The ongoing economic downturn has had all the obvious effects on the adult entertainment industry … as it has on every other type of business. There has been a subtle dynamic at work, though, which could contribute to rapid company growth when the market turns. There are countless smaller adult businesses in the market that generate loads of traffic but struggle at monetization. An established player could snap up these sites, feed the traffic into existing revenue models, and add to the top line easily. While these smaller companies have been acquisition targets for a while, the current economic situation makes them easier to buy than ever before.
The reason is layoffs.
For many, online porn has become a decent side business. The operator goes to work during the day, comes home and manages the site. Vast networks of unpaid writers crank out film and toy reviews, interviews with talent and other content, and maybe a bit of video. The visitors attracted to the site, of course, are directed to various buying opportunities, with affiliate relationships leading to cash in the bank. It’s a thin-margin business, but to many of these small business owners, that hasn’t been a concern. Since they have day jobs to provide the bulk of their income, the extra cash coming from the porn world has been a bonus.
This arrangement works well until the day job disappears. The many layoffs that have resulted from the widespread economic retooling have caused obvious angst among the affected – not to mention the survivors. While they look for new jobs, they can’t help but notice the small money machines that have consumed their after-hours lives. There must be a way, these recently released entrepreneurs suspect, to turn a stream of small payments into a large one.
I’ve heard from a few small review and editorial websites over the past few months seeking various forms of outside investment. Most were looking for equity participants – i.e., someone to buy a portion of the company. One call, however, stood out. The owner of RanchoCarne.com, who I hadn’t seen in a few years, told me that he was interested in selling the site. He had recently been laid off from his day job (in the mainstream world) and wanted to sell his side business to give himself a bit more of a cushion while looking for a new gig. (Given his mainstream life, the owner has asked that I not use his name.)
RanchoCarne, like many of these affiliate program participants, is cash-flow positive, though the numbers are small. Nonetheless, it’s a proven earner. The challenge, unfortunately, is that there isn’t a robust marketplace for online businesses. The business brokers who routinely sell smaller mainstream businesses tend not to be available in the adult space, frustrating the efforts of owners to seek buyers at any price point. It also makes it difficult to ascertain how many of these companies are on the market. Anecdotally, I get the sense that the field is rich – from situations like that of RanchoCarne.com to owners not necessarily looking to sell but who would certainly entertain a reasonable offer.
Of course, the presence of willing sellers alone does not create a marketplace. The other side of the transaction has to be satisfied as well. The mergers and acquisitions (M&A) appetites across the industry over the past three years suggest that there are buyers out there, even if M&A is likely to lean toward increased caution and smaller dollar amounts as a result of the financial crisis.
To date, the major deals have involved original content or payment processing, with the affiliate program partner websites on the fringes at best. And, it makes sense. For any successful content producer and seller, getting traffic shouldn’t be a problem. Each of these affiliate players is a relatively low-cost traffic (and revenue) source. So, why acquire them?
In this market, the conventional wisdom no longer applies. Instead of relying on a loose network, purchasing a handful of the review and editorial sites could lead to fatter margins (because you won’t need to pay affiliate commissions) and up-sell opportunities, as a major operator is more likely to be able to monetize traffic than a smaller site. Each visitor becomes more valuable, therefore, twice over. All the acquiring company has to do is unlock the readership’s potential using skills it has already refined.
The best acquisition opportunities are hidden in plain sight. All a larger site needs to do is take a look at where the affiliate payments are going to identify high-value targets. Open a dialogue with these companies to see if they are interested in a partial or complete sale. Remember: the revenue they receive is coming from several companies. Also, it does not reflect expenses. A high-revenue/high-cost company constitutes a profit opportunity, as the acquirer can use its size to reduce operating expenses and push margins wider. These are the hidden gems in the marketplace right now – companies that can make money but struggle to pay their bills.
And, don’t be shy.
Ask affiliate partners if they are looking to sell … or if they know someone who is. The most successful acquisitions will come from buyers who expand their business networks as widely as possible in order to expose themselves to businesses they may not have encountered otherwise. Sometimes, the best deal is one or two steps removed.
Jumping into an acquisition – you’ve read to the point of boredom in this column – is a recipe for disaster. Instead, start with strategy. There’s no substitute for thinking through a set of situations in order to find out which are most beneficial. Develop a profile for an ideal acquisition target, and look for the companies that match it as closely as possible. Follow this up with a plan for integrating the acquired company and making the most of the traffic it already has. By the time the sale closes, very little guesswork should remain.
The notion that an economic downturn leads to buying opportunities is utterly intuitive, but most limit their thinking to the fact that tough economic conditions result in depressed business values and, essentially, discount shopping. While this is undoubtedly true, it’s the second-order effects that hold the most promise. Moving beyond the conventional can reveal companies that are ripe for acquisition for a variety of other reasons, ultimately making them more affordable and resulting in a higher return on investment.
The layoff situation is among them. The porn-site-as-side-project is likely to become a casualty of the financial crisis (if it hasn’t already). These businesses will begin to search for buyers, as their owners either need or want to beef up their savings accounts and focus on their hunts for new jobs. This puts additional pressure on the small site operators to unload their porn assets, making negotiations easier for buyers. Put simply, the sale becomes a “blue light special.” Treat it like a liquidation, and the upside becomes profound.
The savvy major site owner has the rare chance to build a substantial foundation for the future in this market. While any capital outlay deserves careful evaluation, recession-spending is scrutinized. Instead of hoarding cash, though, strategic investments in this environment are likely to be magnified. Make the right choice now, and the outcome will speak for itself.
This article originally appeared in the August 2009 issue of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscribe.
