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GoPro Inc. cheered Wall Street by pledging to slash its workforce by 15 percent, shut down the entertainment division and refocus on action cameras and drones. But the moves are no panacea.
Yes, GoPro's push into entertainment was always a long shot, while cutting staff will help the company become profitable.
But competition is mounting on several fronts. Many people prefer to shoot action with their smartphones, which are getting better and better. New entrants like Snap Inc. are selling glasses promising a seamless way to capture adventure clips and post them on social media. In drones, GoPro is up against the dominant player, Chinese manufacturer SZ DJI Technology Co., which released a new model a week after GoPro entered the market.
It doesn't help that neither the Karma drone nor the most recent camera, the Hero5, have become the hits management promised. So while the shares jumped about 4 percent Wednesday morning after the job cuts were announced, the stock was still down about 44 percent this year.
"With each year that goes by, there's more and more compelling consumer entertainment products in the marketplace," said Nick McKay, an analyst at Wedbush Securities Inc. "There are questions of long-term demand for the Hero 5. Does it expand beyond GoPro's core customer? We also don't know what their long-term product road map is."
The company said shuttering the entertainment unit and eliminating more than 200 full-time positions will reduce operating expenses to about $650 million in 2017 and help it become profitable next year. President Tony Bates, recruited from Skype in 2014 to help build GoPro's media operations, will leave by the end of the year.
Abandoning the dream of becoming a media company is a sharp reversal. GoPro had originally planned to sell ads against video content users post online. In the IPO prospectus, the company said it would produce original programming. The entertainment unit made some high-profile hires including HBO executive Bill McCullough. But despite partnerships with the likes of Virgin America and Xbox Live, the profits never materialized.
"You have to have a sustainable profit-making base business before you can expand into other things," said Robert Stone, an analyst at Cowen & Co.
With the entertainment division gone, GoPro will be able to focus on hardware. But even that business is challenged. Sales growth has been slowing and earlier this month, GoPro lowered its revenue forecast for 2016. It blamed the disappointing results on production problems.
To make matters worse, a week later, GoPro had to recall about 2,500 drones after a small number of devices lost power. Now, the company is also facing a class-action lawsuit claiming GoPro violated federal securities law by making false and misleading statements about the drone. The complaints include allegations that GoPro knowingly overstated the drone's capabilities and consumer demand for it. The company declined to comment.
By contrast, DJI has been developing drones for almost a decade, and has built a robust engineering team and strong customer support. Earlier this month, Piper Jaffray's Erinn Murphy said in a note that the order backlog for DJI's Mavic drone could be as high as 500,000 units.
To its credit, GoPro has made progress with its long-derided video editing software.
Earlier this year the company acquired two mobile video editing firms, making it much easier for consumers to capture, upload, edit and share content. The Hero5 cameras are easier to use and can auto-upload photos and video to the cloud with a smartphone app.