Market Place: Wreckage at the Intersection of Corporate and Consumer Markets

 

That’s a question the Ciscos of the world — big technology companies that sell stuff to businesses, but lack “ooh-ah” consumer products like iPads — never stop asking.

One obvious answer, of course, is this: Because you’re not Apple. Not only that, you are not a consumer company. You never have been.

The record of powerful companies charging into the consumer marketplace, only to retreat in humiliation later, is long and distinguished. Cisco’s announcement last week that it would shut its Flip video camera division, two years after buying Flip for $590 million, is just the latest chapter in a story that could be titled “The Consumer Marketplace: Destroyer of Dreams.”

So why try? For starters, the stock market rewards sexy consumer products. Their makers are not just companies — they become cultural movements. Apple’s stock trades at a price of about 18.5 times earnings per share, Cisco Systems at 13 times. No one ever waited in line to buy a Cisco networking solution. Cisco’s share price fell about 3.5 percent last week; it is down almost 16 percent so far this year.

“To enterprise companies, the consumer market is the Afghanistan of business,” said Andrew Zolli, consultant and director of the PopTech, an annual technology conference. “Lots of companies take a turn there and no one leaves satisfied — and they all leave eventually.”

Cisco came as ready for the challenge as any predecessor. It dominates the complex and demanding world of digital networking; in under 30 years, it has grown to be one of the largest companies in the world, with a market capitalization larger than Goldman Sachs, McDonald’s or Ford. At the time it acquired Flip, Cisco was said to have cash reserves of more than $29 billion.

But surely Cisco must have seen that the road to the consumer market is paved with the corpses of the fallen.

In 1995, for instance, the computer modem maker U.S. Robotics bought Palm, the maker of personal digital assistants. In the ensuing years, Palm was passed from U.S. Robotics to its new parent, 3Com, and then to its current owner, Hewlett-Packard. In the meantime, Palm, once a market leader, watched competitors like Apple, Google and Research In Motion carve up the smartphone market.

As Cisco hoped in its acquisition of Flip, each of Palm’s parents hoped that the smaller company’s innovations would bring fame and fortune to the entire organization. The parent company would no longer just be a business — it would be a brand. Its executives would be minor (or even major) celebrities. Perhaps the stock price would get a healthy bump.

“It’s a little tough when all the money and energy is over in the consumer space,” said an industry analyst, Mark Anderson. “If you’re on the enterprise side of things, you want some of that.”

I.B.M. was perhaps the most successful crossover artist, moving from mainframe to personal computing with the PC in the early 1980s.

But even that success was the exception that proves the rule. I.B.M. had to set up an autonomous division in Florida, far from corporate headquarters in New York, to give the PC room to grow. “The only way the PC was going to be developed was if it got out from under I.B.M.’s bureaucracy,” said the business historian John Steele Gordon. “That the PC succeeded at all was not because of I.B.M.’s corporate culture, but in spite of it.” (It is worth noting that Microsoft’s Xbox was developed in a similar fashion.)

Even I.B.M.’s move into the consumer space came to an end. The computing giant sold its PC group to Lenovo in 2005.

Acquiring or building a consumer business and successfully integrating it into the larger, existing enterprise company is challenging, says Mr. Zolli, the consultant. “Companies acquire consumer businesses for perceived synergies,” he said. “But the synergies are almost always illusory. These corporate marriages bring all the emotional baggage of a shotgun wedding.”

In 2008, Microsoft bought Danger, a small company that made a cellphone called the Sidekick. The Sidekick had already attained an enviable level of popularity in the much sought-after youth market. Microsoft integrated the Danger team into the group developing the Kin, a Sidekick-like device that Microsoft was hoping would have the same appeal to teenagers and young adults. The Kin was released in May of last year; 48 days later, Microsoft removed it from the market, a remarkably public admission of failure.