The Flap Over Cisco's Flip: Why the Company Killed Off a Popular Product

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The Flip, a quick and easy video recorder that captures spontaneous moments for instant uploading to YouTube, is about to fold. Cisco Systems (Nasdaq: CSCO  ) , 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 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," Hosanagar says. "It bet big that this would be a good opportunity."

According to Wharton management professor David Hsu, the enormous success of Apple (Nasdaq: AAPL  ) 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 standalone 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 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" because of 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 unfathomably 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, Hewlett-Packard, and even Acer. Without consumer distribution channels, Cisco would never build mindshare through Flip. "There was not [a] natural synergy there for Cisco," DelPrete notes. He adds: "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 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."

Additional reading:

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Read/Post Comments (4) | Recommend This Article (6)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 01, 2011, at 4:16 PM, websterphreaky wrote:

    Oh COME ON!!! Do some market research!! Geez Us Christ!

    The Flip is OUT MODED, BEHIND THE TIMES! Which perhaps is partially Cisco's fault, ESPECIALLY Pure Play Technologies' FAULT! The Flip was already Feature Lagging to the Kodak Zi6 HD Pocket camcorder was already way ahead of the Flip HD three years ago! THAT'S Pure Play Technologies FAULT

    Now Kodak has three new models, including one that is Water Proof to 3 Meters, and ALL do 720p 60fps AND 1080p 15fps!!

    The Flip? NOT! and that is Cisco's fault!

    There are other companies that have similar devices that also eclipse the Flip in features and resolution too.

    And just for the record, I had most of the Flip's and now exclusively own and use the Kodak's since the Zi6. So this is first hand testing and reviews.

    TYPICAL the Fools .... old News and BAD INFORMATION News!

  • Report this Comment On May 01, 2011, at 8:01 PM, kutani123 wrote:

    NOTHING wrong with Flip by itself prior to acquisition..

    All faults are with Chambers and bunch of useless, incompetent execs !! who don't have any clue about consumer market, business, and technology. They are novice poker player who has Jack and deuce but ALL IN to bluff hoping to get jack pot.

    WITHOUT clue they miserably had failed to improve and add more new feature to it based on users requirements and industry technology.

    The most noticeable was USB to wireless interface and may more...

    Shame on Chambers and Cisco..

    Juniper, Hwawei, HP, Alcatel, Riverbed, Aruba particular Netgear.. ARE EATING Cisco ALIVE!!!!

  • Report this Comment On May 02, 2011, at 10:42 AM, httyreason wrote:

    why buy a flip when I can use my iphone to do the same thing, or blackberry....

  • Report this Comment On May 06, 2011, at 12:25 PM, JohnnyVirgil wrote:

    Webster, how do you figure it was bad information? The article basically said the same thing. They were getting beat by the competition, even though they have a large base. My 70 yo father loves his Flip. It's got one big red button and built-in software. How much simpler can you get? He also doesn't want a smartphone. It would be interesting to do a demographic study on flip owners. My guess is you'd see lots of grey hair.

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