The future of online billing is an important issue because the entire industry depends on the ability of Webmasters to extract money from consumers in a safe and secure manner. This process is currently under extraordinary stress due to the increased costs involved with the processing of credit cards, combined with a dilution of revenue from affiliate programs due to market saturation. In response, adult Webmasters are beginning to gravitate towards alternative billing mechanisms and limit the financial impact of (or financial dependence on) their affiliate programs.
These alternative-billing mechanisms will tend to encourage a "pay as you go" business model rather than an "automatic paid subscription" business model. As a result, adult Webmasters will be forced to spend an increasing amount of attention on customer retention.
This article discusses how billing mechanisms are likely to change in the near- to medium term, and what adult Webmasters will need to do in order to survive the difficult years ahead.
Crying all the Way to the Bank
Most adult Webmasters differentiate between the revenue that they receive from paid memberships on their own site (or sites) and the revenue that they receive from a Website to which they are affiliated. In recent months, many Webmasters have become painfully aware that both revenue streams are becoming increasingly unprofitable. While there are always case-by-case exceptions, revenue streams from conversions are generally down, due to an increasing number of adult sites on the Web, all chasing after the same consumer dollar. At the same time, the profit from each conversion continues to shrink as credit card processors continually add additional charges and fees to adult-oriented Websites.
To make matters worse, revenue from affiliate programs is shrinking as pay sites try to get their acquisition costs in line with the decreased profitability from conversions. To put it another way, an adult Webmaster can't keep paying big money to affiliates for traffic and conversions if the Webmaster isn't making big money on his or her pay sites. "Affiliate programs are beginning to become a major drain on the finances of many adult Websites," says Colin Rowntree of Wasteland.com.
The expense of executing a credit card charge has skyrocketed in recent years. Many adult Webmasters blame the banking industry, as if bankers were somehow prudish concerning adult content. However, the nature of the content is much less important than the nature of the adult Internet business itself. I recently attended a regional conference for developers of software for credit card processing, where I was able to interview several bankers on this issue. According to my sources, the reason that banks slap extra charges on adult Internet firms is because the banks themselves are lending money to high-risk enterprises. One banker told me of an adult merchant whose chargebacks in any given month were in the range of $5 million - enough to worry the bank's auditors. While the adult merchant was willing to make good on this amount, the bank was afraid that the merchant might go out of business, or simply disappear, leaving the bank with a $5 million liability.
When a bank lends a business $5 million, even short term, the bank needs to feel comfortable about the reliability and solidity of the business. They want to know who they're dealing with, who's going to be responsible, and how the bank is going to get its money when it's due. However, when banks look at adult Internet firms, in general they see people operating under pseudonyms, often with complicated corporate structures hiding actual ownership, and (more importantly) no discernible assets that could be seized in the event of a bankruptcy. "Trust me, our bank doesn't want to be in the porn business, no matter how much the content might be worth on the open market," one banker told me. This is why many banks no longer issue merchant accounts to adult firms and why the few banks (mostly outside the U.S.) that do issue merchant accounts assess significant add-on charges and fees. Third-party billing companies, like CCBill and iBill, create a buffer between the banks and the adult Webmasters. But risk is risk, and although the third-party billing companies screen out the worst offenders, the service they provide comes at a cost.
An Ailing Business Model
There is absolutely no indication that banks or third-party billing firms are going to lower their fees now or in the future. On the contrary, as the adult Internet market becomes increasingly saturated (i.e., too many sites), the likelihood increases that a number of Webmasters will either go bankrupt or simply skip out, leaving the third-party billing companies holding the debt. As this risk increases, third-party billing companies (and the banks that do the actual processing) are inevitably forced to raise their fees. In other words, adult Webmasters have every reason to expect that the cost of processing a credit card will continue to increase. "Too much free stuff, too much crap, and too many programs," complains Max of MaxHardcore.com, "It just seems like the sites that spam the most are the ones that rocket to the top, as they fool people with free trials. But how many cancellations can they process before they're cut off, and change processors? No wonder Visa is getting tougher."
The other source of revenue for adult Webmasters - the affiliate program concept - is similarly under stress. The initial model for affiliate programs - pay per click - is all but gone, because adult Webmasters soon learned that unqualified traffic is worthless. Most affiliate programs now have a "one time fee" for each conversion. Unfortunately, that fee is often greater than the revenue that's generated from the conversion. The reason is simple: There is so much competition for the consumer dollar, and so little differentiation between sites, that many consumers merely buy trial memberships, download the best content, and cancel, later to join a similar site.
Unfortunately, rather than figure out a way to retain these jumpy customers, adult Webmasters often prefer to increase their conversion rate in order to get more customers who forget to cancel. This dependence upon revenue from customers who aren't actively interested in a site, however, inevitably results in chargebacks. One Webmaster recently learned this when, as a test, he joined a site that had licensed his content overseas. "I wasn't sure who they were when we started getting spammed relentlessly," he explains, "so I signed up for a one-day free trial, cancelled immediately, then still got billed for $59.95, not the lower price they advertised. I had to do a chargeback."
The overall business model that has evolved for the adult Internet, dependent as it is upon revenue from dissatisfied customers, is simply not sustainable. As competition continues to increase for the same consumer dollar, the frantic attempts of adult Webmasters to secure additional conversions creates a base of customers who are difficult to retain, thereby creating the conditions for runaway chargebacks, which in turn increase the overall cost of credit card processing, with the net effect that "it's getting too fuckin' hard to make any fuckin' money in this fuckin' business," as one adjectivally-challenged Webmaster put it.
Alternative Medicine
Take heart. A number of alternative billing mechanisms are beginning to emerge that have the potential to replace the current credit card system, according to experts. "Over time, marketing practices within the adult Internet have become far more aggressive, as most of the established consumers who have been around do not jump as quickly for premium subscription offers," explains Scott Rabinowitz of TrafficDude.com, "Of course, since traffic has a baseline cost, whether through advertising, labor, bandwidth, or all three, we have had to find more creative ways to derive return on our investments." Three primary mechanisms have the potential to replace credit card billing: direct billing via banks, payment clearing houses, and telephone companies.
Direct billing takes two forms: using ATM charges rather than credit cards, and online checks. Online checks don't work well for Website charges, though, because Webmasters don't know whether the consumer actually has funds in the bank to cover the check, raising the possibility that the consumer might download a gigabyte of content in the time it takes for the check to be rejected. ATM billing shows additional promise, but consumers are rightly afraid to put that level of financial information onto the Web because online checks lack the protection of credit cards, leaving the consumer with no recourse in the event that he gets ripped off. This is not to say that direct billing does not have potential. However, it would have to be set up so that consumers would feel comfortable and secure, and so that Webmasters would be able to immediately check for the presence of funds in the account.
Payment clearing houses have become increasingly popular among adult Websites. Some of these business concepts are surprisingly sophisticated. E-gold.com, for example, allows consumers and businesses to send specified weights of previously-purchased gold into others' e-gold accounts. Only the ownership of the gold changes, while the gold itself remains in the e-gold.com vault. Officials from e-gold insist that the service offers immediate settlement of charges, worldwide; low transaction fees; and no chargebacks. "Adult sites such as BedroomBondage.com and RussianPix.com, apparently acting in response to the void created by PayPal's departure from various adult niches, have started taking e-gold," says Dr. Douglas Jackson, chairman of e-gold Ltd.
Telephone companies would seem to be a natural replacement for credit cards because these firms have internal billing mechanisms and a one-to-one relationship with consumers. Up until now, schemes for using telephone companies for adult Internet billing have been limited to dialers and 900 numbers. Though they are quite popular overseas, in the U.S. at least, dialers are probably not the answer.
This is because they have been subject to Webmaster abuse, as evidenced by widely-publicized horror stories of unscrupulous Webmasters who don't inform the consumer of charges that are being generated. The alternative method, 900 numbers, doesn't have this liability, but has another liability that makes them unattractive to Webmasters - the inability to do automatic rebilling.
A solution to this problem may be emerging in Europe, where a number of sites have been billing consumers via SMS (Short Message Service), a technology that enables short messages of generally no more than 140-160 characters in length to be sent and transmitted from a cell phone. It works something like this: When the consumer sees a Website that s/he'd like to access, s/he authorizes the site to send his/her cell phone a message every day, for the life of the subscription, with a charge connected to each message. So long as the consumer continues to accept the message, the subscription continues, and the fact that the consumer must authorize the charge (by accepting the message) prevents the most obvious kinds of fraud. As an advantage, the SMS billing method is totally anonymous and untraceable because the transaction isn't channeled through the consumer's bank account.
Changes in Behavior
What's significant about all of these alternative billing methods is that they move the consumer/Webmaster relationship away from a "paid subscription model" to a "pay as you go" model. This is very bad news for Webmasters whose revenue stream depends upon fully automatic billing (as in "I hope he doesn't notice the monthly charges.") Instead, future porn consumers will need to make regular, explicit decisions to remain with a site. This is a requirement because, without a "pay as you go" model, any alternative billing mechanism that evolves, if it supports fully automatic chargebacks, will eventually reproduce the same abuses that are making credit card processing uneconomical.
Regardless of what mechanism eventually evolves, adult Webmasters will no longer be able to depend upon consumer forgetfulness to secure an ongoing revenue stream. Instead, adult Webmasters will be forced to build sites that retain customers, that continue to interest consumers longer than a trial membership period. This is going to come as a major financial shock to Webmasters who are more concerned with acquiring new customers than with keeping them, because as consumers switch to a more pay-as-you-go billing mechanism, those Webmasters will find their customers gravitating toward sites that remain interesting over a longer period of time.
In other words, taking advantage of the future of online billing will lie in providing the consumer with an experience that justifies ongoing charges. Some top Webmasters are already implementing such schemes. Max Hardcore, for example, now offers all of his photo shoots on a simulcast Webcam, with very little advance announcement, a policy that encourages consumers interested in his content to hang around on his site to see what's going to happen next. He also keeps a very lively forum, with frequent participation from Mr. Hardcore, his Webmaster, and a couple of his best models. "A member never knows what he's going to find," he says, "and there's usually some crazy shit going on." Hardcore also is one of the few Webmasters to implement staggered content, where some of the archival content of the Website is gradually revealed to the paying customer - another good method for customer retention.
As Webmasters move toward a sustainable, pay-as-you-go business model, they'll also be re-examining their affiliate programs. Indeed, that's already taking place, according to Colin Rowntree of Wasteland.com. "Webmasters are finding that it's no longer economic to make big payments for conversions and instead are moving back to a revenue sharing model, where the affiliate is paid a proportion of the revenue generated from the referred customer," he explains. While this means that payments to affiliates will be stretched out over a longer period of time, it will give affiliates incentive to direct traffic to pay sites that are not only likely to convert well, but likely to generate the kind of customers who will stay with the pay sites for a long period of time, thereby creating ongoing revenue for both the pay site and the affiliate.
The end result of these structural changes will hopefully be a business model that's sustainable and which does not, like today's business model, contain the seeds of its own destruction. How to position for the future? That's easy. Smart adult Webmasters are already focusing on obtaining high quality traffic that's likely to generate high quality conversions that remain as members of the site for a long period of time, thereby creating ongoing revenue. At the same time, these Webmasters are focusing on putting together sites that have the kind of content, entertainment, and interaction that increase customer retention. Colin Rowntree puts it this way: "It's a bit strange that it's taken this industry so long to figure out that finding good customers and treating them well is the key to making money." o
Jack Morrison is a leading expert on the marketing of online erotica. He can be reached at [email protected].
