Cyberporn bids for the mainstream

LAS VEGAS, Aug. 9, 2000 - Mark Kreloff appears to move effortlessly between two worlds: one where he and his employees work to harness broadband technology and pioneer e-commerce techniques, and another in which “teen hard-core,” and “fetish dungeons” are the coin of the realm. Such professional elasticity is a necessity for the president and CEO of New Frontier Media, one of just a few publicly traded companies delivering pornography over the Internet.

Though still few in number, executives like Kreloff are changing the parameters of cyberporn, which by most estimates already is a $1 billion-plus-a-year industry. By bringing new legitimacy to what already is one of the most profitable sectors of e-commerce, they believe they can quickly blast the virtual flesh trade far beyond its current orbit.

Their willingness to dive into a stigmatized business that is beset by legal and political uncertainties can be attributed to one thing — the advent of broadband technology, which allows people to download and watch video on computers.

Privacy for sale
Offering the discreet delivery of high-quality adult video into the homes of millions of new potential viewers, broadband is the Holy Grail of the adult industry, according to Kreloff and others in the broadband race.

New Frontier Media's Mark Kreloff

Broadband video allows consumers to avoid the potential embarrassment of “renting an adult video at a record store where your neighbor’s teen-age son may be working,” said the 38-year-old Kreloff, whose Boulder, Colo.-based company distributes both hard-core porn and softer adult content via the Internet and six 24-hour pay-per-view television channels broadcast over satellite and cable.

“Ninety-nine percent of what we are selling as a company is the ability for our consumers to get access to our content discreetly and in the privacy of their own home,” he said.

“When it comes to broadband, all of a sudden we can reach every consumer who wants to buy adult content,” said Bill Asher, president of Vivid Entertainment Group, the leading creator of adult videos and a company intent on being a major Internet player. “For that reason, it’s going to make a lot of sense for companies like ours … to invest heavily in this business now.”

Kreloff’s company, New Frontier Media, sought to secure a position atop the interconnected pyramid of 30,000 to 40,000 adult Web sites by acquiring leading cyberporn player Interactive Gallery in October 1999 in exchange for stock. The company now owns more than 1,300 adult-related Internet domains that funnel traffic to 27 e-commerce sites selling sexually explicit photos and video.

Taking the public route
It is one of three public companies working to be major players in Internet porn. A fourth company, Vivid Entertainment, has announced plans for an IPO by year’s end:

NuWeb Solutions, a Florida company created in May to pursue Net porn opportunities out of the remnants of a firm that went bankrupt in 1998, announced in July that it had reached an agreement to acquire Pornication, the leading provider of live interactive adult video via the Internet. The purchase price was not disclosed.

Rick’s Cabaret, a Texas company that operates a chain of adult clubs, announced earlier that month that it had reached an agreement to purchase at least two heavily trafficked Web sites from leading porn provider Voice Media in exchange for about 40 percent of the company’s stock. The purchase gives Rick’s a total of seven porn sites.

Vivid Entertainment, the adult video manufacturer, has announced plans for an IPO by the end of the year to raise money for the possible acquisition of other companies or content and to fund development of broadband technology. The company last year launched a suite of adult Web sites and currently operates 10 major domains.

While the public porn companies have not been warmly embraced by Wall Street, they and other cyberporn players hope their attractive bottom lines eventually will convert skeptics.

‘We are very, very profitable’
“If you look around at a lot of the other dot.com businesses out there, they’re not profitable. We are,” said Jonathan Silverstein, president of Cybererotica, Voice Media’s leading property. “We are very, very profitable. We’ve learned what it takes to make a dollar. Not just make a dollar, but make a dollar and make a dollar and make a dollar.”

If there was some doubt about the veracity of such claims, the arrival of publicly held companies in the adult sector is putting them to rest.

New Frontier Media's television broadcasts emanate from the company's headquarters in Boulder, Colo.

New Frontier Media, for example, reported income before taxes of $5.2 million on $48 million in revenue — $30 million of which was derived from the Internet, according to Kreloff — in the fiscal year ending March 31. Kreloff said he expects the company to nearly triple its pretax earnings this year on revenue of about $75 million.

At least some members of the investment community are taking notice: Security and Exchange Commission documents show that more than 16 percent of the company’s stock is owned by institutional investors, including members of the Oppenheimer and Vanguard mutual fund families.

(Brian Mattes, a Vanguard representative, noted that the two Vanguard mutual funds that hold stock in New Frontier Media are in index funds, which are widely vested in the market.

“There is no research nor any fundamental analysis brought to bear on the selection of stocks for these index funds - they are bought merely because they are in indexes that these funds track,” he wrote in e-mail, saying the company had received “many e-mail notes from current and prospective shareholders complaining about this holding as a result of your story.”)

Another indication of how profitable some top adult Web sites are is found in a July 10 news release by Rick’s Cabaret, which said it had agreed to acquire the domain name “XXXpassword.com” from Voice Media for 700,000 shares of stock and up to $1.3 million in cash if earnings benchmarks are achieved over six years. The statement said the Web site had generated more than $3 million in gross revenue in the 11 months ending on May 31.

Traffic-sharing vortex
While the business can be lucrative, it also has some built-in controls that can make it hard for newcomers to capture significant market share.

Chief among them is the byzantine structure of the industry: Virtually every adult site — whether operated by a Webmaster with a single home page or a company with thousands of domains — is connected in a vast traffic-sharing vortex. In most cases, the smaller portal sites redirect potential customers to “pay sites” operated by big companies with large libraries of content. Those big players, in turn, pay small operators for any sales that result from the traffic that they directed to them.

Even the estimated 12 to 20 big players in Internet porn swap traffic through a combination of click-through banner ads or “mouse-trapping” techniques that open additional browser windows featuring the content of their business rivals.

This system is the result of a marketing strategy developed in the early days of cyberporn, said Frederick S. Lane III, a Vermont attorney and author of the newly published book “Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age.”

“There’s a sense that if someone is looking for sexual materials on a particular subject, they are more likely to spend money online if the pool of those materials is perceived to be bigger,” he said.

“And by and large I think people are finding that that’s true.”

That interconnectivity was the primary reason Kreloff and other major cyberporn players attended a recent adult entertainment expo in Las Vegas.

Handshake deals over drinks
"Many of the distribution people are at this show, but they choose not to attend the show itself because it tends to be more consumer oriented,” Kreloff said. “We’re really here to meet more on a social basis with ... Internet Web masters who take our feeds or talk about traffic deals and new ways in which we can generate traffic and convert that traffic into memberships.”

Most of the traffic-sharing relationships are the result of handshake agreements reached at these informal gatherings, which generally occur at night and are more like frat parties than business meetings. The Las Vegas gathering was no exception, lasting from 10 p.m. until 8 a.m. and involving the consumption of copious amounts of alcohol.

“There is no other business that I’ve been in that I actually socialized with my competition,” said Cybererotica’s Silverstein.

“And the friendship and camaraderie are really a big part of what I like about it.”

But some say the congenial relationships are being tested by the broadband race.

“For a while it was a manna where everyone could graze, but now there will be a rapid evolution so there’s a survival of the fittest in the next few years,” said Scott Maslow, who with his four partners built Pornication into the leading provider of interactive video before agreeing to sell out to NuWeb Solutions.

He said most of the other dozen or so big players in online porn are weighing buyout offers similar to the one his company accepted from NuWeb Solutions, or are examining the possibility of merging with competitors.

“Rich people go where the money is, so it was only a matter of time until morality got thrown out the window,” the 26-year-old former electrician said of the shifting landscape.

Still, he said, he and his partners were glad that the bigger players waited to make their moves.

Opportunity knocked
“Because the industry was in its infancy and because it was taboo, the regular business industry allowed others who did not have the business savvy to come in and, through diligence and persistence over time, amass large fortunes,” Maslow said.

The new competition will force veteran porn players to make some difficult decisions.

Danni Ashe

Danni Ashe, who apparently owns the distinction of being the first woman to establish a major adult Web site by virtue of her creation of Danni’s Hard Drive in 1995, is one operator who plans to try to go head to head with her public competition: The former stripper and nude model has built an all-digital production and broadcasting facility to create video for her soft-core site.

“This business is so close to my heart … it’s like my child,” Ashe, 32, said when asked whether she might be willing to leave the business. “I want to nurture it and I want to see it grow.”

Ashe said recently that she expects her 42-employee company to turn a profit of about $7 million this year.

The Cyber Entertainment Network of Fort Lauderdale, Fla., on the other hand, plans to leverage a licensing deal with international porn publisher Private Media of Barcelona, Spain, to procure broadband content, said chief executive Joe Elkind.

‘Would you sell Broadway?’
Elkind said he and his partner also were resisting pressure to sell any or part of the roughly 3,000 domains the company owns that direct traffic to its 14 paying sites.

“That’s small-time thinking,” he said of fellow operators who are doing so. “Unless you have to, would you sell Broadway in Monopoly?”

But many who follow the industry say the pressures on privately held companies will only increase if their public counterparts succeed in persuading Wall Street that they are worthy vehicles for investment.

And Lane, the author, says he has little doubt that will happen if the new cyberporn leaders can successfully police themselves and “get away from the fraudulent and even criminal aspects that have dogged (the industry)” — such as overbilling of credit cards and misleading offers of “free” trials.

“When folks are increasingly casting about for Internet businesses that are actually making money ... at some point you have to step back and say, ‘These folks are doing it and you can either invest in them or learn from how they are doing it,’” he said. “The learning part doesn’t seem to have occurred very much, so it would seem to me that leaves the investing.”

MORE FROM INTERNET UNDERGROUND

Internet Underground Section Front

‘Toon porn’ draws surfers Is anything taboo in ‘toon porn’? Mystery shrouds arrest of accused software pirate EBay, PayPal and the Fufu fiasco Sex toys blaze tactile trail on Net Anatomy of a penis pill swindle Daughter’s ‘model’ site lands couple in prison Russian hacker gets 3 years in jail Young ‘model’ sites feel the heat ‘Legal child porn’ under fire Internet Underground Section Front   Add Internet Underground headlines to your news reader: