Today marks a serious departure from this series. Those who have followed along will have seen the preliminary thought processes and resulting mathematics as Dawn Elizabeth tries to pay her rent with her amateur pay site. Her modest goals are in sharp contrast to the industry giant known as New Frontier Media — or better known to most adult Webmasters as "igallery."

As a publicly traded company, New Frontier Media (NOOF) must file Quarterly Reports with the Securities and Exchange Commission detailing their income and expenses among other items. The following is an excerpt from their most recent (February 13, 2002) public filing that provides a valuable look into the operational details of one of the "big boys," and reveals numbers that may be used to validate and refine our own calculations and projections, comparing two very different ends of the online adult entertainment industry. Enjoy:

INTERNET GROUP NET REVENUE

Total net revenue for the Internet Group was $5.1 million for the quarter ended December 31, 2001, as compared to $9.0 million for the quarter ended December 31, 2000, which represents a decrease of 43%. Total net revenue for the Internet Group was $19.3 million for the nine months ended December 31, 2001, as compared to $25.1 million for nine months ended December 31, 2000, which represents a decrease of 23%. The Internet Group's revenue is comprised of membership revenue from its consumer-based web sites, revenue from the sale of its content feeds, revenue from the sale of exit traffic, and revenue from its Internet Service Provider ("ISP") services.

Net membership revenue for the Internet Group was $3.2 million for the quarter ended December 31, 2001 as compared to net membership revenue of $5.0 million for the quarter ended December 31, 2000, which represents a decrease of 36%. Net membership revenue for the Internet Group was $12.7 million for the nine months ended December 31, 2001, as compared to $14.5 million for the nine months ended December 31, 2000, which represents a decrease of 12%. The Internet Group's chargebacks and credits were $0.3 million, or 9% of gross membership revenue for the quarter ended December 31, 2001, as compared to $0.7 million, or 12% of gross membership revenue for the quarter ended December 31, 2000. The Internet Group's chargebacks and credits were $1.6 million, or 11% of gross membership revenue for the nine months ended December 31, 2001, as compared to $2.0 million, or 12% of gross membership revenue for the nine months ended December 31, 2000. The Internet Group has continued to manage its credit card revenue closely in order to ensure that it is meeting the necessary chargeback parameters required by the major credit card companies.

The Internet Group has seen a decline in its membership revenue as a result of a decrease in traffic to its sites. This decrease in traffic to the Internet Group's sites during the quarter and nine months ended December 31, 2001 is primarily due to changes made to the Internet Group's webmaster payout model. The Internet Group changed its payout model during fiscal 2002 to compensate a webmaster for traffic directed to the Internet Group's websites only upon the conversion of a referral into a paying monthly member. This change resulted in a 74% and 46% decline in webmaster payouts for the quarter and nine months ended December 31, 2001, while net membership revenue declined only 36% and 12% for the quarter and nine months ended December 31, 2001. Membership revenue and traffic has also decreased because of the proliferation of free adult material available on the Internet.

Revenue from the Internet Group's sale of content was $0.4 million for the quarter ended December 31, 2001, as compared to $1.0 million for the quarter ended December 31, 2000, representing a decrease of 60%. Revenue from the Internet Group's sale of content was $1.5 million for the nine months ended December 31, 2001, as compared to $3.0 million for the nine months ended December 31, 2000, which represents a decrease of 50%. This decrease in revenue from the sale of content is due to a softening in the demand for content by third-party webmasters.

Revenue is earned from traffic sales by forwarding exit traffic and traffic from selected vanity domains to affiliate webmaster marketing programs. Revenue from the sale of traffic was $1.4 million for the quarter ended December 31, 2001, as compared to $2.8 million for the quarter ended December 31, 2000, which represents a decrease of 50%. Revenue from the sale of traffic was $4.7 million for the nine months ended December 31, 2001, as compared to $6.9 million for the nine months ended December 31, 2000, which represents a decrease of 32%. The Internet Group's revenue from sale of traffic has decreased for the quarter and nine months ended December 31, 2001 because of a decline in overall traffic purchased by the Internet Group under its new webmaster payout model. The decline in traffic to the Internet Group's web sites results in less traffic available to sell.

The Internet Group's other revenue was earned from the sale of services such as co-location and bandwidth management ("ISP" services) to non-affiliated companies. The Group's other revenue was $0.1 million for the quarter ended December 31, 2001, as compared to $0.2 million for the quarter ended December 31, 2000, representing a decrease of 50%. The Internet Group's other revenue was $0.4 million for the nine months ended December 31, 2001, as compared to $0.7 million for the nine months ended December 31, 2000, representing a decrease of 43%. This decrease in other revenue for the quarter and nine months ended December 31, 2001 was due to the Group's major non-affiliated customer changing service providers.

COST OF SALES

Cost of sales for the Internet Group was $2.6 million for the quarter ended December 31, 2001, as compared to $4.4 million for the quarter ended December 31, 2000, representing a decrease of 41%. Cost of sales for the Internet Group was $10.1 million for the nine months ended December 31, 2001, as compared to $13.1 million for the nine months ended December 31, 2000, which represents a decrease of 23%. Cost of sales consists of expenses associated with credit card fees, merchant banking fees, bandwidth, membership acquisition costs (purchase of traffic), web site content costs, and depreciation of assets. Cost of sales was 51% and 52% of total net revenue for the quarter and nine months ended December 31, 2001, respectively, as compared to 49% and 52% of net revenue for the quarter and nine months ended December 31, 2000, respectively.

More than 70% of the traffic to the Internet Group's web sites is acquired through affiliate programs that it markets to webmasters. These programs compensate webmasters for traffic referrals to the Internet Group's web sites. A webmaster will be paid a fee of $25 - $45 per referral that results in a monthly membership to one of the Internet Group's web sites. Any traffic referred that does not result in a membership to the Internet Group's web sites will be sold by the Internet Group to other webmasters via affiliate programs to which it belongs, resulting in revenue from traffic sales. The Internet Group is focusing its efforts on further refining its customer acquisition programs in order to balance these costs with the revenue generated.

The Internet Group's traffic acquisition costs were $0.7 million, or 14% of net revenue, as of the quarter ended December 31, 2001, as compared to $2.7 million, or 30% of net revenue, for the quarter ended December 31, 2000, representing a decrease of 74%. The Internet Group's traffic acquisition costs were $3.9 million, or 20% of net revenue, for the nine months ended December 31, 2001, as compared to $7.1 million, or 28% of net revenue, for the nine months ended December 31, 2000, which represents a decrease of 45%. This decrease is due to the implementation of new traffic acquisition programs that focused on decreasing customer acquisition costs. The Internet Group is focusing its efforts on further refining its customer acquisition programs in order to balance these costs with the revenue generated. The Group expects to see incremental increases in its customer acquisition costs in future periods in order to generate additional traffic to its sites.

Merchant banking fees, including fees for credits and chargebacks, were 9% of gross membership revenue for both quarters ended December 31, 2001 and 2000. Merchant banking fees, including fees for credits and chargebacks increased from 9% of gross membership revenue as of the nine months ended December 31, 2000 to 10% as of the nine months ended December 31, 2001. The Internet Group was successful in its attempt to reverse the Visa fine assessed during the quarter ended September 30, 2001, and this is reflected in the current quarter's results.

Operational expenses, which include depreciation and amortization of Internet equipment, were 20% and 9% of net revenue for the quarters ended December 31, 2001 and December 31, 2000, respectively. Operational expenses, which include depreciation and amortization of Internet equipment, were 15% and 8% of net revenue for the nine months ended December 31, 2001 and December 30, 2000, respectively. This increase in operational expenses is primarily related to operating lease, maintenance and depreciation expenses incurred in the build out of the Internet Group's ISP facility which was completed this quarter.

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I hope that you found this filing excerpt as fascinating and insightful as I did. While this "brief" tidbit only shows part of the "big picture" at igallery, I think it provides a great snapshot of what the "big boys" are facing, and while the numbers may be quite staggering compared to our own balance sheets, the lessons learned are equally applicable. You can find the complete filing at Edgar Online (http://www.edgar-online.com/).
~ Stephen