70) Pure Technologies – remember option value

I was a little surprised yesterday by Cisco’s announcement that it would shut down its Flip video business and make 550 employees redundant – in part because I love the product and in part because I imagined that there must be an alternative, for example to spin the business out of Cisco.  It made me think through what made Flip previously great – to follow is a blog post on that and I’ll close out with some reflections on yesterday’s announcement…

wēi  danger

Pure Digital Technologies launched a line of disposable digital camera products in 2004 – customers would rent the cameras through drugstores, return them and pay for prints.  The product initially did well, however as the price of non-disposable cameras dropped Pure Digital’s sales tumbled.  “The market demand for that product just melted away, we found ourselves selling disposable cameras into a market that was shrinking by the hour” said Michael Moritz, an investor in Pure Digital.

The company pivoted into single-use digital camcorders, also distributed through drugstores but the customer uptake was poor.  Surely the company would continue to feel pricing pressure from the Asian manufacturers and would be forced to wind up gracefully?

jī opportunity

Jonathan Kaplan, the company’s CEO refused to roll over so easily.  Instead, he looked for option value in this apparent failure – he wondered if he could use his market learnings and company’s skills to identify a new opportunity.

Firstly, the company noticed that hackers were removing the memory chips from the single-use cameras so they could put videos onto their PCs.   Secondly, drugstores had been asking the company to limit the accessories it shipped with its cameras. With these market needs in mind Pure Digital’s staff hit upon the idea of creating a cheap, easy-to-use digital camera with a built-in USB connector.

The company initially launched a “Pure Digital Point & Shoot” video camcorder in 2006 and then designed an even more minimal product – launching the Flip line of products in 2007. The device’s success was primarily attributed to this minimalism while all other camcorder manufacturers raced to add more features. As a result, the Flip grew the camcorder market: it held close to one-fifth of the total market at its peak.  It was announced in 2009, that Cisco Systems had acquired Pure Digital Technologies for $590 million USD in stock – it was on a roll.

The launch of the single use digital and video cameras hadn’t been an absolute failure – it had created the option for the company to iterate its strategy and develop the hugely successful Flip.

    Fast forward to yesterday’s announcement.  Flip had succeeded previously by radically changing its strategy, I suspect this capability was lost once the business was folded into Cisco and so perhaps yesterdays announcement – to reverse years of efforts at diversifying into consumer products – might be the right one.  Not because there is no potential value in the Flip business but more because Cisco is not well designed to capitalise on the option value that the current challenges might hold.  After all, given the rise of the smartphone, the value in Flip must be in moving into offering services.

    Cisco failed to integrate Flip into its core vision of a networked world or to enable it to stand alone and retain its entrepreneurial spirit.  Had it chosen the latter Flip may just have found some new areas of opportunity and we might have seen entrepreneurs lead a management buy-out – instead the business fell between two stools…

    How About…

    • Taking time to analyse market failures – examining what opportunities the learning opens up?
    • Observing the users that you do have – how are they really using your product?
    • If making an acquisition, assessing whether you need it to retain autonomy / ability to shift strategy?

    Sources NYT article and yersterday’s announcement