What the porn industry can teach us

The business of adult entertainment is making serious recession-proof money, and could have business lessons for all of us. BRENDAN LEWIS

By Brendan Lewis

Fiona Patten and I were both born in 1964. At around age 26, I made a major change in my life and moved from Western Australia to Victoria. I had actually planned to move to NSW, but never quite made it there as my intermediate move to Melbourne kept on getting extended. Now, 18 years later with wife, kids, house, and businesses, I realise I never actually planned to move to Melbourne, but I’m really glad I did.

Fiona also made a major change at around 26. She was a fashion designer who started putting on fashion parades at three in the morning. Her target audience was sex workers and her mission was to raise funds for people suffering with HIV.

And that was the start of her relationship with what’s preferably known as the adult entertainment industry. Eighteen years later she is now the spokesperson for the industry as CEO of the Eros Association. Fiona didn’t plan to be there either, but she’s glad she did.

I figured that Fiona and her industry had learnt vast amounts about doing business on the internet as everyone is always telling me that the porn industry is making money hand over fist.

So I decided to have a crack at getting Fiona to spill what she knew about technology trends and business models. I thought it would be great content for a Churchill Club event. So we did it and actually managed to have an enjoyable, educational, judgement-free, snigger-free evening. Amanda Gome, publisher of SmartCompany, then pleaded with me to share what I learnt, so I thought I would.

The environment

Her industry is one of the most regulated in Australia. Distributing adult DVDs is illegal in most states, but a blind eye is normally turned to it by authorities. This causes a massive headache as piracy is rife in the industry (maybe 80% of content purchased).

But on a piracy complaint, police are much more likely to simply arrest the person for selling illegal adult content than pirated content. Since AICO (Adult Industry Copyright Organisation) doesn’t want to damage distribution channels, it has to take slow, expensive civil action against each pirate.

The adult entertainment industry never planned to be online, they were pushed there by market forces and problems with distribution channels. But once there, they found a new level of scalability. They could have websites with 100,000 members paying $30 per month. Unfortunately this is no longer the case and those days (just a couple of years ago) are fondly known in this industry as the “good old days of the internet”.

Banks were also loathe to give the industry access to their payment gateways lest they be seen to be supporting porn. Necessity being the mother of invention, this meant that the industry ended up developing its own third party payment gateway solutions so that they could take money online. Interestingly third party payment gateways (such as PayPal, Authorize.net etc) now dominate transactions on the internet.

So what’s happening today?

Not all online innovations happened first in the adult entertainment industry though. The rise of YouTube has led to “tube sites” becoming vastly more popular. Delivery of video inside a flash player means that content can be delivered with clever controls, advertising funded sites can be built incredibly quickly and content is harder to pirate. In the last two years or so, 2.5 million adult tube sites have apparently appeared on the internet.

And like YouTube, user generated content has also become very popular. Unlike YouTube, users were much more militant and a 50/50 revenue share model was quickly settled on.

One of the changes that’s happened through delivering content on the internet is that the industry has realised customers are happy to purchase short short clips – seven minutes is apparently just right for most men : ). So the economics of making full length adult movies (around $100,000 to produce) is becoming more shaky. Interestingly the adult entertainment industry is now looking to music industry models to see what they can learn about unbundling content and collecting royalties.

There is also a fair bit of experimentation with revenue models going on. Content is sold by monthly access, by the clip and by the minute. There are also plenty of successful sites that offer low quality free content with advertising wrapped around it. Delivering content inside a flash player in a web page means there is plenty of real estate for advertising, without having to insert ads into the video.

Many of the stars of the industry (again like the music industry) have MySpace sites. Not only are these stars approachable, they are generating significant traffic to the content sales sites.

So what’s on the horizon?

Fiona regularly travels to the US to look at trends in the industry and a number of things caught her eye that she thought she’d pass on.

The pressures of content piracy combined with a market need for only seven minute clips means that full blown movies may become a thing of the past. The short movie format is much more desirable to customers and much more profitable for the industry.

It was quite clear that the increased availability of broadband was leading to content that’s filmed from multiple camera angles that the user can select from on the fly. Fiona commented that the accelerometers in an iPhone could quite easily be used to track how you are viewing content. This means that you could turn your phone to change the camera angle you were viewing. Apparently this is being experimented with already.

Like every mature market, global players are appearing that are buying up content producers. The small guy strategy is to get better at market segmentation. More and more niche interest sites are starting to appear. It’s no longer porn. It’s becoming short porn, tall porn, green porn for left handers etc.

The gay market is also being recognised as punching above its weight in terms of revenue generation. Apparently the average catalogue has 10% gay items in it, but this generates 30% of the revenue.

The social networking platform Ning has just announced that it will no longer allow adult content groups to run on it. The industry apparently considers this quite exciting as it means video piracy will be reduced (apparently lots of content was shared inside Ning communities) and it will drive these nascent communities, that generate their own content, back into the fold where revenues can be derived by the industry.

The downside of all this user-generated content, online communities and community acceptance is that more information about what people like in the space is now online and potentially compromising your right to privacy. However it was Scott McNealy (ex CEO of Sun Microsystems) who said in 2001: “Privacy is dead, get over it.”

Magazines, DVDs, TV, film, computer games all have different regulations in regards to adult content. There is expected to be some alignment between the regulations in the future. This means that some adult content will start to build brands by taking advantage of lots of channels to market.

Think Pirates of the Caribbean with its movies, games, dolls and colouring-in books. This isn’t possible for the industry today, but clearly will be in the future. (Actually, maybe not the colouring-in books).

The final thing that Fiona expected to see in the future was more complex offerings in her industry such as the multi viewpoint clips, and two way broadcasting. She also expected see offerings that combined online and off-line components. The driver for this innovation will be the fight against online piracy.

And on top of all this, it turns out the adult entertainment industry is pretty much recession proof. Makes you think what kinds of innovations are going to flow down to us in the near future.

Brendan Lewis is a serial technology entrepreneur having founded : Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club, Flinders Pacific and L2i Technology Advisory. He has set up businesses for others in Romania, Indonesia and Vietnam. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.

To read more Brendan Lewis blogs, click here.