There’s no telling exactly how big the adult Video-on-Demand (VoD) business is today; the market is too new and too chaotic for anyone to develop an accurate read. However, if the proliferation of distribution deals and growing number of new content aggregators is any indication, the adult industry is on the verge of something big.
San Francisco-based GameLink LLC (www.gamelink.com) is a venerable digital distribution company generally acknowledged as one of the preeminent adult VoD pioneers. “Imitators are sprouting up like mushrooms after the rain,” says GameLink CEO Ilan Buni. He has seen the emergence of so many new competitors recently, he’s already planning for the inevitable shakeout.
Nobody is absolutely sure how this is going to alter the adult landscape, though it’s almost certain to have an impact on everything from the channel through which consumers buy DVD content to the way contracts are written to how royalties are paid. Some are betting on the rise of a huge new market in cell phone-based adult video services.
Flynt Internet (www.flyntdigital.com) executive vice president Mike Santiago sits on an ideal perch for observing sea changes in the industry. According to Santiago, “It’s a bit early to predict the impact of VoD.” But that hasn’t stopped Santiago and his counterparts at Vivid, Wicked, Private, and virtually every other major adult industry player from placing their bets, while site operators have been pioneering new payment and distribution models.
The industry is readying its infrastructure. Sophisticated service providers like DHD Media (www.dhdmedia.com) are offering packaged Digital Rights Management (DRM) and video delivery solutions, while scrappy video specialists like FlixMedia, operators of FlixxxNow.com and FlixCash.com, have been honing an array of VoD content and back-end services for smaller site operators.
The message from all this? Everyone sees a big opportunity, and VoD is almost certainly the locus of the next big development in digital distribution.
The complication? The maturation of the VoD market is still probably two years away, according to LFP Video executive vice president Mark Hamilton. “Until the mass audience is able to receive high-quality encoded content on broadband, and the experience can match that of watching DVDs, the Internet VoD business will remain an additional, rather than primary, revenue stream.”
Where the Money Is
The term Video-on-Demand is used to refer to both Internet video viewed on a PC and video programs ordered via interactive television services like digital cable. According to analyst firm In-Stat/MDR (www.instat.com), 15 million cable subscribers around the world will pay for VoD by 2007. But that figure is dwarfed by the more than 20 million households who already have access to broadband Internet.
According to a cable industry trade group, cable operators had 15 million high-speed Internet subscribers by late 2003. The DSL industry trade group reported 8.24 million U.S. subscribers. And the number of high-speed Internet households is growing at a fast clip – about a 30-35 percent annual rate, according to industry analysts.
Clearly, the big prize in adult content distribution for the foreseeable future is broadband Internet. Among broadband customers, 37 percent report using video online, according to Jupiter Research (www.jupiterresearch.com).
“The customers are buying,” says Raj Patel, director of marketing for DHD Media, the Web services and hosting company owned by Danni Ashe. According to Patel, his clients’ content is more and more frequently being wrapped with Digital Rights Management technology, allowing sites to protect video from being copied illegally. “We’re seeing more of our clients adopt a pay-per-view model. I’d probably say it’s moved from about 5 percent of video content eight months ago to about 25 percent now.”
What’s happening in adult today in some ways mirrors the changes that have already taken place in the music business. This is one instance where mainstream entertainment is in the lead, due largely to the smaller file size and easier download of music.
“Three years ago, everyone was pissed. The file-sharing networks were stealing from us,” says Ron G., a vice president at a major label. Today, Ron downloads music several times a week using Rhapsody, a service from RealNetworks (www.real.com).
Rhapsody and iTunes from Apple are the carrot to the RIAA’s lawsuit stick. They are services where users can download a vast library of music for a modest subscription or per-download fee. The services have become easier to use than peer-to-peer networks because they are reliable and can offer things that pirating services can’t, like allowing people to use their personalized accounts from anywhere. This is particularly important to note for the adult industry, since video files on the peer-to-peer networks are often extremely cumbersome and provide an unreliable experience.
Observers have pointed out that Rhapsody and iTunes are working because they are well-branded consumer experiences of user-friendly, mature DRM software. DRM allows the owners and distributors of digital content to set time, copying, transactional, and other usage rules on their material. The software today is flexible enough for content providers to experiment widely with rules and price points.
“People want the ability to do both subscription and download. In the music space, both models work,” says Greg Chiemingo, spokesperson for RealNetworks.
In the adult space, the big studios are still experimenting with VoD business models. Vivid (www.vivid.com) recently reached an agreement to distribute video on a pay-per-minute basis over HotMovies.com. HotMovies charges from $.08 per minute for access. They also offer full movie downloads and 48-hour rental. David Schlesinger, vice president of licensing for Vivid, says more major VoD distribution deals will be signed soon.
“Pay-per-minute satisfies the same craving they’re reaching out to with pay-per-song,” says Schlesinger. HotMovies.com’s per-minute model is very different than that of another VoD leader, GameLink, which has been selling adult content online since 1993.
GameLink currently streams entire movies on behalf of Hustler, Wicked, and many of the other major studios. When a user buys a movie, they are limited by the amount of total time the movie can be viewed. If the movie is 120 minutes, GameLink gives 130 minutes of viewing access. It’s up to the user to decide when and how to use that time.
GameLink CEO Buni says that once he can establish trust with customers, many will build up a big library of movies over time.
Vivid’s Schlesinger expects that eventually customers will be able to mix and match scenes from different movies according to user preference (like a favorite star), and download them with the same features built in that customers get off the shelf with DVDs.
Whichever digital content packaging models prove themselves over time, the industry will be quick to adapt, and the technology makes it increasingly easy for everyone to do so at a low price. In addition to the maturation of DRM software from RealNetworks and Microsoft, the cost of simply serving video has decreased dramatically. According to Jupiter Research, since 2002 the average cost of serving one minute of video has declined from $.03 to $.01.2.
GameLink’s Buni plans to stay ahead in part by building on his recommendation technology, which he has been improving for years. But most distributors will not have the resources to continually invest in customized software like GameLink’s recommendation system. They will have to find other ways to survive.
David Valentiner runs FlixxxNow.com, a service which for years has been distributing a large catalog of video mostly from independent studios and producers. He sees the adult VoD business splitting into two fundamental approaches: the big-studio economy and the smaller player economy.
“For the most part, we’re paying the content providers 20 to 30 percent of the retail price,” says Valentiner. “One of the trend-setting adult studios is charging 40 or 50 percent. They have taken the mainstream approach. For example, if you license from Disney, you’re going to pay 50 or 60 percent of the rental price to them.”
In addition to distributing DRM-bound videos via affiliate programs, Valentiner markets videos to smaller operators as a means of increasing retention. He encourages sites to regularly offer some videos for free or reduced-price viewing to get customers to renew. “It used to be [that] three months was the average retention. Now it’s down to five weeks, though gay sites have more loyalty. We’re finding specific niches we can service where the big boys can’t compete because of their cost structures.”
Meanwhile, in Hollywood
The mainstream movie business is, as might be expected, far behind the adult world in Internet distribution. There are two major players in this field: MovieLink (www.movielink.com) and CinemaNow (www.cinemanow.com). Neither has set the industry on fire, and according to rumor, MovieLink is shopping itself for an unspectacular sale.
So far, consumers have not shown that they want to watch mainstream movies on the computer. These services will likely not fully blossom until downloaded movies can be easily viewed on the living room television.
The two companies hold their performance stats closely. However, the industry buzz is that MovieLink is having a harder time than CinemaNow. Perhaps not surprisingly, MovieLink offers no adult content, while CinemaNow has a softcore section.
By contrast, the adult VoD business is primed for a burst of productivity. Distributors of every flavor are establishing themselves, and the big players have given their initial nods that the time seems right to experiment. Everyone reports they are increasingly on alert that contracts must be scrutinized and re-scrutinized to be sure no rights are given away that may be very valuable next year.
In the music industry, digital distribution (e.g., Real Rhapsody or Apple iTunes specific line items) is beginning to show up in the regular budget planning for artist development and marketing.
There are still a few impediments to profitability. According to Jupiter Research, current music licensing practices and billing expenses produce a cost of goods on a $.99 download of $.82 to $1.17. Since $.99 appears to be the sweet spot for demand, the industry’s next move will be to tweak payment systems to increase the profit margins.
As these issues are ironed out, DRM-wrapped digital distribution will become virtually institutionalized as a sales channel worthy of full consideration.
And adult content isn’t far behind.
Mark Thaler lived and worked in Silicon Valley during the Internet boom as a marketing consultant. He also worked for Yahoo!’s PR agency as the head of their online marketing group. He is now living in L.A. You can e-mail Mark at [email protected].
