To IPO Or Not To IPO?
That is the question. For even as mainstream Initial Public Offering fever has cooled to sub-freezing levels over the past year, some Adult Internet companies are starting to sizzle in anticipation. In recent months, National Public Radio, Fox News, Wall Street Journal, and U.S. News & World Report have all filed stories about cybersex and the street. U.S. News in fact devoted its March 27 cover story ("A Lust for Profits" by Brendan Koerner) to adult dot-coms going public. According to Playboy.com's Laura Sigmond, however, the newsmag erred in reporting (in Koerner's accompanying article, "Pin-Up IPO, Playboy Tries for Dot-Com Magic") that Playboy (www.playboy.com) would make its IPO by early April; as of this writing, the Bunny had yet to hop onto the NASDAQ.
Still, Sigmond says that Playboy.com has indeed filed S1 documents with the Securities and Exchange Commission, and plans to go public sometime in 2000, just as a handful of other cybersex companies have already issued IPOs. But the subject of whether or not adult Net firms should be publicly traded on the NASDAQ, the American Stock Exchange, the New York Stock Exchange and the like, is very controversial.
Go Dow, Moses?
U.S. News calls porn "the king of online content," and notes - except for the Wall Street Journal interactive edition (http://interactive.wsj.com/home.html) and a few others - that the adult Net has the only websites generating sizable revenue via subscriptions. Compared to eToys (www.etoys.com) and Amazon.com (www.amazon.com), the adult Internet is a billion dollar-plus per year "massive moneymaker," with profit margins of 30 percent or more. The newsmag also admits that "raunchy pictures were the bread and butter of the Internet's early days, and that pornographers pioneered several technical wonders, from streaming video to shopping-cart software."
As Andrew Edmond - CEO of Seattle-based SexTracker (www.sextracker.com), which researches and analyzes the adult Web - points out, people benefiting from the economic boom are looking for places to put their money other than banks, which for some time have been paying low interest rates.
The stock market has become the logical - and popular - place to invest money. And it's understandable that some adult Netizens have IPO envy. Due to taboos, e-porn's profitable pioneers are largely denied the same rights a stodgy Street readily grants the Johnny-dot-com-latelies that are swimming in debt and haven't earned a cent. As New Frontier Media's Mark Kreloff asserts, "We are profitable, unlike many, many other companies that do business over the Internet."
Enviously eyeing Silicon Valley's boomtown of overnight dot-com millionaires fueled by venture capital and IPOs, plus Wall Street's long-lasting bull market, some cybersex execs view going public as the path to a promised land of riches and respectability. These adult entrepreneurs long to go Dow, Moses! Their motto could be, "Let my people dot-com!"
Others in the industry fear that the IPO road could lead the adult Web to 40 years of wandering in the desert. Naysayers who strongly object to listing sex sites on the Dow Jones, Standard & Poor's, NYSE Composite, Amex, and NASDAQ Composite indexes, contend the adult Net has little, if anything to gain by going public - and indeed, much to lose.
Bullish in Boulder
New Frontier Media Inc. (NASDAQ: NOOF, www.noof.com) is one of the first and largest adult dot-coms to go public.
The company distributes adult content via electronic media, including cable television, satellite and Internet, both with low- and high-bandwidth connections. In October, 1999, leading adult content provider Interactive Gallery Inc. (www.igallery.com) became a subsidiary of Boulder-based New Frontier, which maintains a large facility in Los Angeles.
"We run our business very leanly and professionally," says CEO Mark Kreloff, a former investment banker who boasts degrees from Syracuse University's Newhouse School of Public Communications.
Kreloff's description of his adult empire resembles the vertical integration of global conglomerates and mega mergers: "From day one we sought out distribution partnerships with the largest Fortune 500, multi-channel distribution companies, firms such as Time Warner, for our content distribution. New Frontier's websites receive over 30 million unique visits every month. We are 100 percent devoted to the electronic distribution of adult content and license 100 percent of the content we offer to our Web and pay-TV consumers. We not only thrive, but really profit dramatically in the Internet environment, because we are a technology company. New Frontier, for the trailing 12 months ended March, 2000, generated over $48 million in revenue, not including our broadcast business, and $5.2 million in earnings before interest, taxes, depreciation and amortization.
"We raised over $20 million in capital for the company," Kreloff continues. "We completed our NASDAQ public listing in conjunction with an offering of $7.9 million in February, 1998. We did it to secure access to the public capital markets, basically to finance technology infrastructure, development and, ultimately, to attract key members of management with stock options... We enticed all those people to come onboard with very inexpensive stock options, which were priced in the one dollar or two dollar range. I believe the IPO was priced at around five dollars per share, and there was also a warrant attached, that allowed someone to purchase an additional share of stock for five dollars and fifty cents. On or about May 5, 2000, the stock closed at seven dollars and twenty-five cents. The warrant no longer trades, and that warrant traded as high as five dollars or six dollars at one time. If you add the value of the warrant to the value of the original share price, it's a very successful offering. My company right now has a market capitalization of $160 million. That's the value the Street has placed on our company.
"One last tremendous benefit we have had as a public entity that would not have been available to us as a private company, is that we have a currency to utilize in making acquisitions," he reveals. "We paid approximately six million shares of restricted stock for 100 percent ownership of [iGallery]. This year alone, they generated over $30 million in revenue and six million dollars in profit. So, it's been a very rewarding experience for both the purchaser - our company - and the sellers, the management team we have taken on, which previously owned those assets. We are by far the most dominant player in the adult e-commerce world."
Bearish in Seattle
However, not everyone in the industry is as bullish on New Frontier and its Street venture. SexTracker CEO Andrew Edmond speaks highly of the firm, but states New Frontier's price to earnings ratio is low in comparison with non-adult companies. "It's not a sexy company for a big investor, like Fidelity or Wells Fargo mutual funds. It doesn't have the volume or public relations. It's purely a stock that returns dividends. New Frontier's going public has not been worthwhile, other than it was able to buy a very big $40 million a year Internet company, just by giving some stock away. That was kind of nice, but as far as the bottom line goes, it did absolutely nothing. New Frontier and iGallery gained nothing. The transaction was easy, but there was no benefit."
Edmond elaborates: "A company goes public to raise money. However, as an adult industry, we don't need to raise money. We have all the servers, routers, employees, and content we need. The real reason for becoming publicly traded is it provides a common valuation system. If [a company] can go public and be valued at a certain dollar, it can easily merge and acquire other companies that are also public. But an adult company doesn't need to do that. It's not that expensive to come up with a new product or service or get new customers. It's only a two billion dollar a year marketplace. I can't imagine a two billion dollar a year marketplace going to the stock market and making much of an impact. This is only two one-hundredths of a percent of the total value of U.S. public markets. We wouldn't get the valuation dollars and couldn't make the mergers and acquisitions anyway.
"The public marketplace is not the place for the adult industry to be," he states. "Simple as that."
Scrutiny On the Bounty
Cyberspace erotica thrives on anonymity. Edmond points out that, "In a public marketplace, companies have to go through a process to audit and sanitize their financial statements, so investors buying shares had audited financial records and business plans, liabilities, major risks, etcetera."
Intellectual copyright attorney Greg Piccionelli, of Brull, Piccionelli, Sarno, Braun & Vradenburgh, acknowledges the anonymity issue, but believes the adult Net can prosper within the strictures of the regulatory environment imposed on publicly-owned companies. He suggests the main reason adult dot-coms should consider going public is to raise the capital required for emerging technologies, such as providing broadband services.
Again, Edmond disagrees. "Unlike private companies, the marketplace allows for extreme political control. If there was a change in political climate and pressure was put on government regulation agencies that were in control of financial markets in a way where owners or investors could lose hundred of millions overnight if it didn't comply with a political agenda - the public market makes it really easy for compulsory tactics. I'm talking the SEC, FTC, FCC, DOJ, etcetera. That lands the adult industry right in the middle of any government agency with criminal, regulatory and commerce oversight. SEC, etcetera, can open up the books a lot easier and more publicly for public companies than they can with private companies."
As the presidential election nears, Edmond warns against forces with a right-wing agenda. "Those who think they're going to make some money as individuals on the stock market should realize they're just asking for a heap of trouble for themselves and the rest of this business."
But where opponents of adult-com IPOs consider the glass half empty, New Frontier's Kreloff thinks it's half full. "If anything, it has given our distribution partners a tremendous amount of comfort in the companies we run, because we do report to a higher authority," he says. "Namely, the SEC and NASD, be-cause we're a NASDAQ public company. We only see positive benefits from being publicly traded from a scrutiny standpoint, because generating distribution contracts with companies like Time Warner, for example, are not easy. There's always a cloud of speculation over an adult enterprise and to the extent that you actually have public disclosure documents that explain who owns your stock, what your balance sheet and income statement look like, how strong you are financially and what transactions you've completed, I think it really helps in the sale process. It's been a very positive and powerful tool we've had at our disposal in the ongoing securing of carriage within the cable and DVS environments."
Dot Kapital: Stock Market Roller Coaster
Critics of Capitalism decry its boom and bust cycles, and contend that the stock market resembles a craps game; players are subject to its whims, and those who ignore the patterns of feast and famine do so at their own peril.
In the past decade, U.S. markets may very well have experienced their longest running bull market, with the Dow, and especially NASDAQ, posting spectacular gains in recent years. But it's worth pointing out that 1929's stock market crash plunged the world into Depression and 1987's "correction" also cost many people dearly. During America's 1990-era bull market, the "Asian flu" laid low East Asia's economies, and Japan, which seemed invincible in the '80s, still ails.
Most recently, the rise and fall of the NASDAQ, fuelled by new economy tech, telecom, and biotech stocks, mirrored Capitalism's cycle of boom and bust. According to Bloomberg News, the first time NASDAQ rose above 500 points was April 12, 1991. The first time it closed above 1,000 was July 17, 1995; above 2,000, July 16, 1998; above 3,000, Nov. 3, 1999; above 4,000, Dec. 29, 1999; and the dizzying rise peaked at 5,046.86 on March 9, 2000. But then, the NASDAQ precipitously declined. By May 5, according to The Los Angeles Times, the NASDAQ Composite closed at 3816.62, having lost 6.2 percent of its year-to-date value. These cycles are why some adult Interneters resist the market.
Cautious in Los Angeles
Ron Levi, President of L.A.-based Voice Media, Inc. (www.cybererotica.com) stands somewhere between bullish and bearish on the market. Voice Media started out in 1992 as an adult audiotext provider. The company moved online in December 1995, and owns Cybererotica, one of the adult Net's ten biggest firms.
Houston-based Rick's Cabaret - with which Voice Media has partnered - consists of a chain of five men's lap-dancing clubs around the country. It's publicly traded on NASDAQ under RICK.
"Rick's Cabaret put together a couple of websites at www.dancerdorm.com, which we're involved with, supplying them with all the technical and marketing services," says Levi. "This is their entry into the Internet. Rick's further entry into the Internet is its purchasing, in two different steps, of two of our websites. The first deal, for www.xxxpassword.com, will give us just under 20 percent of the stock in that company. At the time that we convey over to them www.clubpix.com, which is the other website we're selling them, that'll give us roughly 43 percent of the company, which is basically control. The letters of intent were signed in April, 2000."
Levi says that the first part of the deal was scheduled for completion by the end of May, with the second part expected to occur around August. Levi hopes - unlike the many non-adult dot-coms that suffered losses during NASDAQ's nosedive - that Voice Media's profitability will be reflected in the quarterly earnings of the publicly owned company and, accordingly, show a rise in stock. "I've seen a lot of companies on the Internet go IPO and I've yet to see a model that was profitable doing so. The way the stock market just recently went down, a lot of the money came out of those dot-com stocks that had gone public and weren't showing profitable models."
Levi views the joint venture onto the Street as a testing of the waters. "Right now, I'm very guarded because of the dot-com stocks recently taking it on the chin. Even companies like eBay - the big starlets - if you look at their prices a year ago and look at them today, you can see that two-thirds, three-fourths of the money invested in them has gone out of it. The correlation there is none of them showed a profitable model. We feel our scenario is going to be different, but nobody really knows until you take the plunge and put yourself out there and see if you get embraced by Wall Street."
SexTracker's Edmond also believes this is a testing ground. "The deal is also a way for Voice Media to play their properties on public markets to see if it's good or bad for business. It is unlikely Voice Media will go public, just as it is unlikely for IEG (Internet Entertainment Group) to do so. Voice Media's been interested in the public market for some time. They've been developing non-adult properties. But I don't think they've ever felt confident they'd find an underwriter to take their properties public. So they sold one of their major properties, Clubpix.com, to Rick's, a public company. I think Voice Media's doing it as an educational experience, as well as a slight gamble, to see if their property goes up or decreases in value because of its relationship with the public market."
In early May, Levi said shares of Rick's were selling at three and one-eighth.
R-E-S-P-E-C-T
Not withstanding the fact that the adult Net - even at the corporate press' admission - trailblazed e-commerce, be-cause the industry deals with sex, it is stigmatized. Of cybersex, U.S. News wrote it is "the Internet's 'dirty little secret.'
The nickname is a partial misnomer, for e-porn is anything but little and certainly no secret." Note that while the adult Web is acknowleged as being neither "little" or a "secret," in the eyes of the writer and much of Wall Street (a conservative bastion), online erotica is indeed "dirty."
And despite the fact that many non-adult firms, from credit card companies to ISPs (U.S. News points out 16 percent of e-porn is accessed via AOL) profit immensely from sex sites, the adult Net remains the Rodney Dangerfield of the World Wide Web. SexTracker's Edmond points out that, "401ks and banks are big melting pots and they have to appease a certain cultural standard on their investments. Which means subscribers of Wells Fargo or Fidelity, etcetera, will get pretty pissed off if their parent mutual fund is buying adult companies."
In early May, Private Media CEO Berth Milton groused, "It is with regret that institutions, mutual funds and stock analysts continue to avoid our exciting and progressive company because of our industry. In some cases, institutions and stock analysts admitted they love the company and stock, but are afraid of being the first to officially recommend and support us to investors."
Like Aretha Franklin or Michael Corleone, some adult Netizens believe that the Street's hallowed halls confer an aura of respectability. Kreloff asserts his firm's standing on the Street "unquestionably" enhances its image; however, with domains such as www.pussy.com, www.tits.com, and www.blowjobs .com, New Frontier, like other adult dot-coms, may encounter Street snobbery. "There's an unfortunate skepticism which precedes meetings I have," he says. "Once I'm able to explain to them who we are, how we've organized our business, who we have partnered with on distribution, our backgrounds - which are impeccable, in terms of legal issues - we start looking at the numbers, growth, markets and infrastructure of the company, and a decision is made based on its merits."
Ultimately, Kreloff asserts, it is profit, not morality, that is the business and raison d'etre of Wall Street, where money doesn't talk - it screams. Kreloff says the financial center is impress-ed with New Frontier's technical innovations and e-commerce experience. "We enjoy a very strong reputation among Wall Street, primarily because management comes from Wall Street," he says. "I was an acquisitions vice president for Drexel Burnham Lambert for years in New York. I worked on a lot of media deals before, during and after that experience. We enjoy a very strong institutional support for our stock. Household investment firms and mutual funds own stock in our company. Approximately 20 percent of our stock is held institutionally. And I've really been able to bridge the gap that existed between adult content distributors and Wall Street."
A possible way to circumvent adult's stigma is by including e-porn shares in larger portfolios with traditional stocks, like other "sin" stocks. But Kreloff considers this insulting. "Lumping adult together with tobacco is really unfair," he states. "There's no social benefit to smoking. Watching adult material is educational, fun and an inexpensive way to receive entertainment.
We are on the verge of attaining the kind of acceptance breakthrough casino companies received ten, 15 years ago."
Hefner Dot-Com
Playboy is the adult community's Wall Street veteran. Its stocks were originally offered on the NYSE in 1971, when Playboy went public. Today, U.S. News declares Playboy.com, which gets a million unique visitors per month, to be a big part of Playboy CEO Christie Hefner's long-term strategy for the firm her father began in 1955. U.S. News reports Credit Suisse First Boston is underwriting the IPO.
According to Hugh Hefner's representative Bill Farley, Playboy is in an SEC-mandated "quiet period" before it goes public. Hefner declined to be interviewed, and obtaining info for this article regarding Playboy.com was been difficult. SexTracker's Edmond and Voice Media's Levi speculate market forces -namely NASDAQ's 20 percent plunge and the Dow's six per- cent fall circa April - may be behind Playboy.com's delay in issuing its IPO. Edmond says he's aware of at least 12 other companies that withdrew IPOs around the same time, and believes Playboy.com is reevaluating when to issue its IPO. But Levi thinks it'll take six months to separate Playboy and Playboy.com.
SexTracker's analyst likens Playboy.com to NBC's Internet spin-offs. "Playboy.com basically just recycles Playboy assets into another brand. They want to take it public to raise money and increase its valuation."
Regarding Playboy.com, Kreloff says "Playboy has an incredible brand and it is about preserving that brand, at any expense. Its site gets a lot of random type-in traffic. But ultimately, Playboy has never really existed in a hyper-competitive environment like the Web. In the Internet, there's just too many choices and some very, very sophisticated players. The Net is the ultimate leveler of the playing field. Basically, Playboy.com is another dot-com enterprise that just doesn't make any money. New Frontier is three times the size of Playboy.com in terms of revenue and we are profitable. And we think we'll be larger than Playboy in the next 18 months, just through sheer inertia."
But in today's hardcore world of fetishes, urination, fisting and the like, Playboy and 73-year-old Hefner are considered passe by some adult Netizens. Kreloff says, "Playboy is lacking. It has a very soft content offering. It doesn't deliver its content relative to other types of adult Net content. We are a lot less inhibited than Playboy in terms of content."
Nevertheless, Edmond postulates, "[Playboy is] certainly not going to lose anything out of going public, other than some small ten percent ownership of their company. But [the company] has much to gain, if they do it right."
Other Adult Dot-Coms
Private Media Group, Inc. (NASDAQ: PRVT, Berliner: PMG, www.prvt.com) is based in Barcelona, Spain. The company began in 1965, evolving from adult magazines to videos and then to the Net. In early May, CEO Berth Milton claimed Private had an increase in stock price since confirmation of its January 28, 1999 listing on NASDAQ. According to Milton, the stock's price was 33 dollars on May 4, and had traded as high as 40 dollars on February 7.
According to Kreloff, "Private has an Internet business which, for the trailing 12 months ending December, 1999, did approximately one million dollars in revenue - relative to about 20 million dollars in overall revenue they generate in print. I think it was marginally profitable, or lost some money."
Kreloff adds, "On Command was recently purchased by Liberty Media, one of the largest media conglomerates on the planet, which owns assets like the Discovery Channel. On Command owned Colorado's pro-basketball and hockey teams and its crown jewel, from Liberty's standpoint: interactive television services available to over one million hotel rooms. It's estimated that 80 percent of On Command's cash flow for the trailing year was derived through the sale of adult content in hotels."
According to U.S. News, Internet Entertainment Group's SEC filing was sidetracked due to lawsuits and charges by ex-employees that IEG double billed for services never rendered and greatly inflated its stated revenues, charges that IEG's Seth Warshavsky denies. Regarding IEG's going public, he says, "My counsel told me I can't go into specifics. We have not filed yet to go public." However, Warshavsky said IEG is still pursuing the possibility of being publicly traded on Wall Street.
Market Forecast
New Frontier's Kreloff prognosticates, "There's going to be room for only two players. We'll be a major consolidator of Internet and subscription and pay TV in the adult category. There's just not enough room for any more than that. I'm not saying the door is closed - but I can tell you how difficult it has been to bridge the gap with the acceptance of adult on Wall Street. This is a very difficult proposition. I have not met many people in this industry who have the patience or knowledge to successfully get a public offering done. If it were easier, there'd be more public companies, particularly in the last three years, when anybody could take a company public. The opportunity is right now; it's phenomenal for us to continue to make acquisitions and consolidate this business. To give all of the webmasters and people on the content side the opportunity to own stock in a well run publicly traded company. And people in the adult business finally, a chance to cash in some chips and own some currency that is liquid, that they can trade and make money from. We are set up now to consolidate a major percentage of the three, four, five billion dollars that are spent in total on adult content in the U.S."
Attorney Piccionelli sums up, "We're probably going to get involved in Regulation A offerings with our clients, because it seems to have worked fairly well with non-adult dot-coms. These are direct to public offerings on the Internet which can raise up to five million dollars, circumventing the market-makers and brokers. The possibility for offering shares of stock directly on-line to the public has finally arrived. The SEC has a series of rules associated with it and if it's done right, it could be a fairly decent way to raise money online."
