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?
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.
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.
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).