Corporate America Cashing In on Porn

March 25, 2002 -- You won't see it in many companies' advertising or in their annual reports, but corporate America is quietly making millions off a product once found only in dingy theaters on the bad side of town: hard-core pornography.

Since the 1970s, pornography has grown from a small niche industry catering to theaters and enthusiasts into a multibillion-dollar business with mainstream appeal. Last year, Americans rented more than 750 million adult films on video or DVD, and watched millions more on cable and satellite at home or in hotel rooms. In addition, they spent more than $2 billion accessing movies and pictures on the Internet's estimated 100,000 pornographic sites.

The modern porn industry was born in California's San Fernando Valley, where it had two huge boosts from new technologies. First came the VCR, which allowed people to rent tapes at the local video store and watch in the privacy of their own home. Then new delivery systems — cable, satellite and the Internet — meant they didn't even have to leave the couch to get their porn.

The new delivery systems have also allowed major corporations to get a piece of the pie without getting too close to the product itself. While the dirty work of actually making the films is still largely done in the San Fernando Valley, major corporations like AT&T, General Motors and Marriott are sharing the profits by helping get the product to consumers. At the same time, a new generation of entrepreneurs — including dot-com techies and Ivy League business school grads — are bringing ambitious business strategies to the mix.

The Web Entrepreneurs

Greg Clayman is a distributor who buys adult content and then sells it on the Internet. When he and his partner, Chuck Tsiamis, saw the dot-com boom starting in 1996, they quit their insurance jobs to form an adult Internet business, VS Media.

"You want to jump on the New Age bandwagon and provide content for the adult side of the business," he said, "like Microsoft supplies software to many businesses around the world."

Clayman's company operates like cable TV, but on the Internet. From offices in Southern California, VS Media delivers live, one-on-one video of models to a network of sites run by small independent Webmasters. The models are employed by production companies. VS Media makes its money by taking a 30 percent cut of each transaction.

The company started with 500 Webmasters in 1996, and now has 20,000, each with an average of four to five sites. Most visitors to the sites watch free, nonexplicit video that VS Media offers as a tease, but Clayman says an average of 2,000 a day take the bait and pay for a one-on-one session — enough to make his company a $20 million business with 40 employees.

Clayman says they built their business on the model of a hugely successful film distributor. "For the first 20 years, Miramax Films never produced their own films. They acquired films, they marketed them and they distributed them. That's what we do," he said.

Missy Suicide, a 22-year-old entrepreneur from Portland, Ore., is a Webmaster who uses a different model — the niche market. Her site, Suicide Girls, stands out from the crowd by providing specialized content: nude pictures of young women from the "alternative" scene ("Goth, punk and emo girls," she says.)

With just $5,000 of her own money for start-up costs, she focused on subscription as her revenue stream: "I knew that I didn't have investors and that I needed to make money through membership in order to pay for the site and in order to pay the girls," she said.

Now, six months later, she claims to average 40,000 viewers a day, and to have grossed $80,000, with her revenue doubling every month.

The Producers

Vivid Entertainment is one of the biggest players in the San Fernando porn industry. The company produces 80 hard-core films a year, and has successfully expanded from the VHS and DVD market into satellite and cable TV.

In 1999, Vivid bought two hard-core pay-per-view channels from Playboy, which had acquired them when it bought the rival Spice Networks. Playboy was already making much more money from its soft-core pay-per-view channels than its magazine, but was reluctant to take the step into more explicit content.

Under Vivid's ownership, the hard-core channels grew rapidly, and last year the company turned around and sold the two channels back to Playboy, plus its own channel, for $70 million.

"That TV deal is what put them over the top," said Paul Fishbein, publisher of the industry publication Adult Video News. "The ability to run those channels, to get them for practically nothing and then to sell them back to Playboy for the amount of millions that they did was brilliant."

The deal also shows how the public's growing taste for explicit sexual content has nudged Playboy — once the biggest name in adult publishing — in a new direction. "I don't think there's any question that the public has forced them to become more explicit," said Dennis McAlpine, an independent Wall Street analyst.

Since buying the hard-core channels, Playboy's pay-per-view audience has nearly doubled and the company's stock has steadily risen.

The Hoteliers

Adult movies are now available in 1.5 million American hotel rooms, 40 percent of the total. Almost all of the upscale chains that cater to business travelers provide them, including Marriott International.

Although only one in 10 guests pays for a movie, most of those who do opt for adult fare, which is billed at a premium rate of $10 a title. Most of the revenue goes to the in-room movie companies that provide the content and the TV sets, but the hotels make 10 percent to 15 percent.

Adult movies account for around 80 percent of hotels' in-room entertainment profits — a small proportion of overall profits, but significant enough that the chains want to keep making them available. Marriott said in a statement that it saw the matter as a privacy issue and did not stand in the way of customers who want to view adult movies.

Only one of the upscale chains, Texas-based Omni, has barred adult movies, removing them from its 30 Omni-owned hotels and encouraging its franchisees to do the same. Omni took the step in 1999, citing its commitment to "family values." The chain received thousands of positive e-mails from grateful guests, but estimates the move cost $1 million in annual revenues and $3 million in additional costs to bring in a new provider.

The Blue-Chip Corporations

Porn's profits have proven irresistible to some of America's biggest corporations. "The revenues are large enough that many of these, if not most of these companies, are willing to put up with a certain level of criticism in order to maintain the cash flow," said Fred Lane, author of Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age.

Long-distance telephone service giants AT&T and MCI Worldcom have been leaders in the 1-900 market, which is dominated by phone-sex services and psychics. Although phone sex continues to generate almost $1 billion a year, its popularity is declining because of competition from the Internet.

Although AT&T is discontinuing its 1-900 service by the end of this year, the company is still making money from pornography on its cable services, which carry several adult pay-per-view channels, including Playboy's Hot Network. AT&T's proposed merger with Comcast Cable will reach 22 million subscribers in the United States, making the merged company the largest distributor of pornography in the country.

AT&T said in a statement that only a small segment of its customer base buys adult films.

A former AT&T cable executive, Jon Radloff, said the adult pay-per-view market was "very profitable" for AT&T, but not something the company wanted to draw attention to. "We wanted to provide it, but it wasn't something that we touted in our advertising campaigns," said Radloff, who was recently laid off in a merger-related downsizing. "We knew that if you offered it, the folks that were interested in that sort of entertainment would find it."

Another blue-chip company that profits from porn is General Motors, whose 225-channel DirecTV satellite service includes the Hot Channel, one of the channels Playboy bought from Vivid, and other adult channels. The adult offerings reportedly generate $150 million in revenue for DirecTV. "It certainly is a powerful contributor to profits for DirecTV," said analyst McAlpine.