Cisco Move to Shutter Flip Good for Enterprise Business: Analysts

Cisco's venture into consumer technology distracted it from its core enterprise networking products and hurt its overall business, according to analysts.

Cisco Systems is hoping the shuttering of its consumer business-including its popular Flip video camera-will help it refocus on its enterprise units and end a streak of disappointing quarterly financial results.

Analysts are debating the wisdom of the move. Several noted that Cisco is not a consumer-device vendor, and that trying to be one was distracting it from its core networking businesses. However, one said that, given the relatively low impact the consumer business had on Cisco's overall profit-and-revenue picture, and in light of the trend of the consumerization of IT, ditching the consumer business might be a mistake.

The move itself surprised few people. Cisco has been hampered for several quarters with relatively poor earnings, weakened forecasts and disappointing revenue figures for its core switching and router businesses. The issues prompted Cisco CEO John Chambers on April 4 to send out a lengthy memo to the company's 73,000 employees warning that "timely, targeted and measurable" changes were on the way.

The consumer business was the first of those changes. Cisco over the past several years has built up its consumer capabilities, starting with its 2003 purchase of The Linksys Group, which brought home-networking capabilities to Cisco. In 2009, the company spent about $590 million for Flip-maker Pure Digital and then bought set-top box maker Scientific-Atlanta. Last year, the company rolled out Umi, its consumer-based telepresence technology.

Throughout such efforts, analysts were quick to question why Cisco, with its enterprise heritage and networking core business, was venturing into the consumer space. As the $40 billion company struggled over the past few quarters, questions were raised over whether the consumer effort was taking Cisco's attention away from its key enterprise businesses.

"This is the kind of divestiture ... that is done for strategic reasons," Charles King, principle analyst at Pund-IT Research, said in an interview with eWEEK. "Closing the business, even if it was a relatively small piece of the overall business, and even if it doesn't make a big difference in revenue or profits, gives Cisco the chance to look at its naysayers and say, -OK, we got it. We're going to focus on the enterprise space.'"

The consumer business accounted for 2 to 4 percent of Cisco's overall revenues, but sales had dropped off by 15 percent in the company's fiscal 2011 second quarter.

Zeus Kerravala, an analyst with The Yankee Group, said Cisco had to make changes to get its commercial engine going again.

Shuttering the consumer business "made a lot of sense," Kerravala said in an interview. "When you look at Cisco, it made its living selling to corporations and service providers."

Any acquisitions should have been made to bolster its core products, and "all of these consumer [buys] didn't really help that," he said. If anything, it seemed that the consumer efforts distracted Cisco from its primary networking business, which at the same time has come under greater pressure from a number of rivals, including Hewlett-Packard, Juniper Networks, Brocade and Avaya.

"It's not the same market it was five years ago," when Cisco essentially had little competition, Kerravala said. "They've got to find a way to convince [enterprises] that their networking products are best-in-class."

Pund-IT's King noted that Cisco's networking business is being put under more pressure as OEMs-anxious to build out their converged infrastructure offerings-push partnerships with other networking vendors. However, the partnerships Cisco has made with such companies as EMC and VMware, and its own data center efforts around its UCS (Unified Computing Systems) and other technologies, position the company well going forward, he said.

"Cisco made the common mistake of going into a market their executive leadership didn't understand, and now that they have been burned, seem to be running from it," Rob Enderle, principle analyst with the Enderle Group, said in an email to eWEEK. "Spreading from corporate to consumer offerings has historically been very hard to do."

Enderle noted a similar situation with Apple, the consumer device giant that last year did away with its Xserve server line.

Given the problems with its networking business, Cisco had little choice but to ditch the consumer business and refocus, he said.

"They have turned HP into an enemy and HP is doing substantial damage to Cisco's margins as Cisco fights to hold share, and it is that fight that likely should be one they focus on," Enderle said. "In the end, efforts like the Flip were a distraction, and their inability to recognize the Flip's true market advantages and protect it suggests they simply don't have the skill set to do well in the consumer market."

Not everyone is applauding Cisco's move out of the consumer business. Stephen Baker, an analyst with the NPD Group, said in an April 12 blog that dumping the Flip business was "a bad decision on so many levels that it is difficult to fit them all into one discussion."

Getting rid of the Flip hampers Cisco's ability to participate in the growing trend of the consumerization of IT, Baker said.

"As one of the largest corporate IT companies, Cisco has always suffered due to its relative lack of exposure to consumer trends," he wrote. "Cutting more and more of its ties to the consumer in the long term will only further remove the company from the cutting edge of the marketplace, while leaving it more vulnerable to the changes sweeping over the IT landscape."

In addition, the Flip business was still a strong one, Baker said. It was the top-selling camcorder on the market, and while volume growth of the Flip was flat between 2009 and 2010, average selling prices had jumped $5, to $158. He noted that Flip sales during the holiday season in 2010 fell 19 percent from the previous year, but said that was due more to poor marketing by Cisco and greater competition, not falling demand for camcorders.

However, both King and Kerravala said that Cisco's problem was that it wasn't a consumer technology vendor like Apple or Google, which have shorter development cycles than do enterprise players. In addition, King said that the Flip's demise was part of a larger trend away from single-function devices; essentially, consumers now can use a smartphone to take videos and don't want to carry around a separate video camera, even one as small as the Flip.

Adam Hanft, CEO of marketing firm Hanft Projects, said in a note that Cisco's issues with the consumer business-and the Flip camera in particular-comes down to the company's inability to build on its ideas for the technology.

"It's a perfect example of perfect theory crashing into the inability to execute," Hanft wrote. "Cisco spent over $500 million on a hot consumer product; they were going to use Flip as the centerpiece of their consumer push. What went wrong? A lot."

Part of it was the fact that Cisco didn't build on the Flip's potential by making such moves as building social-media capabilities into it or opening it up to 4G networks, he wrote.

"The problem was Cisco itself," Hanft wrote. "They are a B2B company at heart, which means they innovate at a rate that's acceptable to their enterprise clients. They don't have a consumer metabolism. Chambers finally came to grips with that reality. ... The consumer market has one massively dominant force-Apple-and a range of fast-followers, from Samsung to Motorola to Dell. Cisco, we now know, is neither."