The Technology Factor Look, Ma, No Staples!
Thirty years ago, a federal study put the total retail value of hardcore 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 VCRs, Frederick S. Lane III writes in his book “Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age” (Rout-ledge, 2000).
But even with most Americans owning VCRs, 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.”
