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A Look Ahead, Part I

A Look Ahead, Part I

February 12, 2012
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" As legally and economically tumultuous as 2011 was, 2012 will have the potential to make this year seem uneventful by comparison for a number of reasons. "

The adult entertainment industry was barraged with a lot of legal news this year. The adult industry press reported stories about mass copyright infringement lawsuits, a new crop of patent troll lawsuits, health and safety regulation of adult content production in California, a terrible 2257 decision, a new anti-cross-sale law, and of course the adult industry world war over the any and all things related to the approval of the .xxx TLD registry.

Additionally, the industry had to contend with yet another year of challenging economic conditions while facing ever-increasing competition from its formidable foe, free content.

But as legally and economically tumultuous as 2011 was, 2012 will have the potential to make this year seem uneventful by comparison for a number of reasons. Principally amongst these are the following:

  • The ever-increasing availability of free explicit adult content coupled with continued weakness in the U.S. and European economies.
  • The 2012 general election.
  • The introduction of several new product platforms, including interactive television systems by Apple, Philips and others, coupled with the mass introduction of affordable 3-D television monitors.
  • The economic and legal issues associated with rapidly growing adult product platforms, including mobile and tablet devices, live chat, adult virtual worlds, and the introduction of what just might be the killer-app for remote tactile devices, such as the Real Touch, the touch enablement of live adult chat.
  • The accelerating problem of patent troll-initiated patent lawsuits, class action lawsuits, and other types of predatory litigation.

Because I expect all of the foregoing to powerfully impact the industry in 2012, this is the first in a series of articles in which we will examine each in turn.

In this article we’ll look at the issue of plentiful free explicit adult content in an economic downturn and why it is a problem that is likely to get worse and potentially reach crisis proportions for some adult entertainment companies in 2012.

It’s the economy stupid (and a whole lot of free content). “It’s the economy stupid” were the words uttered by famous Democratic strategist James Carville to summarize what was on Americans’ minds during the presidential election year of 1992. Almost 20 years later, Carville’s words once again define the No. 1 issue of the day. For the adult entertainment business, unlike 1992, the industry can no longer proclaim itself to be a “recession-proof” business, at least not without some qualification.

For decades adult business entrepreneurs nearly universally could accurately claim that their business was “recession-proof.”

All that seemed to change with the economic crash of 2008. But in fact some segments of the adult entertainment industry have continued to grow during the current economic slowdown. The live chat and adult dating sectors, for example, have continued to grow through the economic downturn while recorded content providers continue to face ever-increasing economic challenges.

One plausible explanation for this dichotomy of fortunes arises from the reason why adult entertainment has traditionally faired so well in tough economic times. Through the years economists have explained that when consumers’ disposable leisure income decreases, consumption of adult content has traditionally increased because it is a form of inexpensive entertainment. Despite the complaints of declining revenues by content providers, it is nevertheless likely that consumer behavior has not changed in the current economic downturn.

During this slowdown, however, for the first time “inexpensive” effectively means “free” when it comes to recorded adult content thanks to the vast amount of free explicit content instantly accessible via the web. Much of the free content is provided, of course, as a result of rampant online piracy of adult content.

But at the same time, while not free, live erotic chat is still often cheaper than a date. And because live chat customers buy live products for the live interactions they provide, the ready availability of free recorded content on the web does little to diminish demand for live content.

Adult dating businesses and adult virtual world social networks such as Red Light Center are also similarly insulated from the competitive effects of free content relative to businesses dependent on recorded content sales.

Thus, it still might be said that the adult business is still fundamentally recessionproof, albeit now so only for segments that are not economically dependent on selling recorded content.

Looking forward to 2012, I expect this trend disfavoring recorded content providers to continue, and even accelerate, despite the well-intentioned efforts by many to reign in content pirates through copyright enforcement actions.

One type of copyright enforcement effort that generated a lot of industry press in 2011 involved filing of infringement lawsuits by content producers against large numbers of unnamed defendants allegedly infringing the producers’ content via peer-topeer file sharing systems. These lawsuits are often brought at the urging, and with the assistance of attorneys or “rights protection” companies, sometimes called “copyright trolls,” that claim an expertise regarding such actions.

The fact that many adult content producers have filed such mass-defendant lawsuits is understandable since many believe that theft of their content via the bit torrents and other peer-to-peer systems is a significant cause of their declining revenues.

But as a number of these adult entertainment companies learned in 2011, successful copyright enforcement is not just about the size of the group of defendants sued in a lawsuit. As a result of court decision after court decision, in jurisdictions in which such suits were filed, a large proportion of the mass defendant style copyright enforcement filings reported in the industry press ran into procedural roadblocks, in part, precisely because the actions involved suing a large number of unnamed defendants.

Regular readers of my articles know that I had predicted this outcome and many of the problems now being experienced by plaintiffs in such cases in my XBIZ article “10 Things to Consider Before Engaging a Firm to File a Mass Copyright Infringement Lawsuit” (available at www.xbiz.com and my firm’s website, www.piccionellisarno.com).

I know that adult content producers are desperate to find a solution to the hemorrhaging of revenue believed to be at least in part due to unlawful file sharing. But while it certainly seems to be a matter of common sense that file sharing systems must be hurting the adult entertainment business badly, I am sorry to say that I have yet to see any solid data regarding the percentage or numbers of illegal file sharers that would be, or would have been, paying customers for the content they are currently stealing.

I think this is an important issue for producers to consider before filing lawsuits. All litigation, by nature, is costly and subjects the plaintiff bringing the lawsuit to numerous risks and uncertainties.

It is for these reasons that I think every adult company contemplating the commencement of mass-defendant copyright litigation, or any other type of litigation, must honestly and effectively weigh the associated risks versus the likely expected benefits before pulling the lawsuit trigger.

When it comes to mass-defendant copyright cases, while I think that copyright trolls may someday be able to provide meaningful revenue to content producers via such enforcement actions, unless and until the laws pertaining to copyright enforcement are changed, I remain unconvinced that such mass-defendant copyright litigation is likely to become a viable, much less, reliable, revenue source for adult content producers any time soon.

Another, and perhaps even more important criticism of the theory that adult content producer’s diminishing revenues are principally the result of piracy is the fact that such a view may hinder a content producer’s ability to identify and address the real cause of their declining revenues. I am of this opinion.

And while I believe that prudent and effective enforcement of one’s intellectual property rights is a necessary part of doing business for every adult content producer, the belief that the problem of free content can be solved with mass-defendant copyright infringement litigation is, I am sorry to say, dangerously naïve.

Unfortunately, for adult entertainment businesses dependent on the sale of recorded content, the problem of abundant free content is not just a problem of piracy. The problem is rooted at least as much in the fact that the adult content production business has an extremely low economic barrier to entry thanks to the availability of cheap video technology and cheap web technology that allows just about anyone to create and globally distribute many of the kinds of adult entertainment products that are in high demand.

In the 1970s there was only a handful of adult content producers, today there are thousands, if not tens of thousands when you count all the true amateurs. Even if there were no adult content pirates, and we could magically make them all disappear tomorrow, it is likely that there would still be a gigantic and exponentially growing amount of free promotional hardcore content available online.

Blaming the pirates, while a popular and seemingly reasonable explanation for declining recorded contentbased revenues, has in my opinion, helped many producers live in a state of economic denial that may have hindered them from taking the kinds of actions necessary to adapt to the new realities of the modern adult entertainment industry.

In sum, in 2012, I predict that the free content problem will continue to accelerate on a natural and inevitable trajectory toward a point in the future at which typically the greatest value obtainable from most recorded adult content will be its ability to promote non-recorded forms of adult entertainment and other adult products (e.g., live chat, adult dating, adult toys, etc.).

I believe that in 2012, continued stagnation of the U.S. and European economies will accelerate this process and provide further economic pressure on recorded content producers and distributors. At the same time, the same forces will, in my opinion, simultaneously favor providers of non-recorded content (live chat, adult dating, etc.) and tangible adult products (toys, etc.).

This article is not intended to be, nor should be considered to be, legal advice. I strongly urge you to seek the counsel of a qualified and experienced adult entertainment attorney familiar with the legal matters discussed in this article.

Gregory A. Piccionelli is an intellectual property and adult entertainment attorney experienced in Internet matters. He can be reached at Piccionelli & Sarno at (818) 201-3955 or greg@piccionellisarno.com.


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