GoPro Profits Fall due to Network Effects
GoPro has been having a less-than-stellar financial year, bringing in 40% less revenue compared to last year. Its shares have fallen “88% from their 2014 high [and] dropped another 20%…in after-hours trading”; this year, GoPro brought in only $240.6 million –last year, it was $400.3 million. Despite the financial loss, Chief Executive Nick Woodman is not surprised; he says “new products will give his company a lift in the holiday season.” GoPro started selling the products in October, so their current sales reports do not reflect the quarter sales with these new products.
What is with the drastic drop in revenue? We can relate this to simple network effects. When a product initially comes out, people have expectations for how popular the item will be (i.e. self fulfilling expectation equilibrium). If an item is novel and widely-known, people expect it to be popular, and their reservation price/ value for the good is higher than if they assumed the good was unpopular and no one would buy it. Since the reservation price of the population is high, GoPro could sell the product for a high market price and still cash in; due to the higher reservation prices of the population, more people are willing to buy the good, and demand is driven upwards until a certain amount of the population is reached that is willing to buy the good only at the market price.
Now after a while, the reservation prices of the population tend to decrease; items aren’t popular anymore, better products from other companies may be released, etc. If GoPro doesn’t reinvigorate consumer interest or lower the market price, then the fraction of consumers interested in their product will fall; people value the good at a price lower than what they need to pay and there is no demand for the good. GoPro can do one of two things to counteract this: lower their market price or create new items that will carry out a new cycle of pumping up consumer reservation prices. They have chosen the latter, and so we should expect to see a rise in income with their next reports.
http://www.marketwatch.com/story/gopro-reports-another-loss-40-revenue-drop-2016-11-03-164855732