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Bunny Winks at ICS Deal

Bunny Winks at ICS Deal

January 1, 2006
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" Diversify... or die. "

Playboy's recent $12 million acquisition of ICS Inc., parent company of Adult.com and GFY.com, hardly registered on Wall Street. But its significance for the adult world shouldn't be overlooked.

What's behind the deal? Why is a basically traditional media company suddenly snapping up an Internet firm?

"It complements our existing network," said Jay Jay Nesheim, spokesperson for Playboy Entertainment Group, the unit of Playboy Enterprises Inc. that comprises its online and TV ventures. "We acquired an affiliate program infrastructure that will give us the opportunity to expand our traffic reach across all of our platforms — including the subscription clubs, online store and new digital Playboy magazine — with the potential to increase revenues in those businesses."

Adult.com president Joe Lensman, who's staying on under the new deal, said it "reemphasizes the value Playboy places on the webmaster community."

Even Hugh Hefner himself seems to have validated the deal, paying about $3.55 million for 238,000 shares of Playboy Enterprises Inc. since the beginning of November. The stock has ranged from $14.40 to $15.35 a share, a premium compared to $13.09 earlier this year when Hefner purchased $5 million worth of shares.

For ICS, marrying the Playboy Bunny means more than becoming part of a major corporation. Playboy is as much a cultural institution as Disney. Besides the cachet this brings to ICS and its properties, the Internet company will, at least theoretically, have access to considerable financial and marketing resources. When the deal was announced, both parties hinted at long-term plans to roll out a broad array of new products, sites, webmaster resources and distribution avenues through mobile, web and video outlets. As for publication, Nesheim said they're still working "on a lot of new ideas, but we are currently not ready to discuss anything specific."

Adult.com started in 1996 and now offers its affiliates more than 100 sites with 40 million unique visitors each month. It's the hub of an online empire that includes GFY — aka GoFuckYourself.com — the leading adult webmaster board, Webmaster Access trade shows, and CinemaPlay Entertainment, Adult.com's DVD distribution unit.

On GFY, there's been plenty of discussion about the acquisition and its implications for the future of the board. Asked by a poster if the deal would mean "more heavy moderation and censorship" of GFY, Lensman responded, in the colloquial tone that has made him extremely popular among webmasters: "Do you think I would do that? GFY rocks. I consider most of the people here as my friends. The only difference is that you now have a friend in a higher place."

XBiz asked Nesheim if Playboy had plans to utilize GFY. "We do understand that GFY is a leading industry message board and that this is the place where the adult affiliate industry meets to discuss everything from new regulations to traffic generation ideas," she said. Without naming specifics, she added, "We are working on appropriate ways to utilize GFY to grow our online revenue streams."

Playboy got its first taste of ICS' potential about three years ago when it chose Adult.com to manage its affiliate program, Playboy Cash. "Playboy singled out Adult.com from the field because of Adult.com's site network, affiliate reach and reputation for honesty," Nesheim said.

The two firms forged further ties earlier this year when CinemaPlay began distributing a line of DVDs with harder versions of programming originally broadcast on Playboy's Spice Network.

Company Diversification
The ICS acquisition may be the latest evidence that Playboy appreciates that old-media adult icons, no matter how prestigious, are beholden to the rule: Diversify... or die. Add to that a second rule: The hotter the sex, the better.

Playboy pioneered nudity as mass entertainment. But in a fast-changing culture, nobody is guaranteed ongoing success. As home video and then the Internet whetted appetites for porn in all flavors, Playboy's plain-vanilla approach to eroticism has sometimes had trouble keeping up. Also, magazines like Maxim and FHM, with their tamer pictorials but edgier ethos, have cut into Playboy's readership, especially among younger men. Although it's still America's best-selling monthly men's publication, the magazine's net revenue was down for the nine months ending Sept. 30, $67.5 million versus $74.8 million for the same period in 2004.

The ICS deal seems like part of a larger strategy to maintain Playboy's softcore image while expanding into adult's harder precincts. "This is not a change to the Playboy model, and we will continue to work as a distinct entity [from Adult.com] much like our Spice TV business does," Nesheimsaid.

The dual approach appears to be working. The company dominates adult pay-TV, providing 75 percent of the content — everything from couplesfriendly features to more-explicit fare through, respectively, its Playboy and Spice channels. Playboy even has its own studio in Los Angeles where it produces high-definition programming for its networks. CinemaPlay's Spice DVDs are marketed with the slogan, "We played nice on TV. Now it's time to get dirty." Unlike the broadcast versions, the DVDs include anal sex and ejaculation.

Playboy learned invaluable lessons about keeping a balance between soft and hard content from its online forays. Initial attempts to translate its traditional content to the web floundered. Playboy.com had lost more than $70 million before starting to turn things around, in part through a broader array of offerings, including "Playboy TV's Amateur Home Videos" and "Spice Uncensored." As Playboy's affiliate program manager, Adult.com helped Playboy.com make its red ink vanish.

As part of its "one foot in the past, one in the future" approach, Playboy, starting with the October 2005 issue, now digitizes the entire magazine, making it available for download in a partnership with Zinio.com.

Are there other online deals in the works? "We are always looking at ways to improve our businesses and we'll continue to review any opportunities that make sense," Nesheim said.

The company has also gotten traction through its licensing deals. Worldwide retail sales of Playboy-licensed merchandise — everything from lipstick to lingerie — hit $500 million last year. Playboy's cut was $20 million, compared with $189 million from its entertainment unit (mainly TV) and $120 million from publishing. But with a brand as famous as Playboy, the company has every right to be sanguine about future licensing profits.

In a time of growing government hostility to adult entertainment, Playboy's clout, as well as its legal resources, could help buffer Adult.com. It's a doubleedged sword, however, because Playboy's expanding hardcore portfolio might make it a juicier target for zealous prosecutors.

"Adult.com is pushing the envelope a bit for Playboy.com," Dennis McAlpine, an investment analyst who tracks Playboy, said. There's a real concern, he noted, over whether the U.S. Attorney General will move aggressively against adult companies.


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