also serves as a promotional showcase for GoPro content as well as a social network for existing users. GoPro will soon enhance that content with films made with VR equipment and drones. The popularity of that network, which currently has over 3 million subscribers, could widen its defensive moat against cheaper competitors.

The key takeaway
In my opinion, GoPro's launch of the mid-range HERO+ LCD doesn't indicate that competitors are weakening its brand. Instead, it's filling an obvious hole in its product line that will provide low-end users a stepping stone toward its higher-end cameras.