New Economy: Even in Downturn, Sex Still Sells
By JOHN SCHWARTZ
With the dark clouds of hard times filling the skies, many
high-technology companies are cutting back and hunkering down. But
some brave entrepreneurs are continuing to innovate. Take Duocash,
a New York company that is pursuing one of the fondest longtime
dreams of technology entrepreneurs and privacy advocates alike:
anonymous, secure payments over the Internet.
One of the biggest stumbling blocks for such systems so far has
been to come up with a form of online cash that businesses and
customers will actually use. Duocash has found a way around the
problem ó it uses prepaid telephone long-distance cards, a system
already in widespread use.
And what was the first Web company to sign up with Duocash?
Entertainment Network Inc., which runs thousands of so-called
"adult" sites. The company, based in Florida, made headlines a
couple of years ago by introducing "Voyeur Dorm," a Web precursor
to reality television programs like "Survivor" and "Big Brother."
The interest of an adult-entertainment company should come as no
surprise, according to Bruce Fancher, the vice president for
marketing at Duocash. "They're always the first," he said. "This
industry has led the market in new technologies."
There aren't many industries that can call themselves
recession-proof, but pornography companies can make the argument
more credibly than most. Over all, X-rated Web sites continue to
grow, according to figures tallied by analysts at Jupiter Media
The number of individual visitors at such sites grew more than 27
percent from December 1999 to February this year ó to nearly 28
million from 22 million. In the same period, retail sites measured
by Jupiter Media Metrix showed growth of less than half that rate,
edging up to 55 million from nearly 49 million.
And the adult-content companies have profit margins that their
owners cheerfully acknowledge are obscene. Though not being too
specific, Gerard Vanderleun, director of the online site for
Penthouse magazine and vice president for Internet ventures at the
parent company, General Media, says that the Web sites' profit
margins "would be well above 50 percent and well below 200
Or, as Entertainment Network's founder, David Marshlack, put it,
"It's almost like I owned a bank and was printing my own money."
One reason the online fleshpots can weather recession is that they
don't depend on income from what has become one of the biggest
problem areas for other kinds of sites. "We don't rely on
advertising," said Bill Asher, who heads the Vivid Entertainment
Group, a company that produces X- rated videos and owns a cable
channel and Web sites. Like many of the adult-content producers,
Vivid Entertainment's Web sites charge a subscription fee.
Of course, no company is totally immune to the business cycle, Mr.
Vanderleun of General Media acknowledged. "We're still making
profits," he said, "but it's not what it used to be."
The 45 percent growth curve the sites enjoyed in 1999, he said,
look "more like a 25 percent curve today." That has led to General
Media's version of belt tightening.
"We're not laying off anyone, but it's not as easy for me to get
authorization to hire two more people," Mr. Vanderleun said.
The reason for the slowdown, Mr. Vanderleun suggests, is the
decline of the kind of extravagance that marked the last few years.
Web surfers who thought nothing of having high-speed Internet
connections, which make the photograph-rich pornography sites more
attractive, are harder to find. Now consumers are paying more
attention to their budgets, and that sometimes means going back to
less expensive, plain old telephone modem connections ó and those
people "don't look at a $20-to-$25-a-month Web site as something
they can afford anymore."
He said his company had recently introduced $10, two-day
memberships to meet the new realities of a tougher marketplace.
The adult companies are also profiting from the misfortunes of
other Internet concerns, said Mr. Asher of Vivid Entertainment. He
said he had noticed the greatest change when it came to hiring
"Now it's easier to afford the Internet guys," he said. "I don't
have to pay some 27- year-old $250,000 to get him to talk to me.
You had to have a basketball court in their office and a Ping-Pong
table to keep them." The company is taking advantage of the
economic lull and the bumper crop of available technical talent to
begin digitizing its archive of movies and prepare for the next
generation of high-speed Internet delivery, when customers will
want to download and view whole films.
Mr. Marshlack, meanwhile, has expanded Entertainment Network
beyond naked men and women to include other ventures. One is
askoj.com, the site formed to allow people to pay for the privilege
of communicating with O. J. Simpson. Another is Second Stroke, a
site that sells used golf balls.
But Mr. Marshlack said that there was something special about
pornography, a business he compared to the bar he used to own.
"During recessions," he said, "people still drink." The adult
entertainment business, he added, provides the kind of cash flow
that lets him operate nimbly and without debt.
Meanwhile, innovations like the Duocash deal help address credit
card fraud, the biggest problem facing pornography sites. The
industry has a high percentage of "chargebacks," or cancellations
by credit card holders who claim that they did not authorize a
purchase. In many cases, site owners complain, the credit card
holder did in fact use his own credit card on a late-night
pornography cruise but canceled the charge in the remorse of day;
others cancel when their spouses confront them with the strange
charges, Mr. Fancher of Duocash said.
Duocash estimates that $5.2 billion is currently stored on phone
cards, which can be bought at kiosks, in convenience stores and
elsewhere. Consumers buy the cards and make their long-distance
calls through an "800" number and then punch in a number found on
the card. The Duocard system simply requires users to enter the
same number into a form on the participating Web site, and bills
the calling-card company.
Duocash, Mr. Fancher said, plans to expand into many markets, not
just the X-rated one. "We don't want to be the porn card," he said.
But pornography companies, he added, move very quickly. "If it's
a corporation, you have to go through a committee and the vice
president and all the usual nonsense," Mr. Fancher said. "Where
with these guys, it's `great, let's do it.' "
And that might partly explain why, even as the new economy
falters, the nude economy keeps going strong.
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-- ----------------- R. A. Hettinga <mailto: email@example.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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