What Happened to Digital Railroad?

On October 15, 2008, John Harrington broke the news that Digital Railroad was likely being liquidated. We were shocked. Since that announcement, there has been a lot of speculation about what happened and what will happen to the images located on their servers. Because we had some dealings in the matter, I thought it might be elucidating to document what happened from my understanding.

I’m not going to address what happened prior to Digital Railroad’s liquidation announcement because I simply do not have any first hand information on that situation. What I’m presenting  is my understanding of what has occurred in the past few weeks because so many photographers have been left in the dark about the rapid sequence of events that have transpired. Portions of this document might be factually incorrect – I don’t vouch for the complete veracity, I’m just trying to shed some light on the situation, so that photographers can gain some understanding of the situation.

Diablo Management Group was hired by the Board of Directors of Digital Railroad to liquidate the company when they realized that they were basically out of operating cash. The reasons behind this lack of cash are irrelevant to the events that followed, but suffice it to say, that the declining economy that started to rear its head in mid-September contributed to the outcome. Without cash to pay for people and resources, it’s very hard to do business. Diablo’s job was to try to find a buyer in a very short period of time, or liquidate the whole thing. The timeframe was necessarily short because there was no money left. The board paid Diablo a fixed fee for a fixed duration, and if a deal couldn’t be consummated, they would shut down the company.

When Diablo was installed, the Board resigned, and Diablo assumed full control of the company. The Board was composed of DRR senior management and investors in the company. Once the company was going into liquidation, there was no reason to have a board, and it was a legal liability for those people to be involved. This is standard procedure.

Sometime in the past, DRR also took out a large loan from a bank called Western Tech (WTI), which Harrington reported to be about $1m. Why? Before the financial meltdown of the entire global economy, credit was relatively “cheap” – i.e. you could get a bank loan at a low interest rate. If you intend on being a successful company (like all companies do), then you assume you can pay this back. This is a “cheaper” way to finance the company than trading equity in your company to external investors.  But in taking this loan, the company agreed that the Bank would be repaid first in the case the company was sold, or went bust.

When the shit hit the fan, the DRR Board called in the liquidators. The bank was owed $1m, and they had “pref” (preference) to any proceeds from the sale. So any party that wanted to buy DRR, in whole or in part, needed the permission of the bank. In the meantime, Diablo transferred all the physical assets of the company (e.g. offices, computers, etc) to WTI to begin the liquidation proceedings.

Word got out that DRR was up for sale, and people started inspecting the assets of the company. Buyers wanted to know how much money the company makes, how much they owe others (e.g. telephone, server hosting, payroll, etc), liens against the company, how much the company is owed (i.e. Accounts Receivable), etc.

Simultaneously, Diablo knew that the company is out of cash, so they couldn’t pay the employees. You can’t have people work without paying them (it’s a legal liability), so they let everyone go. Potential acquirers were asking questions, but there was no one at the company who had intimate knowledge of the business. Diablo tried to assemble answers, but they didn’t really know the entire situation.


When the liquidation announcement was made, WTI probably wrote off the $1m on their books, but they obviously hoped to make back something on their loan. However, they weren’t really incentivized to work too hard to make it happen – after all, it’s only $1m, which isn’t that much in the larger scheme of things. And they weren’t going to be pushed around by bogus offers. Why bother? Why be known as the suckers that sold a company for a penny on the dollar? Or why work really hard through all the paperwork and legal fees to only recover a fraction of the loan amount? Sometimes cutting your losses is the most painless thing to do.

Diablo may or may not have wanted to notify DRR customers as a courtesy, but there was no longer staff to do so. So they didn’t… other than a simple web page. In the meantime, they realized that a bunch of DRR sites and the Marketplace were still operational. Visitors could theoretically transact with the system, only to find that nothing was delivered, and this is a major problem because it’s fraudulent to sell something without delivering what you promised. So Diablo needed to shut down the system as soon as possible. Could they have just shut off the public portion and keep the photographer accounts alive to facilitate transfers? In theory yes, but remember, there was no staff. There were just a bunch of servers sitting in a New Jersey datacenter. (A datacenter than costs money to run every additional hour.)

Ah yes, the servers. Why didn’t somebody just go in and buy the servers and resurrect the business?  We investigated this as an option.  Even groups of individual photographers wanted to do it. Seems like a good idea, but then the roadblocks emerged.    

Because the company ran out of cash, they hadn’t been paying the server hosting bills. So “buying” the servers wasn’t just a matter of negotiating with WTI and Diablo to buy the physical servers and the data that resided on them. It also involved dealing with a data center hosting facility that hadn’t been paid in a few months.

So even though the servers are technically the property of WTI, physical possession was held by the server hosting company. And given the size of the bill, the server company probably wasn’t going to allow a team of people to come in and remove several tons of equipment.

Let’s say for arguments sake that all of these obstacles could be overcome. Let’s say you had enough money to pay off the bank, and pay off the server hosting company and all the other creditors, and now you own DRR. Let’s say it takes $1m to do this. What exactly have you purchased?

The answer: A huge headache. Why?

Marketplace
A bunch of sales were made through the DRR Marketplace over the past few months. But if I am Acme Corp and I bought images from DRR, and I knew they were going out of business, why would I pay that bill? Even if I cared about the photographer, the money would be going to the bank, not the photographer. So why bother? We shut down our PhotoShelter Collection because it was a bad business for us. We were making healthy money with our Personal Archive only to burn it up in feeding the Collection’s growth. We wanted to give lots of money to the photographer, but the bottom line is that it takes a lot more money to run a successful marketplace because a direct sales team is necessary to close the largest deals that can pay the staff, rent, electricity, servers and so on. Is a 35% commission unfair to the photographer? Yes, but it keeps companies like Getty in business.

Photographers are owed thousands of dollars from DRR’s marketplace sales, and even if WTI sold the company “free and clear of liability,” the acquirer would still have photographers calling up and asking for their money even though they had no legal recourse. So time and money would be spent dealing with angry photographers with little to no upside.

Archive
If you’re a DRR user who just renewed last month for an annual membership, and an acquirer came in and inherited those contracts, they could be liable to service your contract for the next year without getting any money. DRR collected that money last month, and it was spent already. So the acquirer has just spent $1 million to acquire the company, but might not get paid by some users for up to one year, and which point the users might decide to quit. That is a huge risk for the acquirer. What sort of attrition could be expected? Would people be so emotionally upset at DRR that the new acquirer would take the brunt of that anger? It’s a huge risk.

This is just a sample of the analysis that potential acquirers considered in DRR’s final days.

The Mad Dash for the Exit
Hundreds of DRR photographers were desperately trying to get images out of the system, and in many cases, they tried to transfer them to PhotoShelter. But as time wore on, they received “image not available” on anything they tried to transfer. Initially, we thought that this was intentional on the part of Diablo to maintain the value of the property. The more photographers that flee, the less value the company has to a potential acquirer.

But our developers actually think that the server that was managing the outbound FTP actually ran out of disk space, and there was no staff to monitor that. Our staff conjectured that the images were sitting in a database, and when a transfer was queued up, it was retrieved and all the meta data changes were embedded in the image. That newly “created” image needed to reside on a disk drive in order to be transferred. If the rate of images being queued exceeded the rate at which they were being cleaned up, then the disk fills up at some point, and the server basically starts throwing errors.  In truth, a few ex-DRR employees were trying like hell to help their customers get images off the system, and it was heartening to see that level of commitment from people basically working as volunteers.

During this period, I read a lot of comments from angry photographers on multiple forums who ranted against Diablo. Ironically, I think this anger is misguided because Diablo was just doing their job. They didn’t try to block people from accessing their images, and on the contrary, when I spoke to their principals, they told me that they were trying their best to allow photographers to remove their images. Hence the joint announcement by PhotoShelter and Diablo on October 30th which extended the date of the shutdown, and gave a hard date for the closure of the site.

Newscom looked at acquiring the company, but later, their managing director, William Creighton stated, “We started with the basic premise that we’ve got to run it as a profitable business. We looked at the cost of operating it, then we looked at the revenues that would be coming in,” Creighton explains. “The costs outrun the revenues and that made it a  no-win proposition.”

Another company was reported to be looking into acquiring the company after Newscom, but  presumably they came to the same conclusion because nothing transpired, and Diablo made the official final announcement to shutter the company.

In the end, the photographer got royally screwed. This is the case, in part, because all of the involved parties needed to cover their asses from legal liability. If we didn’t live in such a litigious society, someone might have been inclined to be altruistic, but that simply is not the case. That said, Diablo has been involved in liquidations for over 20 years, and any photographer who wanted to mount a legal suit would be wasting their time and money. If you’re owed money from prior sales or you just renewed your DRR archive account, don’t even bother trying to collect. Trade organizations like SAA are valiantly trying to recover monies owed, but the reality is that no one is going to get anything because there is literally nothing to get. Sure, there is money owed for Marketplace sales, but there is no one to collect them. And again, a company that licensed an image is more inclined to keep delaying payment until the collection calls stop.

Besides being a sad tale, the saga really shows how weak the markets are right now. If a company like Nikon had a similar situation, you can bet that a company would come in and buy them because of the value of the brand and the user base. Unfortunately for DRR, this simply wasn’t the case. If we lived in boom times, and credit was cheap, somebody probably would have come in and purchased the company. But the global economic meltdown has changed the environment significantly. The ability to get credit to purchase a house, company or car has been heavily stymied by the economic environment.

Lessons Learned
Fortunately for us, PhotoShelter is well-capitalized and we manage a very modest budget. But you don’t have to take my word on it. Look for the signs that a company is in trouble. Are they answering their phones and e-mail? Are they releasing new features? Do they have a visible public presence? All those things are a good indicator of general health because when things go south, things like product development and customer support come to a stand still (by the way, we’ve had five feature releases on the PhotoShelter Personal Archive this year, and two in the past month).

It is easy to see how DRR’s demise can damage people’s belief in the entire space for online archiving, portfolio, and digital storefront providers.  As a company with a similar business to DRR, in many respects PhotoShelter has inherited the responsibility to educate photographers and ensure that what happened to photographers associated with DRR can never happen again.  And to do this, we’re not going to change a single thing.  Over time, we’ve proven our own track record – so we’ll stay highly responsive to customer needs with an ambitious schedule for new feature releases, consistently innovate to create success opportunities for our photographers in a tough market, and stay smart in how we manage our cash flow.        

On that note, let’s leave with a few happy stories.

Longtime user, David Wagner, recently upgraded his account to create a e-commerce enabled website within a few minute. He immediately priced his images for rights-managed licensing using our very cool integration with fotoQuote, the industry standard for pricing photography. A few days later, he was surprised to find an email that was automatically dispatched from PhotoShelter indicating that a newspaper in Brasil had found his images and had licensed one of them using a credit card while he was sleeping. I love this story because it feeds into my mantra that you never know who is looking at your website, and if you don’t have e-commerce enabled, you’re losing potential sales.

wagner.jpg

Then the other day we received an email from Craig Mitchelldyer whom Grover profiled on the blog. He was chatting with staff from the Portland Tribune one night, and they were lamenting the fact that they didn’t have slideshows on their newspaper site. Craig mentioned the PhotoShelter embeddable gallery, and a few nights later, he went to a Portland Trailblazer’s game with staffer Jaime Valdez and 10 minutes after the game, they had a slideshow up on the site. Next week, they are going to try shooting live into a public gallery like we did at the PhotoPlus Expo, with immediate FTP uploads so the slideshow will appear on the website as the action is captured.

You can succeed with the right tools and a little ingenuity. We hope to help you on your path to success.

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This article was written by

Allen Murabayashi is the Chairman and co-founder of PhotoShelter. He co-hosts the "I Love Photography" podcast on iTunes.

There are 5 comments for this article
  1. The Corey at 1:38 pm

    A very similar thing happened to me at a stock photography start up. We were told six hours into our day that they no longer had money and we were now volunteers. At fist I was upset but later realized it wasn’t personal. They ( the founders) wanted to stay in business and wanted to keep us there but in the end funding dried. This also happened around the time of the Bear Sterns collapse. Usually about 25% of new businesses don’t make it, I can only see this getting worse in the year/s to come.

  2. Garfield Hall at 4:29 am

    A part of why I am so attracted to the Photoshelter platform, as much as I am, is their drive to educate their customer base and to be transparent at all times. I feel secured in knowing that they do honest business and allow an open forum, in which photographer can participate to thrive and to develop with their feedback. There is great value in knowing that you are a key participant in the development process of the entity that you entrust with your assets and that you grow when the entity grows as well. In the foreseeable future, Photoshelter will likely anchor an enviable position in the photo market, much like that which Getty possesses. This will not be because they use their assets and power to muscle Photographers into a mold that makes them paranoid or fearful, but because they empower them at every juncture. I see more and more that my decision to come on board was perhaps, the wisest choice I have ever made in my photography career. And I do not take lightly, that I was one of the lucky ones that sold while PS was still licensing imagery. Kudos to Allen Murabayashi and company, he’s a true visionary and facilitator. Garfield Hall Photographer

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