Award-winning author David C. McCullough once opined that "History is a guide to navigation in perilous times." And there is truth to the cliché that to figure out what will happen in the future, one simply need look at past events. The adult online industry is no different, really. If we want to know what our future is, we need to listen to the stories, wisdom and anecdotes of those who went before us. In this issue, we get some of the bigger players from the past several years to tell us where they've been, where they are and where they think things are headed.
Peter Acworth, CEO of Kink
Greg Clayman, co-founder and president of Video Secrets
Scott Coffman, founder and president of AEBN
Richard Cohen, founder and president of HotMovies
Rex Excoffier, founder and CEO of Totem Cash
Michael Klein, president of LFP Inc.
Tony Morgan, CEO of National Net
Scott Rabinowitz, co-founder of Traffic Dude
Morgan Sommer, co-founder of Cybersocket
Ari Suss, CEO of Niche Shops
Farrell Timlake, president of Homegrown Video
Fred Valiquette, president of BrainCash
Oystein Wright, CEO of Mansion Prod.
Where are sales today, compared to where they were five years ago?
Clayman - Sales today are just as strong as they were five years ago; however, our mindset and methodology of what a sale is has changed very much. Each sale represents a customer and our goal is to keep a customer for life. We treat each and every customer as if they were personally buying from our storefront and in turn they feel this and feel comfortable about coming back for more.
Valiquette - I would say that there are more customers in the Internet market than five years ago, but also a lot more people who are going after them.
Rabinowitz - Better and stronger, from the point of view of B2B sales for highly accountable consumer traffic media buying.
Acworth - Our sales are indeed higher than they were five years ago, having been increasing proportionately with the number of new subscription websites we have launched since then.
Wright - Since Mansion Productions have continued to add products to our suite of software, we enjoy three to four times more sales in terms of products and services compared with five years ago. We have had steady growth every year, and especially 2007 was a good year for us.
Timlake - Online we are growing rapidly, but I guess that is not saying much since about five years ago we basically had to start from zero members when we parted ways with CyberErotica. Offline sales have been good since we outsourced our distribution with PurePlay. Even though DVD sales are down a bit they have expanded our cable license revenue. Even though I hear everyone complain how tube sites have killed their sales, I really don't agree, since quality is something that will always have a value that people are willing to pay for.
Klein - If you are talking DVD sales, then yes, there has been a decline from the numbers that we used to get five years earlier. The industry as a whole has seen some steady decline in DVD sales due to the expansion of broadcasting and Internet in their homes.
Morgan - While many people think that sales are down, there is little doubt in my mind that sales are actually up. They're just spread out among more sites and programs than ever before.
Suss - XR, LLC is a very different company from five years ago. We have branched into sex-toy distribution, manufacturing, and wholesaling. Our sales are higher because of this.
How have your revenue streams changed over the past five years? How do you anticipate they will change in the next five years?
Klein - While DVDs are still an important part of our revenue stream and the advent of Blu-ray has a been a nice plus, we do have a stronger growth in our Internet and broadcasting business, each of which is seeing some strong steady climbs in the past couple of years. I think as new technology develops, the revenue path will continue to go toward the new methods of delivery
Coffman - Revenue stream has been mainly VOD pay-per-minute. We believe that this model will continue over the next five years; there will just be many more types of devices that we are serving content to.
Clayman - Our revenue streams have changed slightly over the past five years. We feel that one of the main aspects that makes us successful and keeps us in the forefront is that we stay focused on our core competency: live chat. We have developed derivatives of our live content such as VOD, which have created new revenue streams from our existing core competency. As far as five years from now, I don't think anyone really knows. The landscape of the industry is constantly changing and we feel that if we just stay committed to what we do best and keep on improving it, other revenue opportunities will arise and we will consider them as they come.
Cohen - Our revenue is about the same, but its sources have fluctuated from certain areas to others. Chat lines, phone sex, and membership sites are down, but HotMovies.com and domain revenue are growing.
Excoffier - Membership used to represent more than 90 percent of our income; now, it's below 20 percent. We let users buy girls one by one for a few bucks, then make sure they get everything they were expecting and more, then they'll come back to buy more. I believe the market will continue to go in this direction. It's all about winning the customer's trust.
Rabinowitz - Core revenue streams have expanded to include more ad product options for clients to buy. In the next five years, I imagine having a comprehensive client service portfolio that evolves as new targeted advertising mediums for adult entertainment break ground.
Valiquette - I think the overall pricing for adult memberships will go down, but the volume of sales will be up. People were used to $30 per month memberships, but with all the free content out there, only niche sites will be able to charge the premium. I also expect that we will make more money from upselling or adding value services to basic memberships.
Acworth - Our revenue streams haven't changed much in the past five years because our primary business model is still subscription websites. But having added a pay-per-view billing option to our websites this year, i.e. the ability for customers to buy and download specific movies, we anticipate that the next five years will look significantly different from the past five. Looking ahead, we also expect to add a pay-per-minute billing option, diversify into the live/interactive market, as well as a social networking/dating market, and to continue our branding efforts with new merchandising and publicity strategies.
Sommer - We have diversified into business activities that were not even on the radar five years ago. I expect our business to continuously evolve while holding onto those core activities in which we have expertise and profitability.
Wright - We have noticed that the industry has been in a dire need to stay competitive as more players have entered the marketplace. And since we are a provider of software that makes it easier for companies to stay productive, we have seen a surge of sales of, among others, our market leading products MPA3 and MAS in addition to our new product VIST. We have also seen an increase in our Web design services and consulting.
How have you adapted your business for the current industry and financial climate?
Suss - Currently, we are looking at our business model as well as looking to streamline processes to reduce overhead. We are maximizing our current location to the square foot so we can delay moving to a new, larger facility. We hope the current financial crisis will be over when we run out of space.
Excoffier - You won't see us throwing money at shows, parties, and contests, or trying to offer $150 per sale anymore. We share a true 50 percent of all revenues with our affiliates and focus all our efforts on their bottom line.
Klein - While we continue to shoot product for DVD release, we also have productions going on that are geared specifically for the Internet, broadcasting, and mobile marketplace. Those products can eventually be packaged for DVD release as well, and we find at times the strong Internet or broadcasting audience will seek out the compilation titles on DVD even if they have seen some of the content already on the other mediums. Also, we continue to find trends that work for us, such as the huge success that we have been having with our parody movies like This Ain't the Munsters XXX and Who's Nailin' Paylin?, which have been big sellers and have even driven traffic to our other business due to their notoriety. And our Blu-ray releases have been very popular.
Rabinowitz - Complete retrofit on operating guidelines, client policies, and hiring practices. Our company operates with a moderate-sized, but highly talented and well-cared-for staff. We focus our agency efforts on selling direct response consumer media, which is less about advertising and more about financially accountable means to source customers for the firms that buy from us.
Timlake - One of the reasons we have been around so long is we have always listened to our customers and adapted to their constantly expanding demands. So we are more like the shark that has existed for millions and millions of years by simply refining what it does well. We have learned to avoid being overly reactionary. Many companies try to change constantly to do what they think others are doing successfully and more often times than not they find that the lack of focus caused by bouncing from initiative to initiative eventually kills their business. We are always cautious of the political climate and right now that is even worse than Reagan's witch hunts on the industry. With regard to the recession, for us it is business as usual: no flashy spending and keep the costs down, and we try keeping our customers happy in these depressed times.
Morgan - We are redirecting many of our expenses toward customer retention and away from new customer acquisition. Our research shows that it costs us $25 to replace every $1 lost in business, so when money becomes tight we spend less in advertising and promotion and more in providing our existing customer base exactly what they want and more.
Clayman - We have adapted our business in such a way whereas we can be more fast and flexible both internally and externally. Our company as a whole is streamlined where internally we can move and adapt fast if we so choose. Externally we operate similarly in that we listen to our customers and do our very best to give them what they want in the most quick and efficient manner.
Acworth - Over the past two years, we have made some significant changes to our technological infrastructure. Most importantly, we rebuilt our back-end to enable a "Single Sign-on" (SSO) system. Essentially, a customer now registers for a universal Kink.com account before buying any of our products or interacting with our community (prior to this, a member of one of our subscription sites had to have a separate account for each of our websites they subscribed to). This SSO feature has helped tie our family of products together, as well as introduce the concept of a self-managed customer identity, which we feel is the natural first step toward building a community around our models, products, and shared kinkiness. We have also invested further in Live Stream technologies, the application of which will hopefully enable us to better achieve our goals for the future, as well as stay ahead of the curve in terms of industry trends. While the turbulence of today's financial climate has been rattling the confidence of many players in the industry, by staying focused on producing content that turns us on to make, providing features that we as consumers would demand to see, and nurturing a community to which we proudly belong ourselves, we feel confident that our products are well positioned to weather any economic storm that comes our way.
What is the biggest issue affecting your business today? How are you dealing with it?
Clayman - The economy is the main thing that could adversely affect our business. We have offset the potential impact of a soft economy by widening our base with more new customers and more performers. We are positioned such that even if the average customer were to spend less, we have more customers than ever before so the total revenue will be higher. Over the past 13 years our approach has always been long-term, and this philosophy serves to lessen the impact of normal market ups and downs.
Coffman - Piracy! We're working with the Free Speech Coalition to develop a plan of attack.
Cohen - Tube sites are affecting business most. We believe tube sites will lead to the downfall of many businesses and propel consolidation in the industry. Besides being free, we believe they are hurtful to the adult industry overall in that they offer free hardcore content to anyone without any age verification. We do not feel we can do anything to stop them from further proliferating. Policing the tube sites to take down pirated content or boycotting their advertisers does not affect them or their growth. Millions of low-end paying customers have already discovered they no longer need to pay for adult content and now find the quality and quantity of what they watch on tube sites "good enough" to meet with their adult content needs. As word spreads, these numbers will grow exponentially.
Valiquette - I think there are two main issues that affect our industry right now: content piracy and shady credit card practice. Content piracy will be better handled after the YouTube vs. Viacom case will be ruled out. I think that will define clearly what the rules of the game are. On the other side, offering promotions via cross-sales is not the problem, but when you base your entire business model on selling cross-sales instead of products, then I think there's a problem. Expect Visa to put stronger rules in place to fix that like they always did in the past. In both cases, the overall industry is paying for these behaviors.
Sommer - Many of our customers are experiencing declining sales. We are working with them to generate traffic and revenue back to their sites, and working with them to take advantage of other direct-to-consumer marketing opportunities.
Morgan - The biggest issue facing the hosting world is deflation. We are charging less per megabit than ever before and while that trend has slowed, it has not stopped. With that said, however, consumption continues to rise at rapid levels as more and more of the world is getting DSL, cable modems, FIOS, etc. This has allowed us to continue to grow our revenues and profits even if margins are declining.
Rabinowitz - Hiring and retaining world-class advertising and technical professionals. Ours is a service business at heart and function and as such, we have broadened the scope of our recruiting to cover many professional centers online and off where like-minded people can be found and then cultivated for greater success.
Excoffier - We're lucky enough not to be affected by tube sites, because our content is interactive to some extent. Our biggest issue is the lack of trust new users show when it comes to downloading software or using a credit card for an adult product. Too many of them have been burned in the past and it takes a lot to rebuild that trust. Our website revolves around a forum where free users and members communicate.
Acworth- Our success and ubiquity within the global marketplace has made our content a popular target of copyright infringement. We anticipate that piracy will continue to be an ongoing concern, which is why we are diversifying our business plan to include live/interactive technologies, expanded community features, and new branding/merchandising opportunities.
Wright - It's very hard to find good programmers. Our need for more programming and support help must grow at the same pace as our new sales. We've found that to be the biggest challenge for us to stay on top of things. To be a good software provider you have to be good at supporting the software as well. If you don't, then it will be a disaster.
Klein - One of the biggest concerns is still all the free content on the Internet. That has a dramatic effect on all areas of media distribution, including DVDs, broadcasting, Internet, and publishing. Doing a tube site correctly where you just show teasers of content and upsell to a paid membership is fine, but all these sites that show 20-minute clips and longer with a lot of pirated content is just causing a downfall in the industry as a whole. The way to deal with it is to go after sites that steal your content, which we do, and work to continue to have the best top-quality product released on DVD and on your Internet sites so that consumers know that for the better-quality content there is a price to pay but they won't be disappointed in the results.
How do you think your business model will evolve over the next 5 to 10 years?
Valiquette - It was easy to sell any type of content in the past. I think in the future, customers will be more educated and also know better what they like and are looking for. More oriented and more optimized marketing toward the users and their preferences will be the key to optimizing profits.
Stagliano- The business model has already changed from the past five years. It may change further depending on what other income sources prove to be the best.
Morgan - I think bandwidth prices will continue to drop but not nearly at the same pace as they have over the past three years. This will force more and more hosting companies out of business as they have not spent the necessary money to grow their infrastructure at the same rate as their bandwidth consumption. This will leave the market wide open for those of us that have remained competitive yet not chased the new accounts down in price to the point that it becomes impossible to remain in business.
Cohen - We will continue to offer a huge library of streaming titles as well as do everything we can to enhance our sites. We believe that this will further the growth of our customers' loyalty and perpetuate our reputation as one of the best places on the Internet to watch adult content.
Klein - We will continue to focus on new delivery methods, as I am sure that there will be more of a convergence of all the current technology. Internet and Broadcasting delivery are going to meld into one source whereas you can watch TV, order from thousands of movies, and check your e-mail all on your big-screen TV. The focus will be to look at what areas continue to work best and make sure to put a lot of effort behind those areas and I am sure other mediums will decrease in revenue potential while maybe not disappear altogether, so we will just have to use our resources wisely.
Clayman - We see our business model growing and expanding over the next 5 to 10 years. Live entertainment is an interactive experience that can be recorded, but not reproduced. We feel that is one of the reasons why people find live entertainment so enticing. We see our business model expanding into hotels, pay-per-view, and cable as well as satellite once it can support two-way communications. We don't feel that live entertainment will replace adult movies, but rather give consumers a choice on whether to watch a movie or direct their own show.
Coffman - More of our business will integrate virtual sex with our VOD product.
Rabinowitz - We will see the industry place a much greater emphasis on productive and accountable marketing techniques over the next few years. As a result, I see properly executed media sales businesses having the opportunity to become large-scale operations and provide a suitable alternative to sales and revenue derived by adult merchants previously through mostly affiliate business.
Suss- We expect to grow our manufacturing divisions through product expansion. Currently www.MagnumEnlargement.com, www.TrinityVibes.com, www.ZeusElectrosex.com, and www.StrictLeather.com have been great successes. We also plan to launch a new business segment soon.
Timlake - We are going to continue to develop our community and look for other compatible products and brands we can market to that community. I was inspired early on by the way Playboy magazine had erotic entertainment, fashion sense, travelogue, and humor, etc. I always imagined not only making money through advertising and services, but also selling a broad range of products and services, and that is easier than ever to do online.
How will customers buy and watch porn in 5 to 10 years?
Timlake - Five years from now I imagine it will be relatively similar. Sure, there may be fewer DVDs and more online viewing, but by and large people will still most likely only watch a two-dimensional screen of some sort. However, 10 years from now I think there is a possibility that there will be three-dimensional viewing possible in the home, and this will give point-of-view scenes a dramatic twist.
Cohen - As technology evolves, the ability to watch adult content imported from computers to TV sets will become readily available. However, we do not expect cable companies will be eager or make it easy for customers to watch hardcore content on their televisions. As a result, we believe that most customers will not invest in any additional set-top box that will let them do that, and will still prefer to watch content on their computer.
Coffman - If they still buy, it will be on a pay-per-minute or all-you-can-eat basis.
Stagliano - Obviously some form of Internet delivery system will be used, probably something better than IPTV.
Clayman - The Internet is one of the most perfect mediums to view adult entertainment. It allows the end-user privacy, anonymity, as well as diversity. Although the Internet has come a long way over the past 5 to 10 years we feel that it is still in its infancy. The Internet will continue to evolve and grow and become even more a part of our everyday lives via all-new distribution mediums. This will enable consumers to buy and watch adult entertainment in all the ways they can now as well as ways that are not currently feasible or known of as yet.
Excoffier - I see a direct parallel with the music industry. Music and porn are already thought of as free products in the minds of the newer generation of customers. It's just a question of time before you won't be able to sell a porn video online if you don't have any added value around it. Social networks, interactivity, and trust are the added values I would bet on.
Sommer - Mobile, TV/Internet, and combinations of the two.
Rabinowitz - Through as many methods and mediums that the market will allow for, in terms of profitable means for merchants to distribute content access to consumers. Physically, people will conceivably be watching porn through a wide range of Internet-connected appliances, various mobile devices, and through IPTV and extensive on-demand adult programming, which can be distributed through cable and related streams.
What will the industry look like in 5 to 10 years? Will it be larger or smaller?
Stagliano - What I hope happens is quality content will be the most important thing. In recent years, mediocre content on the Internet has done well in the right hands. It's possible now that the Internet consumer is getting more particular; as witness to this is the flat sales of major sites. I hope to capitalize on this because I believe my company's content has always been better than many of the successful sites; I've just done a bad job of presenting it on the Internet.
Wright - The industry will be larger. The trend we see is that a lot of mainstream companies feel it is OK to move into the adult arena to add on to their revenues. It happens a lot more than most of you think.
Valiquette - Larger in size, smaller in the number of people in it. Profit margins are getting smaller, so a lot of small affiliate programs will disappear or be acquired by larger companies. The game will be tighter and require more technical aspects, so I also expect fewer companies to enter the market because of that.
Morgan - There will be more people in the industry than ever before, with only a few large players making any money. The rest will be "weekend warriors" working on their sites at night and on the weekend while they still go to their "real" job every day.
Suss- The adult novelty online retail business I expect will have more players in the next 5 to 10 years because cost of entry into the market is minimal. I feel the manufacturing market is not saturated at this time and we will continue to see new companies launch creative products like the We-vibe, Rock-Chic, nJoy, and Magnum Enlarger. Yet, the retail-store market may see a decline in the next 5 to 10 years as more and more people choose to buy their sex toys online for convenience and privacy.
Timlake - I have always said that "porn is food and people have to eat." As always, I think the industry will grow with the population and regardless of some political or religious repression (which probably only makes it grow faster anyway). There might be greater consolidation of companies as smaller companies buy up the smaller ones. However, there will always be new companies coming up and others dying out. Homegrown Video will be larger, though; that much I do know.
Rabinowitz- The industry may be smaller in terms of the number of companies/players. Despite this, the financial opportunities related to adult entertainment will continue to grow. The new "newbie" is very different from just a few years ago. In the past, we'd get calls from people who on a whim slammed together a porn site business and expected imminent riches, despite having no resources behind them, no planning, etc. The new "newbies" emerging today are people with business and marketing plans, capital resources, business experience, and other resources that allow them to be more competitive almost out of the gate.
Cohen - That depends on what you mean by "industry." The number of customers watching adult content will remain the same, but many of the existing companies will either disappear or merge. There is simply too much content and it's no longer easy to earn a reasonable profit from producing it. In addition, DVD sales will continue to decline. Most people do not watch an entire DVD or watch the same adult content more than once or twice. The Internet is slowly replacing the need for buying DVDs. Collectors and others who desire a top-quality, large-picture experience will become the only customers who continue to purchase DVDs.
What is your most important avenue of marketing today?
Wight - Word of mouth and good reviews. As long as we keep on being the best we can be, business will continue to come our way.
Clayman - We have multiple avenues of marketing that are extremely important to our business. Of all our marketing avenues, our affiliates are the most important marketing asset to the company both now and in the future. As of now we feel that affiliates and affiliate marketing is only going to grow. We are committed to every aspect of the affiliate marketing system and maintain ongoing projects to assist in this growth. Every year more affiliates see the amazing profitability of live-chat upsells and this only helps our business.
Sommer - Print media and direct-to-consumer marketing avenues.
Valiquette - Affiliate traffic is still the main source of traffic to most sites at the moment. The traffic paths are in mutation. The affiliate model is evolving and a lot of the traffic is moving to the advertising model. Also, a lot of affiliate programs are starting to generate their own internal traffic now. Basically it's a brand-new ecosystem that is taking place, so expect the rules of the game to be totally different.
Klein - Continuing to get the word out that you have fresh, new, and well-produced content that is constantly being updated, either through new DVD releases, new scenes on your Internet or mobile platform, or new movies for your broadcasting service.
Timlake - I could tell you what our most important avenue of marketing is, but then of course I would have to kill you! I am willing to say that we still see opportunity in bringing our offline marketing efforts together with our online sources of traffic. How do I feel that area of our business will change? I think our strategic partnerships will have to grow and we will have to rely less on our own efforts at a certain point to maintain positive growth. Right now, due to our history, we have been very cautious about working with anyone external of our operations, but I can see that needing to change.
Rabinowitz - For B2B enterprises, direct marketing at the human level works best. Face-to-face time with clients, prospects, and industry peers, via shows and direct meetings.
What is the most important thing you have to do to remain relevant to today's consumer?
Clayman - Stay in touch with your customers and give them what they want, not what you want them to take. Given that our product is live and always personalized, it changes in real time with the tastes and desires of consumers. Our offerings are entirely organic, and if one fetish or genre becomes more popular, our performers immediately adapt with the market to meet the demand.
Stagliano - Continue to make new and interesting content.
Acworth - We are very aware that no matter how strong our content is, it is only as strong as the consumers that subscribe to it. We therefore see great importance in encouraging our members to voice their opinions and be vocal about their likes and dislikes. We listen closely to all suggestions and concerns and nurture the tools that strengthen the interactivity of our online community. We recently relaunched our forums with many new features that have improved the overall user-experience and increased its functionality. Our directors diligently read our comment boards and forums to get new ideas, find inspiration, and engage in debate. As long as we continue to listen to our members, watch the marketplace to stay competitive with new technology and market trends, and most importantly produce authentic entertainment that reflects our fantasies and empowers viewers to enjoy their own, I am confident that Kink.com will always remain in touch with consumer demand.
Valiquette - Improve what we are doing from every aspect. I think this is what will be rewarded in the long run. Quality products and services: This is what people will always be looking for.
Suss - We need to educate our consumer on the benefits of our products and how our products can fill their needs.
Cohen - We continue to offer more content than any other VOD site. This ranges from low-quality amateur to premium features from the top echelon of studios. We do this at reasonable prices. We let our customers choose what they want to watch and how much they want to spend. We believe that membership sites will continue to decline because customers continue to demonstrate that they want to pay as they go for adult content.
Rabinowitz - It is more critical than ever that merchants selling to the consumer be conscious of evolving tastes and preferences, in terms of both actual content and quality of products (content) offered as well as the ease of the customer experience itself. That includes looking constantly at everything from site layout and design, to overall payment model, payment methods, and what you do with customer information. The "it ain't broke so why fix it?" approach is not an ideal mindset for managing growth.
Klein - To stay on top of all the new methods of delivery of content, and making sure that you produce your content within the realms that work best for those new delivery methods. Each new delivery platform has different requirements and you can't always assume that you can just shoot a movie and it will work great across all areas.
This article originally appeared in the January issue of AVN Online. To subscribe, visit AVNMediaNetwork.com/subscribe.