Flip Flop?
Christopher Carter
I am sure many fans of the Flip Digital Camera have been lamenting the demise of the device by its parent, Cisco. Many news stories have cast the reason for the demise as the convergence of video capture on smartphones, an issue I have blogged about in the past WRT other devices (Flo-TV, MSFT Zune, Netbooks - RIP), but loyal fans of the device are shaking their head. You loved the convenience of the device, the video quality and its built in editing tools. Why, just last week, The View's Sherri Shepherd (aka Mrs. Tracy Jordon on 30 Rock) had her Flip confiscated at Radio City Music Hall while attending the Charlie Sheen Torpedo of Truth tour, or whatever he is calling that travesty. To me, something stinks about this announcement. Look at a few quick facts:
1. Cisco purchased Pure Digital (Flip's Parent) for $590M in stock, including 105 employees. Cisco announced it is laying off more than 500 employees. Did staff increase 5 fold in 2 years?
2. Flip has sold 2.5 million units in total in spite of the rapid growth of smartphones with video functionality
3. Flip, et al, account for only 1% of Cisco's total revenue ($40.0B), around $400M. Does discontinuing a product, and making such a public announcement of it, who's revenue is a rounding error in a company's P&L make sense?
[A location deep inside Cisco HQ] We have a problem. Shareholders are upset that our margins are eroding and our stock price hasn't budged in 2 years (bouncing between 18 & 28). We've invested lots of money in acquisitions and in R&D to develop a networking business for the home. Our core corporate networking business is under pressure as cheaper alternatives are available and as companies move toward "cloud-based" service models. What should we do?
[Back to blog] And the answer was kill the Flip? This, my friends, is called a distraction.
The reality is Cisco's other businesses, their core networking businesses, are struggling. The Cable Set Top Box business is declining, including a decline of 29% year over year according to the latest 10Q Quarterly SEC Filing and forecast to continue to decline in the coming quarters. Sales of network products for the home (i.e. Linksys) are also declining. In fact, the latest 10Q reports sales of the Flip Video Recorder "OFFSET" the decline in sales of the Video Systems business. So kill a small product that is contributing to sales and profitability? Recall Cisco spent much more on the acquisitions of Scientific Atlanta ($6.0B) and Linksys than they did on Pure Digital, Flip's parent.
The reality is the larger home networking businesses are in decline as consumers have a variety of alternatives now available for entertainment and home connectivity. Younger consumers who are heaped with college loans and who are struggling to find jobs are not ordering cable service. Even the large cable MSOs (i.e. Time Warner Cable, Cablevision, etc.), the ones who BUY the digital cable STBs are developing their own STB by-pass strategies called TV Everywhere, leveraging new technologies to distribute content to consumers on smartphones and tablets.
In addition, Cisco is in the midst of rolling out a new line of switches (Nexus 700 Series) that has a lower price and margin mix than the older product line (Catalyst 6500 Series - according to their 10Q). They are also focusing on the transition of companies to virtualization, cloud-based services, Web 2.0 services, increased global company collaboration and the transition from IP4 to IP6 technologies. All of this takes money and places Cisco in competition with other large corporations as technologies that enable these services converge.
Thus, Cisco's decision to announce the demise of the Flip Video Recorder served as more of a management purpose ("look, we are working to fix the problems in our consumer segment") to appease analysts and shareholders than it did to solve larger performance issues within the company. This was more of a short term smoke screen, and where there is smoke, there is fire.