Cisco buys Flip Video maker for $590 million

(Credit: Pure Digital)

Updated 7:46 AM PT with comments from executives at Cisco and Pure Digital.

Cisco Systems, the world's largest maker of switches and routers that power the Internet, has taken another step toward becoming a major player in the consumer electronics market.

On Thursday the company announced it has acquired Pure Digital Technologies, the maker of the popular Flip Video camcorders. Cisco will pay about $590 million in stock for the company and will also provide about $15 million in retention-based equity as incentives to PureDigital employees, the company said in a statement.

Pure Digital started selling its consumer-friendly mini camcorder in May 2007. The device, which is a little bigger than a deck of cards and has a built-in USB connection, was designed to provide an easy and simple way to take video and upload it to the Internet, especially to popular sharing sites like YouTube and MySpace.

The device, which costs between $100 and $229, depending on the version purchased, has built-in memory storage to take up to 30 minutes or 60 minutes of video. The integrated software also makes the device easy to upload video to PCs or Macs. The product line has grown and now includes the Flip MinoHD, a small high-definition camera. Pure Digital says it has sold more than 2 million total Flip video units since the product first went on sale.

Cisco has been preparing for a major assault on the consumer electronics market for several years now. In 2005 it spent $500 million to acquire the home router company Linksys. It also bought Scientific Atlanta in 2005 and has been selling the company's set-top boxes into people's homes via its relationships with cable operators. Earlier this year, Cisco turned the consumer strategy up a notch with the announcement of a new home audio product and a media center for storing and organizing digital media in the home.

But until the acquisition of Pure Digital, Cisco has mainly offered networking products for the home. More simply put, Cisco has concentrated on providing connectivity between different products in the home over an IP network. Now with the acquisition of Pure Digital, there is no question that Cisco will be engaging in the rough and tumble of the ultra-competitive world of consumer electronics.

A vision of video's future
And with Cisco's belief that video, and more specifically high-definition video, will drive the Internet in the future, it's no surprise that the company was interested in a company like Pure Digital.

"We share the same vision about how video can change the world," Ned Hooper, senior vice president of Cisco's Corporate Development and Consumer Groups, said in a phone interview. "The power of what Pure Digital has done with the Flip Video product is that they have integrated software and the Internet experience into the product in such a way that it allows people to share, publish and easily get access to video. And that really fits with Cisco's vision of visual networking."

Hooper added that Cisco and the Pure Digital team also envision of making the Flip Video product a true platform for sharing video across the Internet. And he said the two companies have already begun talking about future generations of products that will make video captured on the Flip Video product even easier to share.

"Today Flip Video camcorders use the PC to get to the Internet," Hooper said. "But Cisco and Pure Digital share a vision that one day every product will be directly connected to the Internet."

Hooper wouldn't elaborate about which technology would be used to do this, but it's likely that the company could add Wi-Fi capability and later down the road 4G wireless access. Cell phone carrier Verizon Wireless plans to have its 4G wireless network available in 2010. And Clearwire, which is using spectrum assets from Sprint Nextel, already has its 4G wireless network using WiMax available in a handful of cities.

"We're not making any product announcements right now," Hooper said. "The answer to how we will do this will be driven by what consumers want and what is easiest to use."

Cisco expects to complete the acquisition in the company's fiscal fourth quarter of 2009, which ends in July. After the acquisition is complete, the Pure Digital team will become part of Cisco's Consumer Business Group, which includes Linksys by Cisco home networking, audio and media-storage products. Jonathan Kaplan, chairman and CEO of Pure Digital, will become general manager of the combined organization. He will report to Hooper.

Kaplan, who has managed to build a powerful brand with the Flip Video products in less than two years, said that he couldn't have imagined a better partner for Pure Digital.

"You can't generate 20 percent market share in a market that hasn't changed much in several years without having competitors talk to you about how you can help them," he said in an interview. "But we weren't looking for someone already in the consumer electronics industry who wanted to make their products better. We were looking for somebody who wanted to change the world. It's not about what our products do today, but what we will be doing in two years or five years."