EROTICA INC. -- A special report.; Technology Sent Wall
Street Into Market for Pornography
By TIMOTHY EGAN
Published: October 23, 2000
Published: October 23, 2000
[…]
Why file criminal charges against a lone video retailer, Mr.
Spencer argued, when some of the biggest corporations in America, including a
hotel chain whose board of directors includes W. Mitt Romney, president of the
Salt Lake City Olympics organizing committee, and a satellite broadcaster
heavily backed by Rupert Murdoch, chairman of the News Corporation, were
selling the same product?
''I despise this stuff -- some of it is really raunchy,''
said Mr. Spencer, a public defender who described himself as a devout Mormon.
''But the fact is that an awful lot of people here in Utah County are paying to
look at porn. What that says to me is that we're normal.''
It took only a few minutes for the jury to find Mr. Peterman
not guilty on all charges. His case illustrates what has happened to an
industry that used to be confined to the margins of commerce, in the seedy
parts of most towns, run by people who never dreamed of taking their companies
to Wall Street.
Spurred by changes in technology that make pornography
easier to order into the home than pizza, and court decisions that offer broad
legal protection, the business of selling sexual desire through images has
become a $10 billion annual industry in the United States, according to
Forrester Research of Cambridge, Mass., and the industry's own Securities and
Exchange Commission filings.
Whatever the phenomenon may say about the nature of American
society, the financial rewards are so great that some of the biggest
distributors of explicit sex on film and online include the country's most
recognizable corporate names.
The General Motors Corporation, the world's largest company,
now sells more graphic sex films every year than does Larry Flynt, owner of the
Hustler empire. The 8.7 million Americans who subscribe to DirecTV, a General
Motors subsidiary, buy nearly $200 million a year in pay-per-view sex films
from satellite, according to estimates provided by distributors of the films,
estimates the company did not dispute.
EchoStar Communications Corporation, the No. 2 satellite
provider, whose chief financial backers include Mr. Murdoch, makes more money
selling graphic adult films through its satellite subsidiary than Playboy, the
oldest and best-known company in the sex business, does with its magazine,
cable and Internet businesses combined, according to public and private revenue
accounts by the companies.
AT&T Corporation, the nation's biggest communications
company, offers a hard-core sex channel called the Hot Network to subscribers
to its broadband cable service. It also owns a company that sells sex videos to
nearly a million hotel rooms. Nearly one in five of AT&T's broadband cable
customers pays an average of $10 a film to see what the distributor calls
''real, live all-American sex -- not simulated by actors.''
For all the money being made on sex -- legally -- by
mainstream corporations, the topic remains taboo outside the boardroom. The
major satellite and cable companies do very little marketing of their X-rated
products, and they are not mentioned in annual reports except in the vaguest of
euphemisms.
None of the corporate leaders of AT&T, Time Warner,
General Motors, EchoStar, Liberty Media, Marriott International, Hilton, On
Command, LodgeNet Entertainment or the News Corporation -- all companies that
have a big financial stake in adult films and that are held by millions of
shareholders -- were willing to speak publicly about the sex side of their
businesses.
''How can we?'' said an official at AT&T. ''It's the
crazy aunt in the attic. Everyone knows she's there, but you can't say anything
about it.''
For hotels, the sex that can be piped through television
generates far more money than the beer, wine and snacks sold from the rooms' mini-bars.
Just under 1.5 million hotel rooms, or about 40 percent of all hotel rooms in
the nation, are equipped with television boxes that sell the kind of films that
used to be seen mostly in adults-only theaters, according to the two leading
companies in the business. Based on estimates provided by the hotel industry,
at least half of all guests buy these adult movies, which means that
pay-per-view sex from television hotel rooms may generate about $190 million a
year in sales.
At home, Americans buy or rent more than $4 billion a year
worth of graphic sex videos from retail outlets and spend an additional $800
million on less explicit sexual films -- all told, about 32 percent of the
business for general-interest video retailers that carry adult topics, according
to compilations done by two trade organizations that track video rentals.
Chains like Tower Records now stock nearly 500 titles in their so-called erotic
category, far more than films about history or dinosaurs.
On the Internet, sex is one of the few things that prompts
large numbers of people to disclose their credit card numbers. According to two
Web ratings services, about one in four regular Internet users, or 21 million
Americans, visits one of the more than 60,000 sex sites on the Web at least
once a month -- more people than go to sports or government sites.
Though estimates have been greatly inflated by some
e-commerce sex merchants, analysts from Forrester Research say that sex sites
on the Web generate at least $1 billion a year in revenue, providing a windfall
for credit card companies, Internet search engines and people who build Web
sites, among others in the commercial food chain.
Some of the most popular Web properties -- which feature
quick links to sites labeled ''Virgin Sluts'' and ''See Teens Have Sex'' -- are
owned by a publicly held company in Boulder, Colo. That company, New Frontier
Media, has stock traded like any other, and it expects its video network to be
in 25 million homes within a few years. It does business with several major
companies, including EchoStar and In Demand, the nation's leading pay-per-view
distributor, which is owned in part by AT&T, Time Warner, Advance-Newhouse,
Cox Communications and Comcast.
Another company, LodgeNet, whose chairman is Scott C.
Petersen, does $180 million in annual business selling sex videos and other
forms of room entertainment to hotels. LodgeNet is a major employer in Sioux
Falls, S.D., its home base. It is a client of the accounting giant Arthur Andersen,
and nearly a fifth of the company's public shares are held by a Park Avenue
investment firm, Red Coat Capital Management of New York.
''We feel good about what we do,'' said Ann Parker, a
spokeswoman for LodgeNet, which trades on the Nasdaq market. ''We're good
corporate citizens. We contribute to local charities.''
The biggest provider of hard-core sex videos and adult Web
content, Vivid Entertainment Group of Van Nuys, Calif., whose founders and
principal owners are Steven Hirsch and David James, has been making the rounds
of investment bankers of late, preparing for an initial public stock offering
next year that could ultimately lead to the first porn billionaire.
''The adult entertainment business is just exploding,'' said
Bill Asher, the president of Vivid, whose offices are in a new granite and
glass building that houses investment and venture capital firms. ''Right now
there are a lot of people making a lot of money. Somebody's got to take control
of it, and we figure it might as well be us. We see ourselves as the designated
driver of this business.''
To the astonishment of Mr. Flynt, who began in the
pornography business by selling poor-quality pictures of naked girls as a way
to build interest in his strip clubs, his competitors in the $10 billion annual
adult market are mainstream corporations whose board members are among the
American business elite.
''We're in the small leagues compared to some of those
companies like General Motors or AT&T,'' Mr. Flynt said. ''But it doesn't
surprise me that they got into it. I've always said that other than the desire
for survival, the strongest desire we have is sex.''
The Technology Factor
Look, Ma, No Staples!
Thirty years ago, a federal study put the total retail value
of hard-core pornography in the United States between $5 million and $10
million -- or about the same amount that a single successful sex-related Web
site brings in today. It seemed likely that the industry would remain where it
had always been -- largely out of sight, but profitable, and faced with
consistent legal problems.
What kept the market relatively small, in the view of people
in the industry, were the barriers between consumer and product. Typically, a
person would have to go to a run-down part of town, among people considered less
than savory, to find hard-core adult films or bookstores. These retail outlets
frequently were raided by law enforcement authorities, further adding to the
risk for a consumer -- a risk of shame, or arrest.
In 1975, the Sony Corporation released the videocassette
recorder to the broad market, and within 10 years, about 75 percent of all
American households owned a VCR. Once the venue had moved from theater to the
privacy of the home, the adult entertainment industry was never the same. For
example, a single film, ''Deep Throat,'' generated more than $100 million in
sales, thanks in large part to the popularity of VCR's, Frederick S. Lane III
writes in his book ''Obscene Profits: The Entrepreneurs of Pornography in the
Cyber Age'' (Routledge, 2000).
But even with most Americans owning VCR's, people still had
to take a trip to the video store, risking some embarrassment. Pay-per-view
television and the Internet removed the final barriers.
Cable and satellite programmers allow people to buy a
variety of sex-based programming, from Playboy, on the lighter side, to the Hot
Network, owned by Vivid, and the Erotic Television Network, distributed by New
Frontier, on the more explicit end of the spectrum. Consumers could watch
movies of people having sex without ever leaving home.
What investors and bigger corporations soon discovered was
the vast audience for pornography -- once the privacy barrier was eliminated.
Twenty percent of all American households with a VCR or cable access will pay
to watch an explicit adult video -- and 10 percent will pay frequently,
according to the distributors New Frontier and Vivid. That interest explains,
in part, why the production of pornographic films has grown tenfold in the last
decade. There are now nearly 10,000 adult movies made every year, according to
an annual survey of the films produced in the Los Angeles area.
Last year, there were 711 million rentals of hard-core sex
films, according to Adult Video News, an industry magazine that is to
pornographic films what the trade publication Billboard is to records. It even
has its own film awards -- modeled after the Oscars.
But video rentals have reached a plateau over the last two
years. The future is pay-per-view at home -- driven by the easy access and good
technical quality of digital television -- and pay-per-view from the Internet,
driven by the technological innovations of new cable and phone lines that carry
far more images, more quickly, to a computer screen.
''Videos changed the way people could view porn because they
were able to watch in the privacy of their homes,'' said Barry Parr, an
electronic commerce analyst with International Data Corporation. ''Internet
pornography takes that a step further -- they can do it with absolute
privacy.''
The number of people visiting sex sites on the Web doubled
over the last year, outpacing the number of new Internet users. Some of the
more popular sex Web sites attract in excess of 50 million hits, or visits, a
month, according to the ratings services Nielsen/ Net and Media Metrix. About
one in a thousand people who visit a site will subscribe, for fees averaging
$20 a month, according to some of the leading Web pornography providers and
Flying Crocodile Inc., a company based in Seattle that tracks and services the
sexual-content market.
At the same time that technology was making it easier for
people to view pornography, legal obstacles were falling. The 1973 Supreme
Court case Miller v. California established a threshold for defining illegal
pornography; a major test was that it had to be considered obscene to the
''average person, applying contemporary community standards.''
Initially, the case helped prosecutors clamp down on
publications and movies. But that proved to be short-lived. If ''Deep Throat''
could sell $100 million worth of copies, then what was the community standard?
''The court may have handed off the determination of
obscenity to the local community, but the standards of local communities had
fundamentally changed,'' writes Mr. Lane in ''Obscene Profits.''
When Mr. Peterman was prosecuted for distributing obscene
material in Utah last year, he became one of the few video retailers in the
nation charged with such a crime in recent years. In a state long regarded as a
bastion of family-values morality, more than 4,000 people signed petitions
supporting his prosecution.
But Mr. Peterman showed that he had 4,000 regular customers
for sex videos. His lawyer argued that Mr. Peterman was not violating community
standards, because people in Utah County bought 20,000 adult sex videos from
one satellite programmer alone in the period that Mr. Peterman was said to have
broken the law; it was double the volume in most cities the size of Provo. And
in the Provo Marriott, guests were paying for nearly 3,000 explicit adult
videos every year, according to court testimony. After the Peterman trial, that
hotel dropped its adult movies.
''My client was just a little guy,'' Mr. Spencer said, ''a
mom-and-pop dealer in a very big business.''
The Corporate Factor
It's the Demand, Companies Say
At a time when political campaigns from the presidential
level down to that of the local school board have made an issue of sexual
excess in broadcasting, the corporate entanglements in the pornography business
have blurred the lines of the debate.
In Missouri this year, Senator John Ashcroft, a Republican,
ran ads denouncing ''Hollywood's decaying influence'' on society, singling out
his Democratic opponent, Gov. Mel Carnahan, for accepting donations from
Christie Hefner, the Playboy executive.
Mr. Carnahan, who died last week in a plane crash, had
countered by pointing to donations to Mr. Ashcroft from Charles W. Ergen, chief
executive of EchoStar, which sells adult pay-per-view through its fast-growing
DishNetwork satellite division.
''If he's going to start that, he's in greater trouble than
I am,'' Mr. Carnahan had said.
Mr. Ashcroft's supporters had replied that there was still a
distinction between the two companies: EchoStar did not produce pornography --
it merely sold it, while Playboy created its own videos and pictures, they
said.
''We added adult at the request of our customers,'' said
Judiann Atencio, a spokeswoman for EchoStar. ''We have something for everybody,
from Irish hurling to cricket. Adult is there if you want it.''
When AT&T announced that it would start offering the
hard-core Hot Network to its 2.2 million digital cable subscribers beginning in
August, they were castigated by critics and pressured by religious and civic
groups that hold stock in the company.
A group of mutual-fund investors, which included the Sisters
of Charity of New York, the Evangelical Lutheran Church of America and the
Mennonite Church, told AT&T its members did not want their three million
shares invested in a company that sold pornography.
''At the heart of our concern is the concept of mainstream
companies getting into hard-core pornography,'' said Mark Regier, who manages a
mutual fund for 800,000 members of the Mennonite faith. ''For a company with
AT&T's tradition and its charitable work to be involved with pornography at
this level is unbelievable. And I don't think many people understand what it
means to take away the barriers to this kind of material, such as AT&T is
doing.''
For AT&T, there are sound business reasons to start
carrying the highly profitable Hot Network. Unlike distributors of mainstream
Hollywood pictures, sex-film distributors typically offer the programmers a
split of 80 percent of the revenue, compared with 50 percent or less for
routine features.
Impulse buys, in which customers tap a code into a remote
and a movie follows, have also spurred in-home sales of pornographic films.
''Impulse technology -- that's been just incredible,'' said
Mr. Asher of Vivid Entertainment, which makes hundreds of adult films and
claims that it sells a million copies a month to cable, satellite, home video
and hotel retailers. ''You have about 35 million homes with this kind of
technology now,'' Mr. Asher said, ''and it's growing enormously. It's easy and
it's private -- that's the key.''
Although the companies that program explicit sex films will
not give out their revenue figures for this category, a report by the Showtime
Event Television company found that adult pay-per-view took in $367 million
last year -- a more than sixfold increase from the $54 million of 1993, easily
outpacing the growth of pay-per-view ''events'' like boxing and wrestling.
Time Warner, EchoStar, General Motors and AT&T all say
they are simply responding to a growing American market that wants pornography
in the home. At the same time, the companies say new technology makes it
possible for parents to keep such programming away from children.
''We call it choice and control,'' said Tracy Hollingsworth,
a spokeswoman for AT&T Broadband, the company's cable division.
''Basically, you use your remote to block out any programming you don't want.
But if you want it, we offer a wide range of programming that is available in
the market we're in.''
Hotel chains have made similar decisions when, this year,
several groups urged them to get rid of the adult pay-per-view programs that
are in nearly 60 percent of all middle- to high-end hotels. Only one chain, the
relatively small Omni Hotels, chose to remove the sex films.
''What we noticed was that early on, the content was
R-rated, but then it migrated rather quickly to really raunchy stuff -- just
hard-core porn,'' said Jim Caldwell, the president of Omni. ''I thought: What
are we doing? We don't have topless waitresses in the restaurant.''
Mr. Caldwell said more than 50 percent of all guests were buying
the sex films. ''The anonymity is the big thing,'' he said.
Omni's decision to remove pay-per-view sex videos from the
company's 15,000 rooms will cost the company more than $1.8 million a year, Mr.
Caldwell said. But he said he had received phone calls and letters of thanks
from 50,000 people -- more than for any other corporate decision.
Much larger hotel chains, like Marriott, which calls itself
the world's largest hotel management firm, with nearly 300,000 rooms in the
United States, and Hilton, with 290,000 rooms under its control, have not made
changes.
Some critics said Marriott, run by several prominent members
of the Mormon Church, though not affiliated in any way with the church itself,
should drop its adult movies, given the stand against explicit sexual materials
that Mormons have long taken. But company officials said they were mostly
franchisers, and could not make unilateral decisions for the hotel owners who
paid to be a part of the Marriott chain.
The two companies that provide hotels with pornographic
films are both traded on Wall Street and have enjoyed big run-ups in their
stock prices over the last few years. The leader, On Command, based in Denver,
is worth more than $400 million, and its principal owner is Liberty Media,
controlled by John C. Malone, the cable and telecommunications magnate who sits
on the board of AT&T and recently agreed to buy up to 15 percent of the
shares of Mr. Murdoch's News Corporation.
The chairman and chief executive of On Command is Jerome H.
Kern, a former New York corporate lawyer active in civic and volunteer causes,
serving on the board of New York University and as a director of Volunteers of
America in Colorado.
On Command would not discuss how much money it is making on
adult films. But in its annual report, the company said it was generating $23 a
room each month for the 835,000 hotel rooms it reaches. The company goal is to
get into an additional one million hotel rooms. Analysts say at least half the
revenue comes from adult films. The company recently began offering all-day
erotic television to hotel customers, for a single price of $15.99.
''Talk about your captive audience,'' said Mr. Asher of
Vivid. ''I've heard that in some hotels, 85 to 90 percent of all profits from
in-room spending comes from adult channels.''
The Money Factor
Big Profits Now, Bigger Ones on Way
While the big companies that deliver sex films to homes and
hotels will not talk about how popular explicit sexual materials are, the
makers and distributors say the volume is enormous. And court testimony and
documents that were made public in the Peterman case also offered some insight
into the profit potential.
''Despite the fact that this material isn't marketed,
revenue-wise, it's one of our biggest moneymakers,'' said Peggy Simons of TCI
Cable, in court testimony in Mr. Peterman's case. TCI, controlled by Mr.
Malone, has since been bought by AT&T.
''When we talk to the companies one-on-one, they tell us
we're great, that we're a huge moneymaker for them,'' said Mr. Asher, whose
company owns the Hot Network, which is available in 16 million homes. ''And by
the way, I tell my biggest customers -- don't say you ever met me.''
In trying to take public his company, which now does about
$80 million a year in sales, Mr. Asher said, ''The biggest problem I have is
the image of the adult business. People think it's run by the mob, or a bunch
of guys with gold chains. I grew up in Paris, Illinois. I have a master's of
business administration degree.''
The Hot Network portrays people having sex in a variety of
methods -- what the company calls ''widely accepted sexual activity'' -- and
prohibits scenes of violence, nonconsensual sex, drug use, forced bondage and
sex with minors.
Analysts of electronic commerce and telecommunications say
the mainstream sex market might be leveling off, but new technology is likely
to bring in even more consumers.
''The novelty of it has not worn off yet, and I don't
believe it will wear off,'' said Sean Calder, a vice president for e-commerce
at Nielsen/Net Ratings, which gauges the popularity of Web sites. ''The numbers
point to a huge personal need. We see lots of people logging on at 3 in the
morning.''
The $30 billion project to rewire the cable industry with
lines capable of bringing more material, and allowing people to buy on impulse,
will play a big part in the emerging home pornography market.
''These companies like AT&T, they're thinking ahead to a
time, perhaps in 10 years, when 50 million Americans will have broadband
capability and all their television and Internet will be interactive through
one big box,'' said Bryn Pryor, technology editor for Adult Video News, the
trade magazine.
''But it's not just technology that made the big boys get
into it,'' Mr. Pryor said. ''This just happens to be a business where you can't
lose money.''
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