Both brick-and-mortar and digital erotica consumers have it good these days. Whether they prefer the higher quality DVDs deliver or the immediacy of an online fix, content is easy to come by and relatively inexpensive. Better still, the variety available in today’s adult marketplace is unprecedented.
But is life as pleasant for erotica producers? The virtual world can be a scary place for producers accustomed to the comfort of creating physical product. The technology behind digital distribution can be dauntingly complex, and it evolves rapidly. It can be expensive for companies to gear up and then keep up. Add that to reports that digital distribution channels are underperforming for some primarily brick-and-mortar companies, and the path to the future begins to look treacherous.
Be that as it may, producers no longer can afford to ignore the digital realm. Although no one is completely ready to sound a death knell for brick-and-mortar distribution, pundits now are saying the Internet, mobile devices, and broadcast television (all part of the much-ballyhooed "digital environment") eventually will displace the vast majority of real-world sales outlets in much the same way DVDs replaced videocassette tapes. Understandably, such predictions make brick-and-mortar retailers and physical-product distributors more than a little nervous; they make content producers nervous, too. Even Web-based DVD retailers like HotMovies.com are seeing a shift from hard-product consumption to video-on-demand and downloads.
Although most brick-and-mortar adult entertainment companies are at least dipping their toes into digital-distribution waters—and some are doing quite well—many view the future with trepidation. Already a palpable nostalgia for "the good old days" of high profit margins and low production budgets seems to be coalescing in the face of an ever-more-crowded market filled with ever-more-sophisticated and -demanding consumers.
Digital distribution has advantages
"I don’t think there’s any question that the business is changing and evolving," said Steven Hirsch, chief executive officer of Vivid Entertainment Group. Vivid has a reputation for adopting new technologies earlier than many other companies, and it seems to find success with most of them. "The DVD business is going to start shrinking, and the [online] video-on-demand business is going to increase. It just makes sense. Shelf space limits retail, but not so much the Web."
New technologies of any kind are on Hirsch’s radar constantly—even if he doesn’t see them contributing very much to Vivid’s bottom line immediately—because he’s convinced the future is electronic. He expects to see brick-and-mortar revenues shrink while mobile and VOD revenues grow within the next three to five years.
Michael H. Klein, president of Hustler’s LFP Broadcasting and LFP Internet Group, said his company, too, has invested heavily in digital delivery in order to secure its future. Hustler offers its fans "anything that can be done on the Web," Klein said. The company’s mobile initiative "is doing very, very well," especially in Europe.
Although digital content contributes a respectable amount to Hustler’s bottom line, Klein said the company sees it right now mostly as an unparalleled branding opportunity. On that, he and Scott Coffman, president of online video-on-demand company Adult Entertainment Broadcast Network (AEBN), agree. "[Online broadcasts] are an extra revenue stream for [video producers]," Coffman said. "Some of them are making good money, yes, but it’s nothing like what they’re making on hard product. [However,] you cannot measure what exposure on the Internet does to their sales in stores. Trailers and clips are what drive people to mainstream movies, and the same is true for adult. The exposure is priceless."
Coffman said Web exposure is excellent for a company’s branding efforts and immeasurably beneficial in creating "buzz" about new product; he called it the digital equivalent of a real-world, multimedia advertising blitz—except content owners make money when people view online what essentially are "ads." In essence, instead of paying for advertising, digital distribution is advertising that generates revenue, Coffman said.
Of course, not everyone chooses to jump into the deep end of the technology pool right away. As Pure Play Media CEO Richard Arnold put it, "You can always tell the pioneers, because they’re the ones with the arrows in their backs." That doesn’t mean Pure Play avoids the latest trends altogether; it just prefers not to be a trailblazer.
"The guys in the Net end of the business are putting together some great product that’s driving our market," said Arnold. Pure Play not only produces content, but also distributes it to broadcast and retail outlets. According to Arnold, the company has discovered material shuttled from cyberspace to DVD sells "very well" in the brick-and-mortar world, "because [online producers’] customers have already told them what’s going to sell. The Web provides instant test marketing."
The secret to success, according to companies that live or die by the whims of virtual consumers, is to maintain momentum in the real world while building it in the digital realm. Adult DVD Empire, which began as a new-age retailer on the Web and then added VOD, has found the two distribution channels work well together. "[VOD and streaming video] really aren’t cannibalizing our [physical-product] sales at all," said Director of Business Development Mike Barry. "People who like what they see on VOD will buy the DVD. It’s a cross-marketing opportunity. Most of the companies we work with encourage us to get the VOD up as soon as possible."
Perhaps most indicative of a bright future in the digital realm is Sex Z Pictures’ experience. According to CEO Bo Kenney, "Broadcast and the Web have taken the customers out of bricks-and-mortar." Sex Z’s sister company, distributor LGI Digital, owns 12 retail stores in Virginia, but Kenney said, "We’re only using the brick-and-mortar stores to get to where we don’t have to need them anymore. We’ve seen a 5- to 8-percent drop in DVD sales this year." To illustrate graphically how the market is changing, Kenney shared surprising figures: "We sell 34,000 DVDs monthly in the retail stores. In Fairfax County [Va.] alone, we sell 1 million [television] VODs a month." The company’s online efforts are performing equally well, he noted.
It’s also got drawbacks
Although Kenney’s figures are impressive, the current problem is that producers make less per view when a title is distributed digitally than they do when it’s sold in a retail store. "When we sell a DVD, we might get $10 per unit and the store will mark it up to $29.99," Kenney said. "On the Web and TV, we get pennies per play."
Even Hirsch, the perennial technology champion, admitted digital content isn’t setting the world on fire financially—at least not yet. "If you ask the average producer what he makes on [digital product], it’s not very much," Hirsch said. "Internet VOD is a very, very small percentage of our overall business, although our VOD TV numbers are increasing." Hirsch also admitted Vivid’s seen virtually no impact on its revenues from its mobile initiative, at least in the U.S. "But we’re seeing some impact in Europe," he noted. On the upside, "[Digital’s] not taking anything away from our retail business currently," he noted.
Part of the reason digital distribution is perceived by some as a money pit is the growing criticism of the very thing that made the virtual space so popular to begin with: its ability to make content more accessible. Even companies that do well digitally bemoan the glut of explicit content online. "I don’t know if you’ve seen the Internet lately, but it’s muddled with video," complained Barry.
David Joseph, president of Red Light District, echoed the sentiment. "People say it’s technology that’s causing the slump in physical-product sales, but if you ask me, it’s more the fault of product saturation," he said. "There are still people out there who will purchase physical product, but there’s so much content on the Internet these days that they can get for free. That’s what’s hurting the industry."
Emil Del Prete, owner of Video Wholesalers of America, added, "What the industry’s going to learn is that [digital distribution] is a double-edged sword," he said. "You notice your shrinkage with physical product, but there’s no way to measure digital product shrinkage."
Infrastructure issues, too, limit the effectiveness of digital delivery, Del Prete said. At this stage of its evolution, the Web simply is not capable of transmitting the highest quality content to more than a handful of consumers. Before buying 25-year-old Video Wholesalers from his uncle five years ago, Del Prete was a high-tech guru who helped create one of the original mainstream shopping networks online. Although he heartily believes in the power of technology to revolutionize consumer behavior, he doesn’t see physical product disappearing completely. "Does [digital distribution] take away business from a distributor? Yes, it does, but we’re not seeing any massive decreases yet. In fact, I’m increasing my business every day. There’s something about the physicality of a product—its art value—that’s important to some people."
History has demonstrated that a significant number of consumers won’t change their habits until they literally are forced to do so.
But it’s inevitable … right?
"Physical distribution will be good for, at best, another five years," according to Joseph, who noted that the period between initial decline and complete disappearance of VHS product was frighteningly brief. "Digital distribution is the future."
"There are quick spurts in technology, but paradigmatic shift happens very slowly," Avi Bitton, chief technology officer for Wicked Pictures, mused. He thinks brick-and-mortar distribution will remain an industry mainstay for at least another five years. "I do think the onus is on us to leverage some of the changes that are coming around in DVDs," he continued, referring to high-density discs and high-definition content. "Costs have to decline, but that alone could extend the lifecycle [of physical product]." He also said interactive technologies enabled by media convergence—like the ability to chat online with stars or a community of other fans while watching a movie on TV—could extend brick-and-mortar’s relevance while advancing technology’s inexorable march.
"All digital distribution methods eventually will converge," Hirsch predicted. "The real endgame is HD VOD—watch whatever you want whenever you want in the highest quality possible. It’s going to be interesting to see how that impacts the production side of the business."
Hirsch also sees "burn-your-own" technologies becoming increasingly important for the adult industry, although not particularly quickly. "Our burn-to-DVD program is doing fine, but it’s not making a lot of money," he said.
Barry gives physical product’s lifecycle a bit longer than many others, saying digital won’t engulf brick-and-mortar for another seven to 10 years. Still, he said, "I think it’s obvious [digital is] the direction things are going in the entertainment industry as a whole. The only thing holding it back is convergence between the Net and the home entertainment center."
HotMovies.com Director of Business Development James Siebert is one of the few who thinks DVDs already may be dinosaurs. "The online experience represents instant gratification, and it’s private—which is why it’s especially popular with women," he said. "DVD is at the end of its road. Everything from this point forward is going to be focused on digital. The compression, the encoders, the end-user equipment all have to get better for it to really take off, but mainstream is pushing the envelope right now with social networking sites like YouTube. That’s a scary business model for the adult industry. I’d be worried about that if I was a content producer."
For the immediate future, most adult companies seem to be looking for creative ways to hedge their bets in both spheres. "When a new DVD comes out, our website traffic grows exponentially," said Chris Jones, marketing and advertising coordinator for Pink Visual Productions. Primarily, he said, that’s because "the stuff on our website cannot be found on our DVDs, and vice-versa." Jones said he sees digital and brick-and-mortar channels working in tandem to support distinctly different market segments for some time to come, and that’s why "we’re making a concerted effort to support our brick-and-mortar distributors and not take any business away from them." Nevertheless, he admitted his company—like most others—plugs its website on the DVDs it sells in stores. That’s just part of remaining competitive, he said, noting that "we give our brick-and-mortar guys special deals and opportunities to participate in special promotions." In addition, because turn about is only fair play, Pink Visual promotes its brick-and-mortar partners on its website.
"People like to think that someday folks will no longer shop in stores, ever, and they are wrong," said Brian Sokel, director of marketing for TLA Entertainment Group. "Unless we all become androids, sell-through retail will always be there. Browsing with our eyes, feeling product, and instant gratification are all incredibly important components to consumer enjoyment.
"I don’t think the Internet will completely kill brick-and-mortar, but I think brick-and-mortar needs to be fluid," he continued. "Sell-through is the key: It provides instant fixes. But turning brick-and-mortar stores into more community-focused centers with a more cross-referenced identity, bringing the online world into the brick-and-mortar, allowing customers to browse hard product but also look online through kiosks, getting online action within the stores—that’s the secret. It’s the coffee shop of the future, really."
For Hirsch, it’s not as important how the industry moves forward as it is that it simply does. "It’s all industry evolution," he said. "It becomes a marketing game."
