gdgt

[This appeared in the gdgt weekly newsletter. Subscribe to the newsletter here: gdgt.com­/newsletter/ ]

I have to admit that I was taken off-guard by the news that Cisco was unceremoniously shutting down its Flip line of video cameras. I mean, I knew that Cisco CEO John Chambers sent out an internal email a few weeks ago indicating that some big changes were in the works in response to the company's drift over the past few years, but even so it's still relatively uncommon for a company to just kill off a giant product line wholesale like that. Especially one that was bought for the princely sum of $590 million just a couple of years ago.

There are probably two big reasons why Cisco did this. One is that despite acquiring both Linksys and Pure Digital, the maker of Flip cameras, in a quixotic effort to move in this direction, Cisco has never felt totally comfortable being in the consumer electronics business. Enterprise has always been the heart of their business, and it's understandable that they've made a strategic decision to focus on that -- though Cisco shareholders probably wish they'd come to that conclusion before blowing a huge amount of cash. (I'm very curious to see what they end up doing with Linksys.) The other big reason, and the one most people are focusing on, is that the market for Flip cameras has taken a hit now that most decent smartphones can record HD video.

Now, I don't think that the rise of smartphones that can record HD automatically means there's no market for Flip cameras. In fact, I think there's a decent market for standalone devices in general, and there are plenty of reasons why someone might buy a Flip camera even if they own an HD-capable smartphone (like to give to a child, use on a trip, or because you don't want to kill your phone's battery). But is it a growing market? Probably not, and this is an important distinction to make. There is a difference between a market that's flat out disappeared and one that's just not growing anymore, and all indications are that Flip was not going to see anywhere near the dramatic rise in sales it saw late last decade. So while to a gigantic growth-obsessed company like Cisco (remember at one point they had the highest market cap of any company in the world) it may have seemed like there was no good reason to keep around a business unit that was destined to stagnate, I'm sure that Kodak, which has a line of rival products, is not at all unhappy that Flip is getting out of the game.

Was it better to just call things quits, lay off 550 hardworking people, and call it a day? Couldn't they have found someone interested in buying it? It's not hard to imagine someone finding value in the brand and paying at least a couple hundred million for Flip, but sometimes it makes more sense from a financial standpoint to shut something down and take a tax write-off rather than sell it at a loss. Whatever the specifics, it appears that Cisco's accountants made a successful case for that.

Of course, the larger question is whether there was something Cisco could have done to keep Flip relevant and increase sales. Perhaps, but no matter what it was definitely going to be tough. There's no getting around the fact that as smartphones have gotten more powerful they've absorbed the functionality of a variety of different gadgets. Over the past few years we've seen cameras, media players, GPS navigation units, game consoles, and e-book readers all challenged in one way or another by the rise of all-in-one devices.

It's not hard to see why. A phone is a must-have item -- it's not like you're going to pick owning a video camera over owning a phone -- if your phone can adequately replace another device you're probably going to think twice before buying one. Increasingly consumers are only buying the standalone version of something when there's a distinct advantage to doing so. Examples include buying a nice digital SLR for taking photos, a tiny MP3 player for jogging, a portable game console to get better games, or a Kindle for reading books because the battery life is better and e-ink can be easier on the eyes.

A standalone product can have a tough time when that distinct advantage is small; it's why we're seeing point-and-shoot digital camera sales stagnate while more and more people use their smartphone for snapping casual pics. There was a point when Flip cameras had a big advantage over phones: they could record HD video at a time when virtually no phones could. In fact, they thrived in what turned out to be a relatively narrow window that existed after the price of camera sensors and flash memory dropped enough to make a simple, inexpensive HD camcorder practical, but before those components got cheap enough to start showing up in smartphones. Once that window closed it's natural that they'd see growth flatten: anyone who owned a phone with HD video capabilities wasn't going to buy a Flip camera just to do some quick and dirty HD video recording. It's not as if the quality of the video on a Flip camera is anything special, anyone doing any serious videography will probably spring for something fancier.

So to stay in the game Cisco needed to either drop prices to a point where consumers might buy a Flip camera in addition to their phone (and given how aggressively priced they already are, that'd probably have to be in the area of fifty bucks, which I'm sure would demolish whatever small margin they're making on these things) or constantly try to stay ahead of smartphones in terms of features and functionality. Given that we're years away from consumer adoption of a successor to 1080p (YouTube's support for 4K notwithstanding), Cisco couldn't pin its hopes on a wave of consumers upgrading to new higher resolution models anytime soon. Certainly a WiFi-enabled version that would let you do high-def video conferencing would have attracted some interest, and I suspect somewhere inside Cisco there's someone who was working on a 3D Flip camera, but neither would be enough to spur the kind of growth Cisco would be looking for.

It's an odd end for any consumer electronics brand to come to, and one that we don't see all that often. Remember that it's not exactly like Flip was failing and on the verge of collapse. They're estimated to have done about $400M in revenue last year, and it's not hard to imagine a less assertive CEO taking the path of least resistance and just letting them lumber along for a few more years. Eventually something would have happened, though, it's hard to imagine Cisco keeping around a business with cloudy prospects, that's not growing, and that's peripheral to the rest of the stuff they do.