Blog Post

So What Should Cisco Really Have Done With Flip?

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

This week, Cisco announced a major restructuring of its consumer business, a not altogether surprising development for an enterprise technology goliath that’s never seemed quite at ease in the consumer space, despite a string of acquisitions over the years.

However, what was surprising — shocking actually — is what the company chose to do with its highest-profile part of the business, the Flip video camera line: shut it down. Why is it so shocking? Rarely do you see a company choose to simply kill a business when other viable – and perhaps better – options are available.

So what were Cisco’s options? I see four basic strategies the company could have taken with the Flip line once it decided to de-emphasize its consumer business; all of these scenarios have positives and negatives.

The first option is the strategy the company went with — killing Flip. The only benefit I see here is sheer expediency. The downsides are equally obvious, such as a missed opportunity to get a better return and 550 pink slips.

What were the other options?

Sell It

This actually seems, in retrospect, the most likely of options, since there is usually a buyer for viable products or divisions, particularly ones that still have cachet and actually own sizeable market share.

Positives: There are quite a few positives to this strategy, including recouping some of the acquisition price (though not all, since it’s clear Cisco overpaid), saving many of the 550 or so jobs and a potential equity stake once sold to a company who could do a better job with Flip in the consumer market.

Negatives: In my mind, it’s the longer time frame. Clearly Cisco is under pressure to show results now, and didn’t have the required patience for a sale.

Spin It

Oftentimes when consumer units don’t fit within their larger corporations, you’ll see a spin-out. We saw it with Netgear (Nortel) and Palm (3Com), and I think the strategy could be logical for Cisco consumer. Chances are a spin out would include the entire consumer group (Flip, Linksys, Umi), either through IPO or management buyout.

Positives: There are a couple here, the biggest of which would be a potential financial upside through IPO or management buyout, but also the saving of jobs that are otherwise axed. There is also taking what I see as a “higher-road” option, which seems less rash and could create potentially higher net-value impact down the road.

Negatives:  The biggest is the longer time window required of a spinout, and the possibility down the road of having to revisit other options if the IPO market doesn’t warm to an independent Cisco consumer, or no management team with financial backing emerges.

Harvest It

Harvesting strategies are usually reserved for mature businesses, which I actually don’t think Flip is. It is, however, a business that Cisco could have simply just cash-cowed by reducing headcount, eliminating any R&D and just sold the product for the foreseeable future.

Positives: The company would have continued to see sales and even margin growth for a couple of years if it cost-reduced the marketing, R&D and any other non-vital parts of the business.

Negatives: Even with cost-reduction as the focus of the business, margins on Flip were always going to be a problem for Cisco, as they’re much lower than Cisco’s corporate-wide 50 to 60 percent gross margin and 20 percent net income.

Given Chambers mea culpa memo a few weeks ago, it appears the kill strategy was chosen because it showed the type of quick results Wall Street likes. Whether or not it was the best choice in the long run is up for debate, as clearly there were other possible strategies f0r Flip that Cisco could have picked.

For more thoughts on why Cisco killed Flip, see my weekly update at GigaOM Pro (subscription required).

21 Responses to “So What Should Cisco Really Have Done With Flip?”

  1. Were Flip cameras REALLY selling? They seemed to have become one of Woot’s darlings. I’ve never actually seen a Flip camera, nor found a reason to look into buying one. I have multiple digital cameras that shoot HD video through real lenses, and onto removable media. Why buy yet another device? And WiFi access? Please! The only way to move large volumes of data is through a direct connection, either a cable or removable media.

  2. Part of the damage done by shutting it down so quickly is in the message a shut-down sends to channel partners and others who would want to do business with Cisco.

    For example, employees at a company sold to Cisco are now that much less likely to stay, knowing that Cisco could just shoot them without warning or even attempting to keep their unit viable.

    As for Flip’s margins, One of Cisco’s great strengths has been its willingness to be in businesses with very diverse margins. They were getting 80%+ gross margins (on hardware!) for some of their big iron early on, yet they bought and expanded Linksys on margins sometimes less than half that. A rare and impressive feat, even if they never seemed to achieve the potential synergies between Linksys and their ‘real’ networking business.

    • Hi Paul,

      Cisco won’t have any credibility now when it tries to create FUD about its future start-up competitors (for example, a favorite Cisco FUD tactic has always been to state, “this start-up Cisco competitor might not be around in 2-years”).


      Brad Reese

  3. Please, they shut it down so that no one would make something of it and further embarrass Cisco. Any kind of spinout or sale allowed someone to make Cisco look bad. This path ensures the tax write off, makes them seem “serious” and puts it to bed.

  4. In David Pogue’s NY Times article on Thursday, he had been briefed on an all new Flip device that was WiFi enabled and ready to go to market. Seems odd that Cisco wouldn’t at least retain investment bankers to broker a deal with another company like Facebook or YouTube/Google. Maybe that is still an option.

  5. Hi Michael,

    Beware Cisco of how the mighty fall.

    A Primer on the Warning Signs:

    Stage 1: Hubris Born of Success

    Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.

    An Example of Cisco Hubris:

    Fast Company December 2008: Taken to its ambitious conclusion, Chambers wants customers to remake their companies in Cisco’s image, a prospect possible only because of their dependence on Cisco technology. “Without changing the structure of your organization,” Chambers told the analysts in September, “I would argue that [innovation] will not work.”

    Stage 2: Undisciplined Pursuit of More

    Stage 2 leads to more scale, more growth, more acclaim, more of whatever those in power see as “success.”

    “We’re so great, we can do anything.”

    An Example of Cisco’s Pursuit of More:

    Business Week May 2009: Chambers tells BusinessWeek that Cisco likely will hit a total of 50 fresh markets within a year. “We’re moving into new [areas] with a speed nobody has ever attempted,” he says.

    Stage 3: Denial of Risk and Peril

    As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to “explain away” disturbing data or to suggest that the difficulties are “temporary” or “cyclic” or “not that bad,” and “nothing is fundamentally wrong.” In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.

    An Example of Cisco’s Denial of Risk and Peril:

    Starting with a 2007 sales base that was $22 billion less than Cisco’s 2007 sales base, Huawei grew its 2008 sales $880 million more than Cisco grew its 2008 sales. For the first 9 months of its FY09, Cisco net sales plummeted $1.59 billion while simultaneously Cisco net income sank $985 million.

    Stage 4: Grasping for Salvation

    The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all. Those who grasp for salvation have fallen into Stage 4. Common “saviors” include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a “game-changing” acquisition, or any number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.

    An Example of Cisco grasping for salvation:

    Cisco CEO John Chambers’ memo to Cisco employees blaming them for what ails Cisco and the closing down of Flip.

    Stage 5: Capitulation to Irrelevance or Death

    The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future.


    Brad Reese

  6. It is difficult to see from the outside in how the company should handle this. Nothing about shutting this unit down is or should be illegal. That’s crazy talk. The viability of the Flip isn’t great long term in its current incarnation, and I’m sure if Cisco wants to retain the IP, they’LLC make some cash on cutting costs and selling or leasing the leftovers. I feel for the people who are loosing their work, but such is life and private ownership. That’s why we enjoy such fast evolution in technology, and we should be grateful for that. I have faith in those smart folks landing jobs on even better products in the near future.

    • @James – agreed that nothing is illegal about shutting it down. That’s their perogative. But I disagree that being on the outside makes it impossible to second-guess their strategy of shutting it down. It’s fairly obvious they shut it down in part because they wanted to appeal to Wall Street, which is short-sighted. I also don’t agree that there’s not potential in Flip as a going concern; the simple fact they shelved the product that people were envisioning tells me they weren’t fully committed to this market, which is a big part of the problem.

      • Michael, you’re right about them not being fully committed to the product. That happens much too often, particularly with software and web apps. Often times an acquisition is just an exit strategy for founders who are not completely committed either, otherwise they wouldn’t sell. I suppose that’s why good products endure–commitment.

        I cannot disagree either about them wanting to make Wall St. happy, I mainly meant that perhaps even if that were their main goal, it’s their right to pursue it.

        Personally, I don’t see why not just spin off or sell off, unless there are IP interests they’d like to hang on to at the coat of this product. Though for me it would be a hard sell between the Flip and the iPod touch, as the iPod endures, and is much more well-rounded for everyday use, I’m sure the Flip could be a thin enough operation to support that business on its own.

        Legally, Cisco is in the right. From an ethical perspective they’re not necessarily in the wrong either, but it’s a good example of inefficiency and lack of vision. I think that’s what they’re attempting to resolve with this in a heavy-handed way. It happens outside of the technology field all the time…

  7. What cisco should have done was never release the thing to begin with. They are a communications company. Stick to network equipment and infrastructure. Nobody wanted or needed a camera from them. There are several companies out there who do a much better job at it.

  8. They could have offered it to the founders at a fire sale price, if there were no consumer electronics companies or private equity firms interested. I would be shocked if the founders wouldn’t have bought it back for $25M, as it was profitable and generating a lot of revenue (>$300M?).

    What Cisco has done should be a crime. It is the equivalent to crushing a perfectly good car, because you don’t need it any more, instead of selling it or giving it away. They are destroying assets and jobs, and have not provided any justification for the incredibile waste of resources. At the very least, they could have sold the IP and other rights and inventory to someone, I’m sure there would be interest in it. I have to think it’s all about Chambers’ ego.

    • @KenG – I am pretty shocked they just shut it down. Flip, for all the talk of smartphones and swiss-army-knive devices, has a viable product that showed sales growth. They had the much discussed converged product (Wi-Fi enabled Flip) locked and loaded for a spring launch (as Pogue wrote about yesterday). Its kind of baffling what they did.

      That said, I wouldn’t write off Flip entirely. I am sure Cisco’s gotten some calls since Tuesday, and may well sell the company, or assets.

      • Yeah, it was weird that they just sold it down when it was supposedly growing and not bleeding cash but Cisco needed to re-focus on its core business. I think it didn’t spin it or sell it off because it wanted to retain the IP associated with the company and use that in other products, as well as in lawsuits.

      • @Marin – good point about possibly keeping IP, but I think a deal could have been structured to use IP while selling the product business.

        That said, they’ve already pushed Flip software expertise into the Linksys business (Flip’s software and UI/User experience is the biggest value IP in my mind for Flip), and I don’t see anything around digital video capture that isn’t widely available through other pocket-cameras that is completely unique to Flip.