Another dotcom boom & bust? Peering into the Crystal Ball

© Icqurimage 2005

Memories from the last dotcom boom & bust cycle still haunt a few apprehensive executives and venture capitalists. However, despite the much publicised crash at the turn of the Millennium, the Brave New World of E-commerce has once again exploded with new life and confidence. This resurgence has been driven by an increase in on-line spending from $256 million in 2002 to an estimated $582 million in 2006. Although trade deficits have increased against a background of falling high street retail sales and rising oil prices, the optimists still rule the roost. The economic forecast is for modest growth of 2.0% in the EU and of 3.4% in the United States through 2005, growth which is expected to continue in 2006. This quiet optimism is founded at least in part by a resurgent Internet industry, with dotcoms and Internet sales establishing their own economic trends and patterns.

Was there really ever a dotcom crash?

In 2001 a blanket of media coverage worthy of the eruption of Vesuvius itself proclaimed the “death of dotcom”. The phenomenon of E-commerce had been written off as yet another failed and fleeting fashion. Agreed, the collapse of some 500 companies led to the loss of some 60,000 Internet jobs in 2001, in addition to the 40,000 jobs which had been shed the year before. However all sense of proportion and perspective was missing, and the presence of a mighty new forest was seemingly overlooked after the storm had felled some five hundred large trees. Such events might have been better understood after reflecting over a pool of water. Imagine if you will that a gardener digs a pond in his garden and allows it to fill with rain water. Mosses and algae quickly invade the water along with countless insects. Soon amphibious life arrives to colonise the new niche, and within a few months the new pond is teeming with life. However the pond is only so big, and both predators and prey have quickly populated the new pond. So after the initial explosion of new aquatic life an inevitable population crash follows, as the only fittest and best adapted survive the pond’s finite resources. A simplistic analogy granted, but one that holds water. Where once there was only earth there is now a fresh pond teeming with new life.

The dotcom pattern of growth and decay holds true for any new industry, whether it is real estate, mobile phones or E-commerce. After an initial explosion of growth through the 90’s when entrepreneurs and industrialists excitedly seized upon the opportunities presented by the new medium of the Internet, only those with the best planned and best conceived ideas prospered and survived. Those who had the foresight could plan ahead to adapt to rapid advances in technology and changes in market forces – they became the visionaries who survived the lean years. For instance from the hundreds of start-ups who entered into the lucrative on-line dating industry, only a handful have emerged as giants. Most of the minnows who have not found specialised niches will likely not survive the inevitable cull. Amid all the euphoria of the 90’s where millions of dollars of investment capital changed hands to fund what were in essence only pipe dreams, only those companies which were well managed with good long-term strategic planning emerged to become a Yahoo, Google or eBay. Indeed nine out of ten start-ups within any market sector will eventually fold, and so the ratio of dotcom start-ups which eventually fail is actually directly comparable to the failure rate within most other industries. So what made the journalists hype the ‘dotcom crash’? It was unquestionably the scale and the speed at which E-commerce surged and receded. The dotcom spin doctors played to the media gallery on a platform of high technology glitz & glamour, competing to see who could throw the most lavish launch parties and advertising campaigns. Having attracted all that attention it was perhaps not surprising that their subsequent demise was seen as a major event.

The journalists did of course have a point. The dotcom industry was different in many ways. Billions of dollars were hurriedly poured into a new industry that apparently had not heard of market inertia or saturation. Those inexperienced in the volatility of market forces and unaware of the time that it takes to successfully bring a product to market naively believed that millions of dollars of merchandise could be sold in a single day. Logistics, margins and infrastructure were merely an afterthought. The new breed was younger and fresh from College, proudly sporting an MBA in finance or a degree in computer science. To them anything seemed possible and tomorrow was only a day away. The culture of toil and industry was as alien to their youthful optimism as the bitter after taste of failure. The restaurants and coffee bars surrounding their expensive offices buzzed with excitement as stories abounded of multi-millionaires driving exotic cars and youthful CEO’s earning super salaries. In their perception the old guard lacked the enthusiasm, technology, comprehension, vision and the bright new ideas to power the growth of their new industry. Millions were spent on Flash web sites with streaming sound and videos, and billions more were lavished on advertising campaigns and futuristic offices in prime locations.

There were some spectacular failures. Webvan (R.I.P. 2001) were the victims of their good idea, and grew too fast too soon. Within 18 months Webvan had raised $375 million and expanded from San Francisco to eight major U.S. cities, building a gigantic multi-billion $ infrastructure including high-tech warehouses. With such massive investments the tiny margins of the grocery business led to the demise of a company once valued at $1.2 billion. Kozmo.com (R.I.P. 2001) was an on-line store for movie rentals and snack food promising free delivery within an hour. After expanding to seven cities, some bright spark realised that it cost far more to deliver a DVD and a bag of chips than the revenue from a single rental. Kozmo.com collapsed, even after belatedly instituting a $10 delivery charge, with the loss of a thousand employees and some $280 million in investment. Boo.com (R.I.P. 2000) was an example of technological over-enthusiasm and inept management. Established in the UK as an on-line fashion store, Boo.com created a flashy and complex web site in the era of the dial-up modem. Added to this reality displacement was a rapid global expansion which required programming for different languages, pricing and tax regimes. With modest sales and growing overheads Boo.com consumed some $160 million before eventual liquidation. eToys.com (R.I.P. 2001) was another classic illustration that doing business on-line is not necessarily cheaper than opening a chain of warehouse outlets. After spending some $170 million on advertising, marketing, and state-of-the-art technology, eToys.com found that the pressures of competition meant that its spending greatly exceeded its income. As a result its stock collapsed from a peak of $84 a share to just 9 cents in a little over a year. These are only a selection of the biggest busts, but similar mistakes were made across the board.

Unfortunately for many in this Brave New World of E-commerce the laws of economics were not so easily rewritten. Consumers exhibit inertia (a reluctance) in accepting new technologies and products. Whilst a fashionable youth is often quick to embrace novel ideas and fashions, those who are wealthier and wiser often prefer to wait for new lifestyle choices to become more established and refined (and cheaper) before they will invest their capital. In an industry in which innovations such as on-line payments and database product searches were quickly adopted, new predators and parasites also soon emerged to attack unwary consumers with phishing scams, mail worms and spy-ware. Consumer confidence was decimated by credit card scams, spam and lost payments. Contrary to popular belief, a web-based E-commerce operation is not necessarily cheaper to operate than a high street store. Internet-based free marketeers face the costs of mass marketing, warehousing, programming, hi-tech offices, technical support and customer service representation, not to mention the additional overheads of constantly revising their web site content. Many like Kazoo.com and eToys.com simply got their sums wrong, whilst others who made an initial profit quickly found that their new markets became over populated with free offers from competitors with larger budgets. Management teams simply did not have time for either themselves or for their ideas to mature. There is little point in investing millions of dollars in advertising and marketing to gain a hefty market share if the service, supply and delivery infrastructure is inadequate, as many dotcoms found to their cost. People shopping on-line will often pay more for convenience and quality, but will expect to pay less for an equivalent product. If a model calendar retails for $7.99 in the mall, it is unlikely that someone will be prepared to pay more on-line. However, the dotcom pond is now reaching the stage of maturity. The surviving colonists of E-commerce now serve as models for new start-ups which are springing up in the off-shore tax havens of the Caribbean, a region which has seen staggering investment growth from some $3.6 billion in 2000 to $66.5 billion in 2004. Even in the fast & breathless world of the dotcom planning must be contingent and strategic, and growth targets must be sustainable, attainable and carefully managed.

The State of the Market

Before we can gaze into the crystal ball we need a broader view of E-commerce in the modeling industry, both conventional and adult. Without doubt the Adult Internet industry is the fastest growing and most lucrative sector of E-commerce today. Whilst many heap moral scorn upon the industry, the adult sector provides a model for technological innovation and competitive know-how. With many adult sites registering over a million visitors a day, even advertising rates as low as a few hundredths of a cent per ‘click-through’ represent substantial revenues. Clearly this funding model favours large adult sites with extensive networks of links directing traffic to them rather than small open access sites. However those who visit adult-orientated web sites are also much more likely to spend on-line. Some pundits believe that as much as 80-90 % of all E-commerce occurs upon adult web sites. The adult Internet has without doubt become the new all-pervasive entertainment medium of the 21^st Century.

The scale of the legitimate adult industry is too vast to estimate, although insiders talk of some 10,000 sites generating well in excess of a $billion a year through credit card transactions. This gives the on-line adult industry the resources to further advance Internet technology, including bandwidth management, streaming video and consumer interactivity, as well as an advertising war chest to create new domestic and foreign markets to sell these technologies to.

Most adult sites offer a standard fare of images, streaming video and live web-cams. Once again the adult industry shows that it all comes down to traffic volumes and percentages. Small sites which attract 10,000 visitors per day achieve revenues of some $3,000 per month, those with 50,000 visitors per day average $20,000, and the largest sites with over a million visitors per day typically gross more than a million dollars a month. Adult sites seem to fall into two broad categories – pay-for-view subscription sites which usually charge between $10 and $45 a month, and open access sites which are supported by paid banner advertising. Both models seem to thrive, although there is a delicate interplay between the high bandwidth hosting requirements of open access sites and their dependence upon low cost pay-for-click advertising. Some of the top earning adult Internet companies are listed below to give an impression of the scale and profitability of the industry.

Company	Google Citations	Product	Turnover
IEG	14,200	Internet content	$600m 2004
Danni’s Hard Drive	5,920	Internet content	£5m 2004
Vivid Entertainment Group	3,300,000	DVD/Internet sales	$43m 2004
Wicked Pictures	1,580,000	DVD/Internet sales	?
AVN	131,000	Adult Internet news	?
Private Media Group	32,100,000	DVD/Internet sales	€9.4m 2005 est
Xobile	14,300	Mobile content	?
New Frontier	319,000	Internet content	$31m 2004

Web sites belonging to individual models (both adult & conventional) offer a similar range of images, movies and merchandise to those offered by generic adult sites. Model sites make extensive use of banner ads on related sites and ‘link directories’ to channel as much traffic to themselves as possible, making the banner the cornerstone of the industry. Model sites attempt to drive as many visitors to their sites as possible in order to generate income from merchandise, memberships and memorabilia. Where individual model sites do appear to differ is in the apparent convention that top independent models do not seem to need to pay to advertise on model directories or link sites. In fact only a few of the membership-based model directories (as opposed to agencies) do charge for access, and even then it is usually the consumer rather than the models themselves who pay to cover the cost of the advertisement. Contrast this with the high membership rates that model sites typically charge their consumers – up to $30 a month (equating to some $300 in revenue per person per year), and the flow of capital is self-evident. The income of these sites is driven by web traffic, which is in turn driven by search engine position and by the numbers of links and advertisements which feed into the site. Many model directories such as the illustrious VIPmodel.com did not survive this harsh market and have folded, falling victim to a combination of the ‘free’ model advertisement culture and the high bandwidth traffic that their image-rich sites attract. Some model directories simply serve as feeder sites for individual model sites, whilst others are funded by subscriptions within a competitive market dominated by open access directories. Few model directories currently seem to charge their clients, and models do not appear to need the services of those who do charge – their image is after all the product itself. Presented below are figures for some of the Internet’s leading female models, many of whom currently attract thousands of referrals per month from just one site alone, showing just how quickly and successfully many have adapted to the medium of Internet advertising.

Model	Google citations	Category	Membership
April Hunter	5,890,000	Fitness	$21.95/month
Carmen Garcia	1,260,000	Fitness	$19.95/month
Aria Giovanni	847,000	Adult	$24.95/month
Kim Chambers	791,000	Adult	$29.99/month
Ebony Eve	678,000	Adult/fitness	$17.95/month
Bobbi Billard	171,000	Glamour	$29.99/month
Renee Townsend	155,000	Glamour	$14.95/month
Sandee Westgate	147,000	Adult/fitness	$24.95/month
Victoria Zdrok	132,000	Adult	$25.95/month
Dita Von Teese	111,000	Fetish	$19.95/month
Devin Devasquez	39,600	Glamour	$19.95/month

In sharp contrast to the model directories, escort and model agencies have thrived on the Internet, a medium which has proved perfect for their product. Escort sites with high traffic volumes and high search engine positions can typically charge their escort models up to $100 a month just to advertise on low maintenance, low technology sites. In addition to paid advertising, model and escort agencies can routinely command commissions as well as membership fees, converting their traffic into a lucrative source of income. At present there are more than 100,000 escort agencies and directories on the Internet, with no immediate sign of a contraction in the industry. This may be due to an increased market share for Internet-based agencies and directories, but is certainly also due to an increase in the size of the market itself. Add these factors to overheads which are typically much lower than revenues, and it is not difficult to understand the proliferation of such sites.

Of course it is virtually impossible to place an accurate value on the value of the adult Internet sector, or to define its reach. For example is AT&T, which distributes adult content via broadband access and cable part of the adult industry? Is AOL, one of the largest ISPs providing access to adult networks part of the adult Internet industry, or is Yahoo with its countless paid adult listings? Are third party payment systems which serve sites with adult content a sector of this industry? The scale and reach of the industry is unfathomable with such a diversity of associated industries and suppliers. Global estimates of the number of commercial adult Internet sites currently in operation vary between 1 and 10 million. One analyst estimated that revenues from the adult Internet industry exceed $2 billion in the United States annually. From the point of view of the IRS the adult Internet is good news, as the on-line economy is inherently more traceable, and its revenues are easier to recover than they are for the cash-based adult sector. Juniper estimated that in 2004 global Internet revenues generated from adult content ranged from $31 billion to $75 billion worldwide, and there is no imminent sign of decline.

Another important factor in the success of the modeling and adult industries is that they are driven by individual risk takers, often self-funded, who are unregulated and unrestrained by the demands of venture capital. These self-made entrepreneurs, many of whom built their businesses from their own homes, are independent of corporate America. The adult industry is notably more aggressive and unregulated than most of corporate America. It is an industry where new technological developments reach the market within weeks rather than years. New ideas are tried and tested within months, and sink or swim just as quickly. In the adult industry good ideas and new technologies spread like a contagion.

Back to the Crystal Ball

As for forecasting the growth of E-commerce within the model sector we may draw several conclusions. The first is that the industry is being constantly driven by technological innovations and by vast levels of financing which would have been deemed science fiction only ten years ago. The industry is still growing, with current revenues being used to further stimulate the global appetite for sexual imagery which underlies our primary function on this earth – reproduction. Second the models of the adult and mainstream industries represent only the pristine peak of a vast iceberg, a virtual show-room for changes in sexual tastes and physical ideals. As such adult imagery is perhaps the last luxury consumer item to be cut as we edge towards a recession. Perhaps the adult industry is the most ‘recession proof’ of all luxury goods, services and entertainment? Recession or no recession, sexual drives remain undiminished, and if the spare cash is not available for consumers to spend on visits to strip clubs or upon other forms of live adult entertainment, then a visit on-line is affordable to most. Third, beauty and sexuality are as timeless as the human race, and the Internet is merely the latest medium in our cultural obsession with human sexual icons, just as the Victorian peep shows, stag films, and adult theatres were in their day & age. The static and moving images of models on the Internet is not a passing fashion, merely a stage in the evolution of wireless media and its provision of virtual, interactive erotic imagery.

A 2001 report from Analysys titled “Sex, Sport & Shopping” predicted that the broadband Internet market for erotica would be worth some $3bn in 2003, the year in which VisionGain increased that forecast to $70bn by 2006. Some $4bn of this is expected to come from mobile Internet services driven by the new social acceptability of adult material and by the widespread growth in the use of cellular phones and personal digital assistants (pdas). Juniper Research estimated that global revenues for the adult sector of the mobile market segment will increase 5-fold from $500 million in 2004 to $2.5 billion in 2009. Perhaps most intriguing is that market research suggests that two-thirds of America’s adult Internet users also make on-line purchases, corresponding to a market of some 134 million consumers. Whilst in 2000 only half of those who used the Internet had made an electronic purchase, this had increased to 78% by 2005 making E-commerce as mainstream as the mall. Such renewed consumer confidence can only add to Internet revenues along with further increases in broadband speed and the number of consumers who are connected. As purchases of E-tickets and other goods on pdas and cellular phones starts to take off, E-commerce will become a truly pervasive medium. As E-commerce currently represents less than 5% of all U.S. retailing, the potential for further growth in this sector is phenomenal.

The future is lean, with more and more dotcom start-ups beginning life as efficient, small scale enterprises run from a home or shared office. Contrary to popular misconception a dotcom takes longer to get to market than a conventional high street retailer. This is simply because in Cyberspace there is no local or passing trade. All traffic must first be enticed to the site, then captured and ultimately converted into business. Thus dotcoms must be frugal upon start-up as even success stories such as Yahoo and Google took some five years to turn a profit. Even if a dotcom is started without borrowing capital, the young entrepreneur must stay lean and competitive until a rich harvest can be reaped from his or her lengthy investment.

Despite the rapid growth in mobile Internet technologies and associated streaming media, slower download speeds and screen sizes will ensure that the hand-held pda and mobile phone will not replace the computer for most adult Internet services. Those with an acquired taste for life-like, high resolution adult images and streaming video, the essential currency of the modeling industry, will not be satisfied with such small screen services. However with its social novelty and almost universal accessibility the mobile market will attract advertisers in their droves. Meanwhile broadband access is expected to more than double to nearly 50 million U.S. households by 2008, growth which will be further fuelled by price cutting wars between cable and DSL service providers and by ever greater bandwidth capacities. The coming dominance of Internet Broadband TV over conventional television networks is therefore not a prediction - it is a certainty. Why? Simply because all households will require broadband computer access whether it is for shopping, education or just for browsing. This will mean that many households will subscribe to the triple service of VoIP Internet telephone, broadband computer access and Internet Television offered by their ISPs.

In the very near future households will run multiple computers from a single access point in the network, and as the range of multi-media service options increases from Everquest to the Playboy Channel, it will make financial sense to cut costs and to switch to a single broadband service provider for telephone, Internet and TV. The existing TV broadcasters have seen the writing on the wall and are rapidly opting-in to this new technology. Thus within a few short years your computer and television set will ultimately become one and the same, and your favourite models will appear on your TV set on demand. For those of you weighing up the pros and cons of investing in stocks and shares in the adult industry, the message from the market is crystal clear – buy, buy, buy!