Industry trends - increased worldwide revenue sources: FORBES
High technology and high finance are making
the smut business look legitimate. How did
this happen?
Porn goes public
By Richard C. Morais
It's Tuesday night at the Bagdad, a porn
palace in Barcelona. On a rotating stage, an
assortment of costumed performers engage
in sex in front of an audience of 20 or so,
mostly men. Next door, Private Media Group,
a Nasdaq-listed international pornster, uses
Bagdad talent to stage live sex shows on
the Web, 24 hours a day.
Here's how the digital version of the old
peep show works: One of the 20
Privatelive.com Internet "artists" is naked on
a couch, performing graphic acts for the
wall-mounted Web camera. While she's
feigning excitement, she discreetly taps a
hidden panel that adjusts the camera's
angle. She looks at the PC screen.
Privatelive.com customers are
simultaneously ogling her from the privacy of
their homes and typing out messages to her.
Their credit cards are getting charged a
dollar a minute. There are only three on-line
now, but Private Media says it can handle
1,000 such customers at any one time. One
of the cybervoyeurs types into the chat
room that he wants the porn actress to
tweak her nipple. She obliges.
The Web-cam images are relayed at five
frames a second from the basement in
Barcelona to a satellite dish atop Private
Media's headquarters in the city's suburbs.
The satellite then sends the images across
the ocean to the Internet's MaeEast
backbone in Washington, D.C. and from
there to customers in Chicago or London or
Jakarta, via a high-speed connection.
Welcome to the modern peep show. Today's
legal porn business is a $56 billion global
industry (see table, "The global playground")
and very different from when FORBES
published its groundbreaking coverage in the
1970s about mob enforcers and
under-the-table cash payments. Says Berth
Milton, 43, a second-generation Swedish
pornographer and the chairman of Private
Media Group: "The era of paying cash under
the table is over."
Milton converted Private Media's $20.5
million of 1998 revenues and 25% net profit
margin into a Nasdaq listing in February.
Cranston, R.I.'s $34 million (revenue) Metro
Global Media is also Nasdaq-traded. A $50
million (revenue) Web porn-peddler from
Seattle, Internet Entertainment Group, is
preparing its first stock offering now.
Germany's ($95 million revenue) Beate Uhse
AG hopes to become the European Union's
biggest sex store chain and is floating 20%
of its shares on the Frankfurt stock
exchange in a $65 million offering this
month. Uhse's American competitor,
"category-killer" Castle Superstores Corp., is
preparing a $15 million private placement
prior to a hoped-for stock offering.
Porn still has its traditional freaks and
mom-and-pop operators, but it is also
getting merger-and-acquisition activity just
like any mainstream business. Vivid Video
acquired Spice Hot Network for $25 million in
March, after Playboy Enterprises bought
Spice Entertainment Cos. for $100 million in
cash and stock. "The adult entertainment
business is consolidating," says Ralph
Feuchtenkort, a consultant to Europe's
hard-core companies. "In the future there
will be fewer than ten global players."
A turning point in the industrialization of
pornography came in 1973. That was when
the Supreme Court ruled in Miller v. California
that "pornography" but not "obscenity" was
protected by the First Amendment. While
the Supreme Court began pornography's
legal liberation, the biggest obstacle to the
distribution of graphic sexual material
remained the mob-controlled Times Square
sex shops and theaters. Squalor and
embarrassment had the effect of enforcing a
taboo.
Technology took care of that: the VCR, the
pay-per-view and now the Internet. The
curious discovered they could watch erotica
in the privacy of their own home. Result?
Last year 8,948 hard-core videos hit the
U.S. retail market, up from 1,275 in 1990. In
1998 Americans rented 686 million "adult"
tapes. This year X-rated videos should
generate some $5 billion in sales and rentals,
double the revenue of five years ago. Even
a Critic's Choice Video catalog recently
carried 16 pages of adult tapes. And that
explains why the trade publication, Adult
Video News, has become a glossy 280-page
monthly stuffed with advertising.
Behind these videos stand Vivid Video, VCA,
Metro, Private and a score of other
companies that dominate the high end of
the international porn market. Production
costs for a 90-minute video range from
$10,000 to $400,000. The films will include
five to eight sex scenes with about a dozen
porn stars and might be set in exotic
locations.
Industry leader Vivid Video of Van Nuys,
Calif. produces 90 films a year. Last year
Vivid released separate hard and soft
versions of The Masseuse Part III. It cost
$100,000 or so to shoot the film, not a lot
by Hollywood standards, but Vivid must
compete with 80 smaller companies and
thousands of amateurs making hard-core
films with handheld cameras for a few
thousand dollars.
How do you make money when your
competitors are almost giving their product
away? You reedit and resell the same film
again and again. "We amortize the budget
over different products and push the
content into different areas," says Steven
Hirsch, Vivid Video's 38-year-old president,
also a second-generation pornographer.
That is why a film like The Masseuse Part III
will unleash a tidal wave of product: video
compilations; pictures streamed over the
Internet; DVD; hotel pay-per-view; soft-
and hard-core versions for cable stations
and international versions. That's how Vivid
Video could earn a 15% net return on $35
million in sales last year.
More so than in the rest of the film industry,
the serious money in the business is made
not by the producers but by the distributors.
Retailers in the 1970s operated behind
beaded doorways selling magazines they
bought out of the trunks of beat-up cars.
Today the prototype retailer is
Phoenix-based Castle Superstores Corp., an
"adult version of Toys 'R' Us." Castle
Superstores operates 11 Wal-Mart-like
outlets in the West dedicated to sexual
paraphernalia: 45,000 items, including 270
flavors of condoms and 600 different types
of lotions. No backroom cabins for perverts
but bright lights, pleasant music, all aimed at
luring women and couples into the store, not
just the usual single men.
It's working. Castle founder Taylor Coleman
predicts that his revenues this year will hit
$20 million and that his stores will continue
to earn 17% pretax. "Investment banks are
clawing down my door," says Coleman.
Another outfit, PHE, owner of Adam &Eve,
sells $90 million worth of adult products,
including sex toys from its mail-order
headquarters in North Carolina. In April,
Erotica U.S.A. ran a sold-out sex industry
exhibition at the Jacob Javits Convention
Center in New York City, complete with a
"Fetish Ball." Some 40,000 visitors forked
over $30 to $150 a ticket to gain entrance.
The U.S. adult cable and satellite industries
generate $310 million in annual revenue. A
porn producer will sell the U.S. cable/TV
rights to a 90-minute X-rated film to a porn
channel for from $1,000 (a hard-core version
for a satellite station) to $25,000 (soft-core
version for Playboy). At the other end,
however, a channel like The Erotic Network
sells views of the film to its 6 million
addressable homes in $8 blocks of time. All
the films produce a revenue stream of
perhaps $7 million a month. The network
keeps 20% of that stream; the other 80%
goes to the cable operator, a blue-chip
company like Time Warner.
AT&T, which connects callers to 800 and
900 phone-sex numbers and is the proud
owner of TCI and MediaOne, is as much a
part of the modern porn industry as
performers Lovette and John (Buttman)
Stagliano. And hard stuff, not the peekaboo
soft-core found in the U.S., is readily
available in Hilton and Sheraton hotels
across Europe. This reporter, surfing TV at
five in the afternoon in a local hotel in Jerez,
Spain, with his wife and 8-year-old
daughter, came across graphic oral sex. It
was one of the teasers fed into the public
system in the hope they will entice you to
click on the pay-per-view.
Behind hotel porn stand companies like On
Command Corp. and LodgeNet
Entertainment, the Nasdaq-listed providers
of "in-room entertainment for the lodging
industry." Together they shovel porn into
1.5 million rooms worldwide. LodgeNet
confirms that 50% of its pay-per-view
revenues comes from adult content.
Enter the Internet, the greatest distribution
system of our time. Pornography to the tune
of $1 billion already flows over the Internet,
according to Forrester Research of
Cambridge, Mass. Behind those figures are
sites like Sex.com, Cybererotica.com and
Clublove.com, and some 40,000 individually
run operations. The $7-million-revenue
(annualized) Internet Video Network, for
example, specializes in interactive Internet
strip shows from a 10,000-square-foot
studio in Pompano Beach, Fla.
Typically, Internet companies buy pictures
from porn producers and then slap on their
own banners, charging customers $10 to
$30 a month to view them. Internet porn
companies have employed MIT programming
wizards to pioneer Web techniques—now
taken up by mainstream companies—such as
automatically launching a different porn site,
for a cut, when someone tries to exit.
It's hard to tell how big these Web
pornographers really are, because they
often stand behind hundreds of seemingly
different sites. Senior analyst Mark Hardie at
Forrester thinks the biggest porn sites have
sales between $100 million and $150 million.
We can't confirm that, but we were able to
find several companies—such as Voice Media
(Cybererotica.com) and WebPower
(SafeSexPlus.com, Amateurs.com)—with
revenues in the $55 million region. The
Internet is a gold mine to pornographers,
since the medium bypasses any regional
censorship efforts and cheaply opens up
previously inaccessible markets like the
Middle East. And if ever there were an
industry that could benefit by streamlining
its distribution channels, it's this one.
"German consumers pay up to $110 for an
adult video," says Feuchtenkort. "They are
no longer willing to pay for five different
[intermediaries] between producer and
consumer."
No company is better positioned to take
advantage of this new world than Private
Media Group. Founded in Sweden in 1965,
Private was the first legal porn magazine in
the world. Berth Milton says the magazine's
founder, his father, was a "freak" who had
him selling hard-core 8mm pornography at
the age of 11. Berth Milton swore off the
business and went on to make money in the
stock market and by building an electronics
business in Sweden and a hotel in Spain. But
he saw how Private was being run into the
ground, and in 1991 he bought out his
estranged father. Milton has since moved
the company into everything from video to a
Private label fashion line.
Private's kiwi-flavored lubricants and rubber
panties are sold on hourlong infomercials in
Europe, and its distinct brand of hard-core
pornography, sold in 35 countries, is now
accompanied by original soundtracks from
pop stars like 3D (Massive Attack) and Liam
Howlett (The Prodigy). The company
sponsors a U.S. Masters-standard pro golfer,
attempting to create the image that
pornography is part of a healthy person's
lifestyle.
Private, which gets most of its revenue by
licensing content to distributors around the
world, has retained the rights to its 34-year
catalog of pornography, making it the MGM
archive of hard sex. Milton aims to exploit
that archive digitally by charging Private's
Internet customers a flat annual fee of $100
for access, plus $20 a month for a wide
assortment of videos. Says Milton, "I can't
see any problem in getting 2 million to 3
million people to pay $100 a year—that's
without all the extra spinoffs."
Here's the irony: Even as pornography
becomes more appallingly graphic, it is
becoming more mainstream. Phone
companies, cable companies, hotel chains
and now investment bankers are all part of
the act. It may be the ultimate case of
defining smut-down.
| back to top |
Sidebars:
Porn on the Danube
GDP: the sex sector
No jacket required
The Playboy philosophy
Table:
Meet the merchants of flesh
Read more:
By Richard C. Morais
Management, Strategies, Trends
From June 14, 1999 Issue
June 14, 1999
Table of Contents:
INVESTMENT GUIDE:
Cover Stories
Money and marriage
Married, with benefits
Couples' therapy
Kids on the payroll
The macho jinx
Mine and thine
Till death do us part
How much insurance?
The wired pair
Flings
Swindles of the year
Innkeeping fact and
fantasy
Stocks & Bonds
To the lifeboats!
The ultimate
buy-and-hold
Bond trading for the
masses
Monkey business
Natural selection
Cyberinvestor
Beating the IRS in
cyberspace
E-crash!
E-hardball
Investigate, invest
Estate Planning
Dear John
Death traps
Making teachers smile
Hard Assets
Looking for the next
Van Gogh
Schoolboy dreams
Real Estate
Hold off buying a
bigger house
REITlets
Trading places
Family Finance
House fight
But she promised me
the Limoges
Global Investor
Europe, restructured
Foreign intrigue
Funds
Buy a loser
Crash taxes
Taxing Matters
Final deductions
From acorns, mighty
oaks
MANAGEMENT,
STRATEGIES,
TRENDS:
Wall Street
Libertarian for all
Amazon.chicken?
Companies
Cereal seller
Stocks
Doctor, please
People
Who you gonna call?
Trends
Safety down under
It's raining money
From CIO to CEO
Gap attack
Clients to die for
Cool down!
Marketing
Madison Ave. bound?
Smut stocks
ENTREPRENEURS:
Up & Comers
Threadbare designer
Growing Pains
When reality bites
INVESTMENT
COLUMNISTS:
Portfolio Strategy
Adaptability
MONEY AND
INVESTMENTS:
Streetwalker
TECHNOLOGY:
Technology
Picture-perfect
The laser blue(s)
A brief on briefing.com
Staying Healthy
Targeting diabetes
Software Horizon
Software sawbones
Digital Tools
Think again
COLUMNISTS:
Observations
Is Chicago going soft?
Management
Strategies
Firing your dealers
DEPARTMENTS:
Side Lines
On My Mind
By work possessed
Fact and Comment
Commentary
A Brief History Of
Kosovo Negotiations
And Diplomacy
Digital Rules
CEOs For The Next
Century
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