What do you do when your most important client changes the rules of the game? You tell them to get stuffed.
David MacLaren would never put it that way, but it sums up what the president and CEO of VRX Studios (TSXV: VRW) did when a three-year contract with the 800-lb. gorilla of travel websites came up for negotiation last year. He might not tell you this, either: when painful upheaval will strengthen your firm long-term, you make the change.
Until then, VRX, which provides visual content to hotel and travel websites, had created virtual tours of hotels for the exclusive use of Expedia, a travel website backed by InterActive Corp. Suddenly, Expedia wanted VRX to slash its fees by half while offering no guarantee of the volume of business it would give to MacLaren’s young company. Expedia also wanted to retain exclusive rights to the photos, meaning MacLaren couldn’t recoup lost revenue by reselling the images. He had a lot of revenue to recoup: Expedia accounted for roughly 80% of VRX’s total business.
“Do we accept this and have a glass ceiling, or do we come up with a new model?” asked MacLaren. He bravely chose the latter.
For that, MacLaren can thank his lucky stars. “We walked away from a major client,” he explains, “but also from an unsustainable business model. The main thing with Expedia is that there was no growth potential. For a public company, it was unacceptable.”
By January, VRX had shifted from a service- to a licensing-based model, in which it owns the visual content it creates, updates it regularly and sells it on a pay-per-view basis to the hotels and online travel services that post the images on their own websites. The idea appeals to travel sites because they don’t have to rely on using photos of inconsistent quality provided by the hotels they promote; hotels like the idea because it means they don’t have to pay for high-quality photos to be taken, updated or maintained.
Sounds sensible, but MacLaren admits the move was risky. In the three months it took to launch the first phase of the new model, VRX had to invest close to $1 million in infrastructure and new staff without a major source of recurring revenue. It also had to face the possibility that travel websites would resist paying for content they’d grown accustomed to receiving for free.
“We wanted to turn the industry on its head,” explains MacLaren. “There was demand for visual coverage of hotels, and potential clients liked our quality, but no one wanted to really pony up. We had to do some super sales pitches.”
The effort is paying off. In the past five months, VRX has signed up more than 500 hotels and landed deals with 12 brand-name resort chains, such as Sandals and Caesars, plus Hyatt North America. It has also engaged in a trial with one of Expedia’s rivals.
MacLaren estimates that, by year’s end, VRX’s library will contain coverage of more than 1,000 hotels that will generate 10 million views per month Ã¢Ã¢¬Ã¢¬ enough to boost revenue above 2003 levels. “It’s our own content and we have more than one licensing client, so we have higher margins,” says MacLaren. “In a lot of ways the move was about the money, but it’s more than that. I want VRX to grow. My No. 1 purpose is to make it bigger.”