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The Flap over Cisco's Flip: Why the Company Killed off a Popular Product: Knowledge@Wharton (http://knowledge

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The Flap over Cisco's Flip: Why the Company Killed off a Popular Product
Published : April 27, 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."
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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
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and we can help differentiate the experience. "Back in those days. HP and even Acer. 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 the old days -. Mass. says that the Flip represents less than 1% of Cisco's sales and 1% of the company's employees. Baker notes." The company has provided no additional elaboration about its decision to kill the Flip. "is a unique beast. Building close contact with consumers is critical for technology companies going forward." 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. "What Cisco saw was that Flip would continue to load the network." Flawed Strategy Carmen DelPrete." he continues. closing the business will not save a significant amount of cash.. "I think it was a dumb decision.the 1990s -.The Flap over Cisco's Flip: Why the Company Killed off a Popular Product: Knowledge@Wharton (http://knowledge. understands why Flip might not be the best fit for Cisco. he says. a digital teleconferencing system. he adds." These days. If Cisco hadn't gotten so caught up in YouTube and viral video at the time. a market research firm based in Framingham." Apple. as a leading manufacturer of Internet equipment. consumers use so much technology in their personal lives that the home is becoming the place where innovation takes place." DelPrete acknowledges that many tech companies are captivated by the Apple model. it was a bit of a renaissance time as consumer-connected devices were taking off. New product acceptance now flows from the home back into the workplace. YouTube and consumer video capability were generating tremendous excitement. and it was driven not by product or marketing concerns. Baker. including Sony. for his part." says DelPrete. Viral videos were exploding. and Cisco. N. They have a plan and are executing on that plan. Even so." states Stephen Baker. chief research officer for IDC. but the comparison to Apple is often "like apples and oranges. recalls that when Cisco acquired the Flip.edu/article. it's an unfathomable bad decision. and those sales dropped 15% in the second quarter. [Acquiring] Flip was a little impulsive. he warns.the latest and greatest hot technologies all came through enterprise. But there is a mix between controlled experimentation and just making more of an impulsive move. "They were thinking. the company acted prematurely in killing off a product that is still viable and could generate revenue for at least several more years. it probably would have been a pass. vice president of industry analysis at NPD Group. 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 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. the strategy was flawed because Cisco does not have much of a presence on retail shelves like other consumer-focused technology companies do. however.                    Page 2 of 3  . Cisco would never build mindshare through Flip. consumer products account for only 2% to 4% of Cisco's overall revenues.Y. and that would be good for Cisco's business overall. adding that "at some level. but he is "shocked" that   All materials copyright of the Wharton School of the University of Pennsylvania.'" Ultimately. 'We want to make sure we get this out in the market so that people can use it. In announcing the Flip's demise. Chambers said in another statement: "We are making key. stood to gain from increased traffic. "history has shown that these things move in cycles. a market research company based in Port Washington. he says. but by financial engineering. All the way around." DelPrete notes. and today they are doing quite well. Without consumer distribution channels.cfm?articleid=2757) company's consumer strategy included acquiring set-top box manufacturer Scientific-Atlanta and Umi. Cisco needs to be applauded for experimentation. We will see where the next part of the cycle goes." But.wharton. "There was not natural synergy there for Cisco. targeted moves as we align operations in support of our network-centric platform strategy. Overall. a move which also meant the layoff of 550 workers. Today it goes through the consumer. "It is short-sighted. therefore. according to Baker.upenn. Even if the Flip did not fit into Cisco's long-term plans. net income in the quarter was down 18% from the same period in 2010." Hosanagar.

"If you look at tech companies in recent years that have stumbled." he argues." Indeed.wharton. "Cisco has to explain why they spent $590 million less than two years ago and are closing shop without doing much with it.what was going on.edu/article. admitting it and moving on swiftly.if ever -.                    Page 3 of 3  .upenn.The Flap over Cisco's Flip: Why the Company Killed off a Popular Product: Knowledge@Wharton (http://knowledge." 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. For multiple copies. they have a challenge in finding new market opportunities that are big enough to make a difference. 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." This is a single/personal use copy of Knowledge@Wharton. "Cisco is a very large company and. e-prints. Yahoo and Nokia really never fully acknowledged -. please contact PARS International: reprints@parsintl. which "certainly could be valuable to Cisco. but it's probably not for Cisco." It made sense for Cisco to want to increase its understanding of video technology. posters or plaques. The company had strengths in video quality and user interface.com P.cfm?articleid=2757) the company made no attempt to sell off the Flip business. "There's still a large group of loyal Flip users. according to Werbach. but its core market remains enterprise customers." he says. like all large companies. "Cisco is never going to be a consumer marketing company. It's just not in their DNA. it often takes a long time -. custom reprints. "Flip was more than just a successful brand marketing company. Cisco should get credit for recognizing a mistake. Werbach says Cisco's openness and willingness to change direction is not necessarily a guarantee of success. Werbach adds.   All materials copyright of the Wharton School of the University of Pennsylvania.to fully acknowledge the flaws that knocked them off their perch. So to the extent that a business like the Flip is really about selling cool gadgets to users. and the Flip still commands significant market share.before it was too late -." However. that may be a great business for Apple. (212) 221-9595 x407.