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Paul Boutin Cisco acquires Flip camera maker, analysts bring out the knives

On Thursday, network equipment megalith Cisco Systems announced the pending acquisition of Pure Digital, makers of the popular Flip video camera whose success is due to its one-button simplicity and built-in video management software for both PC and Mac. (See gadget gury David Pogue's video for an entertaining explanation of the Flip's appeal. A new model, the Mino, shoots HD video.)

Cisco watchers are largely unimpressed with the deal. In short, analysts and writers who cover Cisco consider the Flip's market of 2 million units too small for Cisco to bother with, and Pure Digital's selling price of $590 million too small a return for investors Benchmark Capital and Sequoia Capital.

Gartner analyst Nick Jones:

This leaves me totally puzzled. $590 million is loose change for Cisco. But why spend even loose change on a brand no-one has heard of outside the US and which has sold about 2 million units in its entire history. Last year the mobile industry shipped well over 800 million handsets with cameras, the latest models like the Samsung Omnia can already shoot HD video which is on the cusp of mainstream mobile adoption. The chips and camera modules on mid to high-end devices will all head to HD over the next couple of years. So products like Flip are going to be buried under an avalanche of HD enabled handsets. I can understand Flip wanting to sell out before the tsunami arrives but why would Cisco buy?

Network World columnist Brad Reese:

A spectacularly successful cash out for Pure Digital's venture capital investor - Michael Moritz of Sequoia Capital (keep in mind that Moritz and Sequoia were also the original venture capital backers of Cisco), [but] not be a wise acquisition for Cisco.

First, how do Cisco's valuable channel partners benefit with Cisco capital and management attention focused on products sold in mass retail outlets for between $130 and $230, and whose success has spawned a large group of copycat competitors?

Second, Cisco's expertise is in developing and supporting complex technology. I fear Cisco risks being "dumbed down" ... for example, a recent report shows Cisco gaining market share in [small to medium business] routers but losing ground in the high-end router segment to Juniper Networks.

PEHub blogger Lawrence Aragon, who writes about private equity:

It sounds like a pretty good deal, but you have to understand that the VCs put $95 million into Pure, which makes the Flip digital video camera. Assuming they own half of the company, that’s a return of just over 3x their money. For a middle-of-the road VC firm, that would be a decent return, but for big name backers Benchmark Capital and Sequoia Captial that’s pretty much a dud.

Did Pure Digital's investors push for a relatively cheap acquistion before the Flip loses its market share? Does Cisco have plans for the Flip, or for Pure Digital, that aren't obvious from outside the company? Cisco's press release suggests Cisco, an enterprise IT colossus, is trying to become a household brand as well:

"The acquisition of Pure Digital is key to Cisco's strategy to expand our momentum in the media-enabled home and to capture the consumer market transition to visual networking."

The consumer market transition to visual networking? Sounds like Cisco is looking to sell cameras to the makers of YouTube home videos. Good luck competing with Apple and Logitech.

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