2010: The Year Ahead

Stephen Yagielowicz
With the New Year upon us, it behooves operators in the adult entertainment industry at all levels to look ahead to some of the basic (and some often overlooked) factors that are likely to influence our rapidly evolving businesses in 2010 — and beyond. While adult entertainment encompasses a rich and diverse ecosystem of sex, sites and sales, for the purposes of this article, we will focus on online adult entertainment and some of its related market segments.

It is important to remember that none of the following issues occurs in a vacuum — most are all related and inter-dependent, with cause and effect relationships. For example, new banking regulations could dramatically affect affiliate program business models, with a spill over to affiliates and the traffic brokering companies many rely upon.

With this in mind, here is a selection of hot button topics for your consideration when updating your business and marketing plans:

Affiliates and Affiliate Programs
2009 saw a decreasing number of adult affiliate programs accompanied by declining revenues for many of the companies that remained. This situation is likely to continue throughout 2010, presenting challenges to both program owners and affiliates.

Many successful "affiliate programs" have increasingly moved away from relying on affiliates, with some companies that once received 100 percent of their traffic from affiliates now receiving only 10-20 percent of their traffic mix from affiliates.

With quality traffic becoming ever harder to come by, and rapidly declining revenues, throngs of part-time affiliates have left the industry completely; although quite a few continue to post on industry message boards, if nothing else. The remaining affiliates are falling into several camps: including those that are building their own premium properties to send traffic to; those that still command respectable traffic levels and demand high-dollar payouts or fully prepaid advertising deals; and hobbyists that will hang on a little while longer — or perhaps forever, just for the fun of it.

While years past kept programs focused on escalating pay per sale (PPS) affiliate payouts to unrealistic levels in an effort to attract and retain productive affiliates, 2010 is likely to see many more programs transitioning to (or back to) revenue sharing payouts for all but their most important (and demanding) affiliates. These payout schemes are much easier to finance and provide a better indication of the worth of a surfer — even if the promos for them are not as flashy as the "$1,000 PPS!" ads.

Revenue sharing, of course, only works if there is revenue to share — and this business model does require high-quality, frequently updated websites that offer original and exclusive content. Today's web surfer is simply too savvy to stay a member of some mega-program's cookie cutter feed site for too long. Sure, the move to in-house and performance-based advertising has freed up revenues that can boost or maintain PPS levels, but offering super high PPS payouts still typically requires a lot of cross- and upsales — a practice that may not have a very long future in its current form.

The bottom line for 2010 is that fewer affiliate programs will court fewer affiliates, and everyone will have to do a better job throughout the equation — from programs educating and nurturing their current affiliates to the affiliates needing to learn better ways to sell their sponsor's offers.

Banking, Billing and the Economy
Perhaps the hardest thing for many operators to wrap their heads around, "the economy" received more than its fair share of the blame for declining sales in 2009. While the overall economic malaise has played a definite role, other factors such as an over-abundance of free content and the lack of anything truly "new" has made it hard for many consumers to justify spending money on online adult content.

As for the economy, one of the biggest influences it is having on the industry is not one of "sales are down because folks are not spending money or out of work," it is the retraction of credit lines and cards. This is an issue beyond our control, but directly impacts merchants who cannot process a customer's transaction — an especially bad situation for those using recurring billing models and high PPS payouts. For example, Joe Surfer signs up to your paysite but your follow up charges are declined, because either the card no longer has any credit left on it, or the numbers simply changed. Either way, the member is now un-billable, but your affiliate still wants his $40, which definitely hampers cash flow.

While the Dow has climbed back above 10,000 and the recession officially declared to be over by the Obama administration, consumers are being slow and cautious about opening their pocketbooks, which is natural as talks of a "double dip recession" persist. This fear may be temporary and based on another few months of "wait and see" before it is over. Still, many companies that blamed the recession for their woes may have had more profound influences eroding their market positions but found the economy to be a convenient scapegoat.

Posing at least as big of a problem as the economy is the global banking crisis and its impact on the billing processors that are at the heart of the ecommerce food chain. One high-profile example is the ongoing drama of ICC-CAL — a vital and perhaps irreplaceable link in the international processing chain whose problems with high-risk processing due to punitive action by VISA over chargeback rates may spell the end of some high-profile affiliate programs in 2010. XBIZ World will have a feature article on ICC-CAL and the implications of its woes in our February issue.

Legal Issues Affecting Adult
While several ongoing and developing legal challenges are being grappled with, including another challenge to '2257 and the growing chorus of demands for mandatory condom usage in commercial productions, of all the current legal issues facing adult operators, none is so overlooked as Michigan Democrat Rep. Bart Stupak's H.R. 4059 — the Online Age Verification and Child Safety Act.

The Act would make it "unlawful for an operator of any pornographic website accessible by any computer located within the United States to display any pornographic material, including free content that may be available prior to the purchase of a subscription or product, without first verifying that any user attempting to access their site is 18 years of age or older in a manner consistent with the regulations prescribed under subsection (c)."

According to, the bill is in its first step in the legislative process; referred to the House Energy and Commerce Committee on Nov. 6 for deliberation before approval for general House debate. Most bills do not make it out of committee.

Designed "to enhance Internet safety and security and to prevent exploitation of children online through the use of technology," the bill is the latest Congressional proposal to protect minors from exposure to sexually explicit materials. The bill is targeting not just online adult entertainment, however. "The product or services subject to paragraph (1) include alcohol, cigarettes and tobacco, fireworks, gambling, handguns, pornographic material, and any other product or service that the Commission determines is age-restricted under Federal or State law," the bill states.

Allowing a minor into such a website could result in a fine and 10 year prison sentence under this law, which also applies to billing companies that process transactions for these services. As a result, when this legislation or a similar successor is enacted, if not before, you can expect the card associations to require some standardized form of age verification gateway before processing your transactions.

Another twist is that the jurisdiction would apparently fall to the Federal Trade Commission.

Mobile Porn
Mention the word "mobile" around any adult webmaster today and his or her eyes will light up and they will tell you "that's where the money's at!" It is a nice thought, and for some operators, a reality, but the fact remains that the mobile market looks so good because other segments are doing so badly.

There is no doubt that mobile devices are growing in multimedia capability by leaps and bounds. Likewise, it is unarguable that a cell phone is a must-carry technology for most consumers. Combine this capability with its constant availability and the privacy that the user may enjoy while viewing content in an "out of the way" place, away from the family computer, and mobile porn does seem like a killer app.

But consider the problems of corporate censorship (in the U.S.) which relegates most of this material to off-deck distribution; the problems of effective age verification in the U.S. and abroad; and billing issues in many markets; and you'll see that the golden apple has a few nasty worms in it.

Granted, companies such as TopBucks Mobile are making determined efforts to profit from this market, but their aggressive determination in penetrating this arena, and widespread publicity over this move, have left many traditional affiliates thinking it's best to use one of their white labels and redirects for their "mobile marketing." Not the worst move an adult affiliate can make, and definitely good for the company, but the over-use of white labels can lead to too many look-alike sites that can dilute consumer excitement over the novelty of mobile porn. You can of course balance that concern with a training of the consumer to see these white-labels as "what mobile porn is supposed to look like," but the lack of any real competitors to TopBucks at this point is telling.

There are other factors, of course, at play in the mobile market space. Consider the proponents who cite the worldwide popularity of these devices. Sure, cell phones are everywhere, but the availability of reliable billing mechanisms is not universal. Even if you can bill the global consumer, such as via PSMS, after the phone carriers, billing processors and other intermediaries deduct their fees the operator may receive only a few pennies for his marketing efforts. Just as with online adult, however, this may be more of an issue of business planning than anything else. Running mobile sites as standalone properties may not be their best use today, but rather, offering mobilized content as a bonus to, or tiered membership option for, traditional paysites, could be the way to go for the short term and beyond.

It is this view of "mobile" as simply another content distribution channel that is taking hold, with boutique producers right on up to the largest of players, seeking ways to leverage this technology as part of their offerings — not their only offerings. As is happening in mainstream marketing, this could take the shape of short-form webisodes, perhaps released weekly, with the full version available at the end of the "season." The webisodes could be offered freely as promos, like Tube or MGP clips are, with the upsale being VOD or DVD/Blu-ray delivery of the full video, for example. Sponsored programming is also likely to see an uptake in 2010, where the cost of production and delivery is borne by advertisers.

Also as with the adult Internet, the demand for pre-recorded content may be minimal in today's mobile market, with live, interactive content being the "dream fit" for these devices. While smaller screens may be better served with wallpaper images, the growing screen sizes of mobile devices allows room for the control surfaces required to operate video players and chat systems, paving the way for mobile videochat services to become commonly deployed.

Then there is the iPhone.

For many adult operators, the iPhone is the Holy Grail of adult mobile platforms. While some point to other devices, such as the Android-powered Droid, these platforms do and likely will continue to take a back seat to Apple's wonder. This does not mean that the iPhone is perfect — far from it, especially when considering its lack of Flash support, which will send many mobile mavens back to the encoding suite for an H.264 pass. According to a recent report, however, iPhone users are the single most likely group of consumers to pay for premium content. This alone makes them an audience worth targeting — and with all of the new iPhones found under Christmas trees this year that audience is growing rapidly.

These predictions are just that — predictions — but the market issues they touch upon will affect all operators in the online adult entertainment industry in 2010 and beyond. Take these areas into account when developing your business and marketing plans and you'll have a more successful New Year.