Strategy

The Vice guide to sex, drugs and profit

How to build a US$100-million global media empire on a foundation of rock star living and canny business sense.

“We were partying till four in the morning, and we were pitching this Internet show [later that day],” says Gavin McInnes, recalling a recent incident when asked whether drugs affect work. “We stayed up all night, and around five in the morning we realized, ‘Shit, we’re going to be drunk even if we go to bed.’ Some gay guy I know who has AIDS gave me crystal meth…got some of that, stayed up more, and I thought we had it pretty much together, but it turns out we made asses of ourselves.”

McInnes, one of three co-founders of Vice magazine, is strolling through the streets of Williamsburg, Brooklyn, spinning opinions with his unique brand of taboo-slaying, depraved genius. Blunt words that would have most publishing executives fired in a heartbeat have been the fuel stoking Vice’s engine for more than a decade, and McInnes remains as irreverent as ever.

To many who first encounter it, Vice is an appalling mixture of sex, drugs and alcohol, twisted images and just about everything else offensive and insulting tossed into a monthly magazine. To fans, it is the most honest and hilarious cutting-edge send-up of the world we live in, a backlash against the politically correct baby boomer status quo, and the crème de la crème of neo-con party humour. If Conrad Black grew up listening to the Sex Pistols and popping pills, this is what he’d be reading.

Vice has become a business force to be reckoned with: a globally expanding multimedia youth culture empire. Vice Publishing Inc. has 10 editions of the magazine in Europe, North America, Australia and Japan, and will soon be launching in France, Spain and Belgium (and possibly China). It also has two books out: The Vice Guide to Sex and Drugs and Rock and Roll, and Dos & Don’ts. Vice online provides Internet space to advertisers through viceland.com. Vice Records (a joint venture with Atlantic Records) has signed some of the hottest groups out there, including the Streets, Bloc Party and the Stills.

Top that off with addVice, their full-service event and image marketing firm, with corporate clients such as Sony PlayStation and Solo Mobile. According to Vice co-founder Shane Smith, there is also a movie deal with director Spike Jonze (Being John Malkovich, Adaptation) and a likely one with media giant Viacom that would increase Vice’s estimated US$100-million value. That deal includes The Vice Guide to Travel, a DVD featuring antics such as skateboarding with Hezbollah guerrillas in Lebanon.

That formidable fortune has bestowed legendary status on the story of Vice’s rise. In 1994, 20-something Suroosh Alvi left a Montreal heroin rehabilitation centre with the idea of starting a magazine. He teamed up with McInnes, who had sent Alvi a punk comic strip he wrote about the narcotic. McInnes brought his Ottawa childhood friend Shane Smith aboard (who had been living in Europe, where he claims he dabbled in drug smuggling) and the unholy trinity was born. The magazine launched as The Voice of Montreal, backed by Haitian publishers.

Pulling intoxicant-fuelled all-nighters, McInnes and Smith (together with Alvi, who was clean and sober) cobbled together a free monthly tabloid, mixing street culture and punk music’s ironic wit. With precious few copies, they distributed only to stores that would deliver the right readership, generating cult status and instant demand. Word grew quickly about the publication, which shortened its name to Voice. The trio soon ditched the Haitian backers, borrowed $15,000 from parents and set off on their own as Vice. They claim they wooed ads from record labels and clothing companies by plying older female media buyers with sex, and male ones with drugs.

By 1998, media hype and controversy in Canada for the bad boys of publishing grew so large that Internet mogul Richard Szalwinski (founder of Behaviour Publishing, Normal Networks and Discreet Logic, among others) invited them to his office and asked them to name a price. They came back with a $4-million valuation, a number pulled out of thin air. But Szalwinski didn’t blink; the dot-com bubble was fully inflated and his lips were on the balloon. A part owner, he took Vice under the wing of Normal Networks, and into the big time.

“Working with Szalwinski was amazing at many levels,” says Alvi, between bites of his BLT at a greasy spoon a few blocks from Vice’s Brooklyn warehouse office. “He bought into our company just based on our vision…there was no due diligence, there was no looking at accounting. We had no books… OK, Captain America.” Alvi mixes nostalgia and bitter memories in speaking of the man who brought Vice to New York. “It was his idea to diversify the company and expand the brand, and he gets a lot of credit for that stuff,” says Alvi. “We wouldn’t have been able to come down here on our own.”

Vice was set up in swish Manhattan offices along with Shift, another Canadian magazine connected with Szalwinski. His strategy rested on expanding into retail, opening Vice clothing boutiques and an online store where advertisers (many of whom were urban fashion labels) could sell their wares. Expansion was the driving force, backed by Szalwinski’s seemingly limitless bankroll and balls-out approach.

“Magazines are a marathon,” says Evan Solomon, co-founder of Shift and now co-host of CBC News: Sunday Night. Szalwinski “was running it like a sprint.” Fundamentals such as accounting and debt collection were second to growth. Szalwinski’s partners “didn’t care about profits,” says Shane Smith, recalling a meeting at Normal Networks. “They said, ‘We want new entities,’ and I said, ‘What about making money?’ and they looked at me like I shat my pants.” The bubble burst in 2000 and suddenly Vice was sitting under a US$5-million mountain of debt.

So began what Alvi refers to as two years of hell. “Shane, Gavin and I walked around the building at our old office saying, ‘Do we call it quits? Do we go bankrupt? Because that’s what we’re going to have to do.’ It wasn’t an option; we had to figure out a way to make it work.”

With the support of Normal’s CFO, Patrick Gavin (now Vice’s publisher), director of operations, Richard Bisson (now comptroller), and Erik Lavoie (now associate publisher), McInnes, Alvi and Smith engineered a bold buyback of Vice. They tracked down Szalwinski in Nantucket, Mass., and convinced him to reverse a share swap and sell them their debt. On average, creditors were offered 50¢ on the dollar, and unpaid debts were collected. Lavoie got his father, Montreal businessman Patrick, to help secure a line of Scotiabank credit. Lavoie furiously sold ads, McInnes churned out content, and Vice shifted its focus back to publishing and profitability. They abandoned pricey Manhattan for free warehouse space in Brooklyn, saving some US$20,000 in monthly rent (and gaining office furniture liberated in the move).

More than five years later, Vice is back in black. “I don’t believe in debt financing,” says Smith before jetting off to London to check up on the company’s U.K. operations. Alvi explains this post-recovery philosophy: “That’s fundamental to what we do. Do we have assets for this? Do we own at least 50% of this? If not, then we’re not interested.” Everything must now turn a profit. Recently, Vice shut down its chain of clothing stores to focus more on media.

At the core of this is advertising sales, where Vice punches well above its weight. Though circulation is small, just 175,000 in North America out of 685,000 worldwide, the magazine’s pickup rate is 100%. In Canada, it is passed along to an average of six other readers. No excessive printing guarantees an active and interested readership, buoyed by the choice of distribution locations. Vice is only available at hip, urban, mostly independent clothing stores, bars and music shops. This targets a specific demographic, the urban trendsetter (“tastemaker” in marketing speak) who is at the heart of Vice’s commercial success.

“Imagine a pyramid,” says Vice Canada’s director of marketing, Shawn Phelan, who puts his readership at the top. These are the coolest kids in town: the first to listen to the next big band, the first to sport upcoming styles, the ones everyone else desperately tries to emulate. “Speak effectively to them and you will influence the rest,” explains Phelan. In advertising, they are about as gold a group as it gets, because they spread the message on your behalf. Advertisers such as Diesel, Paramount, Adidas, Calvin Klein, Mini Cooper and even Jaguar have all bought into this strategy.

American Apparel CEO Dov Charney (the Montreal-bred, Los Angeles-based King of Chutzpah behind the clothing retailer) is Vice’s biggest advertiser and fan. “They deliver access to the forward-thinking, metropolitan adult,” declares Charney over the phone. “We don’t want to pander to politically correct obsessions, we want to make sexy clothing. We want a provocative ad campaign, not one that fits the Moral Majority or the Ryerson student council.” With American Apparel ads on the back cover of each North American issue, Charney’s brand has risen in tandem with Vice.

“Vice lives up to its name,” says Rob Guenette, president of Taxi Toronto, the much-hyped advertising firm. “They’ve found such a unique conduit into their target market, so raw and so real, the authenticity rings true.”

The most popular section of the magazine is pure McInnes: four pages of his street fashion critique called Dos & Don’ts. A Do could be a photo of a kid on his father’s shoulders, holding a beer. “Either that kid drinks Budweiser or the dad has trained his kid to hold his beer,” writes McInnes in one issue. “Either of those things are so great that it makes me want to throw away all my condoms.” Don’ts are savaged. “Ooh, you are so ugly and Caucasian. Your silver shirt and your bitter little red hair say two very clear things about your future. Fat chick.”

“Dos and Don’ts are the essence of the brand,” says Steve Mykolyn, vice-president of design and interactive creative director at Taxi. “Thank God Gavin and Shane are in creative control. The worst thing that can happen is a change in content.” Any dilution of the brand would shed credibility with readers, and with that, advertiser value. Balancing that with advertisers’ limits is what remains tricky.

A former staffer tells a story about how Vice Canada once sold ad space to an older executive at Time Warner’s home entertainment division, who had expressed concerns about having his company associated with the magazine. But Vice’s demographic lock was irresistible, and he bought a spot, only to find his ad for Warner’s DVDs opposite a full-page photo of an elderly man performing a sex act. Warner never advertised in Vice’s Canadian edition again. “Ad sales get bombed when we have really harsh stuff in there, and they lose hundreds of thousands of dollars,” says McInnes. “I’ll have one penis joke in there…and I’ve taken food out of some guy’s mouth for a year.” Advertising economics dictate that Vice should eventually have to water down content to attract mainstream North American advertisers. What they’ve done instead is franchise the brand, launching international editions to pull in revenue from the four corners of the globe, while keeping content edgy.

Local partners will set up lean editorial and sales offices, finance the project and go after ad money. According to Erik Lavoie, international editions bring in 85% to 90% local ad material, with the exception of Canada, which shares 35% with the U.S. market. Sidelined in past years because of U.S. and international expansion, Canada’s operation is being beefed up again, almost as a matter of pride. “We’re a Canadian company and a Canadian mag,” states Lavoie.

Smith, Alvi and McInnes are now in their mid-30s, ageing away from the youth market they’ve captured and sold the unmarketable to. With a portfolio this juicy, could a buyout be at hand? “We were recently offered US$10 million for 10%, but we’re not selling,” affirms Alvi. “We don’t need to do the deal. We’re comfortable and doing great deals and our equity will be worth a lot more in a year.”

Do: Feel free to dismiss Vice as a crass publication pandering to tragically hip youth. Don’t: Underestimate the Canadian trio who make it happen. They’re canny entrepreneurs.