Cisco Dumps Flip - Who Stands To Profit?

By James Brumley | April 15, 2011 AAA

Cisco System's (Nasdaq:CSCO) decision to get out of the pocket camcorder market - by closing shop on its highly-portable Flip - was understood by most, and applauded by many. Arguments in favor of the networking giant shedding the business line accurately noted that Cisco was built from the ground up as a company that serves the corporate market; as such, the consumer technology market was never going to be an easy fit.

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Now that the decision to get out of the consumer market has been made, the only things investors need to worry about now are which companies will benefit from Cisco's exit from the business, and how much opportunity is being put back on the table. Here's the answer to both.

What Cisco Is Giving Up
To say that the Flip camcorder was an ill-conceived idea is a little off the mark. The company managed to sell $325 million worth of them in fiscal 2010, and was on pace to sell $400 million worth in fiscal 2011. Although no figure was cited for the Flip's actual profit contribution, it's generally assumed that the business was a profitable one, at least to some degree.

That's not bad for a venture Cisco paid $590 million for just a couple of years earlier, especially when there wasn't even a solidified market for the devices.

The problem for Cisco wasn't the viability of the Flip - it was the relative impact. With a total of $40 billion in sales last year, the Flip only represented about 1% of the organization's revenue, although it certainly required more than 1% of the company's mental capital.

Nevertheless, Cisco owned an estimated 22.5% of last year's digital pocket camcorder market, selling 2.5 million of them at an average price of about $158 each. There was clearly a marketable product in the flip, even if that market isn't enormous.

Who's Glad Cisco Is Out of the Digital Camcorder Market?
Smartphones have been largely blamed for the Flip's end. After all, most have reasonably high-quality still cameras, and a few can even create digital films. The functionality of mobile devices certainly didn't help the pure digital video recorder, but it may not be a sign that there's no hope for the technology. After all, these dedicated devices may only serve one purpose, but quality and functionality are paramount.

Just ask Eastman Kodak (NYSE:EK), Canon (NYSE:CAJ), Sony (NYSE:SNE) and Panasonic (NYSE:PC). Each of those companies still makes a digital camcorder that is comparable to the Flip, and none of them has decided to exit the business. In fact, they'll be glad to take what Cisco's exit is giving them.

Indeed, the decision couldn't have come at a better time for Kodak, which is already rapidly penetrating this market. In February of 2010 it only owned 5% of the portable video camera market; as of February of this year, it owns 12.8%. With another almost 25% of the mini camcorder market out of the way, that growth rate has room to persist. In fact, Kodak is expected to be the big beneficiary of the Flip's exit.

Sony held just under 21% of the digital camcorder market as of February. Panasonic is a relative newcomer to the pocket camcorder market, so it may not be a game-changer yet. Given the strength of its name and history in the consumer electronics market though, it may take a bigger bite out of the apple than most expect. The same goes for Sony, and even Hewlett-Packard (NYSE:HPQ), which recently entered the race with its V5020u.

The Bottom Line
Pocket camcorders aren't a dying business. The pocket video recorder is viable - it's just not viable for Cisco, despite the fact that the Flip was widely considered to be one of the best products in the category. With Cisco out of the way now, odds are good that one of the other consumer technology names will fill in that space, and maybe even expand it. (While some investors see it as volatile and unreliable, the tech sector can provide fantastic returns for investors with a little know-how in the field. Check out A Primer On Investing In The Tech Industry.)

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