creation

This page discusses the creation side of the online 'adult content' industry sectors and players.

It covers -

• an introduction to mapping the industry
• arrivals, departures and concentration
• location - the geography of content production/distribution
• revenue models - retail, paid access, advertising
• content - what is on the sites

     introduction

As the preceding pages suggested, there is considerable uncertainty about the shape and size of the adult content industry - "they exaggerate everything, especially the size" - and relationships between different sectors.

That reflects the social marginality of much consumption, the evanescence of many enterprises and the lack of market transparency. Few enterprises are publicly listed (of value for insights into revenue and profitability) and there are few agreed benchmarks.

It is probable that the industry involves a few large enterprises (with some, for example, operating hundreds or thousands of web sites) and a large number of very much smaller (and more transient) enterprises. It encompasses bodies that are directly involved in the production and distribution of adult content. It also encompasses bodies that provide services such as hosting and payment processing or that exist to restrict access to industry services and products (eg vendors/operators of content filtering systems).

The profitability of the industry is uncertain. Claims of huge turnover and high margins have been questioned by skeptics who note for example that Private Media Group, supposedly one of the largest US operators (and unusual in being listed on NASDAQ), claimed revenue of US$34 million and profits of US$7 million.

Seth Warshavsky of Internet Entertainment Group said that in 1998 IEG made a US$15 million profit on US$50 million revenue; both figures have since been questioned. NASDAQ-listed New Frontier, supposedly one of the largest groups, reported aggregate revenue of US$61 million in 2001. It had acquired Interactive Gallery Inc (IGI), supposedly one of the largest content distributors for around US$27 million in 1999; IGI at that time forecast profit of around US$6m on $21 million revenue. In February 2003 New Frontier announced 3rd Quarter sales of US$8.6 million, with operating earnings of US$1 million.

Offline producer Vivid claimed annual revenue of around US$100 million in 2006, from around 60 movies per year (with a per film production cost of US$50,000 to US$300,000 and marketing & distribution cost of US$20,000). In 2004 80% of Vivid's income reportedly came from DVD sales, down to 30% in 2007, at which time most revenue came from pay-per-view TV, internet video-on-demand, subscriptions to Vivid.com (40,000 subscribers paying US$30 per month for US$15 million annual revenue), merchandising and mobile-phone deals.

In 1999 German sex shop chain Beate Uhse forecast internet and tv revenue of €50 million; actual sales in 2001 were €5 million. A year later Cyberotic Media, characterised as Uhse's leading competitor in online content, went bust after reporting €2.5 million sales from 150 sites.

     arrivals, departures and concentration

A recurrent theme in popular writing about online porn is that it is a quick way to make lots of money with little expertise and even lower investment. Supposedly all you need is a good domain name, a server and what Peter Lorre described as "feelthy pictures", with the latter bought/licenced from a competitor or simply stolen.

Eric Schlosser's Reefer Madness (New York: Allen Lane 2003) thus quotes one industry figure's comment that the only barriers to entry are "a sense of embarrassment and the lack of a good lawyer".

Asia Carrera opined that the net

is giving the smaller players in porn - namely, the talent, like myself, as opposed to company owners and distributors - a chance to market themselves and to profit off the marketability of their own names. One of the things that always annoys me about making movies is that the talent only gets paid once for a shoot, while some guy behind a desk profits again and again, selling the movie rights to hard-core distributors, cable channels, and selling CD rights, DVD rights, compilation tapes, Internet content, etc. It's hard for talent to rise to the level of the guy behind the desk because launching a production company is so prohibitively expensive. But starting up a website costs virtually nothing for anyone who owns a computer, and I can tell you firsthand that there's money to be made as long as you're willing to invest the time.

In practice the industry appears more complicated, with considerable demand offset by competition from established players and new entrants (driving margins down) and difficulty in cheaply sourcing some services.

A 1998 Salon item thus noted that although "anyone can put together a rudimentary adult site for under $1,000 by purchasing a CD-ROM of pornographic photos and slapping up a Web page" (with bottom-of-the-market image compilations priced at 5 cents per snap), turnkey construction is more expensive:

A rudimentary site with pictures and ad banners goes for as low as $3,499; $4,999 will get you a video feed; $34,999 will get you an e-commerce subscription service

An indication of market saturation is provided by a name search at DomainSurfer: 53,194 domains in the com/net/org gTLDs with the word 'porn', 167,171 for 'sex', 3,288 for 'smut' and quite a few for terms you wouldn't use in talking to your mum, kids or dog.

Profitability appears to involve scale (securing high traffic figures) or niche markets that often attract regulatory attention. Contact with some practitioners and analysis of the literature, such as it is, suggests that globally there are around 150 to 400 major operators (often utilising a large number of sites, many of which primarily point to each other), with revenue derived from subscriptions, advertising and provision of content - such as outright sale or licensing of images on CD - to smaller operators. It is unclear whether the major operators are making significant investments across regional borders. Many are reported to pay the minors for directing traffic to them.

A 2001 paper on Censorship Rules: The Topology & Data Topography of Australian Adult Websites (PDF) by David Harte & Mark Brogan suggested that as of late 1999 Australia's online adult content industry was highly concentrated, identifying 23 operators and around 250 sites. 98% of Australian sites were portals to offshore hosts (principally located in the US). 67% used subdomain or subdirectory domain names. 219 of the sites were hosted in the US; almost all content for sale was hosted outside Australia.

Jason Hendeles forecast in 2001, on the basis of private information, that by 2003

the number of adult webmasters - firms that operate at least one adult-content site - will likely rise from the current figure of between 30,000 and 45,000 to more than 110,000 ... We believe the higher present-day figure to be the more accurate. These webmasters range from very large concerns (one, iGallery one of the top ten online adult content providers, has registered approximately 1,500 second-level domains) to small, home-based operations (registering on average between 9-18 domains each). At the moment, about 25 webmasters dominate the field, with the lion's share controlled by the top ten. By 2003, according to data from Forrester and NSI Registry, our estimates suggest these webmasters, and others who will emerge in the meantime, will likely have registered an astonishing 2.1 million domain names worldwide, up from approximately 640,000 in 2000.

It would appear that churn at the bottom end of the industry keeps pace with churn among customers, many small sites being dependent on relations with major operators or simply going out of business - to be replaced by new hopefuls - because they are uneconomical.

     location

As we've suggested in discussing questions of space and the 'death of distance', location matters in cyberspace - with businesses and support services gravitating to friendly jurisdictions, sites with advanced infrastructure and places with managerial or other talent.

As yet no-one appears to have produced a comprehensive geography of the online adult content industry. It is clear that much content comes from Eastern Europe and South East Asia, that management resides in traditional entertainment entrepots such as Los Angeles (or Sydney), and that depending on particular jurisdictional concerns the servers are located in the US (reflecting free speech provisions and technical expertise) or second/third world nations.

Claims of large-scale involvement by the Russian mafia or other organised crime have not been substantiated. The plethora of sites featuring images of Eastern European boys, girls (and sundry livestock) may instead reflect a weak economy, low cost expert labour after the disintegration of the Soviet Bloc, outsourcing of content production to a new cottage industry.

     revenue models

Industry revenue embraces three spheres of activity -

• retailing of tangible products such as DVDs, videotapes, clothing and things that buzz (ie the online version of mailorder known as etailing)
• sale to end-users of access to information such as erotic stories, still images, webcams and interactive entertainment (whether through subscriptions or on a pay per play basis)
• advertising, primarily by major industry participants rather than entities such as Telstra, Ford or Coles Myer

Mailorder-style retailing is primarily of interest through its exposure of jurisdictional quirks and quibbles, such as that which has made Canberra the X-rated video capital of Australia (distributing tapes and disks to consumers across the nation and overseas), and the migration online of retailers such as Germany's Beate Uhse.

Most industry revenue appears to be attributable to end-users who typically use a credit card to subscribe to a site, with subscription on an annual or month by month basis and priced at between US$10 to US$100 per month.

Pricing does not necessarily reflect the 'quality' or uniqueness of content on the site and there appears to be considerable churn between sites, with suggestions that 50% of subscribers fail to renew (or cancel) the subscription to a particular site each month and 90% have left after six months. The US National Academies study noted claims that "the average subscriber" uses the subscription 1.5 times per month, with a single session typically involving 75 to 100 pages.

Advertising is the second major revenue model for site operators. Some advertisers simply pay a flat fee for display of their content (eg a banner that's a link to a major site), pay on a click by click basis or share subscriptions from 'conversions' through the site.

Pricing is apparently in line with mainstream cost per million (CPM) and cost per acquisition (CPA) fees such as US$5 to US$45 per 100,000 clicks on an ad.

The model is heavily weighted towards high traffic volumes, with 'winner takes all' characteristics. Site operators seek to maximise the number of eyeballs and conversions, which is why surfers encounter a very large number of sites/links that direct them to a major site whose content is only accessible on a payment.

Some of that direction involves unpopular practices such as "selling exit traffic" (aka mousetrapping or browserjacking). That is particularly problematical when a visitor has unintentionally encountered an adult site - eg its registrant has changed and an innocuous site has "gone porn" (discussed in Ben Edelman's paper on Domains Reregistered for Distribution of Unrelated Content) - and merely wants to leave without further exposure to the content.

The more traffic through a site, the higher its advertising rate, with operators seeking to maximise a new site's traffic before the end of its halflife. Edelman notes that 4525 distinct domains redirected traffic to a particular site. Porn's Parallel Web Universe, a 2000 article in Upside magazine, advised

If you spend $100,000 on ads and get $100,000 in 30-day subscriptions, those subscriptions die at the end of the month and the process must start again. On a typical adult site, if that $100,000 is for recurring subscriptions, 70 percent will continue the next month, 50 percent for the third month, and 30 percent will remain for the fourth month. Provided you can continue to add $100,000 of new subscribers with a $100,000 ad expenditure each month - given the vastness of the Net, this can continue for many months - at the end of four months, $400,000 in advertising has generated $770,000 in revenue. But without recurring billing, the balance sheet is just break-even.

The National Academies study notes that payment regimes "can be (and usually are) adjusted on the basis of the value of the user to the advertiser", with conversion of particular demographics being rewarded through a bonus. The report notes that the emphasis on raw numbers in some remuneration schemes - the maximum number of hits, irrespective of conversions - means that most operators have "few incentives to refrain from differentiating between adults and children" and that one operator allegedly earned up to US$1 million pa from selling traffic.

     content

What do adult sites contain? Typically they feature still images and/or prerecorded video. Some also include text (eg stories and chat) and live video or webcams, often of the 'voyeur cam' variety.

Image collections comprise photos - generally in colour - and other graphics such as drawings or cartoons. Most collections involve one or more actors (animate or otherwise), with content arranged by category or photosets (ie sequences).

The major sites usually offer thousands of colour images, often delivered from fast servers. Photosets are sometimes exclusive to the site; categorised images are often sourced from a range of online and offline locations (eg scanned from magazines or repurposed from adult videos).

Prerecorded video encompasses everything from home movies to ambitious studio productions (archival or new features that are also distributed on tape and DVD). It is delivered as streaming or downloadable formats (short clips or full-length), with viewing quality affected by factors such as the delivery format and broadband access.

It is often syndicated rather than exclusive to a particular site. Perspectives are provided by Robert Morse's 2000 thesis Streaming Media: The Technology & Business of Short Films & the Internet (PDF), Michael Genovese's 2000 thesis Video on the Internet - The Ultimate Promise of Global Communications? (PDF), Dan Rayburn's Streaming and Digital Media: Understanding the Business and Technology (New York: Focal Press 2007) and Webcasting Worldwide: Business Models of an Emerging Global Medium (Mahwah: Erlbaum 2007) edited by Louisa Ha & Richard Ganahl.

The past five years have seen a proliferation of voyeur sites that deliver streaming video of feature ostensibly live unscripted performances by individuals/groups.

For privacy advocates a particular concern is the more recent emergence of webcam sites that provide access to archival or real time still and video surveillance images of individuals, eg activity in elevators, toilets and change rooms.




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