Tuesday, 12 April 2011

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.

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