The adult entertainment industry has pioneered the use of new Web
and Internet technologies and is making online profits like no
other sector. Toby Poston examines a lesson in e-business, porn
style
Amazon's Jeff Bezos, Yahoo's Jerry Yang or eBay's Pierre Omidyar
are the names that are usually suggested when someone asks for
exemplars of e-commerce success. But when it comes down to who has
made a real profit via the Web, it's people like Danni Ashe,
Stephen Cohen and Seth Warshavsky that we should be acknowledging.
Most organisations are still producing limp returns on their
e-business investments, but these guys have been making millions
for years.
Why haven't you heard of them? It's probably because they have been
earning their cash in the online pornography game.
To date, porn has been the Web's major economic success story. As
an online sector it was already worth $1bn a year back in 1998,
which has risen to an estimated $20bn today.
DOMINATING E-COMMERCE
Its dominance of the e-commerce
arena is particularly strong in the area of paid for online
content. According to research company Datamonitor, it accounted
for 69% of paid for content revenues by the end of 1998 and it will
remain the market leader in 2003 with 58%. Most industry analysts
refer to the Wall Street Journal as the success story of this
market, as one of the few media organisations that has been able to
charge users for accessing its online edition. But while it charges
just $59 (£42.14) a year for access, Danni Ashe's "Danni's Hard
Drive" adult site has around 25,000 members paying a monthly
subscription of $24.95 (£17.82). You don't need a calculator to
tell you who has the sexier business plan.
And Danni, whose company made a profit of $6.5m (£4.6m) last year,
is small fry compared to the likes of Cohen, who runs the giant
Sex.com domain, and Warshavsky, whose Internet Entertainment Group
runs more than 30 sizeable porn sites.
Unlike any other sector, the pornography industry has demonstrated
the economic potential of the Internet as a place where goods or
services can be purchased online.
"The industry has convincingly demonstrated that customers are
willing to shop online and use credit cards to make purchases. In
the process, the pornography industry has served as a model for a
variety of online sales mechanisms, including monthly site fees,
the provision of extensive free material as a lure to site
visitors, and the concept of upselling," says Frederick S.Lane in
his book, Obscene Profits. "In myriad ways, the pornography
industry has blazed a commercial path that other industries are
hastening to follow."
Hardly surprising then, that desperate Internet service providers
and portals are finding it hard to resist the lure of the adult
pound or dollar in their struggles to cope with the slump in online
advertising. Yahoo! announced in April that it would sell
sex-related videos, but a public outcry resulted in it dropping the
plan and re-configuring its adult-oriented message boards and chat
rooms, making them harder to find. But only last June Germany's
third largest ISP, Freenet.de made the bold move of linking up with
one of Germany's biggest erotica distributors to create an Internet
sex portal to be called Fundorado. The company freely admitted that
the move was down to the desire to reach break-even point in
2002.
However, Web-porn is no e-commerce duck laying golden eggs. For
every Hugh Hefneresque adult webmaster raking in the millions,
there are 100 or more entrepreneurial housewives or horny students
who fail to make it in what is already a cut-throat sector.
The economic downturn has hit the adult Web industry as well. When
a porn industry legend like Playboy Enterprises postpones plans to
spin off its Web operations into a separate Nasdaq-quoted company
because of the stock market downturn, the whole industry takes
note. But, downturn or not, the adult industry has proved that
online pornography pays, and with its track record for turning
content into cash and technology into transactions, it can teach
budding e-commerce entrepreneurs a thing or two.
TRICKS OF THE TRADE
Whether inventing new Internet
sales and marketing techniques or just taking existing technologies
and proving that they could boost online revenues, adult sites have
taught more traditional e-commerce businesses a lot about making
content sites into money-spinners. Here are just a few tricks of
the trade, some more legitimate than others.
Drop Dialling Drop dialling hit the news last March when it
emerged that the BBC had begun working with phone operators to use
the technique in conjunction with its hugely popular Comic Relief
Big Brother website.
Drop dialling has been popular within the porn industry for a long
time as an alternative for porn site users who are unwilling to go
to all the trouble of inputting credit card details in return for
downloading a five minute film clip. Instead, the user merely
clicks on a drop-dialler button which automatically disconnects
their Internet connection and dials up via a new premium-rate line.
As well as saving the customer time, it negates the need to
transfer financial details over the phone or Internet, thus cutting
out the opportunity for fraud. It also results in no record of a
purchase being made on credit card statements. This technology
could revolutionise the earning potential of content sites -
allowing them to charge per view for graphic files, video clips or
information. More importantly, they would not have to rely on the
income from plummeting Internet advertising rates.
The downside? Sites could start obscuring the cost of drop-dialling
transactions so that users were unaware of the charges they were
paying. Telephone service regulator ICSTIS has stepped in and
introduced a code of practice which states that premium rate
websites can only charge a maximum of £20 for an online service and
must display a clock showing the cost of the call.
Streaming video The porn industry did not invent video
streaming technology, but boy, did it make it pay. It was the first
online sector to make large scale use of the technology, and the
huge demand hitting porn sites meant that adult webmasters had to
iron out the problems associated with its widespread usage. They
were very quick to start using Java software tools to eliminate the
need for plug-ins to play video clips.
According to adult Web design guru Mark Tiarra, video feeds that
serve up right inside the browser and require no download were
mostly developed through adult sites. Adult entertainment companies
are looking forward to Napster-style file sharing technology as a
means of distributing snippets from movies that will entice people
to buy the whole thing.
Adult videoconferencing has been a lucrative business since its
inception in 1994, with rates charged of up to $5.99 per minute.
The cost of producing and serving high-quality video content is of
course prohibitive, but adult video producers like
Virtual Dreams have prospered by making deals with other adult
websites to distribute its material. This increases the number of
people marketing its product
and dissuades new entrants to the industry from setting up video
production operations by offering them the much cheaper alternative
of just licensing
material from other sources.
News agencies such as Reuters and the Press Association now sell
their content to other sites, much as maintainers of porn libraries
sell their content to others.
Payments and real-time credit card processing Tiarra claims
that the adult industry was the first to introduce billing systems
that didn't ask the user to wait for five minutes while credit card
details were being checked. Adult webmasters realised very quickly
that paying for adult content had to be as quick and painless as
possible.
While some sites have become expert in processing large volumes of
credit card
transactions through secure servers, most now outsource to
third-party processors like Verisign. A standard system uses a
script to link an adult site's payment page to the third party
payment processor's servers. The company funnels the processing to
bank centres over dedicated leased lines and then back to its site.
Transaction times average at around 10-20 seconds. The charge for
processing depends on volumes but runs at 10%-15%.
Fraud is a huge problem for adult sites, particularly with phoney
credit card
numbers or chargebacks, where a customer refuses to pay a
particular charge on a credit card bill. As with most content
sectors, micropayments are seen as a Holy Grail, enabling sites to
charge 20p-50p for small items like individual images or video
clips, rather than having to aggregate content for lump sums that
makes it worthwhile processing a punter's credit card.
Cost-per-click advertising You don't see adult-site ad
buyers making their purchases based on banner-ad impressions, says
Tiarra, who believes that the model is largely why non-adult
content sites have struggled to make a profit. He believes that
using cost effective cost-per-click and commission advertising is
the way to a profitable site. Essentially, you have to figure out
what the average visitor is worth to you in income and not pay more
than that per visitor to get traffic.
Tiarra adds that the average adult pay site gets around one in 750
visitors to sign up to their service. A certain percentage stays
past the trial period and you can then average out how long they
will remain a member. If one in 750 punters signs up and they are
worth an average of £50, then each visitor to your site can be
averaged out to be worth 6.6 pence. If you pay more than that per
visitor in advertising, you are losing money.
"I have only seen adult companies do this properly and well," says
Tiarra.
Managing traffic The successful business model of trading
and selling user traffic was adapted and perfected by adult sites
several years ago, says Jay Kopita of the adult industry's YNOT
Network. The vast majority of adult sites direct traffic to each
other. Small, free-content sites tend to feed traffic to larger
sites by ensuring that when someone exits their site, they pop up
the site of another adult site. The small site then gets paid on a
cost-per-click basis, or on a flat rate for leads that convert to
members.
Good conversion rates are the lifeblood of many adult sites. "The
adult Internet perfected the use of cookies and traffic counters to
be able to profile visitors, see where they go, and adjust their
sites accordingly to make visitors 'stick' or hang around longer in
those critical first few seconds," adds Kopita.
Broadband High-speed home Internet access jumped 148%, up to
12 million from 5 million, between December 2000 and the previous
year according to audience measurement specialists
Nielsen/NetRatings. And if you believe the Analysys research group,
the pornography industry has been at the forefront of developing
broadband Internet services.
Innovative services include live streaming of events with
email-based interaction, other 'virtual sex' services and
full-screen streamed video sites. Broadband ISPs have yet to
embrace this potentially lucrative market, apart from in Asia where
the Korea.com portal provides a pornographic video on demand
channel.
Even if ISP's remain reluctant, content delivery services which
have their own network of Web servers, such as Akamai, can be used
to bypass ISPs.
Private Media Group, an adult entertainment company, launched its
broadband site, PrivateSpeed.com at the Cannes film festival last
May. The company is working with itvmedia AG, a Swiss-based
streaming media company which will provide high-resolution,
full-screen video using its own proprietary technology and the
latest version of Windows Media technology.
Private has targeted the 12 million-plus broadband home Web users
and will be charging from $14.95 for 90 minutes of pre-paid movies.
The company believes that broadband Internet access will shorten
the distribution chain for its content and improve revenue and
margins.
Pop-ups The annoying pop-up consoles that many sites are now
using started as an idea for adult sites to trade traffic and
advertise with. At its worst, pop-ups can start appearing faster
than you can close them, hijacking your browser to the extent that
it crashes.
Spoofing Adult sites are notorious for luring unwary viewers
to their sites. The most typical method is to have a website
address similar to a popular site. Fancy visiting the official US
government site? Make sure you type in whitehouse.gov and not
whitehouse.com!
Another trick is to steal the meta tags (invisible code that helps
search engines index a site) from legitimate sites, paste that code
into their own site, and then submit it to a search engine. The
search engine then winds up sending you to a bogus site, instead of
the one you intended.
CASE STUDY: PRIVATE MEDIA GROUP
Most organisations
would be happy to break even on their Internet-based operations,
let alone make a 50% margin on all sales. This is what adult
entertainment company Private Media Group managed last year, its
40-strong Internet department responsible for revenues of $5.3m,
206% up on the previous year and with a profit margin to die
for.
Private, one of the few adult entertainment companies listed on a
stock market (Nasdaq), has been around since 1965, but made its
first moves onto the Web in 1996. It started handling transactions
and introduced live streaming video and chat rooms in 1998 and
began offering a broadband service in June of this year.
According to Andre Ribeiro, Private's communications director, the
basis of the company's online success has been the fact that it
creates its own content. "The investment was low. Private had
already invested in the creation of all the content with its old
media operations: magazines and videos. So it was basically a
process of digitising the content and creating the technology
structure."
The company's portfolio of sites now include a searchable library
of images and video clips, an on-demand streaming video service,
text-based interaction, broadband full-screen video on demand and a
shopping site for all the company's products.
It has recently diversified into another lucrative online sector,
gambling - having launched online casino and betting sites. "We
launched these sites together with partners who are the biggest and
best in the world with gambling and casinos. The reason to launch
into these industries is to offer a wider choice to our clients,
and capitalise on the tremendous traffic to our sites," says
Ribeiro.
The company also licenses its content to more than 20 third-party
website owners, receiving a percentage of the membership revenues
obtained by those sites. It also provides a 25% commission to 400
other sites that sell Private Media products.
Its alliances extend outside the adult entertainment world. Private
has strategic partnerships with a number of Internet portals and
communities worldwide, such as Excite.co.uk, Fortunecity.com,
rtl.de and inicia.com."At the moment we are currently in
negotiations with the majority of the world's largest portals, who
have come to us," says Ribeiro. "We usually provide all the content
and links for the adult section of their portals and we share the
revenues with them."
Company CV
*
Founded: 1965
*
Business: Publishes and distributes adult entertainment
products
*
Staff: 120 (40 strong Internet department)
*
Revenues: $27.1m (2000)
*
Net profit: $5.6m (2000)
*
Subscription rate: $29.95 per month, $149.95 per
year
*
Payment methods: 90% credit card, 10% drop dialling
*
Technology: Servers based in Washington and Zurich, with
systems based on Microsoft and Oracle. Verisign SecureWebPay
handles credit-card transaction processing. Private uses the Akamai
content delivery network.
*
1996: First Private Web site launched
*
1998: Live streaming video and chat rooms introduced
*
2001: Broadband service introduced