Entrepreneurial Challenge: Clean Machine

Disc-Go-Tech isn't too concerned that the technology it depends on for its existence is going out of style

History is littered with products that either didn't stand the test of time or just failed outright–and usually with good reason. It's hard to imagine anyone listening to an eight-track tape in their horse and buggy as they hurry home to watch a Beta video rental from the general store.

Yes, we're discarding new gizmos almost as fast as we pick them up these days. So it's more than a little surprising that Langley, B.C., entrepreneur Mark Chaplin doesn't seem too concerned that the technology he depends on for his livelihood is going out of style–and none too slowly. Chaplin's five-year-old company, Disc Go Technologies Inc., makes machines that clean and repair discs–such as DVDs, games or CDs–and sells them to the likes of video stores, libraries and pawnbrokers.

Buffing off a few microns of plastic to restore a disc's shininess and make it playable has been a pretty lucrative business so far. But with the digital age upon us, it would appear Disc-Go-Tech may go the way of, well, disco. “As a company we realize that discs aren't going to be around forever,” Chaplin concedes. “But we have a huge base of customers in the entertainment industry and, right now, there isn't a solid format for how they're going to deliver digital media to their customers.”

A potentially bigger headache is looming, and it has nothing to with how Disc-Go-Tech customers sell their products, but how the company operates. In the early years, Disc-Go-Tech primarily targeted the business-to-business market, and it's a strategy that has worked. Since introducing its first automated disc-repair machine in 2002, Disc-Go-Tech has grown into a 25-employee operation with projected revenues this year of roughly $4.5 million, and A-list customers that include Blockbuster, Movie Gallery and, at one point, Rogers Video. Not bad for a company that six years ago was a tiny startup with just $37,000 in sales. Next year, however, Disc-Go-Tech is planning to enter the mass consumer market with a new product that will sell for less than US$100. “It's going to be a huge shift for the company, yeah,” says Chaplin. Not only will Disc-Go-Tech have to change its marketing and selling tactics; it will also have to worry about manufacturing thousands of units (as opposed to one-offs or short runs) and may have to double in size to handle the extra workload. Since the new consumer device will likely be manufactured overseas, Chaplin can add quality-control issues to a growing litany of possible problems he has to deal with before his new product ever sees the light of day. That's a tall order for any company, but especially one that is more used to selling US$60,000 industrial-strength machines.

Disc-Go-Tech isn't completely green when it comes to the consumer market. Aside from the Disc-Go-Mech, the company has gone down-market with a couple of other products, particularly the Disc-Go-Pod. At US$349 it's a bit too expensive for most consumers, not to mention overly powerful, but it does appeal to mom-and-pop-type stores that rent videos and games. It has been listed with some specialty retailers and in a few catalogues, most notably in U.S.-based Cinmar publications, as well as B2B catalogues including Video Store Shopper and Brodart. The Pod is currently manufactured in China, giving Chaplin a taste of what's to come. “We've had some experience with Chinese manufacturers and things like that and had a lot of bad experiences,” he says.

Still, what Chaplin and Disc-Go-Tech have managed to do to date is a far cry from manufacturing and selling thousands of cheaper repair systems into a market that already has dozens of options, from alcohol wipes to the SkipDR, a decent disc-cleaning system made by Digital Innovations of Arlington Heights, Ill., all of which work with varying degrees of success. In fact, Chaplin says one of his biggest challenges will be to convince disc lovers that Disc-Go-Tech will work. “All those little repair kits–alcohol wipes and things like that–that claim they can fix scratches have done nothing but hurt the industry,” he says. Yet thousands of people have bought the US$40 SkipDR because it's really the only serious option other than do-it-yourself remedies.

Chaplin says he's looking forward to the challenge of mounting some competition, although he's still a little hazy on the details. His company will probably outsource everything from assembly to packaging, and someone will also head overseas to oversee production. “It is quite a process,” says Chaplin. “It should be fun.”

The jump into the business-to-consumer model isn't the first change in strategy Disc-Go-Tech has undertaken since developing the Disc-Go-Mech back in 2002. Chaplin's original plan was to sell franchises and give a machine to each franchisee as part of the selling cost. The franchisees would then offer their disc-cleaning services to the local market. It seemed like a sound proposition, but well-entrenched competition down south left Chaplin and the two franchises he did sell–one in Atlanta and another in Nashville–spinning hopelessly. Fortunately, a large American entertainment company that wanted to get its hands on the machines bailed out the franchises in early 2003, and Chaplin was free to start selling the Disc-Go-Mech to other companies.

Chaplin did end up adapting one of the most appealing elements of his franchising model: a service royalty of roughly 30¢US on every disc repaired. “It's similar to the photocopier model,” says Chaplin. “People buy the machine and they're locked into a service agreement where we supply all the supplies, the training, set-up, support and everything for the machine, and they pay us a per-disc fee.”

Not a bad business model for an idea that essentially started in Chaplin's garage in 1996. Back then, Chaplin was working in R&D at Mitroflow International Inc., a Vancouver-area medical-device manufacturing company. His friend and current business partner, Ron Haufler, was a car detailer who was adept at polishing just about “anything and everything,” including the odd compact disc, with his car-polishing equipment, as Chaplin discovered when another friend came by Haufler's house with a damaged disc. “He polished this disc up and I said, 'There's no way this is going to work,' so he threw it in the CD player and it worked perfectly,” Chaplin recalls. Astonished, Chaplin got Ron to buff a few of his scratched and unplayable discs and they worked, too. The pair started pitching the service to local video-game and rental stores, who were only too happy to hand over their dirty discs. Six months into the endeavour, the pair signed the Video Update chain, now part of the massive U.S.-based Movie Gallery group. Blockbuster Video followed about a year after that.

By 2002, Haufler was fixing hundreds of discs a day–still doing it by hand with a vise and a polisher–and Chaplin, who had left Mitroflow in 1999 to concentrate full-time on Disc-Go-Tech, was plotting business strategies to take the strain off his friend. They tried an existing automatic disc repair machine in 2000, but sent it back after half a day because Haufler could work four times faster on his own–never mind the blisters. So they built and marketed their own machine using a $100,000 loan in 2000 from Chaplin's ex-boss at Mitroflow and $30,000 raised from family and friends in November 2002. It also grabbed another $180,000 after attending an angel investor seminar in January 2003.

That gave the duo enough cash for the Disc-Go-Mech–“the biggest, baddest machine on the market,” according to Chaplin–but also the low-end Disc-Go-Pod, and the mid-range Disc-Go-Cube and the Disc-Go-100 in following years. The 100, a fully automated disc-cleaning system that uses cartridge-based supplies instead of sandpaper and bottles of fluid, has had its share of problems. Scheduled for a May delivery date, technical difficulties and the Port of Vancouver strike prevented its release until September. But then it was pulled off the market for a quick revamp after just a few units shipped. That's taken away some of the momentum the company was building as it starts concentrating on the consumer market. If successful, Disc-Go-Tech will continue its three-year string of triple-digit revenue growth, but it won't be easy. “It's not going to be an overnight success, but it will sell quite well once consumers realize it does work,” says Chaplin. “It's going to be a long haul.”

At least time seems to be on his side. Technology market researcher In-Stat of Scottsdale, Ariz., predicts digital delivery services won't replace DVDs for a while yet. It expects DVD sales will top US$76 billion in 2009, up from roughly US$33 billion last year, as consumers start replacing their old VHS tapes and DVDs with high-definition DVDs.

And if the world does go digital in the meantime, Chaplin believes his company can adjust and develop something for that realm as well. “We make discs go,” he says, “but we'll also be there when discs go.”