Over the past four decades the adult industry appears to have undergone more transformations than the European Union, and what goes on behind the scenes remains just as much of a mystery. A financial mist has long shrouded the adult film industry, although now that the corporate sector has taken an active interest, the veil seems only to have thickened. Outsiders claim that the US adult industry earns over a $100 billion a year, while insiders put the figure at far below $10 billion. The primary question, at least from Wall Street’s perspective, is just how much money the revamped adult industry actually makes. Many sceptics remain unsure as to whether the new high-tech industry really represents a 21st Century gold rush, or whether such claims are merely smoke and mirrors. From the point of view of the American economy this is no small question, as the wealth generated by the adult industry affects everyone from teenagers to tax accountants. There is of course inherent bias in putting a precise figure to the (legitimate) adult industry. Those who are engaged in courting new adult stars or city investors stand to gain from inflated estimates, whereas company owners who are sitting pretty naturally do not want to court further competition or attention from the Inland Revenue. When it comes to the adult industry, size clearly matters.
For richer or poorer
Newsweek recently reported that the adult industry is unlikely to be worth as much money as many have claimed, especially now that the explosive growth of the Internet has triggered a sharp decline in revenues from DVD sales. Although actual figures are disputed, everyone at least seems to agree upon this market trend. According to Adult Video News (AVN), the US adult industry generated almost $13 billion in revenues in 2006, a 2.4% increase from 2005. While the sale and rental of adult DVDs remains the single largest market sector with sales in excess of $3.6 billion, representing 28% of the adult entertainment market (AVN), this sector still saw a 15% fall in revenues despite an overall increase in unit sales. Although this does suggest a strong prevailing demand for adult films, the rise of low cost Internet production companies has clearly squeezed the profit margins of the big film studios. For most of the established players, including Private, New Frontier Media, and Playboy (for whom financial figures are available, see inset), the pattern is one of slow or stagnant growth as emerging technologies help new players to capture an increasing market share. Whether or not you choose to take the published figures at face value, there is clear evidence for a vigorous transformation within the industry.
A 34% growth in revenues from the distribution of adult movies via cable, satellite and hotel channels went some way towards compensating for the decline in revenues from DVD sales. Currently home and hotel movie channels contribute some $1.75 billion a year to the coffers of the adult industry. As was widely expected, the sale of adult content through Internet subscriptions and online downloads also showed strong growth, increasing to some 22% of the market, or around $2.8 billion. This strong upward trend reflects continued growth in the provision of broadband services as well as advancements in speed, bandwidth and technology.
New found commercial ‘respectability’, a liberalization of social attitudes, and astronomical revenues have all conspired to whet the appetite of corporate investors. Any reference to 'adult' investments was once a taboo subject within boardrooms, although more recently it has become a buzz word for investor confidence. This sea change in the prevailing corporate mood comes barely a generation after the pogrom waged by the Reagan administration against the adult industry. Until now, society’s dark view of pornography had made even the most lucrative commercial opportunities the preserve of anonymous private investors. For instance, Friend Finder, a social networking pioneer which earns in excess of $200 million a year, found that their attempts to attract investment met with a cold reception once the primary source of their revenues was revealed to be their Adult Friend Finder service. Until recently, the shares of only a few adult entertainment companies were traded on stock markets, accounting for less than 0.5% of the adult industry’s turnover.
However, many hedge funds represent broad interests, and institutional investors such as university endowments are conscious not only of their reputations but also of how difficult it may prove to sell their shares on with anonymity. Such calculations, despite the adult industry’s proven resistance to recession, suggest that investors will come to expect far higher returns for their risk. However, given that the digital era is ushering in new low cost, high margin distribution models, including services for mobile phones, broadband TV and hotel pay-per-view, and given the reduced threat of competition for investment opportunities from image conscious hedge funds, the high reward-to-risk ratio may well be enticing shy investors from the shadows. In some cases, direct association with the adult industry may be avoided altogether by ensuring that revenues from the distribution of adult services represent only a small, unheralded component of operations. This is a strategy which has been used successfully by a number of corporations including Orange, Yahoo, Lodgenet and AT&T.
There has been a rapid and sustained rise in the number of adult titles being released every year, and these figures do not include either glamour or ‘soft-core’ titles. Falling costs of production and distribution, and the advent of viral marketing strategies underlie this trend, leading in turn to the appearance of more small-scale production studios. Where there is an increased supply, it follows that there must be an increased inward investment to cover the necessary production, recruitment and distribution costs. Although there appears to be no imminent sign of a collapse within the content production sector, the abundance of free adult video available on the Internet has led many to speculate that the content production sector has become ‘super-saturated’. Whether or not sufficient demand exists to maintain this level of production remains to be seen. However, one key market indicator is that the industry is now increasingly orientated towards the production of ‘niche’ content to cater for exotic and extreme tastes. The provision of such niche content becomes increasingly viable as a market grows and consumer appetites become more refined.
Hollywood has not been alone in noting a steady decline in DVD sales. This medium has proved to be a lucrative source of revenues for the adult industry over the past decade. According to AVN, expenditure on adult DVDs has fallen by over 15% to $3.6bn over the past twelve months as hard drives and flash keys have replaced DVDs as the storage medium of choice for adult libraries. Some estimates put the figure at closer to 30%. This has caused widespread concern across the industry, as no company wants to be caught holding a stockpile of unwanted DVDs. Fearing negative equity and heavy losses, some adult DVD companies are cutting their production costs, whilst others are seeking alternative distribution and marketing channels. However on this occasion, unlike the decline of VHS video in the nineties, there has been a quantum shift in market behavior from fixed storage media such as DVDs to rewritable, higher capacity storage media such as computer hard drives and portable flash keys. Adult media are now universally available in digital format via the Internet, satellite, cable and broadband TV, and this has made the genre more accessible, more discrete and more ‘portable’. While this may fuel fears of increased piracy, in reality it costs the consumer little more in terms of time and money to pay to download a movie from the Internet than it does to obtain illegal copies. Although there will always be a demand for high quality recordings with glossy packaging, this sector will prove more expensive to the consumer as the cost of production of the new generation of Blu-Ray and HD DVD movies increases and unit sales continue to fall.
While there is a prevailing argument that the provision of free content on the Internet leads to a smaller yield of paying subscribers, it should be noted that this has been paralleled by a rise in the total number of adult consumers on the Internet. Indirectly such ‘passive consumption’ fuels the growing cult of adult film celebrities, with associated increases in secondary revenues from merchandising, magazine sales, advertising and paid attendances of adult industry ‘events’ at conventions and strip clubs. Vivid, Wicked and other leading production companies are using an emerging market of VOD distributors, including Virgin Media, Sky-BSB, Lodgenet, in addition to mobile phone service providers for the release and distribution of new adult titles, and are also preparing to release films in high-definition (HD) format for those who want the total experience of wide screen TV. On the other hand, companies like the Hustler Video Group are instead focusing upon VOD and the Internet for the release of their new titles, with some new content being recorded exclusively for the web.
There are those who remain convinced that the provision of free adult downloads on the Internet threatens their industry, especially those companies who do not enjoy the Hollywood production budgets of Vivid or Wicked. Whilst there may be an abundance of free clips available on the Internet, this does not alter the economics of ‘leads’ and sales, even if only a tiny fraction of those who ‘sample’ actually buy. Equally this does not diminish the impact of these loss leading samples upon brand awareness, market share, or the popularity of the adult film stars featured within them. The deluge of free adult material available on the Internet may in effect serve to drive a schism between ‘big budget’ productions such as Pirates, much favored by hotel chains and broadcasting networks, and low budget ‘niche’ content which will increasingly come to dominate the Internet sector.