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Size Matters

Size Matters

June 27, 2014
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XBIZ Research
Will virtual reality boost the paysite market?
Yes, it will soon
  40.00%
Yes, but in a few years
  37.06%
No
  22.94%
Out of 170 votes. Results based on votes submitted by members of XBIZ.net social network.

Legendary Hollywood film producer David O. Selznick once quipped that there were only two ways to make money in motion pictures — either via very cheap, or very expensive productions — illustrating how profitability across the vast middle ground of content production has remained perennially elusive.

It’s a reality that continues to shape the media landscape, adult-oriented or otherwise, as evidenced by the current state of the online adult entertainment market, where producers on shoe-string budgets struggle to compete against monolithic powerhouses that are consolidating their virtual stranglehold on professional productions and high-volume distribution channels — while middle market players have all but evaporated from today’s scene.

The middle ground, like the middle class, is seemingly fading away — and leaving the smallest and largest of firms to prosper in the wake of this seismic shift.

This is an anecdotal assumption, however, so I set out to begin quantifying some of the data by reaching out to industry leaders at XBIZ.net for insights as to today’s adult website budgets, specifically, major expense areas and the percentage of gross revenues attributed to each, to see if we can come up with an average that site owners could use as a benchmark. Although companies of different sizes and market segments will have different percentages, they do share many of the same budgeting categories. 

Additionally, I am interested in identifying approximate revenue ranges to stratify results, defining what we consider to be “hobbyist” or part time sites, small companies, medium and large firms based on their revenue breakpoints in 2014.  Sure, this analysis is all “how long is a piece of string” conjecture, but some basis of comparison is better than none...

According to Grooby Productions President Steven Gallon, individual operators and hobbyists that want to make a living from the industry might be happy with $40,000 per year — but anywhere up from there would depend upon the scale of their operations.

Characterizing Grooby as a small- to medium-sized company with an office in Los Angles employing eight full-time staff members and another seven full-time remote workers, Gallon says that his company earns money from website, DVD and ad sales, along with white labels and other revenue streams.

“We’re primarily a content company, so a vast amount of our budget goes there, probably close to 30 percent for models and photographers and obtaining content,” Gallon told XBIZ. “Staff costs would be next up at 20 percent, including dividends, social security, health insurance and bonuses, but much of our advertising, editing, design and social media is done in-house, so that accounts for a lot of this also.”

Other expenses include 15 percent for bank and processing fees; 12 percent for affiliate payouts; three percent for server and technical costs; close to three percent for business development, including travel, hotels, dinners and show sponsorships — with about one percent going to software and services such as legal fees and DMCA pursuits, and another percent on advertising.

“We don’t spend a lot on advertising, but if we included the Tranny Awards (soon to be renamed the TEA Awards), then we’d only be looking at about one percent,” Gallon offers, adding “The rest goes into taxes, rent and office supplies, etc.”

Gallon confides that during the darkest days of porn’s decline, the company proactively tightened its corporate belt, preventing the losses that harmed less nimble firms, while paving the way for expansion.

“We’ve had year on growth for 2012-2013 and so far in 2014,” Gallon concluded, adding “Our plan this year is for 10 percent gross growth.”

Deemented of Oliya Productions explains that typical costs for Internet businesses include the pre-opening expenses, such as company start up, development, website design and the construction of the site’s front- and backend, along with intermediary expenses such as customer acquisition and product stock, plus sales staff, miscellaneous overhead and legal expenses, plus post opening costs, including  fulfillment, restocking, accounting, returns and customer service.

“Marketing as an example is a cost of customer acquisition. If you sell DVDs or post new photo sets that is fulfillment. Front end may be a portal or the site and its URL,” Deemented explains. “You can fit different items of an individual business into different slots, such as an affiliate program could either be customer acquisition or sales or both. For most web businesses after opening, customer acquisition is the largest piece of the pie.”

Barefootsies of Reality Chexxx believes that adult website budgets involve too many variables to make averaging a valuable excercise.

“For example, corporate porn is going to spend a lot more on ad buys than the ‘piss ant.’ Many do very little cash money spend, and instead work the social and link trading type of things,” Barefootsies told XBIZ. “You’re also going to have labor (plus the costs that go with labor) and other expenses a small fry would not consider, as they are probably a sole operator or a mom and pop.”

There are many different factors affecting advertising, content, hosting, labor and more, causing the figures to also vary between tube and pay sites, for example.

Barefootsies outlined two basic options for building a pay site today: the first budgets $300-$500 monthly for hosting that can handle more content or multiple servers needed for storage and encoding. Next, $150-$300 per month for Elevated X or a similar CMS which could have additional costs, as well as four to five figures each for labor and content each month.

The second option is lower budget, running $99 per month for hosting a single site (or less content), plus  $29.95 monthly for Porn CMS, “free” labor courtesy of mom and pop, and perhaps $X,XXX content expenses for small time productions or less scenes.

“As you can see, there are vastly different expenses and costs involved,” Barefootsies says, noting that the same range of expenses applies to tube sites whether they use MechBunny or a different CMS.

AJ Hall of Elevated X Adult CMS fame says that rarely do customers start out budgeting $800/mo.  for software and hosting.

“The actual number is closer to half that as an average with the cost of the Pro CMS version and hosting each representing about half of that amount. If you go with the same hosting but with the single site Basic CMS version, the split changes to two-thirds of the expense going toward hosting,” Hall stated. “That simple change alters the software/hosting cost split by 25 percent, and that’s a lot, depending on a company’s revenue and what percentage these items represent.”

Hall adds that as a company grows, things like CMS, hosting and processing fees (which may be as high as 25 percent for a small company) will drop to single digits, and for larger companies will drop to a fraction of a percentage of total expenses.

“Don’t get me wrong, we’ve had plenty of people over the past eight years pay $150 a month for Elevated X and go with budget hosting and make a couple grand per month off a small pay site and be totally happy, but that’s usually not their ultimate goal,” Hall told XBIZ, emphasizing what he calls the seven P’s: “Prior proper planning prevents piss poor performance,” a lack of which he says is the number one reason for every business closure or abandoned project he’s seen.

Master Ryan of Porn CMS is amazed at how many new site owners sign up for a basic account that includes the video converter and hosting for $29 per month, yet are only able to last a few months or can’t afford staple items such as content, marketing and design.

“They come into this with practically nothing and want to make bank. I support them as much as I can, but there's not much I can do for people who can’t even put a minimal amount of investment into their new business,” Master Ryan stated, advising operators that wish to start a pay site that they need to budget a minimum of $1000 per month for expenses. “That’s assuming you pay next to nothing for the CMS and hosting (such as our $29/mo. package) and go with a generic design. You still need content and marketing and that amount can be a little lower if it’s a solo site and you don’t pay for content, but that’s only saving [perhaps] 10-15 percent.”

Master Ryan offers a rule of thumb where 20 percent of a budget should be devoted towards site development, including the content, design and software, while 80 percent is targeted for marketing.

“The marketing is the only part that brings in sales. even if you want to sit at your desk eight hours a day and do all the marketing yourself, it still needs to be 80 percent of your time,” Master Ryan explains. “I’ve had so many past (and a few present) site owners that spend 80-90 percent of their time on their content and tweaking their site, and they wonder why they aren’t making more than a few sales a week. Then I have very successful site owners who keep their site very basic and spend all their time promoting the site.”

“You can guess which ones run their sites full-time and which ones still have day jobs,” Ryan adds. “Making money in porn isn’t magic — it’s all about online marketing.”

Kelli Roberts of Kelli Internet Services told XBIZ the tale of two recent clients that both set out to build adult pay sites, but on vastly different budgets.

“One understood that you needed content and gladly wrote that check for $8,000, which actually he got a crazy good deal — it worked out to be about 100 DVDs, each [averaging] five scenes, so basically he spent $8,000 for 500 videos for his new site,” Kelli confided, revealing the other client was shocked to learn he had to spend money on content. “It was like, umm, then why are people going to join your site?  What are they going to do when they get inside your members area, twiddle their thumbs?”

The client ended up spending around $1,500 for content, which bought him around 12 DVDs with 60 scenes in total. 

“So now you have this great website, but nobody knows about it. So of course you have to factor in marketing and some basic SEO. They both spent insanely different amounts on this too,” Kelli told XBIZ. “In the end they both got what they wanted, a membership website — and both spent very different amounts doing it.”

One proponent of the low budget route is Woody of PlatinumAdultBusiness.com, who receives 65 percent of his income from designing turnkey adult websites, and notes that it only costs him $8.95 per month for hosting, plus SEO expenses.

Kelli Roberts was quick to explain that $8.95/mo. only buys virtual hosting on a shared server, saying “That may work for your first website, when you have no real traffic and just getting started, but you’ll quickly find once you start getting any amount of real traffic that you are going to need to upgrade to a dedicated, managed server and that at a very basic level starts at $99 a month and goes up from there.”

Adult Voyeur confides that on one of his sites, the average shoot cost is around $25,000, while the shoots for another site cost around $3,000. On top of this are expenses for “spec” and leased content and the bandwidth used — and those expenses are different for cam, dating, toy and other sites.

SGS of SDYPhotography tells XBIZ that while model costs have fallen through the floor, the company sees hosting as its biggest expense, but notes that this cost has come down annually, and that the firm will be seeking to make further reductions this year as well.

Explaining that UK producers of note have long gone from the adult sector, Oscar Storm adapted his business to suit the needs of models, earning himself a 20 percent return in the process.

“For me, my sites are not a way to generate income or make money, they are a marketing tool, part of the overall,” Storm says. “The costs come from my marketing budget and are small compared to the media advertising spend I do. As a cost they have to be justified in my overall business model.”

Storm outlines his expense percentages as being 50 percent for property, which is broken down to include items such as property tax, repairs, fixed costs, furnishings, lighting and laptops, etc., as well as 25 percent for marketing, including websites, advertising, emails, and sponsorships, of which websites account for only around five percent of expenses. Add in five percent for administration expenses such as general office costs and travel, and Storm is left with 20 percent profit.

For his part, Leo Karabatch of XCzech Empire offered that he started out with 50 updates featuring 10 models, and that he acquired this original, exclusive content and girls, building three sites with a custom CMS and video player, plus graphics and hosting, on a budget of $5,000 — showing frugality can lead to greater profits and lower barriers to entry — and Leo is not alone in this quest.

Self-proclaimed “piss ant” Crissy N. of Wikkid Vibes, operates an adult retail store and tries hard to keep costs low at this company run by a husband and wife team.

“Our total cost for a month is around $160. All our SEO is in house. We do our own blog. As of now we have been able to make our little piece of the adult world self-sustaining,” Crissy N. says. “We hope by keeping up with the trends selling what our customers want and providing great customer service we will grow a profitable company.”

Amelia G of Blue Blood’s SpookyCash echoed the difficulties in coming up with accurate figures, noting that “it is very challenging to get remotely accurate numbers in an industry where most of the players are privately-held.”

Looking at the wide range of expenses and revenues reported by adult entertainment companies in 2014, it is clean that size does matter; and whether you’re spending $8 or $80,000 per month or more, there are common issues you’ll be dealing with — the only difference will be your options, and profits.


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