Flip shouldn't be Cisco's only fold in the challenging consumer market, industry watchers say.
Analysts are calling on the company to do more to divest itself of disappointing consumer product lines and operations in the wake of restructuring the unit and shuttering its Flip video camera business. Cisco might want to look at cutting loose Scientific-Atlanta cable set-top boxes and Linksys home routers, too.
"We still want Cisco to take additional aggressive action and we wish Cisco would have exited the consumer video and home networking markets altogether," states Ittai Kidron of Oppenheimer & Co. in a report on Cisco's moves titled "And Now the Flop." "We also feel Cisco will need to restructure or exit its [Scientific-Atlanta] video systems business at some point given the unfavorable longer-term secular trends."
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Analysts have been calling on Cisco to either better align its consumer operations with its core business or slowly exit the market altogether following disappointing results in recent quarters. Cisco CEO John Chambers promised bold actions to turn the company around in a memo publicized by Cisco last week.
In addition to closing Flip - which it obtained by acquiring Pure Digital for $590 million in 2009 -- Cisco gutted its Eos media and entertainment operating system and sent the technology to other market segments within the company. It also vowed to better align Linksys with core enterprise and service provider routing and switching businesses, and to merge its disappointing umi home TelePresence system with Cisco's business video offerings.
Analysts say folding Flip is a positive first step for Cisco in restructuring its consumer operations, but the company needs to keep going.
"We were neutral at best on the pricey deal and our concerns regarding Cisco's ability to differentiate/leverage Pure Digital appear to have come true," Kidron states. "We're still hoping for more. We think Cisco should consider completely exiting consumer video and scaled back home networking businesses. Overall, good start but more is needed."
Wall Street was always a bit leery of Cisco's creeping ambitions in the consumer market, according to Brian White at Ticonderoga Securities.
"The Street never fell in love with Cisco's consumer strategy and the Flip product line was the epitome of this disdain," White states in his report on Cisco's consumer revamp. "Cisco's announcement to shut down the Flip product line is a wise decision, in our view, as the world has changed significantly over the past couple of years with the proliferation of smartphones such as Apple's iPhone 4 offering similar capabilities. Additionally, investors were sour on the acquisition of Pure Digital since day one."
Cisco's consumer business was pinpointed as one of the reasons for the decline in product gross margin in Cisco's second quarter. Sales of Scientific-Atlanta cable set-top boxes were down 29% in the second quarter. And Cisco's new umi home TelePresence system "got crushed" at Christmastime, according to Chambers.