Partnerships between companies, especially those between online and brick-and-mortar operations, are becoming increasingly frequent in today’s more competitive adult industry. AVN Online touched base with several dealmakers to get the skinny on the growing trend toward shared revenue.
From the dawn of civilization, business deals have been a necessary and important part of human life. They have provided merchants an incentive to come together for their mutual benefit, and have allowed everyone from fur traders and boot makers to cowboys and Indians to construct alliances that further their respective interests. It was only a matter of time before the adult industry caught on.
Indeed, deals and partnerships between companies in the online adult sphere are commonplace, and those cross-market partnerships between online and traditional brick-and-mortar powers are becoming increasingly popular, pointing to an important trend in the adult marketplace. From gay video-on-demand site NakedSword’s headline-grabbing deal to launch the (now-defunct) gay-straight hybrid site ClubThrust with Jenna Jameson’s ClubJenna, to SmashBucks’ deal to create and host the website of porn star Michael Stefano, industry players are realizing the value of aligning their expertise toward a shared goal. And, according to some, it’s resulting in a quickly changing marketplace.
"It’s like everybody says: ‘The big get bigger,’" Mansion Productions Chief Executive Officer Oystein Wright said. "And when two companies that are very well known combine forces, it obviously shifts some of that power balance in the industry and makes the other companies think twice about what they want to do to be able to compete. I think you’re going to see more and more of [these deals]. A lot of these companies understand they can’t do everything themselves, and they don’t want or have the time to teach themselves."
Mansion secured one of the biggest partnerships of 2006 when it landed a consulting deal to revamp Hustler’s websites late in the year.
The trend toward partnerships seems to have hit its stride within the past year, particularly among brick-and-mortar businesses, which are now forging content-distribution partnerships with Internet sites after initial reluctance. "I would say that it’s definitely an increasing trend in the marketplace, and a necessary trend," said Mary Gillis, product marketing manager for popular gay VOD site Maleflixxx, which successfully courted a number of video companies into content-licensing deals. "The marketplace is growing, and competition is growing. The only way to succeed in areas where the competition is as fierce as it’s becoming in the adult industry is to be able to leverage the power and reputations of companies that are like-minded."
The Great Internet Debate
Though video companies have begun to warm up to the Internet recently, they weren’t always so hot to trot. For years, video production companies were slow to the take when it came to branching out to the World Wide Web, and the companies that did reach out to content streaming and VOD websites usually complained of "unfair" revenue splits. Such complaints did not exactly encourage other video company owners to jump on the Internet bandwagon.
"I think it took me a little while to get out there because I wasn’t sure of it, and it was unknown waters for me," said Red Light District Chief Executive Officer David Joseph, who only recently signed a deal to distribute his content online via Webquest after several failed attempts at in-house distribution. "I was scared of content getting out there; I was trying to control everything. Meanwhile, all these other companies that [went online] a long time ago were doing very well with it, and the boat was passing me by. I already think we’re a year and a half too late. I wish I would have done everything a long time ago."
So what changed? According to Tim Valenti, president of gay VOD company NakedSword, it simply boils down to a matter of time plus experience. "Back in the day when we were first starting out, we had [to beg studios] for content. Today, it arrives in box loads at my door every day, and we have to be more discriminating about what we put on our network because it reflects our brand. Today, everybody who produces content has pretty much grown up and understands that [the Internet] is where they’re going to be able to sell it."
VCX President David Sutton concurred, explaining that partnering for an online distribution deal with SmashBucks was simply a matter of getting onboard with a forward-thinking company. "Internet is the future of this business," Sutton declared. "It’s a portion of the industry that cannot be ignored. I’ve heard stories that some companies are a little bit reticent to get involved with that future technology. They’re afraid that the digital delivery of this stuff is a dangerous proposition because once it’s digitized, it’s out." Sutton, however, pointed to older technological advancements as representative of the same fears. "Look at the DVD," he said. "It’s a master in and of itself. Anyone can buy a DVD and make 2,000 pieces if he’s got a disreputable replicator. There are never any guarantees that your content won’t get out there, no matter what the medium."
Sutton added that a major factor in his decision to align VCX with SmashBucks was that any deals made with the online company would not interfere with traditional distribution outlets. "I suspect that things are going to be very profitable for both of us, and it’s not going to affect one iota the success that we’ve had with our distributors," he said. "It’s not going to take any part of their market share away. People are either buying electronic delivery or they’re buying the physical component." Sutton remains cautious, however: "This is a new deal for us, so we have to see how things work out."
Building Better Brands…Together
By far, one of the chief benefits of alliances is the effect they have on brand recognition.
"Branding is the key to sales," said Fred Valiquette, president of Braincash, which markets sites for performers like Lexington Steele and studios like Doghouse Digital. "All of our marketing is oriented this way. Through our network of affiliates, free sites, and blogs, we reach millions of eyeballs every day, [and] repeat exposure is the key. Braincash also means quality and is a big brand to webmasters, so it works both ways."
Likewise, Wicked Pictures Chief Technology Officer Avi Bitton, who helped guide the video company into an online distribution deal with Leslie Sharp’s DCM Inc. after several in-house attempts proved unfruitful, mentioned that such deals give all involved companies the chance to "exploit niche expertise." "Nobody is an expert at everything," he explained. "If the partner clearly understands your brand, then naturally their expertise converts to increased recognition of your brand because of the expertise your partners have in their field."
For gay video company Falcon Studios President Todd Montgomery, giving NakedSword the exclusive rights to distribute Falcon content online meant gaining a whole new fan base. "I think that anytime you place a significant portion of your online business with a third party, not only are they stewards of your content and technology and customer revenue, [but also] they’re stewards of your brand," he said. "If the third party gets and understands ‘brand,’ they will help expand your brand online and introduce your business to audiences you weren’t previously reaching."
As the result of its deals with both Hustler and third-party biller Epoch (whose affiliate program is hosted on Mansion’s MPA3 back-end engine), Mansion stands to gain a lot of exposure. "For us, it’s huge," Wright said of the company’s alliances. "We’re pretty well known for some of our brands like MPA3 and MAS, but [partnering with Epoch] will take it to a completely different level. With Hustler, it’s also very good for us. Everybody knows Hustler; not everybody knows us. So for us, it’s obviously very beneficial to have them as a client."
"It’s an advertising proposition for VCX," Sutton explained, adding that limitations in the quality of electronic delivery will ensure the success of DVD sales long into the foreseeable future. "Unless somebody wants to download four to 10 gigabytes of digital data, the quality is not going to be the same as you get on a DVD. Am I worried about a guy taking a 340 x 340 stream and making that his only purpose of the adult product? I don’t think so. I think, if anything, if somebody likes what they see at 340 x 340, they’re going to be more inclined to buy the full widescreen version of the product that’s available on DVD. That’s a great advertisement—and we get the advantage of the capital inlay from the consumer who buys twice."
The Lure of the Helping Hand
Beyond the money, there is another enticing factor that helps companies come together. "We’ve been working on trying to build our website for a couple years now, and it’s been quite difficult to have the right people in place. It’s been really hard on us," confessed Joseph of the main reason behind Red Light’s liaison with Webquest. "We’re a manufacturer; we need to stick with what we do best, and that’s producing content. We thought it would be best to team up with someone like Webquest, because they know how the affiliate programs work better than anybody."
"I don’t know the Internet worth shit," declared porn star and director Michael Stefano, who said he "vibed" with SmashBucks’ Mike Hawk and Joe Spikes and decided to let them create and run his site, MichaelStefano.com (though Stefano retains ownership of the domain). "I needed someone to do my site, and they were good guys and made me a good deal. All I have to do is appear in a scene. I think a lot of porn stars are going to start doing this. People who have been models for a while and who have lots of DVDs out definitely have to go to the Internet."
While Stefano is a recent arrival on the Web, companies like Atlas Multimedia have been courting the video side of the industry for several years.
"The Web business is getting more and more complex, and performers do not want to be bothered with running their own sites," said Christian Amico, vice president of Atlas Multimedia, which creates and manages websites for adult performers and studios like Anabolic and Diabolic. "This is where we come in. We have spent a lot of time and money programming all the things that a complete porn-star site requires, thus making it way easier and quicker for a performer to get a solid Web presence. I think more and more performers are realizing that a larger company is much more proficient in creating, setting up, and managing their sites, and that the bigger the affiliate program you get involved with, the better it is for the performer to reach a much wider audience."
Gillis agreed. "I think these deals are becoming the norm because people are realizing that the best way to do things is to find the people who are already doing it," she said. "[Companies] come to us for a couple of reasons, the first being core competencies. Maleflixxx does one thing, and we do it very well. We do video-on-demand; we don’t produce our own content. We recognize where our strengths and our abilities lie. When you consider going into VOD, that’s a whole other company and an entirely new business proposition. We can leverage so much from [companies] in terms of star power, reputation, brands, and consumer recognition, but they can leverage our expertise to reach international markets in six languages and six currencies and really build their brand at an international level."
"I’ve seen too many companies trying to do it on their own," Wright recalled of video companies like Wicked and VCX. "Unless they hire somebody who’s already been in the Internet business to go and work for them and build their site, it’s going to be really hard for them. If they’re trying to do it themselves, it’s going to be a lot of trial and error. I mean, you can spend a few thousand on this now, or you can spend $50,000 to $150,000 trying it do it yourself and still not get anywhere."
Or, as Valiquette summed it up, "A partnership with an already established company turns to profit for you and leaves time to focus on the other aspects of your business. In the end, it turns out to be a win/win situation for everybody."
The Money Split
Of course, where adult industry businesses are concerned, the most important factor leading to deals between companies is the money. Stefano said he will be sharing a 50/50 revenue split with SmashBucks ("I own the domain; they run it for me," he noted), and related similar agreements.
"I think the money is a lot cleaner online," Hawk stated. "In brick-and-mortar, you have distribution, and by the time it melts down to actual money for the studio, the amount shrinks down. I think with online distribution, it’s truer to the number [studios had in mind]."
But what number? Video companies traditionally have griped about the revenue split offered in deals with Internet companies. "When you sell the DVD wholesale to a distributor, you’re making 100 percent of the profit on that disc from the first tier of distribution," Sutton said. "Whereas, when you do that same deal with an Internet streaming company, you get substantially less than 50 percent of the revenue and substantially less than 50 percent of the profit."
"The model for revenue shares is very different online," conceded Gillis. "It’s not a traditional wholesale/retail split. VOD companies have their overhead to pay. They also have their royalty costs to pay; they have their affiliate commissions to pay. There are all sorts of different pieces of that pie, and they all need to be respected. [But] it’s a bit of a surprise to a brick-and-mortar company that’s taking their content online to find ‘Oh, I’m not going to get 50 percent anymore because there’s not that much room in the pie anymore to go around.’"
Still, there is good news—at least for established content producers. "We project that through our partnership with NakedSword, we’ll experience significant growth," estimated Falcon’s Montgomery. "We’re looking at growing above 30 percent online, and NakedSword will help us drive that level of growth."
The Art of the Deal
There’s no question that making deals can be beneficial to established and growing businesses. The question is: How does one know which deal is right for him? "A good deal is one that is good for both companies," Valiquette declared. "Ultimately, it should create a synergy and turn the project into a plus for all parties involved."
The majority of the people with whom AVN Online spoke echoed Valiquette’s statements. "We want to make sure that the deal is good for us and good for our partners," Valenti concurred, "because if it’s not, it’s a short-term deal, and those aren’t the kind that we want. That’s not how business grows. Unfortunately, there are a lot of short-sighted people in this industry who are looking to make a fast buck or who craft deals only in their benefit."
While Hawk maintained that positive interpersonal contact is the best way to secure deals with prospective partners, others stressed the importance of being upfront and clear about expectations. "The best deals consist of mutual honesty and clear understanding of the goals and strategies, a deal that fits in with a comprehensive long-term strategy for the company, and solid feedback loops," Bitton posited. "Deals are organic and have to be managed. That only comes when you’ve considered the caliber of the people and the quality and clarity of the communication, their infrastructure and track record, and the clarity of their vision and understanding of their own product or service." In other words, he added, it’s all about common ground. "I think it amounts to being able to identify and explore opportunities that give evidence of shared goals and values within a space that is of interest and that fits within the comprehensive strategy of your company."
In the end, however, it’s really just about staying on top of growing trends and keeping up with the times. "I think that, like in all industries, you have to reinvent yourself every few years," Valenti offered. "Things change; climates change. You have to go with the flow if you want to stay in business."
