Could New FAA Regulations Crush GoPro Inc.'s Drone Dreams?

By Markets Fool.com

Last November, The Wall Street Journal claimed that action camera maker GoPro would launch consumer drones in 2015 to diversify its top line away from action cameras.

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DJI's Phantom 2 Vision+. Source: Company website.

Meanwhile, the FAA has been developing new regulations to govern the use of consumer and commercial drones. For now, the FAA has proposed some broad rules, stating that drones should fly below 500 feet at all times, remain within sight of the operator, and only be flown during the day. But the FAA also proposed that only people who passed an aeronautics test and were vetted by the TSA should be allowed to fly drones, which could cripple their mainstream appeal.

The public has started worrying about drones as well. A recent survey from the Pew Research Center also found that 63% of Americans believed it "would be a change for the worse" if personal and commercial drones were allowed to fly through U.S. airspace.A new company, NoFlyZone, even addresses those concerns by creating a database of coordinates where drones aren't allowed to fly.

Let's take a look at how these negative developments might impact GoPro's dream of launching consumer drones in the near future.

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Why GoPro wants to launch drones
GoPro's action camera business has one critical weakness -- its lack of competitive barriers against cheaper competitors. Over the past year, rivals like Polaroid, Sony , and HTC all launched action cameras with comparable specs as GoPro's HERO devices at lower prices.

Demand for GoPro's cameras certainly hasn't slowed down yet -- the company's revenue soared 41% year-over-year in 2014 to $1.4 billion. However, GoPro still launched its low-end GoPro HERO for $129 last September, indicating that itwas clearly concerned about the rise of comparable "GoPro knockoffs."

Meanwhile, demand for consumer drones rose after French company Parrot launched its $300 AR Drone quadcopters back in 2010. China's DJI Innovationslaunched its popular $1,000 Phantom quadcopters in 2013, which generated sales of $130 million within the first year. Both Parrot and DJI Innovations' drones are equipped with onboard cameras for aerial photography. Many other drones are sold with GoPro-compatible mounts.

Research firm Teal Group forecasts that annual spending on drones will nearly double from $6.4 billion to $11.5 billion over the next decade, with civil (consumer/commercial) drones eventually accounting forabout 14% of that market. Therefore, selling drones could be a practical way to reduce GoPro's dependence on action cameras.

What's GoPro waiting for?
Aerial photography enthusiasts already have plenty of impressive drones to look forward to. HEXO+, which can be pre-ordered for $1,149, can follow and film a user autonomously using a mounted GoPro. Nixie, a smaller wearable device, flies off the wrist and trails the user with a tiny camera. Another device, AirDroids' Pocket Drone, is a drone which can be folded into the size of a 7" tablet and mounted with a GoPro.

The autonomous HEXO+ GoPro drone. Source: Company website.

Although it makes sense for GoPro to crash this party with its own first-party drone, it seems to be waiting to see if these aerial photography drones can actually gain mainstream appeal.

Even if GoPro generated as much drone revenue as market leader DJIdid in 2013, it would equal a mere 9% of its 2014 sales. However, demand is still soaring. Parrot reported that its drone sales rose 97% year to around 83 million ($95 million) in 2014, accounting for 34% of its top line.

Why GoPro shouldn't worry about the FAA
GoPro shouldn't launch a consumer drone before it's ready, but it should still strike while the market's hot. With so many companies launching GoPro-compatible drones, the market looks eager to embrace a first party GoPro drone.

FAA regulations might eventually set up soft roadblocks for drone enthusiasts, but GoPro investors needn't worry. They should recall that the FAA has been developing those rules since 2008 -- so drone regulations might remain a grey area for years to come. GoPro, DJI, Parrot, Google , Amazon , and other companies also teamedup last year to lobby for fair and practical drone regulations, which could help eliminate major hurdles like aeronautics tests.

Therefore, investors should keep an eye out for positive developments regarding GoPro's drones throughout the year, since they might eventually evolve into a new pillar of revenue growth for the company.

The article Could New FAA Regulations Crush GoPro Inc.'s Drone Dreams? originally appeared on Fool.com.

Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), and GoPro. The Motley Fool owns shares of Amazon.com, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.