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» Cisco Flips Consumer Strategy

by Roger Cheng and Don Clark, published on April 13, 2011

Cisco Systems Inc. said it will drop its iconic Flip camera business as part of a broader retrenchment that suggests the company's campaign to build a consumer brand has largely failed.

The networking company's moves—expected to trim 550 jobs and trigger a $300 million quarterly charge—follow an internal memo from Chief Executive John Chambers last week that promised tough decisions in the wake of recent lapses in execution. Besides the heavily promoted Flip, Cisco discussed changes affecting a high-profile consumer video-conferencing line introduced last year and a home-networking unit that includes its Linksys wireless routers.

Mr. Chambers, in a statement Tuesday, indicated that Cisco is reducing its efforts to build direct relationships with consumers. Rather, he said, the company will help corporate customers and service providers expand their consumer offerings, and deliver networking products to help them do that.

Cisco's announcements mark a sharp reversal from other recent actions, notably the $590 million purchase in 2009 of Flip maker Pure Digital Technologies Inc. Besides acquiring the company, Cisco named former chief executive, Jonathan Kaplan, to help set Cisco's strategy as senior vice president and general manager in charge of consumer products.

The company spent heavily on consumer branding, hiring celebrities such as Ellen Page to star in its television commercials and paying for product placement in high-profile shows such as "24." The pocket-sized Flip—a major departure in size and ease of use from prior video cameras—was a key focus.

Mr. Chambers shot videos on the device, and constantly brought it out during television interviews. Cisco aired a number of TV commercials featuring random family moments or trick camera shots promoting the product. It also tapped Sean "Diddy" Combs to design a custom Flip camera that was sold in December. Flip sales were $317 million in fiscal 2010.

But an initial surge in sales of such devices cooled recently as some consumers began using smartphones to shoot high-definition video, said Stephen Baker, an analyst at the market-research firm NPD Group.

Cisco's Flip—which faced competing products from rivals such as Sony Corp. and Eastman Kodak Co.—experienced a decline of about 20% in unit sales in U.S. retail outlets over the holiday season while the total market was roughly flat, he said. Cisco was No. 1 in such point-and-shoot camcorders in the year ended in February 2010, but was No. 2 to Sony in the following 12 months, NPD estimates.

In February, Cisco said sales of consumer products fell 15% and weighed on the company's gross margin in its fiscal second quarter. Company-wide, profit fell 18% as margins slid for the fourth consecutive quarter. A day later, the company announced that Mr. Kaplan would leave to pursue "other career opportunities."

The same month, Cisco promoted Gary Moore to chief operating officer, while Marthin De Beer took over the consumer products business. The executives spent the past month looking at how Cisco's various businesses fit together.

Karen Tillman, a Cisco spokeswoman, said she couldn't discuss whether Cisco had tried to sell the Flip unit. "We did a pretty thorough evaluation of the business," she said. "The decision was made that the best thing to do was to shut it down."

In other announcements Tuesday, Cisco said it will shift responsibility for the umi—the home video conferencing system announced last year—from its consumer products unit into another unit that sells such "telepresence" systems to businesses. Cisco in March introduced an entry-level model of the product at $399—compared with the original $599 price tag—and slashed the monthly service fee to $9.95 from $24.99.

But Cisco had to compete with products from Logitech International SA and Skype SA that require no monthly fees. Elliot Gold, who tracks the conferencing industry for TeleSpan Publishing, estimated that umi generated less than 10% of the amount generated by Logitech's competing device. "This is due to Cisco's mistaken insistence on a monthly fee," he said.

Ms. Tillman said Cisco will focus on marketing umi through telecom carriers or other partners, and whether to any continue retail sales of the product is being evaluated.

As for home networking products, Cisco plans to refocus the business for greater profitability, Ms. Tillman said, though she added that consumers won't notice a difference. The company is also evaluating possible changes for a business called Eos, that helps media and entertainment companies manage their content, she said.

Mr. Chambers' internal email stressed Cisco's commitment to narrow its focus, and some analysts have called for such additional measures as divesting the home networking business. Ms. Tillman wouldn't discuss specific possibilities, but indicated more change is likely. "This is the first move we're making," she said.

Source: online.wsj.com

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