GoPro's Karma Dilemma: Are Drones Worth It?

By Travis Hoium Markets Fool.com

If 2016 and the first few weeks of 2017 have taught us anything, it's that making drones is hard. Lily Robotics' announcement this week that it was shutting down operations and refunding customers, which didn't come too long after 3D Robotics failed in consumer drones, and GoPro Inc. (NASDAQ: GPRO) recalled its own drone.

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Drones are a lot more complex than most people give them credit for and the failures of well-backed start-ups should be convincing evidence that success won't be guaranteed for everyone. As GoPro ponders its future, the failures of the past should be a warning sign. The drone market is high potential, but it's extremely high risk as well.

Image source: GoPro.

Lily falls back to earth

The Lily drone was one of the most hyped drones of the last two years. Supposedly, you could throw the drone in the air to launch it and catch it in your hand when done flying. There was a "follow-me" mode and the drone made taking amazing selfies a breeze.

Lily's problem is that it never shipped a single device. Not one. And now the company is shutting down and refunding all of it pre-orders. There's at least one lawsuit out against the company and the whole business seems like a mess.

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This follows once high-flying 3D Robotics' Solo product running into trouble making consumer drones and shifting gears to commercial drones. Even Parrot SA, who makes a number of low-cost drones, has reportedly laid off about 35% of its drone staff.

The technology behind drones is much harder than it appears and a number of companies have found that out the hard way. The algorithms to keep drones steady are complicated and ever evolving. Sensors to keep a drone from crashing make manufacturing and software are similarly getting more complicated. Adding in the camera and gimbal is yet another layer of complexity.

A company like DJI, which is vertically integrated, can control the process more easily than companies outsourcing manufacturing, which most of the companies I've mentioned have done. And DJI's maniacal focus on continuous improvement has left most competitors in the dust rather quickly.

GoPro's drone challenge is bigger than expected

This wasteland of well backed competitors is what faces GoPro in its effort to bring Karma back to store shelves. We know of issues that left the drone losing power mid-flight, but the bigger issue may be making a competitive drone at a competitive price, something DJI's competitors have failed to do.

Given the quick recall GoPro had it's safe to say that there are significant issues with the product. The company has the funds to fix them if it so chooses, but it's not yet clear they have the engineering knowhow to become a drone company. Designing an action camera is one thing, building a drone is another.

What remains attractive if GoPro can succeed is the opportunity in commercial drones. DJI is the only major, established competitor in the industry with around two-thirds of the market and over $1 billion in sales annually. If a company like GoPro can gain a foothold, it could be a huge source of revenue, and with GoPro's brand, customers will likely give it a shot to succeed.

Management said that it is completing testing on the mechanical issues GoPro ran into after it launched and hopefully they're taking the time to make improvements to controls that will stabilize videos more efficiently as well. In early February, customers and investors will find out what the relaunch plan is for Karma.

What we should also keep in mind is that Karma doesn't need to be a 100% perfect product from the day it's relaunched. It just has to fly, not lose power, give stable video images, and create a foundation on which GoPro can design future improvements. The fact that so many drone companies have failed before actually launching shows that GoPro may be further along than the headlines make it appear. With that said, there's no guarantee of success and this product could still crash and burn, like most of its competitors have done.

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Travis Hoium owns shares of GoPro. The Motley Fool owns shares of and recommends GoPro. The Motley Fool has the following options: short January 2019 $12 calls on GoPro and long January 2019 $12 puts on GoPro. The Motley Fool has a disclosure policy.