Over the Horizon

Stephen Yagielowicz
2008, its challenges, opportunities, personalities and powerhouses, have weighed heavily on my mind over the past two weeks; as we worked to bring together the December issue of XBIZ World magazine — and with it, our special Year in Review section.

As part of that process, I reviewed all the news we featured during the year; an enormous concentrated pile of data which revealed some interesting industry insights — while more brightly illuminating others. It wasn't like any of the information was new; it was being able to see it all within the context of the larger picture — in a way that cumulative daily data doses don't allow. The end result is a clearer view of where we are and where we're likely to be going, based upon where we've been.

But the past is done — and now I'm focused on the future. Let me give you a sneak peek:

Piracy and prosecutions; tube sites and 2257; the death of the DVD — these issues are nothing in comparison to the impact of the economy on adult entertainment operators. Sorry guys, but the old saying that "porn is a recession-proof industry" was only true in the good old days before we decided to give it all away for free.

Sure, folks still want to get off, but with lower levels of discretionary income, the search for free porn will intensify; driving subscription and PPV sales lower. And for those that thought they'd just make open member's areas and use an ad-based revenue model — have you run the numbers or sought any advertisers lately? Web-based advertising is measurable, and many companies are being smarter about placement — and cautious about spending.

While the little guy, including the solo operator and the smallest of shops, through drive, creativity, diligence and the ability to decisively turn their operations on a dime, will still be able to survive — and even thrive — by being flexible and adaptive; some larger, more cumbersome operations, especially those plagued by weak leadership, are doomed. And in this latter category, I place many adult webmaster affiliate programs.

Why? It goes back to the economy: with fewer prospects, all savvier about their choices and their entertainment expenses, it only makes sense that they will increasingly gravitate towards the brands. For example, how will you, as a marginally profitable affiliate program operator, hope to compete with a monster such as that recently created when Private Media, possessing one of the world's largest and highest quality content libraries, acquired adult giant Gamelink with its sophisticated delivery expertise and infrastructure?

Sure, I'll wait for an answer — but the clock is ticking and that's the problem…

It's like the evolution of Las Vegas, where with the exception of a few nostalgic holdouts, the old "mom and pop" operations were swallowed by the corporate mega-brands and the landscape was changed forever.

As an example of the type of smaller operator that I see having a real chance at survival, I talked to a guy yesterday that was quite pleased with himself for launching his first paysite — and for, even at this stage in the game, finding a brand new niche. And yes, he even launched a new affiliate program to promote the site and scored on the order of 150 niche-related domains to keep would-be competitors at arms-length. Some folks consider that to be crazy in today's economy and challenging market — but this guy is no noob — he is an experienced adult affiliate with a pretty wide range of products, knowledge and experience. And like a lot of other traditional affiliates, is developing products to better self-monetize his traffic flow. I think he'll do ok with this project and I hope that in a few months he'll lift the veil of secrecy and share some of his learning experiences with us.

But that takes a lot of talent and luck; and for many, it would be easier and smarter, to sell out.

"So," says the little guy, "I'll spend the next year making myself an irresistible target for acquisition and sell out!" That's a great idea, but the implications for those that remain are worsened by that trend; since it's an opportunity for shady operators to buy and build networks to dilute their chargeback ratios and then run abusive cross-sell programs — burning a lot of people that might have otherwise been paying customers for many of us.

I'll predict now that VISA will step in with an outright ban on pre-checked cross-sales in the near future; and for some of the companies that went on program buying sprees with this business model in mind, cash flow is going to plunge. But that reality will only speed up the abuse and increase the shadiness, I fear.

So what about the big guys? One need only look to a mega-brand like Playboy to see the difficulties faced by even the most well-known names in the business. But having said that, these companies have the resources to eventually "figure it out" and to remain viable in the process; with their continual consolidation and expertise-building giving the online adult industry something it's never really had before — a barrier to entry.

Or should I say "a barrier to profitability" — since it's not any harder to enter the biz today than it was a decade ago (and maybe a lot easier) — but it's certainly a lot harder to make a buck.

Of course there are many other factors impacting the adult entertainment business; and its woes and opportunities are not the result of any one issue, but a combination of all of them.

Given all this, I see great opportunities along with great challenges in the year ahead, but on the other side of 2009, I see a stronger, more professional and thriving industry — for those that can adapt to these changes. It may be a smaller industry, but I think it'll be a better one — I hope to see you there.

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