Foreseeing Change: from Polaroid to GoPro
The first thing that helps us foresee change is to really deeply understand both the operations of a business, as well its customers. Why is this? When we are close to the operating business, we are able to understand which factors will have a biggest impact on its future development. We will also be able to spot early indications of change in those factors. How do we do that? Reading market reports or quoting gross profit figures from the annual report won’t do the job. We need to dig down into the operating business. This can’t be done on the go. To understand a business we need to stop, look and listen.
What also helps foresee change – and that will be the focus of this post – is our ability to think outside the box. To think outside the box, experience is important. The more companies and industries we have seen, the less we are confined by existing industry structures and the better our sense of how markets and businesses can evolve into new structures. I value the experience of having seen different industries and companies above all. It offers free lessons in what can happen.
As an investment professional I was fortunate to have analyzed various different industries. More important I was fortunate to work with portfolio companies over the lifespan of an investment. Both, the exposure to many different industries as well as the journey with portfolio companies, enabled me to draw important lessons of how companies can change as a result of industry transformation. I am not able to share specific examples for confidentiality reasons. Instead we will instead look into various well-known companies and industries throughout this site. We will see how they changed over time and what lessons we can draw from this change.
This article is about an industry, which has been and will continue to be a roller coaster ride in terms of change. We are talking about consumer electronics. In this post, we will compare a very old company with a new company. Both have brought change to an industry in a similar fashion. Most importantly, both companies have managed to stay undefeated in their markets for a long time, thanks to some bulletproof competitive advantages.
Remember Polaroid, the company, which gave us many of those colorful pictures from the 60’s to 80’s? This Polaroid, was founded in 1937 by genius inventor Edwin Land, who amongst other things developed an instant film camera, which he initially called the Land Camera. The camera would later become known as the legendary Polaroid camera. Polaroid is also called the “Apple of the 1960’s and 1970’s”. It is compared to Apple Computer because both companies were driven by a visionary founder and inventor. Both were obsessive about fine-tuning their technologies, and both were design oriented. And finally, both managed to create an impressive pull demand for their products thanks to a combination of smart branding and technology advantage. Similar, as customers got in line for the new iPhones, some Polaroid dealers managed to charge $ 300,- for the SX-70 camera despite its list price of only $ 180. Therefore it will not come as a surprise to hear that Edwin Land, Polaroid’s charismatic founder also served as an role model for Steve Jobs.
Polaroid’s exciting story is described in much detail in the book “Instant, The Story of Polaroid”, by Christopher Bonanos. Further detail about its story can be found in the patent lawsuit of Polaroid vs Kodak
Polaroid grew from $ 23m revenue in 1950 to $ 1,3 bn in 1983 and $ 3bn in 1991. Total annual sales of instant camera units climbed to 14.3 million in 1978. However, as instant photography declined following its incredible run, Polaroid had to file for bankruptcy protection in 2001. The reasons for the decline were a reduction of processing times of 35mm analog photography and the emergence of digital photography. Polaroid failed to compensate this decline through innovation and launch of new revenue generating products.
Today’s Polaroid, which emerged from the bankruptcy, and subsequently went through several owners is a different company from the original Polaroid. At its core the company has turned into a licensing organization. Unlike the old Polaroid it doesn’t innovate, but instead it focuses on marketing licensed technologies under the Polaroid brand.
Just recently, however the new Polaroid launched the “Cube”, a HD video action camera. Now there is something interesting about the cube. It is launched into a market, which was created by a company, which shares a number of similarities with the early Polaroid.
Enter GoPro! As Polaroid had created the market for instant photography, GoPro has created the market for video action cameras. After they invented their field, both companies faced limited competition for many years.
Two Companies, similar Market Drivers
Both companies operate in the imaging market selling photographic tools. They both invented their niche by segmenting the broader market and by targeting specific users through offering them a better functionality.
Polaroid invented its niche of instant photography, within the broader photographic market, which then consisted of 35mm photography. It helped users by providing the benefit of having a picture develop instantly after the shooting. At that time, no iphones and digital cameras were available. People had to wait for two weeks until they could look at their pictures. Now imagine how amazing it was to be able to immediately share a picture with your friends at a party.
GoPro invented the action camera. It competes with conventional digital cameras as well as the iphone coma era. It helps users capture their experiences in challenging environments. It helps them focus on the activity and not worry about operating a camera.
Simultaneously the success of both cameras was built on community.
Polaroid had the power to draw people together. If you took pictures at a party, you could immediately look at them and chat about them, quite similar to how we show our iphone pictures today. People suddenly were able to share their selfies with their friends.
Now let’s fast forward to the present day. GoPro’s videos might not only be shared on a party but more important, they are shared with the bigger communities at YouTube and Facebook. People are now able to share their selfies with the world.
As a result of this strong community effect, both companies benefited from strong word of mouth and a resulting pull demand created in retail channels.
But the similarities continue. The products of both companies helped creatives and professionals create content and further develop their business. The resulting endorsements from these multipliers in turn drove the camera manufacturer’s businesses.
In Polaroid’s glory years, Ansel Adams, as well as other artists such as Walker Evans, Andy Warhol, David Hockney, and Robert Mapplethorpe used Polaroid cameras to develop their art. Before Polaroid, artists would have to wait weeks, until they could see their creations. The instant development helped them immediately see the results of their work. In return, the endorsements of those artists were a major contributor to Polaroid’s growth.
Likewise, GoPro offers surfers, bikers and other athletes a tool by which they can convey their performances to a broader audience. GoPro turns the adventure athlete into a filmmaker. This helps him record his breathtaking adventures and thus build his personal brand. Before GoPro, athletes would need a professional film team with cameras coming along for the ride to capture and share their experiences.
Both companies simplify the capturing and sharing of experiences.
As a regular consumer of modern media you will not have escaped the fact that the marketing strategy of both companies is built on endorsements from these multipliers.
GoPro’s YouTube channel provides evidence of this. The list of athletes, which endorse GoPro is endless, and it includes well-known skiers such as Lindsey Vonn and Julia Mancusa, well known mountain bikers, skateboarders, musicians and pole jumpers.
If you look at old Polaroid ads, you will see the faces of Salvador Dali, Ansel Adams, David Hockney, Andy Warhol and Walker Evans amongst others.
At their core, both companies offer simple capturing devices. The value they create, the source of their success, however goes beyond the physical camera. The content that is produced with that physical device is as important, as the device itself. Both companies made it easier to communicate through pictures.
Polaroid benefited from a Razorblade business model as a result of this. It sold the camera, and in addition it generated loads of money from selling film, which users needed to create the content.
Similarly GoPro is selling the camera, and then is aggregating content on its Youtube channel. While it is harder to monetize this content, as it was to sell film, GoPro plans to generate additional revenue from advertising.
Now all of this shows how both companies created value for their customers and what drove their impressive growth. The more puzzling question, however is, why both companies faced only limited competition for a long period of time and what was the source of their competitive advantage.
Polaroid was without competition for three decades. According to the book “Instant” it was able to sell a package of film at a margin of around 60 percent.
Similarly, when you think about action cameras, you first think about GoPro but not necessarily about Sony or anybody else.
Yet both markets are dominated by large players. While GoPro faces numerous competitors such as Sony or Canon, also Polaroid was a tiny player compared to Kodak, which was almost 10x Polaroid’s size in terms of workforce. Kodak could build on a significantly larger marketing and distribution power.
In their markets, both companies managed to stay undefeated for a long time. This makes it particularly interesting to compare them.
… similar Drivers but different Challenges
“With all the similarities of these two companies it doesn’t come as a surprise that both were undefeated”, you may be thinking. Well, in a way it does come as a surprise. Because each of the companies has generated its supreme market position from distinctly separate sources. This is what makes the comparison of both companies in particularly interesting. And we will be able to develop some patterns, based on those differences later in this post. These patterns will then help us better understand industry transformation, enabling us to foresee change.
Ready to dive into the details?
At its core, Polaroid was a research lab, “a scientific think tank”, as the book “Instant” states. Land had filed more than 500 US patents. That’s close to 10 patents per year. For a one-product company. It was thanks to these patents and their underlying technology that the company didn’t face any competition for almost three decades. When Kodak finally managed to launch a competing product in 1976, the giant still didn’t manage to break Polaroid’s technology advantage. The resulting Kodak camera still lacked the usability and design of the Polaroid model. And, most importantly, it had been launched under violation of Polaroid’s patents.
Developing the product and technology was no walk in the park. When Polaroid launched the instant camera, the company was already familiar with the underlying technology, with polarizing filters. It had been developing and using polarizing filters for a number of different applications such as sunglasses and goggles for pilots. Yet, when Land developed the first prototype of the camera, he had to master additional challenges. They included the geometry of the camera as well the chemical composition of the film and paper. Many details had to be set right to make it work. Then turning the prototype into a consumer product posed many more challenges at the time, such as camera assembly, tool manufacturing, parts procurement. In particular procurement wasn’t trivial. Building the camera required the assembly of around 125 different parts, supplied by more than fifty different outside vendors, which were spread around the world. Sub-assembly and final assembly was done by hand, as the Polaroid – Kodak patent lawsuit documents (LINK) reveal. The book Instant describes how Land had difficulty finding a contractor who was able to manufacture a camera shutter with the required accuracy of timing. And, of course these were just the challenges of developing the camera, not to speak of the production of the film. According to the documents from the patent lawsuit, Polaroid had invested $ 600 million in developing and improving its famous SX-70 camera models.
Now let’s compare this to GoPro. Without doubt, GoPro introduced an outstanding and so far undefeated new product. Yet if compare Polaroid’s product development with an early Mount Everest accent, then GoPro’s journey was a guided expedition, supported through sherpas and oxygen bottles. Compared to the technology leap, which Polaroid meant, GoPro is built on readily available semiconductor and optical components. GoPro’s founder built on existing technologies when he invented the GoPro. He was able to track down a Chinese company that already manufactured a camera, on which he could base his first prototype. He modeled his first prototype by hand, using a Dremel tool, and had his first camera produced in China by wiring $ 5.000,- to a camera producer. If you go to an electronics store, you will find that a number of cameras are available which appear to be similar at a first glance.
“But GoPro not only offers the camera, but also the editing software”, you may wonder. Yet, today amateurs as well as experts can get hold of software such as iMovie, Premiere Pro or Final Cut Pro. As a result differentiating through a groundbreaking post processing movie software has become difficult.