In 2009, I purchased a Flip HD camcorder. Around the same time, Cisco purchased Flip, the company, for about $600 million. It was never clear precisely what Cisco was up to, but with YouTube being a big deal, some form of Internet connectivity seemed to top the list of the possible “synergies.” It took Cisco just a year to change its mind, announcing in April of this year that it would shut Flip down.

Cisco’s move sparked surprise and even outrage. Flip had 500-odd employees, was earning $400 million in revenues, and had grown 15% the previous year.

But even those opposed to the shut down sensed a problem. For example, mere months after its purchase I sold my Flip on eBay for about half of what I paid for it to an elementary school teacher who wanted to let his students make movies: I never had it with me and it was too complicated to just pick up and quickly shoot whatever the kids happened to be doing. My new toy, an iPhone 4, could do the same job more easily and I always had it with me.

That story hung over the product category like the Sword of Damocles. But Flip’s fans seemed outraged that Cisco wasn’t going to just try harder to keep Flip a going concern.

What is interesting about Cisco’s move, strategically speaking, is precisely that. It did not hold on in the face of likely technological oblivion. But as documented in a new paper [PDF] by Brian Wu, Zhixi Wan, and Dan Levinthal, many others in the same situation have not only held on but gone “all in” — and to their detriment. Kodak, faced with a clear challenge from digital photography, invested heavily in hybrid products. A case in point, the Photo CD, a way of taking film to photo shops and bringing a digital product home. The problem was, you still had to pay for film and development, the precise thing that a pure digital route would bypass. Kodak spent more than it ever had on R&D only to see its share price obliterated.

Sometimes massively outspending an entrant works. Intel held off AMD, who at various points innovated past it in microprocessors. But Intel did so at the cost of a many-fold-greater R&D spend and practices, holding on to distribution channels that eventually raised the ire of antitrust authorities. But unlike Kodak, the assets that were Intel’s brand and distribution channels were ones still useful in the face of new microprocessor configurations. For Kodak the assets that made it great were, in Wu, Wan, and Levinthal’s terms, a prism that gave it color blindness when it thought that color was its chief legacy. Even now, Intel faces strong challenges from smaller mobile chipsets that do not need to be put inside computers that Intel was inside (think iPads and netbooks).

Seen in this light, Cisco’s decision to cut and run on Flip is unusually visionary. Why not do it now rather than sink many hundreds of millions more trying to hold on, while stringing customers along into making network investments on their videos? That said, Flip’s competitors in the pocketable camcorders plow on. Time will tell whether Cisco made a bad call.

On a final note, some have suggested that Cisco should have just unloaded Flip rather than shut it down. One suspects that it may not have been able to appropriate much value from that strategy for the very same reason Cisco could not justify future investments. But there is another concern. Cisco has a reputation for fair dealing in acquiring companies. Flip’s owners were beneficiaries of that. But at the same time, if you want a reputation for fair dealing as a buyer of a company, do you really want to unload an asset for a price higher than you think it is worth? If you don’t want to be seen as a shark as a buyer perhaps you have to forgo being a shark as a seller too.

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