Wednesday, April 13, 2011


Cisco has not been doing well with its returns and investors are uneasy. Cisco has to make some major changes in order to restore investor confidence, hence the recent decision to start getting out of the consumer business. This week Cisco announced that it will stop making the Flip camera, a popular pocket-sized video camera. A change that shocked many because of the money that Cisco spent only a couple of years ago for the technology from a company called Pure Digital.
The big change was an effort for the business to realign itself to focus on selling its core products like Cisco Network Equipment. This network-centric platform strategy will focus on how to help their enterprise and service provider customers optimize and expand their offerings for consumers, and help ensure the network's ability to deliver on those offerings.
Cisco bought Pure Digital, the maker of the Flip camera, in 2009 for $590 million. The decision to stop making the camera is a hard pill to swallow since the Flip products are considered market leaders and Pure Digital remains far and away the leading consumer video camera company.
Cisco needed to do something drastic to show Wall Street that it was getting back on track. For more than two decades, Cisco has dominated its core markets of Internet Protocol routing and switching. It has provided networking equipment to almost every large company, government entity, broadband and telephone service provider, and thousands of small and medium businesses around the globe.
Unlike many other tech companies, Cisco has managed to weather dips in the economy and almost always emerges from recessions stronger than it did going into them. CEO John Chambers is viewed as managerial guru and technology oracle. Investors, customers, and even governments listen carefully to what he says and the tone of his comments for glimpses of advice and insight which have helped the business stay strong.
As Cisco moved into new markets, sales in its core businesses slowed and Cisco lost market share. While Cisco still dominates in the IP routing market, it has been more challenged in its Ethernet switching business, where it faces stiff competition from a slew of competitors, including Hewlett-Packard and Chinese manufacturers, such as Huawei. Investors have begun questioning whether the company can hit its long-term growth projections of between 12 percent and 17 percent.
Cisco has a long history of growing its business through acquisition to enter new markets. In fact, its lucrative Ethernet switching business was the direct result of an acquisition in the mid-1990s. But for much of its history, Cisco has kept it acquisitions close to its core business: Internet and corporate network infrastructure.
In the past five or six years, Cisco has ventured beyond its core competencies as it tries to enter new markets. The company's first major foray into the consumer market was its 2003 acquisition of home routing company Linksys.
For several years, Cisco toyed with the idea of offering more products in the consumer space like Used Cisco Hardware. Then, at the Consumer Electronics Show in Las Vegas in 2009, Chambers revealed Cisco's ambitions for the consumer market. He said that he expected Cisco's consumer business to generate between $5 billion and $10 billion over the next few years.
Cisco's consumer strategy has largely been one failure after another. Cisco's home-grown products, such as the Linksys Wireless Home Audio system and the Umi telepresence product have all been priced too high for consumers. And even though Cisco acquired a successful consumer business with the acquisition of Pure Digital, it has managed to stifle growth in that product area.
Flip has actually lost market share since Cisco acquired it in 2009, even though overall sales of products in this category have increased 5 percent between 2009 and 2010. Flip, which had led this product category in early 2010 with 26 percent market share, had a disappointing 2010 holiday season. The business unit's sales fell 19 percent versus the prior year, and its market share dropped to 17 percent. Analysts attributes the decline in Flip camera sales to strategic marketing missteps, and more aggressive competition, as opposed to any evidence of an underlying fall in demand.
But slowing sales momentum is not likely the main reason that Cisco decided to abandon the Flip product. The biggest problem for Cisco was likely rationalizing the thin product margins in the consumer business. Cisco is used to getting profit margins in the 60 percent to 70 percent range. But consumer electronic products are lucky to get profit margins in the low 30 percent range. Even though Flip was already an established brand, its cameras, which generally sell for between $100 and $200, were likely not profitable enough for Cisco.
Still, the Flip camera could have been an attractive and profitable business to another company, even if Cisco felt it was a drag on its earnings. While Cisco does not break out sales of individual products, it is estimated that Flip camera sales total about $400 million annually. This is small compared with Cisco's total yearly revenue of about $40 billion, but sales of this product could have been significant to a potential acquirer. Questions are being raised as to why the Flip product line, which is a growing market, was just not sold by Cisco. Cisco’s comment was that after a detailed analysis, and it was determined that the best thing to do was to shut down the business. Others believe that that the reason was because Cisco may be using the technology at another time so they would not want to sell it off.
Cisco does acknowledge that it still sees video as an important part of its strategy. They also stated that the knowledge they have gained about video and the people who use it have helped them with advancing the company with their core products.