How Inequality Hurts

The Hazards in Our Fairytale Marketplace

A consumer alert for soccer moms and doting granddads: Outrageous compensation rewards give corporate executives an incentive to behave outrageously — at your expense! The story behind the sad demise of a beloved camera.

By Sam Pizzigati

We’ve come to expect, here early in the 21st century, that business will abuse workers, at every opportunity.

We’ve watched corporate leaders downsize and outsource, slash benefits, raid pension funds, and routinely replace full-timers with temps. Such moves have become standard corporate operating procedure.

But we don’t expect corporations to show consumers the same contempt, at least not openly. Corporate execs, behind the curtains, may overcharge and bait and switch. In public, these same execs pay homage to consumer sovereignty.

We consumers have internalized this hypocrisy. We really believe we matter. We assume that corporations will bend over backwards to discover and deliver the products and services that great numbers of us want.  

John ChambersWe’re living, in effect, a fairytale. Corporate leaders today care no more about consumers than they do about workers. What do they care about? Maybe we should ask John Chambers, the CEO of high-tech giant Cisco.

Chambers has stood tall, in Silicon Valley, ever since the Internet emerged as a major phenomenon in the mid 1990s. Cisco made the bulk of the Web’s initial “plumbing,” the routers and switches that keep bits and bytes racing.

Cisco also made Chambers fabulously rich. He even survived, quite nicely, the collapse of the dot-com bubble in 2000. Chambers and five fellow execs cleared $307.8 million that year when they unloaded shares before Cisco’s stock peaked. Over half that windfall, $156 million, went to Chambers.

That sort of corporate executive derring-do established Chambers’ “street cred” — on Wall Street — as a CEO superstar. And that rep would help lock in, year after year, grand rewards for the Cisco CEO.

But all the while the ground under Chambers and Cisco was starting to shake. The chief exec and the company owed their meteoric rise — at the height of the dot-com bubble, Cisco rated as the world’s most valuable corporation — to good fortune, not genius. Cisco had been in the right place at the exact right time.

So had Microsoft, and companies like Microsoft and Cisco were able to parlay their first-to-the-gate status in emerging new technologies into marketplace dominance that let them charge far more than any normal market could bear.

Profits on Cisco’s networking gear regularly ran 60 to 70 percent. But profit margins that huge, as Microsoft would also learn, get ever harder to sustain as industries mature. And modest growth, as Chambers surely understood, would not be enough to keep Wall Street happy — and his personal gravy train rolling.

So Chambers began wheeling and dealing. Cisco had always sold product primarily to businesses. Chambers now started buying up companies that sell directly to consumers. In 2003, the first big move: Cisco spent half a billion acquiring LinkSys, a company that makes home routers.

More acquisitions would follow, and Chambers would vow, as 2009 opened, to build Cisco consumer sales into a $5 to $10 billion-a-year operation. That March, to dramatize that pledge, Chambers spent another $590 million to swallow up Pure Digital, the maker of the wildly popular Flip video camcorder.

“Pure Digital,” as the Cisco news release announcing the acquisition would boast, “has revolutionized the way people capture and share video.”

And the Flip had indeed done just that. Inexpensive and incredibly easy to use, the Flip had won the hearts of millions of consumers, including New York Times consumer tech guru David Pogue.

“I’ve got all these great videos of my toddler son in the back seat of the car,” he would later write, “because he’d suddenly start singing a hilarious made-up song, and I’d grab the Flip from the center console, hit the button, and I’d have it.”

But Cisco’s foray into consumer sales would soon sputter. Under Cisco, Flip lost market share to copycat camcorders, and the NPD market research firm would put a good chunk of the blame on Cisco “strategic marketing missteps.”

On consumer electronics, analysts soon realized, Cisco had no clue. The company was trying to squeeze out 60 to 70 percent profit margins in a consumer electronic marketplace where products, as CNET reporter Marguerite Reardon would point out, “are lucky to get profit margins in the low 30 percent range.”

The entire Cisco bid for consumer sales, not just the Flip buy, was turning out to be a disaster. And new competitors, at the same time, were busy gnawing away at Cisco’s dominance in its “core” networking equipment business.

Those competitors were charging lower prices. Cisco faced an increasingly distasteful choice: Either cut prices, too — and accept lower profit margins — or lose market share. Wall Street watched and grew antsy. Cisco’s share price, $27 at 2011’s start, sank to $17. The Street expected more from a CEO superstar.

Chambers, for his part, was getting desperate. Early this month, in a memo to Cisco employees, he acknowledged that Cisco had “disappointed our investors” and needed “more discipline.” He pledged to “make tough decisions” with “surgical precision” that would create only “healthy disruption.”

The “healthy” disruption would come the next week. Chambers shut down Cisco’s entire Flip operation and axed the jobs of 550 Flip employees. Seven million happy Flip owners would no longer be able to count on support and upgrades.

The decision, consumer electronics experts quickly charged, made no market sense. The Flip remained, despite stumbles under Cisco, the nation’s most popular camcorder. And a jazzy new Flip model, fumed David Pogue from the New York Times, was going to ship the same day Chambers pulled the plug.

“Chambers wants to demonstrate to Wall Street that he is ‘turning things around,’” added Investing Daily editor Jim Fink, a Flip user himself, “but terminating the wildly successful Flip video franchise is not the way to demonstrate a turnaround.”

But none of the consumer anger and frustration the shutdown provoked would end up mattering because, in the end, consumers don’t matter to corporate execs like Cisco’s Chambers. If they did, Cisco would have sold Flip to another company — to keep the product alive — instead of shutting the Flip totally down.

signupWhy didn’t Chambers sell the Flip? The Flip franchise holds information property rights to some key video technology. Keeping control over those property rights, observers surmise, meant much more to Cisco than serving consumers.

In his early April memo to Cisco employees, Chambers vowed to create a Cisco “that puts people, customers, and communities at the core of its values.”

An empty promise. High-ranking executives like Cisco’s John Chambers — who has personally averaged $38.9 million annually over the last six years, according to the latest Forbes reckoning — are operating in a corporate economy that rewards only greed. All the rest, consumers included, be damned.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

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One comment for “The Hazards in Our Fairytale Marketplace”

  1. Great report.

    Arrogance wins when sheep sleep.

    Posted by Fred Donaldson | May 3, 2011, 5:05 pm

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