Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Fade to Black…This Is How It Ends for the Flip Digital Video Camera?

Within hours of word that networking giant Cisco Systems planned to shut down its Flip Digital business unit, groups emerged on Facebook calling for Cisco to “Save The Flip.”

The decision has baffled nearly everyone I’ve talked to about it. While changes were expected at Cisco, especially in light of last week’s letter by CEO John Chambers to employees in which he promised “bold steps” and “tough decisions” and “surgical precision” with regard to what needs fixing at Cisco, it’s hard to see how shutting down the Flip unit, even for its meager size within the giant company that Cisco is, amounts to a good business decision.

If Cisco wanted to be rid of the Flip Digital business, why not try to sell it? I asked a Cisco spokeswoman about this today and the only answer I got back: “We performed a detailed analysis and determined that the best decision was to shut it down.”

It can’t have been much of an analysis judging by the reaction among consumers and other companies who might have been interested in buying it–had they been approached. There are probably several companies in addition to the three who made themselves known to BoomTown’s Kara Swisher who would have been interested in buying the Flip business from Cisco.

Exhibit A: As I noted earlier today, the Flip is the best-selling consumer camcorder in the U.S., according to the market research firm NPD, beating out names like Sony, Kodak and Canon.

And yes, I’ll grant it’s a small business when compared to the rest of Cisco’s large carrier-class and enterprise networking and switching unit business, but look at these numbers from Cisco’s most recent 10-K filing. Cisco reported $40.4 billion in revenue last year. Sales in the Flip business unit were small enough that they got lumped into the “other revenue” category along with sales generated by the newly acquired Tandberg video conferencing business and a batch of others.

This “other revenue” totaled $2.6 billion in Cisco’s fiscal 2010, up from $1.6 billion in fiscal 2009. The biggest single factor for that billion-dollar boost was $317 million in Flip camera sales. You read that right: Cisco just shut down a business that brought in $317 million in sales in its last fiscal year.

And yes, that amounts to less than one percent of Cisco’s overall sales. But it had to be a profitable business. I submit as Exhibit B a teardown analysis of the Flip Mino HD camera conducted by the market research firm IHS iSuppli shortly after Cisco’s $590 million acquisition of Pure Digital in March of 2009.

At that time, a Flip Mino HD cost $54.23 in direct materials to build. The four gigabyte model is still available today and sells for $160 at retail. This suggests that the gross margin on that model was easily in the 60 percent range. Additional costs of distribution and marketing and software can’t have eaten too far into that. Plus? That was two years ago. While flash memory costs are certainly volatile, all the other parts used in the camera have probably come down in cost since then.

On top of that, there’s brand equity that would have added to the potential price a buyer might have paid. Cisco poured considerable resources–though small by Cisco measures–into advertising the Flip camera. As Exhibit C, I submit the long progression of TV ads that Cisco aired to promote the brand. While it’s hard to say they were great ads, they worked, and they showed a lot of potential for the brand. Everyone knows what you mean when you say “a flip,” and as any branding expert will tell you, that kind of recognition doesn’t come easily. It’s also no small thing to get the daughter of the president of the United States to use your product during so momentous an occasion as a presidential inauguration. Oprah Winfrey praised them on her show, and on a day in 2007 gave one to everyone in the studio audience. Make no mistake, the Flip was and is a culturally significant product.

And with broad recognition comes a willingness by finicky retailers to take the risk and put the product on their shelves. Exhibit D: In its relatively short life, Flip cameras wound up in Best Buy, WalMart, Amazon and scores of other stores. A good retail distribution network isn’t easy to build. The Flip camera had it, and in fact most of the heavy lifting had already been done. All Cisco had to do was keep building them.

All this is not to say that the Flip brand didn’t have its challenges, not least of all from the iPhone and numerous other smartphones. But there are lots of products that at least on paper are made obsolete by others encroaching on their territory, yet continue to exist for years. Not everyone has an Apple iPhone, nor even a smartphone, and not everyone has the presence of mind to use their phone to shoot video. Doing one thing well is for some people a virtue.

Take for example the cassette-playing Walkman stereo, which existed alongside the Discman portable CD player for years despite the obvious superiority of the compact disc. Some people without the patience to use or buy a smartphone would have continued to gravitate to the Flip for its simplicity and reliability. With a Flip camera there’s practically nothing to learn: Push the red button to start and stop recording, and plug the camera into your computer when you’re done. Though in the last year the product family had shown a pronounced lack of vision: The Flipshare TV device and the Slide HD camera were not well thought out extensions of the brand. Both were launched on Cisco’s watch, and as an indicator of unannounced products in the pipeline, they don’t say anything good.

Yet it’s hard to imagine that the Flip camera couldn’t improve incrementally over time. One thing its devotees always wanted, but never got? An external microphone port. And given all the professional bloggers and reporters who used Flips to enhance their journalistic efforts–I know at least half a dozen journalism professors who rewrote their lesson plans after their first encounter with a Flip–why wasn’t there ever a Flip Pro?

Cisco paid a big price for Pure Digital: $590 million in stock. Given that it contributed $317 million revenue in fiscal 2010, that valuation may not have been unreasonable. We don’t know what Pure Digital’s revenues were in the prior year. But let’s assume they were, say, $150 million, or less than half in the prior year. That would make the multiple that Cisco paid less than four times trailing revenue. Not a crazy price by any means.

So what price could it command now? That’s harder to say. There is, I admit, a pretty good chance that Cisco might have ended up selling it for less than it paid. Certainly no company wants to do that. On the day the acquisition was announced, Cisco shares were trading at $16.23, a dollar and change lower than they are trading today. I’m no accountant, but I have to wonder if there’s some kind of tax advantage to shutting it down versus selling it. (Feel free to leave suggestions in the comments.) But it’s also possible–if not likely–that a sale would bring in more than the $300 million restructuring charge that Cisco is taking to shut it down, re-align other business and fire 550 people. Though for a $40 billion company, it hardly seems worth the effort: $300 million amounts to three-quarters of one percent of revenue, making the potential proceeds mere pocket change.

Which brings me to my final point: Why did Cisco buy the Flip business in the first place? Ostensibly it was about consumer video or something. Cisco floated this utopian vision of consumers flocking to buy ?mi video conferencing systems for their homes and carrying Flip cameras in their purses and pockets and sending videos of school plays and soccer games to Grandma over Cisco-made home networks that were in turn connected to an Internet largely powered by Cisco’s industrial-strength routers and switches.

It wasn’t necessarily the wrong vision (well, maybe ?mi was, but let’s leave that aside for the moment). It may be that Cisco was simply the wrong owner. Cisco’s purchase was puzzling in 2009 and still seems puzzling now. But more puzzling is why Cisco seems to have gone to no effort whatsoever to find the Flip–and the several hundred people responsible for making it–a suitable home.

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