The Real Lesson of Cisco's Billion-Dollar Flip Debacle

Cisco announced that it's closing down the Flip camera business and revisiting its other consumer products.  With a purchase cost for Pure Digital (maker of Flip) of over $600 million, and now restructuring charges of $300 million (link), the total cost of Cisco's failed consumer experiment is probably north of a billion dollars, making it one of the larger business debacles in Silicon Valley in the last few years.

Most online analysis of the announcement doesn't really explain what happened.  The consensus is that Flip was doomed by competition with smartphones, but that says more about the mindset of the tech media than it does about Cisco's actual decisions.  I think the reality is that Cisco just doesn't know how to manage a consumer business.

There are important lessons in that for all tech companies.

Here are some samples from today's online commentary:

Gizmodo (link):  "The Flip Camera Is Finally Dead—Your Smartphone’s Got Blood on Its Hands."

Engadget (link):  "Cisco CEO John Chambers says the brand is being dispatched as the company refocuses, done in by the proliferation of high-definition sensors into smartphones and PMPs and the like."

ReadWriteWeb (link): "Single-purpose gadgetry has no place in today's smartphone-obsessed world."

ArsTechnica (link):  "Flip can't be faring well against the growing number of smartphones with built-in HD cameras. The quality of your typical smartphone video camera is comparable to the Flip, and people have their phones on them all the time."

Computerworld (link):  "More and more people are using their smartphones to take lower-quality video...the market for low-cost small video cameras that produce quick-and-easy videos is dead."

There's an old saying that when all you have is a hammer, every problem looks like a nail.  We need a similar proverb for news analysis -- when you're obsessed with smartphones, every market change looks like it was caused by them.

But did smartphones alone kill Pure Digital?  Two years ago, it was the most promising consumer hardware startup in Silicon Valley.  It had excellent products and a rabid customer base.  Two years later, it's completely dead.  That's a lot to blame on phones.  Plus, Cisco appears to be moving away from driving consumer markets in general.  The Umi videoconferencing system is being refocused on business, and Cisco CEO John Chambers said, "our consumer efforts will focus on how we help our enterprise and service provider customers optimize and expand their offerings for consumers, and help ensure the network's ability to deliver on those offerings."  In other words, we'll be working through partners rather than creating demand on our own (link).

Smartphones didn't cause all of that.  But they did play a supporting role in the drama.  They commoditized Flip's original features, putting the onus on Cisco to give it new features and innovations.  As Rachel King at ZDNet pointed out (link), Cisco failed to respond:

"The technology of Flip never really evolved since then, making it a very stale gadget. Sure, even once Cisco picked up Flip, new models continued to come out each year. Yet Cisco dropped the ball by never pushing further with Flip. It never moved beyond 720p HD video quality, and it never got HDMI connectivity."

Presenting a stationary target is enough to doom any consumer electronics product.  For example, what would have happened if Apple had stopped evolving the iPhone after version 1?  You'd have no app store, no 3G.  Today we'd be talking about iPhone as a cute idea that was fated to be crushed by commodity competition from Android. 

Just the way we're talking about Flip.

The important question is why Cisco failed to rise to the challenge.  Why didn't it innovate faster?  I don't know, because I wasn't there, but I'm sure the transition to Cisco ownership didn't help.  It was not a simple acquisition.  Cisco didn't just buy Pure Digital and keep it intact, it merged the company into its existing consumer business unit, which was populated by consumer people Cisco had picked up from various Valley companies in the previous few years.   Some of the key Flip managers were given new roles reaching beyond cameras, and there must have been intense politics as the various players jockeyed for influence.

Then there was the matter of Cisco's culture.  I had a great meeting at Pure Digital several years ago, prior to the merger.  They were housed above a department store in San Francisco, in a weird funky space with lots of consumer atmosphere.  The office was surrounded by restaurants and shops.

In contrast, visiting Cisco is like visiting a factory.  Every building on their massive campus looks the same, with an abstract fountain out front, the walls painted in muted tans and other muddy colors.  The buildings are surrounded by an ocean of cars.  The lobbies are lined with plaques of the company's patents, and the corridors inside have blown-up photographs of Cisco microprocessors.  In the stairwells you'll usually see a couple of crates of networking equipment, shoved under the stairs.  And all of the cubicles look the same.



The Cisco campus.



A typical Cisco building.

Cisco is an outstanding company, and an excellent place to work.  But it screams respectable enterprise hardware supplier.  To someone from a funky consumer company, going there would feel like having your heart ripped out and replaced with a brick.

Then there were the business practices to contend with.  As an enterprise company, Cisco is used to long product development cycles, direct sales, and high margins to support all of its infrastructure.  A consumer business thrives on fast product cycles, sales through retailers, and low margins used to drive volume.  Almost nothing in Cisco's existing business practices maps well to a consumer company.  But it's not clear that Cisco understood any of that.

The transition to Cisco management happened at a terrible time for Flip.  Just when the company's best people should have been focused obsessively on their next generation of camera goodness, their management was given new responsibilities, and Cisco started "helping out" with ideas like using Flip cameras for videoconferencing -- something that had nothing to do with Flip's original customers and mission.

If Pure Digital had remained independent, would it have innovated quickly enough?  Maybe not; it's very hard for a young company to think beyond the product that made it successful.  But merging with Cisco, and going through all of the associated disruptions, probably made the task almost impossible.

I'm sure that as the Flip team members get their layoff notices, we'll start to hear a lot more inside scoop.  But in the meantime, this announcement by Cisco looks like a classic case of an enterprise company that thought it knew how to make consumer products, and turned out to be utterly wrong.

That's not an unusual story.  It's almost impossible for any enterprise company to be successful in consumer, just as successful consumer companies usually fail in enterprise.  The habits and business practices that make them a winner in one market doom them in the other.

The lesson in all of this: If you're at an enterprise company that wants to enter the consumer market, or vice-versa, you need to wall off the new business completely from your existing company.  Different management, different financial model, different HR and legal.

You might ask, if the businesses need to be separated so thoroughly, why even try to mix them?  Which is the real point.

The other lesson of the Flip failure is that we should all be very skeptical when a big enterprise company says it's going consumer.  Hey Intel, do you really think you can design phones? (link)  Have you already forgotten Intel Play? (link)

I'll give the final word to Harry McCracken (link):  "You can be one of the most successful maker of enterprise technology products the world has ever known, but that doesn’t mean your instincts will carry over to the consumer market. They’re really different, and few companies have ever been successful in both."

Right on.

12 comments:

Andrew said...

Curious how this would apply to Microsoft - are they an enterprise company or a consumer company?

Enterprise:
- Windows Server
- SQL
- Exchange
- etc.

Consumer:
- Windows (client)
- Xbox
- Windows Live

Then there's Office, which is mostly (?) enterprise, but also used a lot by consumers...

Steve Portigal said...

Isn't the difference the growth path? Cisco lived only in Enterprise/Business and then made a big leap across the gulf to heavy consumer "fun" stuff. Microsoft has grown up all their tendrils somewhat more organically and not by acquisition. I could be full o' crap here but that seems to be a big difference.

Michael Mace said...

Good question, Andrew.

As I was writing this I tried to think of tech companies that were exceptions to the consumer vs. enterprise rule. The two I could think of offhand were Microsoft and HP.

In HP's case, I think it was successful because it was really good at creating autonomous divisions. Even today you still get stories about the printer guys refusing to cooperate with the rest of the company.

In Microsoft's case, it had to go through two transitions. It started as an embedded software supplier, then became a consumer apps company, than became an IT software supplier.

Those are huge transitions, and I am impressed. But they happened only because Microsoft was incredibly patient and persistent. For many years Microsoft was an also-ran in apps, but it kept plugging away.

To its credit, Microsoft also focused intensely on learning from the business practices of others (or shamelessly copying them, depending on your attitude toward Microsoft).

In comparison to Microsoft, Cisco's consumer adventure was little more than a casual fling, and I saw few signs of them learning from competitors.

Of course, the other factor in Microsoft's success was that it had a control point it could leverage to give its other products an unfair advantage. Cisco doesn't seem to have that.

Atlanta Roofing said...

This wasn’t just a little mistake, it’s evidence of cluelessness. But in a way, it’s not all the fault of Cisco management. If they were allowed to distribute profits without dilution by taxes, maybe they wouldn’t feel so forced to maintain unsustainable growth, and would focus on things they understand, rather than delude themselves into believing they could extend their success in enterprise and carrier networking to consumer gadgets. To keep their current jobs, the management obviously feels obligated to grow the company faster than the markets they understand can grow. Maybe it’s not too late to cancel that tablet product.

MaGioZal said...

1. An innovative little company makes a successful new product;

2. Little company start to attract attentions from other companies;

3. A Big company buys little company;

4. Big company meddles in the affairs and staff of the now-subsidiary little company;

5. Big company pull out former little company’s new product of the market;

6. Big company kill its subsidiary, the former innovative little company.

How many times we have saw this same movie?

riverlaw said...

Did you see the flip slide? I think that was their idea of innovating. Making a portable devise larger for no real reason.

Avi said...

I see three factors:
1) Cisco killed flip: Cisco never had a plan for flip that made sense. You cover this well here. It's clear that the shutdown is less about flip and more a broad recognition within Cisco that they can't just dabble in consumer products - flip is being shut down, umi is being reassigned to the business division, Linksys is... well, looks like they're leaving that alone for now, and Scientific Atlanta... they seem to think that's a B2B play because of the sales channel.
2) Smartphones killed flip: this has been well documented everywhere else, though probably overemphasized. Even if the market is heavily biased to converged devices, there is usually room for dedicated devices as well. I'd be more comfortable with the notion that smartphones capped the growth of flip rather than killed it.
3) flip killed flip: you allude to this briefly, but the fact is that flip's recent products were not very good. They didn't add features consumers cared about, they didn't adapt to the way consumers want to share content today (rather than three years ago - consumer markets move quickly), they got clunkier in design rather than sleeker, and prices didn't fall much. How much of this is Cisco's fault, and how much is just poor product management? I was regularly briefed by the flip folks, and not once did they say that they were building products/features to fit in with Cisco's grand consumer strategy - probably because Cisco didn't have one. In fact, whne I would suggest ways to tie flip and Linksys and SA together, they would emphatically reply that their mandate was to create great flip products targeting flip buyers. They were quite certain that these products met market needs. They were wrong.

Laurent said...

First of all, as an aside, I think you can also look at Dell as an example of a company that has struggled to span the consumer / enterprise divide. Whether or not you think they're doing it successfully, I've worked very closely with them, and can attest to the fact that even the employees with a proven track record there can have a hard time bridging the gap as they move around.

More to the point, though, I don't really see this as an "either/or" question -- the press may have focused too much on the pressure from smartphones, but I think that even with the best corporate culture, Flip couldn't have continued as just a maker of portable video cameras. The acquisition may have hamstrung them, but they would have had to reinvent themselves dramatically to thrive in 2012. It's hard to imagine any segment of "take-everywhere" electronics that's going to survive the smartphone tidal wave -- the phone is the "anchor" unit, the one thing you _have_ to take with you everywhere. Anything else has to compete for your pocket space, and if your phone can do the same thing, too, then it's game over.

Darryl in San Francisco said...

APPLE APPLE APPLE, don't forget Apple tried to get into the ENTERPRISE business with its X-line of servers an failed also. Cisco is not the only company to fail the enterprise to consumer switch. Apple could not make the transition either.


Not bad company.

Jean-Philippe said...

I was fully convinced... until I ran across counter exemples. The first that was brought to me is BOSCH. On the one hand, it's a B2B company because 60% of its revenues come from supplies to automakers (they invented ABS).

On the other hand, there are also a B2C brand selling washing machines and drills.

Moreover BOSCH leverages its consumer image of quality to win better deals with automakers that can claim to include a BOSCH ABS for exemple.

What is clear to me is that launching a consumer line when you already are a entreprise provider is just like launching a new company. That takes time.
Perhaps that is not compatible with Cisco story and process (buy technology start ups, and relaunch the _product_ line within 1 year), that succeeded so well and that was "sold" to Wall Street.

FYI, BOSCH is governed by a foundation (a protection chosen by its founder) and is more than one century old ; I have no link to it, beside being a consumer.

NB: I am fond of your blog.

Aaron Miller said...
This comment has been removed by the author.
Steven said...

Even though it was not a totally parallel situation (enterprise vs consumer), apparently Steve Jobs foresaw a possible similar fate for Pixar in his dealings with Disney. Part of the merger agreement was that Pixar would continue to operate as an independent entity, completely
"walled off" from Disney.
@Avi - I think 3) was a direct result of 1). Of course they were going to tell you that their mandate was to continue to make great products - that's the company line. But how much support to you think they actually got from Cisco management in accomplishing that goal?