Demand High for VOD: 1

Sam Williams
Lisa S. Lawless is the type of adult industry entrepreneur who prefers the term "erotic" rather than "pornographic." It's not that Lawless shies away from graphic images and content; her Colorado-based website offers a mixture of sex toys, sex books and videos and features a pair of animated, ejaculating vaginas running side by side in an infinite loop. It's more of a branding issue, really. As a company that caters to both men and women, Holistic Wisdom is built on the premise that not every adult viewer fascinated by sex is ready for the full penetration close-up.

"One of the reasons why customers have valued our site is because we have been able to be very honest with them and say, 'Hey, this video might be a little hardcore for your tastes,'" she says.

When it comes to building on that trust, Lawless has found the ideal selling tool: video-on-demand. Through a partnership with the San Francisco-based streaming media company Game Link, Holistic Wisdom lets curious visitors watch a free snippet of "The Art of Female Ejaculation" in exchange for agreeing to join the company mailing list.

Not only has her mailing list grown, so too has the number of sales as many customers move directly to the $8.95 full video order, accessible via a password and link to Game Link's server farm.

"Customers have actually contacted us and asked that we put together a compilation of reviews and previews of better sex and adult entertainment videos," Lawless said, noting the popularity of the company's try-before-you-buy policy as well as the streaming video technology that enables it. "We want to use more of it."

For years, VOD has been the Internet equivalent of the flying car, an over-the-horizon technology marrying the video quality of cable or satellite VOD with the serendipity of an shopping spree or Google search. Only in the adult entertainment sector, where fans have willingly financed even the most ill-conceived, low-res experiments in sexual exhibitionism has the technology found a stable niche.

Adding More Content
"We're adding 30 terabytes of new content at a time," boasts James Seibert, director of business development for National A-1 Internet, the Philadelphia company behind the adult-themed "We just put in a new rack of servers last month."

Although his company owns two additional Internet properties, the mainstream content site and the celebrity-themed, Seibert says adult content is the true workhorse at the moment. The company currently boasts 15 servers, roughly half of which track customer account data and preferences, the other half of which serve up more than 300,000 minutes of content a day.

When National A-1 first started business four years ago, download speeds languished just above the 300-kilobit-per-second threshold. Today, download speeds routinely exceed 1 megabit per second, making it easier to shove more content out to more eager customers. As a result, the pressure has shifted from generating traffic to finding the fresh content that keeps viewers from getting bored and moving on to the next site.

Seibert says his company already has deals with more than 700 adult studios and a farm of 50 encoding machines converting VHS and DVD content to Windows Media and DivX around the clock.

"I'm a technical guy," says Seibert, explaining his willingness to quote numbers. "HotMovies was a side project that slowly consumed my life a year and a half ago to the point that I had to quit doing my technical stuff and focus on my side project."

Such technical details are a reason many other adult VOD executives see the business model as a protected harbor in an otherwise tumultuous sea. Unlike cable or satellite-based VOD, Internet VOD doesn't need an entrenched access provider such as Comcast or Time Warner to reach the end user. All they need is a room full of servers and a web address.

This has opened the market up to small-time players and experimentation. At the same time, the mechanics of Internet-based video delivery have matured to the point that most companies looking to float a VOD brand name have to play catchup with the field's major players — companies such as the North Carolina-based AEBN and San Francisco-based Game Link, both of which launched their first streaming video services before the 2000-'01 tech crash and, as a result, have been able to weather initial scalability troubles with the help of low-cost programming talent.

"You can do many more things on the Internet, and that opens up additional revenue streams," notes John Chambliss, president of Deep Star Broadcasting, a company that chose the traditional cable route when launching its Heat-on-Demand service featuring content by Simon Wolf, Suze Randall and Seymour Butts. "Unfortunately, the buy rates on a national spectrum of cable delivery versus the Internet are not comparable by any means."

For the moment, says Chambliss, a respectable buy rate of 6,000 orders per month over the Internet would barely qualify as a failure on cable with its 16 million-17 million U.S. VOD subscriber base. Rather than elbow his way into a still-developing market, Chambliss chose to negotiate his way into an already-established market and wait for the inevitable phone-cable delivery convergence.

"We're already in negotiations with one of the largest phone companies in the world to supply them with adult content," he says.

Those on the Internet side report similar talks with cable providers and see the Internet's unique mix of frictionless marketing, unregulated content and plummeting infrastructure costs as the winning hand in the content delivery poker game.

Frank Ryan, president of the two-year-old startup says his company has yet to hit the break-even point but has already been approached by Comcast executives. Although the topic of a partnership never entered the discussion, he suspects that Comcast and other cable companies will need an Internet VOD component in their business model just to be safe.

In part two we'll look at XonDemand, AEBN and affiliate marketing.