Monday, October 27, 2008

The Second Mouse Gets The Cheese - Who Will Acquire Digital Railroad Assets?

It looks like the VC's that bought into the Orient Express that was Digital Railroad have a bit of a problem on their hands, snapped in half by the mousetrap spring they didn't see coming to crush them. In an effort to stem the burn-rate of what rose at points to be $800k a month, they took out a loan with a bank of upwards of $1M. The problem is, with a burn rate that high, that was a stop-gap solution that did not include the reining on of expenses, or atleast ones that never materialized. What is remarkable too, is that a startup was willing to pay reportedly between $400k and $500k for it's CEO, Charles Mauzy. While there are suggestions to the contrary where we detailed a similar pay structure for it's President, Maris Berens, a review of further documentation shows his salary at approximately $136k, and then under $125k after he took a pay cut as a part of belt-tightening at DRR. What startup pays that amount of money to a CEO? Certainly, both had a track record and contacts that were worth that, but that's bad form for a startup to pay that figure. What's not a part of the reporting of those salaries is what they had as an added equity stake that is now worth less than the paper it was printed on. There is speculation that the development of the DRR platform on an entirely Microsoft solution, coupled with bringing in Mauzy, a Microsoft veteran, was positioning them for an acquisition by Microsoft (and hopefully a big payday), but that never materialized.

One of the messages I overheard several times in the booth at liveBooks, where I spoke for an hour each day during the just-concluded PhotoPlus Expo was how much people wanted an integrated solution not just to facilitate an attractive facade in the form of a website, but to also be able to serve their clients with image delivery, and a licensing vehicle. For over two years, both liveBooks and PhotoShelter have been in talks to have at-least some form of bridge between the two, and it may be that there were also merger talks and the past two years have been just the courting phase. The fact is that you can get a great design integration between liveBooks and Photoshelter today, and if this all goes south maybe more will develop. However, for now however nothing more than visual integration exists.
(Continued after the Jump)

Months ago, the VC's of Digital Railroad were shopping around the platform, but too much in the way of expectations for what they would get for the sale, as well as a number of unreasonable (relatively speaking) demands were made, and they failed to realize that the clock was ticking, and ticking fast.

As we reported last week (Digital Railroad Likely Being Liquidated, 10/15/08), DRR is likely being liquidated. Every member of the board has, in fact, resigned, and the company is controlled by Diablo Management, with a few of the former senior management or officers remaining on as just employees, with no official officer roles. Yet, that changes today, Monday October 26th. With a negative balance in the bank account, there is no more money, we are told that all staff were sent an e-mail from Diablo telling them not to report to work today. Yet, Andy Parsons, and a few other senior staff apparently will stay on, through the week, as volunteers, without pay. What a new month brings, remains to be seen. Absent the spigot being opened at PhotoShelter to receive FTP'd files as we'd provided advance how-to on, approximately 1% of the 2,300 DRR photographers have either cancelled their accounts, or migrated their files off of the DRR platform. It seems that everyone that is a paying member there is in denial about the realities of the dire situation DRR is in. Just like, the clients have been asking what they can do to help this ship from sinking.

DRR has just two options - file for bankruptcy, or get acquired at firesale rates. The decent rate on this nosedive is just too severe. There are just a few possible players for the company at this time - PhotoShelter, former senior management member Mark Ippolito, and, PictureMaxx. Perhaps too, this could be of value to liveBooks.

Surely, the opportunity to pick up this platform at a firesale rate is attractive. However, PhotoShelter doesn't need it since they have, what is in effect, certainly a better user interface, and cleaner programming code, as looked at from a code jockey and software engineering standpoint. That doesn't mean that the DRR platform is bad per-se, but a central question will be what work needs to be done by the acquiring company. All PS needs is to bleed the lifeblood out of DRR in the form of the free migration for DRR members between platforms, and that is expected to ramp up this week, as PS flips the switch on that capability. How many people do that remains to be seen. Further, DRR has an active Marketplace for aggregating and licensing images, a capability that PhotoShelter launched a year ago, and closed down last month. An acquisition of DRR by PS would mean that they would be back in business with PhotoShelter Collection v2.0, and I don't see them liking that idea at all.

The altruistic and well meaning Ippolito is no-doubt having a hard time securing financing, but he's facing a far less insurmountable challenge, with the company worth less than $1m, and VC's having invested over $20m, all together. Where Ippolito could find $1m, and also the money necessary to continue the company, remains to be seen. Evan Nisselson, the company's founder, tried to re-acquire the company, and failed. Ippolito could do a good job, but won't likely get the chance.

PictureMaxx, which we recently wrote about here (10 Questions for Tom Tinervin, 10/21/08), is not likely to be interested in the acquisition. They have their own, completely different platform, and the ability to integrate the features of Digital Railroad into the PictureMaxx platform is highly unlikely. Further, they would be entering into direct competition with some of their current customers, so that's not likely either.

So, that leads us to this question - is there any real potential buyer out there? Perhaps the final player in the game could be liveBooks. Within the past year, liveBooks was approached by DRR, but there were some unreasonable requests and a starry-eyed valuation that, at the time, probably turned liveBooks off to the idea. LiveBooks certainly could use the platform, since their "Client Access" feature for their websites is clearly lacking in the robust capabilities that both PhotoShelter and Digital Railroad have to offer. Yet, both PhotoShelter and Digital Railroad do not have the functionality and optimization that liveBooks' platform offers for a facade. If liveBooks were to acquire the platform - and that looks like a decision that will based upon how well the liveBooks CTO can untangle the coding that is within the DRR .net platform, and integrate DRR into the liveBooks architecture. In doing this, they then would have a solid platform that could meet prospective clients' needs, and provide a monthly revenue stream from the DRR monthly fees, beyond the pay-once website design model, giving liveBooks a true archive capability and a more complete solution. However, what is liveBooks willing to pay? It's highly unlikely that liveBooks will write a check, but perhaps they don't have to. With sufficient cash-positive flow, and a healthy company, they could take over the code, clients, and, perhaps even run the Marketplace, and do so in exchange for a small equity stake in liveBooks, taken in lieu of payment by WTI. Their acquisition of the company would also give them a possible revenue stream from Marketplace sales, where 20% of the sale goes to the company. One question though, would be that since liveBooks is so single-photographer-centric (they only have a few agencies), how would all the agencies that DRR has on-board, be handled? There are few solutions out there. Surely, they could jump ship to PhotoShelter, code-it themselves, or, then, as noted above, there's PictureMaxx, which we previously wrote about, and DRR's Tom Tinervin is bringing PictureMax to the US, so that's quite a possibility too, since providing a platform for each of the current DRR agency clients would not be as much of a conflict as running the Marketplace themselves.

Whomever acquires the assets, they will get a core code worth, at best, $500k, and you can expect the name to go away. There will be no more Digital Railroad. This will be no merger. This will be the acquisition of the assets of a company. The bank holding the note - WTI - will have the final say. Since they're a secured creditor, and the only real one, they will be the recipient of whatever proceeds come from the dissolution of the company, from a platform sale, as well as the sale of the designer chairs by the auctioneers. The VC's are SOL.

So, will the second mouse get the cheese, in the form of a debt free company with an existing paying client base and image licensing platform? Will liveBooks be the savior of the potentially-soon-to-be-left-at-the-station Digital Railroad subscribers? And what will the fallout be between the very friendly companies of PhotoShelter and liveBooks, who would now be competing - in one way, or another? Or, will Ippolito pull a rabbit out of his hat? Or, will a bankruptcy happen, and PhotoShelter drains the subscribers from DRR, and PS and liveBooks will continue their courtship for synergies? Hang on friends, this is going to be a bumpy ride, and this will be happening fast, since this likely needs to be wrapped up before November.

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