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Cisco takes over the Flip video camcorder

Pure Digital Technologies thought small and simple, and it paid off big time.

The tiny, eight-year-old startup famed for its inexpensive and easy-to-use Flip video cameras has defeated a down economy. On Thursday, the 100-person company was bought by Cisco Systems, a technology infrastructure giant, for US$590 million in stock. The deal caps off a bumpy and unpredictable rise for Pure Digital, which bested the Asian companies that dominate the camera industry from an office located above the Gump’s department store in the heart of San Francisco.

“At a time when everybody has just been hammered with stories of misery, this is a really fabulous tale of what is possible against all odds,” said Michael Moritz, a venture capitalist at Sequoia Capital, which invested in Pure Digital.

Over the last couple of years, Cisco has expanded beyond selling networking equipment for large computing centers, making inroads into the home via set-top boxes, routers and — most recently — digital stereos. The company has been clear about building upon these efforts by aiming much of its nearly US$34 billion in cash at future acquisitions.

In Pure Digital, Cisco found a local talent to complement its consumer ambitions and extend its business videoconferencing technology to mobile devices.

Pure Digital started selling the Flip line of products in 2007 and has since shipped more than 2 million units, which cost US$150 to US$230, depending on the model. The device’s claim to fame has been its minimalism.

The Flip recorders have just a few buttons, weigh about 100g and have 1.5-inch screens. In addition, they arrive without cables, relying on a built-in connector that plugs into a computer’s USB port for both recharging and transferring video files.

Along with the device, Pure Digital offers software that helps shift videos from a personal computer to online services like YouTube and Facebook with the click of a couple of buttons. The simple software, simple design and low cost opened digital camcorders to people put off by more complex devices but still hungry to pass around their videos.

“They were able to capitalize on an opportunity to reach consumers that had traditionally shied away from camcorders,” said Ross Rubin, an analyst for NPD Group.

Over the last few years, the sales of digital camcorders have either stayed flat or declined, Rubin said. Meanwhile, Pure Digital tripled its sales of the Flip products over the last year and now holds close to one-fifth of the market. Sony, the market leader, has since mimicked Pure Digital’s products, as have a host of smaller competitors.

The company started off selling single-use digital still cameras at drugstores. Customers would rent the cameras and bring them to make prints.

The business worked, at first. But as nondisposable cameras became increasingly affordable, Pure Digital’s sales tumbled.

“The market demand for that product just melted away,” Moritz said. “We found ourselves selling disposable cameras into a market that was shrinking by the hour.”

The company next moved to single-use digital camcorders, also distributed through drugstores, where the videos could be burned onto DVDs.

Despite trying various approaches, Pure Digital remained in search of a big hit. Luckily, the company’s partners — and, surprisingly, chip thieves — helped to nudge it in the right direction.

For example, thieves were removing the memory chips from the single-use recorders so they could put videos onto their PCs. In addition, the drugstores asked Pure Digital to limit the accessories it shipped with its cameras, a demand that gave rise to the built-in USB connector.

With prodding, Pure Digital’s staff hit upon the idea of a cheap, easy-to-use digital camera that could funnel videos between the device, PCs and Web sites. Ever since, the company maintained its simple approach while making products more attractive via colorful designs and better-quality video.

It is expected that Cisco will release versions of the Flip recorders that can connect to wireless networks. There are other surprises in store as well, said Kaplan.

“The Flip will find its way into some very obvious places and maybe some not-so-obvious ones,” said Jonathan Kaplan, Pure Digital’s chief.
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