Cisco finds way to improve switch revenue: kill the Flip videocam

Flip is a sacrificial lamb to show analysts Cisco is on top of the whole 'refocus' thing

I have to admit, even after reading a couple of stories and the memo from the CEO about it, I still didn't really get what Cisco's big reorganization was all about.

The soul-searched, self-critical reawakening debuted with a warmish, pep-talky memo from CEO John Chambers was odd because it noted failures and weak execution of strategy, but dind't say how; neither did most of the stories talking about the reorg and whether it would help the company get back the one-third drop in share price it suffered during the past year.

Cisco is as big and powerful as ever, as far as I've heard talking to analysts and end-user companies. No one is throwing it out. quite the opposite.

But here came Chambers, with the kind of foggy directional memo that deplores a lack of focus or execution and promises to make everything right -- the kind of thing CEOs usually put out in the middle of an obvious financial emergency of the kind that has employees polishing up resumes and researching unemployment insurance options.

"We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders," Chambers wrote in a 1,500-word email to employees dated April 4. "That is unacceptable. And it is exactly what we will attack."

As much as his memo made the whole thing sound like a spiritual or motivational issue, the problem Chambers needed to correct was pretty concrete:

During the second quarter, revenue from Cisco's switching products, which bring in 41 percent of its total revenue, took a sharp drop.

Customers had begun switching to lower-cost Cisco switches that have higher price/performance ratios than the Nexus 7000, Catalyst 2960 and other high-end hardware on which Cisco's revenues had begun to depend too much.

So, led by Chambers, the $40 billion company that is master of all networking, the global giant whose switches and routers form the core of corporate, government and telecom networks the world over, announced the decision that would bring back its focus and bring its share price back to par:

It killed the Flip video camera.

Cutting Flip is part of a shift that will cut 550 jobs from a total of 73,000, and cost $300 million. It's only the first obvious move in a series that will probably hit Cisco's consumer products a lot harder than its business business.

In addition to the foggy, non-specific announcement, reorgs usually include a sacrificial lamb the company can give up to show analysts it knows just what to cut and has been ready to do it for a long time. This is almost never true.

"We have been slow to make decisions, we have had surprises where we should not, and we have lost the accountability that has been a hallmark of our ability to execute consistently for our customers and our shareholders," Chamber' note said. "That is unacceptable. And it is exactly what we will attack."

If that seems a little gratuitous – not to mention ineffective as a contributor to an overall reorg – you're right. But it answers the need for a quick sacrifice.

"This came faster than we would have expected," Tim Ghriskey, chief investment officer of the Solaris Group told Reuters. " But perhaps Cisco has been studying this for a while."

Other consumery products and acquisitions are likely to get the axe as well, or at least to be pulled back into the core business.

That, ultimately, will answer analysts' call for focus on the corporate networking business, rather than the 30 peripheral markets on which it has been spending time – cable set-top boxes, home video, consumer VoIP, home networking, and the late, lamented Flip.

As owner of 70 percent of the Ethernet switching market and 60 percent of the market for routers, its core business is at the core of almost every other trend in IT – all of which rely on adaptable, broadband networks to make them work.

Its share of the router market is actually a pathetic remnant of the 90 percent share it had in 2000; it lost some to Juniper Networks, Alcatel-Lucent and a few others during the past decade.

It diversified during the same period into collaboration, video conferencing, consumer products and others that, depending on how you look at it, either blunt the risk of relying too much on one market, or distract it from keeping iron-handed control over it.

Tech analysts mostly want Cisco to get back its networking focus

  • video technology (high-end teleconferencing, Skype)
  • technology and business architecture ;
  • routing, switching and professional services;
  • collaborative tools (VoIP, WebEx online meeting products, and Quad social networking software);
  • data center products (high-end networking hardware, virtualization and cloud computing).

That still sounds like a pretty broad list. But when you generate $40 billion make the gear so common in corporate data centers and networking closets that it's actually unusual to see anyone else's logo, you probably have the resources to cover most of them and enough credibility to make yourself heard in each.

At least, now that Chambers has gotten rid of the Flip camera that was ruining everything else.

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