Stacey and Chris today have been following Cisco Systems’ (s CSCO) acquisition of Flip Pure Digital, a maker of affordable camcorders. At $590 million, I wonder if the company paid too much — not that Pure’s management and venture backers are complaining about the price just yet. The San Francisco-based company has raised $68 million over its 7-year history.
I bring that up because Flip Pure Digital has sold roughly 2 million units since May 2007 and has a 17 percent share of the camcorder business, according to NPD. According to Lazard Capital Markets research group, Pure Digital was on $200-million-per-year revenue run rate — that assumes a unit run rate of a million a year. As a comparison, Cisco paid $500 million for Linksys, which brought in a lot of sales, if not typical Cisco margins. Flip is, again, a low-margin business. Unless the company has a super-secret array of new products or is expecting to grow at whiplash-inducing speeds, paying nearly three times revenues for what is, at the end of the day, a consumer electronics business is a very expensive decision. Cisco is clearly buying the notion of future growth and hence paying a super rich valuation. As Ned Hooper, senior V-P of corporate development and consumer group for Cisco, explained in an interview with us earlier today:
“Historically content is locked to a device, and is not open to move around,” Hooper said. This deal helps change that paradigm for video, in the same way Cisco is trying to do with music in its latest Linksys music router, announced earlier this year. To help make moving content around the home and to the web easier, Cisco purchased Pure Networks last year for its software that helps network devices easily and is pushing the HNAP home networking protocol. Hooper said Cisco would integrate HNAP into the Flip camera and would add features to make it easy to operate the Flip on a network based on Cisco gear.
They purchased the experience and relationships in building the supply chain, sourcing, design evolution, channels, and product path. 3X revenue is not bad in CE terms for an established product that has actually, in a short time, muscled past established CE giants.
Alan
Just to be clear I am not suggesting that this isn’t a good outcome for Flip team. On the contrary. I think the typical CE deals are much lower priced 1.5 times sales. So there is a lot of “optimism” priced into this deal.
LinkSys also was supposed to bring in the “experience, relationships, supply chain etc – that according to popular opinion seems to be suffering – isn’t it?
Alan you have it spot on. The payment is for a company based out of San Francisco that not only took market share from the 990 pound gorilla Sony but also kept a plethora of Chinese companies at bay. Engaged in a “Battle of the Bulge” with Asian companies across geographies in its core business it’s an attribute Cisco deeply respects.
I’d like to add a lesser visited point. Cisco believes in a deep HR bench. It has that plenty in its core routing and switching and related Advanced technology and in its Broadcast area. It has a much more fragile bench on the consumer side. In fact one can cautiously argue its their biggest potential mis step in the making especially considering the Billions Cisco will surely spend on consumer side of the business in the coming months and years. This deal brings on people who Cisco gets as leaders and who strengthen that bench. I do believe the money is well spent if they can keep the team and integrate it within their broader consumer aspirations.
It is a rather odd acquisition. When I first encountered the Flip HD, I wanted to love it. On paper it has great specs, and when held very still, it produces nice results. In practice, however, it is subject to a slightly nauseating “jello” effect in the video when panned even slightly. It needs optical stabilization. It is also worth noting that there is no optical zoom.
And this is where the problem comes in for Cisco/Flip.
Canon is already shipping great 12mp point and shoots with great optics, x3 or x4 zoom, optical stabilization, and the ability to shoot 720p h.264 video. The new Lumix ZS3 will be out next month, and shoots 1080.
The model is not a stand alone device anymore — it is the convergence of HD video capabilities, great point and shoot experience, and a slim form factor.
The Flip HD at $205 or so, vs the canon SD780 at $275, isn’t even close.
So unless Cisco is about to invest heavily in optical research and find a way to catch up to the Canons and Panasonics of the world, this seems like a purchase at the nadir of a product cycle rather than a value added long term proposition.
Jorack
Totally excellent and relevant points with some astute observations about technology trends and competiton. I wonder though you are discounting the momentum-effect. Surely it isn’t the best product but it is become increasingly popular and is slowly finding its way into the main stream. From that perspective, one has to wonder if there is still a lot of growth ahead of the “product.” thoughts.
It’s interesting that the momentum of Flip stems from its perceived (and really, actual) ease of use. Clearly labeled buttons, minimalist interface, and an intuitive sense of how to use the thing straight out of the box. For good reason, this started out as a “Soccer mom” must have. Cheap, and much less intimidating than a camcorder.
For all those pluses, however, the most intuitive “other” image acquisitions is the good old point and shoot camera.
Canon, Panasonic, etc — all established names that people know and have used, and developed brand loyalty to, dating back to film.
Now let’s take the Canon SD780. Minimalist buttons, a clearly labeled toggle between full auto and recording, and the ability to do that one other amazing thing — great looking 720p video that pops right into iPhoto when you plug it in.
Word of mouth travels very fast, and I think people will quickly see their one device as the one they’ve loved all along — the camera.
One last thought — Canon may be the first solid player to launch in the quality 720p camera category, but they are not always the cheapest option. I would expect similar abilities in very short order from Fuji, Kodak, et al.
In the end, I believe that Cisco has indeed made a momentum based purchase, but the momentum is much closer to its nadir than to its early to mid point.
I’m pretty sure Panasonic beat Canon to 720p recording. My TZ5 does this and It’s been out for a good while. Lately it seems more like Canon is playing cathup to Panasonic than the other way around. They just released high optical zoom compact models to compete with the Panasonic TZ line that has been going strong for 3 or 4 years now.
The question is what “else” Cisco have done with half a billion dollars … that’s half a billion dollars less for other initiatives – right?
Actually, it’s half a billion in stock. So the actual amount of money it takes away from other projects is exactly the amount of dilution to the stock value, not the acquisition price. The likely amount involved may not even be in hundreds of millions.
Cisco, in general, and Ned, in particular, is suffering from serious Apple envy. Similar to Microsoft’s Google envy. Unless you evaluate Cisco’s consumer space acquisitions in this light, they won’t make much sense.
It’s much harder to scale down from $275 perch that scale up from $100-$150 range; Also, You don’t need the best product in market as long you can deliver an experience at an affordable pricepoint. Most consumer actually may not care that much about optical zoom as we think. Flip is also innovating by giving users the ability to pick and choose their personalized skin on the camcorders..i.e concept of user contribution ; All this adds up to the differentiation..
I am reminded of the SpinBrush product created by John Oshser and sold to P&G. Low priced tooth brusht ($5-$6) that disrupted Braun and $70 electric tooth brush market. That product caught on like fire and had enormous momentum . The $80 competitors did try to scale down..not much success.
I understand your general point, but in the space we are talking about, the central issues are ease of use and quality of result.
Flip rose on the strength of both when we were talking about SD shooting, and cameras were being sold mostly as picture taking tools with the ability to “also” do video.
The Flip HD really broke through because it was the cheapest way to record 720p. Ease of use was as strong as ever, but let’s be very fair about the quality of result. The image becomes very unwatchable if you are moving it around a lot. But people are very forgiving when something is perceived as dirt cheap to do the amazing that it does (HD) versus the next closest comparison — a camcorder — which is magnitudes more expensive and less intuitive for many to use.
The design and customization of the flip is cute, but I’m not sure that’s really a major factor. For one, you have to pay full cost for the Flip through their store to get it.
Again, using Canon as merely an example, the camera manufacturers understand exactly what is going on — which is why their low ends have been stripped of everything but the basics. And know they happen to offer that one, extra magic thing — quality 720p video. And that extra bit of magic is being star billed with the fact that it “also” shoots great 12mp pictures.
Flip will need to scale “up” to compete with this threat. It is not comparable to a cheap toothbrush replicating the same features of an overpriced competitor.
Just my humble 2 cents.
I love Cisco, but just don’t see what this buys them other than some PR that they are in the low margin consumer goods space.
Really doesn’t make sense to shell out half – billion $s for this one, unless Cisco has something really cooking up.
This isn’t that hard. Pure Digital is a company that took a double-digit chunk of a crowded market in the last two years. The Linksys brand has also released audio and video products the last couple of years. Compare them. Cisco wants to infuse the consumer products group with knowledgeable folks who are inspired and driven.
Cisco is pretty good about not skating to where the puck is, but rather where the puck will be. So, lets give them a little credit here. They must see something in Flip besides today’s shipping products.
I could definitely see them take the ease of use/interface/software that Flip has and couple that with their forthcoming Consumer TelePresence. That could make for some interesting offerings, not only to the consumer, but perhaps back up to the Service Providers as well via their Scientific Atlanta relationships and footprint. ..or perhaps it is going to tie into their new Media Hub. Right now it is mostly audio focused, but I have to assume the next rev is going add a slew of video capabilities. I can see that all tying together very interestingly.
At the end of the day, I think you need to look a little deeper as to what Cisco’s approach is. Yes, this now gets a (marketing leading) device with Cisco’s logo in your pocket — which itself has value from a branding perspective –, but I have to think there is more to this an a cool plug and play camcorder.
What they did was very difficult in this day and age – Pure Digital endured a long and iterative dev and marketing cycle that have killed most companies. They opened a market that could have been taken at any moment by a CE superpower. They took essentially non-proprietary technology and packaged it, and built a market, under the nose of incumbent camera powerhouses. Cisco is actually buying a sharp brain trust, right at the time that the giants are saying, hey, we can do that, too.
Timing. Still, the creation of a market for small, inexpensive video cameras is now established, and we all win.
See — I think that is at the heart of what Om asked originally: Did Cisco pay too much?
They can have the smartest marketing guys in the room, but if their niche was founded on “non proprietary” technology as you point out above, then Cisco will need to complement that marketing genius with good R&D to make the Flip a viable future HD competitor when the low end point and shoot cameras offer 720p.
Think about the chaos, if Apple included 720 or 1080 in the next 1 or 2 generations of the iPhone or Touch.
Flip is a great niche device, but the market and perceptions move swift.
@ Jorack,
Agree with your comments on the tech capabilities and quality levels of a Canon camera especially when you can shoot a 720p, compared to a flip.
However, i dont think cisco would have bought the Flip to just get an entry into the consumer electronics arena and compete agains the canon’s of the world, right? I have seen my friends use a Flip which is really a simple, awesome product with high utility and clean software solutions that even kids or soccer mom’s as you said, can use it with ease.
So, could the Flip be a buy of not just a great user friendly product but also of a strong technology / software component that can be embedded into Cisco’s home video products like set-top boxes, consumer telepresence capabilities etc? If that’s the case, I dont think a 2.5-3x revenue might be an overpay, especially if you look at it from the perspective of not just a nice consumer product driving video but also a technology solution play that can be the gateway for future network video solutions. (which probably drives more top / bottom line $ for cisco).
Again, as always, only time will tell for the not so obvious deals…but I think this might be an interesting one.
I am reminded of the SpinBrush product created by John Oshser and sold to P&G. Low priced tooth brusht ($5-$6) that disrupted Braun and $70 electric tooth brush market. That product caught on like fire and had enormous momentum . The $80 competitors did try to scale down..not much success.
Om – I believe you are correct. Cisco significantly overpaid
Currently two great CE brands, Sony and Panasonic are trading at 1/13 and 1/11 of the multiple that Cisco paid for Pure Digital
Mkcap Sales Multiple
Sony 20,59 89,6 0,23
Panasonic 24,25 91,6 0,26
Pure Digital 590 200 2,95
From a purely accounting perspective and based on accepted ratios, Cisco may have overpaid for Pure Digital Tech. However, Cisco acquired the iPod of the camcorder industry and the brains that produced it.
A few years from now, as selling routers and other low-margin network equipments becomes a commodity, I trust most profits will come from this new business division. In summary, I think this was a fair price for Cisco to pay to get in this business. Companies that are already established in this industry segment wouldn’t (and probably didn’t) accept to pay this price.
Really? the “iPod” of the camcorder industry?- More like the “zune”!
How many brand name HD camcorders do you know of? How many mobile phones will be out there with HD next year?
this is a rediculous price in a market where Cisco has struggeld to compete and sell. nyone remember the “kiss” acquisition? Another consumer white elephant company.
I’ll take panasonic, sony, sanyo over Cisco any day! Or better still Samsung or iPhone.
This company has only sold 2 million units! Nortel is up for sale at a cheaper price! Madness…. the shareholders should be asking JC just what on earth was he thinking.
So perhaps Pure Digital gave Cisco their Get Lost price, and Chambers said sure. Or there was a bidding war and Cisco…won.
Cisco are loosing the plot- how much for a company that has only sold 2 million units?
This is an expensive white elephant. When will Cisco look outside of the US and understand what is going on on a global scale? There are many many different types of HD video cameras available today. So this can plug directly into a PC or USB port?- big deal.
Do you think that cell phones won’t have that capability next year? The Samsung Omnia provides HD 720p video recording capability and you can upload direct to youtube without going through a PC using wifi.
What about the latest iPhone with video?
Cisco concentrate on “changing the way we live, work, and learn” -leave out the “play” part, we just cannot compete agianst mobile phone manufacturers, sony, sanyo, panasonic, etc.
This acquistion was all down to J. Chambers’ evangelical fixation on video. We have skype- we don’t need telepresence at home. We have mobile phones- we don’t need to carry yet another device around with us. We all have PCs at home- don’t think we will all rush out to get a Scientific Atlanda box under our TVs to upload flip videos to some obscure Cisco social networking site.
Reseach your customers, understand the market, understand the competition and stop wasting your share-holders money!