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 techniquesnow taken up by mainstream companiessuch 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 companiessuch 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 yearthat'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.
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