Knowledge Wharton-2011

The Flap over Cisco's Flip: Why the Company Killed off a Popular Product

April , 2011 in Knowledge@Wharton

The Flip, a quick and easy video recorder that captures spontaneous moments
for instant uploading to YouTube, is about to fold. Cisco Systems, which
bought the Flip just two years ago, is closing the business in a move that
illustrates how rapidly evolving technology and business strategies can force
major corporate flip-flops.
Cisco's abrupt decision in April to kill off a successful product that is still the
top-selling camcorder on Amazon.com has angered Flip enthusiasts. Some
analysts suggest that the $40 billion networking company, which has been
struggling in recent quarters, made the move in order to shift its focus back to
its enterprise roots after a flirtation with consumers triggered, in part, by
Apple-envy.
"It seemed like a great marriage at the time," says Kartik Hosanagar,
Wharton professor of information and operations management. Cisco --
which paid $590 million to acquire Flip from Pure Play Technologies, the
startup that launched the one-trick device in 2006 -- "was going after the
consumer. It bet big that this would be a good opportunity."
According to Wharton management professor David Hsu, the enormous success of Apple has led many
technology companies to look to the consumer market for growth. These companies hope that by focusing
on consumer-oriented products, they can acquire the knowledge and experience necessary to produce
huge hits like the iPod and iPhone.
Cisco's acquisition of Flip in 2009 was puzzling at the time, Hsu says, because the product -- even though
it was very good at what it did -- seemed to run counter to the momentum building up for gadgets with
many functions. "Cisco was trying to have more of a consumer-based strategy, maybe for corporate
diversification," Hsu notes, adding that the company's other major consumer product is the Linksys home
router which, like the Flip, is positioned as a simple product for the less technologically inclined. Perhaps
Cisco, in trying to diversify away from networking, went after a product niche focused on "the consumer
side in the easy-to-use segment."
Instead, rapid adoption of smartphones equipped with video and photo capabilities challenged the
self-contained Flip.
Disappearing Market
"Cisco decided there really is no market in the stand-alone video device today," says Eric Clemons,
Wharton professor of operations and information management, noting that consumers who want to record
video will use a high-quality digital model or catch spur-of-the moment videos on their smartphones.
Consumers do not want to carry numerous single-purpose gadgets and are choosing devices with more
functions, such as the iPad 2 with front and back cameras and the ability to Skype. "Honestly, I don't even
know where my iPod is," Clemons notes.
As another example of changing times, he points to the days when computers had fax modems built into
them. Now, documents are sent electronically via email. "Sometimes devices really do disappear in the
face of convergence. My guess is that when the iPhone and [other] smartphones became universal, the
Flip became irrelevant."
Meanwhile, Cisco is struggling in its much larger enterprise business. In addition to Flip and Linksys, the
This is a single/personal use copy of
Knowledge@Wharton. For multiple copies,
custom reprints, e-prints, posters or plaques,
please contact PARS International:
reprints@parsintl.com P. (212) 221-9595
x407.
All materials copyright of the Wharton School of the University of Pennsylvania. Page 1 of 3
The Flap over Cisco's Flip: Why the Company Killed off a Popular Product: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=2757)
company's consumer strategy included acquiring set-top box manufacturer Scientific-Atlanta and Umi, a
digital teleconferencing system. Even so, consumer products account for only 2% to 4% of Cisco's overall
revenues, and those sales dropped 15% in the second quarter. Overall, net income in the quarter was down
18% from the same period in 2010. In a statement released earlier this year Cisco CEO John Chambers
said the company faces "air pockets" due to big declines in orders by government agencies and cable
operators.
In announcing the Flip's demise, Chambers said in another statement: "We are making key, targeted
moves as we align operations in support of our network-centric platform strategy." The company has
provided no additional elaboration about its decision to kill the Flip, a move which also meant the layoff
of 550 workers.
The company's decision drew some complaints from the tech community that Cisco acted too hastily in
putting an end to a beloved consumer product. "I think it was a dumb decision," states Stephen Baker,
vice president of industry analysis at NPD Group, a market research company based in Port Washington,
N.Y. "It is short-sighted, and it was driven not by product or marketing concerns, but by financial
engineering."
Baker argues that the Flip was sacrificed in order to build new credibility with analysts and investors by
convincing them that the company was moving toward a stronger focus on its main business. Baker,
however, says that the Flip represents less than 1% of Cisco's sales and 1% of the company's employees;
therefore, closing the business will not save a significant amount of cash. Even if the Flip did not fit into
Cisco's long-term plans, he adds, the company acted prematurely in killing off a product that is still viable
and could generate revenue for at least several more years.
Building close contact with consumers is critical for technology companies going forward, Baker notes.
"In the old days -- the 1990s -- the latest and greatest hot technologies all came through enterprise. Today
it goes through the consumer."
These days, consumers use so much technology in their personal lives that the home is becoming the
place where innovation takes place, according to Baker. New product acceptance now flows from the
home back into the workplace. "I suspect in a couple of years that [Cisco] will regret this and will
probably get beaten up by Wall Street for not having a consumer presence again. All the way around, it's
an unfathomable bad decision."
Flawed Strategy
Carmen DelPrete, chief research officer for IDC, a market research firm based in Framingham, Mass.,
recalls that when Cisco acquired the Flip, YouTube and consumer video capability were generating
tremendous excitement. "Back in those days, it was a bit of a renaissance time as consumer-connected
devices were taking off," says DelPrete. Viral videos were exploding, and Cisco, as a leading
manufacturer of Internet equipment, stood to gain from increased traffic. "What Cisco saw was that Flip
would continue to load the network, and that would be good for Cisco's business overall," he continues.
"They were thinking, 'We want to make sure we get this out in the market so that people can use it, and
we can help differentiate the experience.'"
Ultimately, he says, the strategy was flawed because Cisco does not have much of a presence on retail
shelves like other consumer-focused technology companies do, including Sony, HP and even Acer.
Without consumer distribution channels, Cisco would never build mindshare through Flip. "There was not
natural synergy there for Cisco," DelPrete notes, adding that "at some level, Cisco needs to be applauded
for experimentation. But there is a mix between controlled experimentation and just making more of an
impulsive move. [Acquiring] Flip was a little impulsive. If Cisco hadn't gotten so caught up in YouTube
and viral video at the time, it probably would have been a pass."
DelPrete acknowledges that many tech companies are captivated by the Apple model, but the comparison
to Apple is often "like apples and oranges." Apple, he says, "is a unique beast. They have a plan and are
executing on that plan, and today they are doing quite well." But, he warns, "history has shown that these
things move in cycles. We will see where the next part of the cycle goes."
Hosanagar, for his part, understands why Flip might not be the best fit for Cisco, but he is "shocked" that
All materials copyright of the Wharton School of the University of Pennsylvania. Page 2 of 3
The Flap over Cisco's Flip: Why the Company Killed off a Popular Product: Knowledge@Wharton
(http://knowledge.wharton.upenn.edu/article.cfm?articleid=2757)
the company made no attempt to sell off the Flip business. "There's still a large group of loyal Flip users,
and the Flip still commands significant market share," he argues. "Cisco has to explain why they spent
$590 million less than two years ago and are closing shop without doing much with it." DelPrete's view is
that Cisco might not have been able to find a buyer for the Flip because it straddles the space between
high-end cameras and smartphones.
Wharton legal studies and business ethics professor Kevin Werbach has another theory: Cisco may have
decided not to sell the company in order to keep some of its intellectual property and knowledge in-house.
"Flip was more than just a successful brand marketing company," he says. The company had strengths in
video quality and user interface, which "certainly could be valuable to Cisco."
Indeed, Cisco should get credit for recognizing a mistake, admitting it and moving on swiftly, Werbach
adds. "If you look at tech companies in recent years that have stumbled, it often takes a long time -- if
ever -- to fully acknowledge the flaws that knocked them off their perch. Yahoo and Nokia really never
fully acknowledged -- before it was too late -- what was going on."
However, Werbach says Cisco's openness and willingness to change direction is not necessarily a
guarantee of success. "Cisco is a very large company and, like all large companies, they have a challenge
in finding new market opportunities that are big enough to make a difference." It made sense for Cisco to
want to increase its understanding of video technology, according to Werbach, but its core market remains
enterprise customers. "Cisco is never going to be a consumer marketing company. It's just not in their
DNA. So to the extent that a business like the Flip is really about selling cool gadgets to users, that may
be a great business for Apple, but it's probably not for Cisco."
This is a single/personal use copy of Knowledge@Wharton.