Where Do We Go From Here?

Stephen Yagielowicz
Today I'd like to talk about “opportunity” — and to try and answer a question on the minds of many players in the online adult entertainment industry: “Where do we go from here?”

As this is an evolutionary issue that demands periodic revisiting in order to keep business plans current, I thought that with Phoenix being only a week away, a look back at my observations from this year's Adult Entertainment Expo and Internext Expo shows in Las Vegas, would provide a valuable base for comparison with the scene about to unfold in the desert. Things change quickly in this industry, yet these observations are only three months old, and I'd like to share them with you in the hopes that they — along with any changes on tap in Phoenix — will guide your decision making over the next year and beyond...

The first impression I had of Internext this year was that “the party’s over.” I would characterize the show floor as a ghost town, where one almost expected tumbleweeds to blow by to the tune of coyote howls in the distance. A far cry from its heyday, nearly every exhibitor I spoke with expressed disappointment in both the turnout of attendees and the business that was done at Internext. As the owner of a major affiliate program told me, “the money’s gone, and you see it reflected here.”

Indeed, many industry powerhouses who once had show-stopping booths were nowhere to be seen; and while in some cases this is due to politics, in most cases it is simply the result of a basic financial decision that the return did not justify the investment.

Also noticeably absent were the throngs of smaller exhibitors. As a case in point, in year’s past, you could find any number of content providers, many of whom had catalogs of still images and screen shots of video clips. If you wanted to purchase some new sets, you could pick and choose and they would burn a CD for you on the spot — giving you exactly what you wanted at an unbeatable price. This year, the only content providers that I saw were the larger companies offering video-on-demand services, including paysite feeds and pay-per-view movies.

This movement away from photo content is not limited to the Internet, however. I spoke to one talented and highly experienced photographer who lamented the fact that the magazine market is dead. “I have a ton of excellent images, but I just can’t sell them,” he said. He, along with others like him, were at the show seeking an outlet for high-quality (yet decidedly "vintage") photo content.

Beyond the economic pressures induced by a dwindling market, legal uncertainty may also play a part in the absence of some content providers (as well as some sponsors), many of whom have had to close their doors over the recent 2257 record keeping upheavals.

While there will always be a market for erotic photography, it’s clear that this segment of the industry is suffering, and how the players in this segment deal with these changing times can provide a foreshadowing of what can be expected for other market segments in the future, as economic, legal, technological and political pressures all continue to reshape the world of online adult entertainment.

Consider that if the very foundation of the industry — the providers of the content that we resell to consumers — is in trouble; then how will those businesses based on them fare?

There have long been rumblings and rumors over the demise of both traditional paysites as well as the affiliate programs that they are both based on, and feed. Consumers are showing an increasing reluctance to join membership-based adult websites, with major factors being disappointment over previous membership experiences as well as the insane amount of free porn readily available at thousands of TGP/MGP sites. There’s an old saying that easily applies here: “Why buy the cow when the milk is free?”

Serious legal pressures over affiliate liability as well as economic pressures over making unrealistic payouts are taking their toll on the affiliate model as well. While traffic from affiliates is the backbone of many paysites’ revenue streams, a single judgment over a Can-Spam Act violation or other legal transgression by an affiliate can ruin a company. This is leading to limited membership or “invitation only” affiliate programs where only “known” operators are allowed to participate. The evolution of this process will force many smaller affiliates (and affiliate programs) to conclude that it’s no longer worthwhile to be in this business.

This doesn’t necessarily mean that these folks will quit adult. Many will in fact conclude that since they control the traffic, they should also control the revenue streams, and thus launch paysites of their own. This would make a double hit on existing programs by not only decreasing their traffic supply but also increasing their competition.

In the face of all of these issues and more, it’s no wonder then that many are asking themselves “Where do we go from here?” Given the relative “geekiness” of many of those in the industry, it’s no surprise that technological panaceas to the problem are the ones most likely to be sought.

Indeed, from mobile applications such as content for cellphones, PSPs and Video iPods to on-demand applications such as pay-per-minute (or per image or per video clip) sites, adult marketers are scrambling to find “the next big thing.” I believe, however, that until the advent of truly realistic, fully immersive virtual reality porn arrives, that there will be no “next big thing.” Instead, the focus should be on solidifying and consolidating existing business models.

I will point to the examples I saw on the AEE show floor. Unlike the relatively dismal scene on the Internext floor, AEE was alive and bursting with energy. If hard times have been hurting the video side of the business, it wasn’t apparent here. What was apparent, however, was the desire of many Internet-based companies to move into this market, as some well known websites that feature exclusive content were exhibiting there in hopes of finding outlets for their content on DVD. While traditional video companies have all realized the importance of the Internet as a distribution outlet, the migration at this point seems to be predominantly one-way.

This then is where I see the industry heading: Consolidation and attrition will continue to take its toll on the little guy, leaving fewer but larger and stronger companies in its wake. The companies that succeed will not be exclusively focused on one arena or another, but will become true “adult industry” powerhouses, creating their own in-house acquisition and distribution chains. This will allow them to develop exclusive content that can be delivered across multiple platforms, both on and offline, as well as provide the traffic base needed to market it — without the need for affiliates — at least in the current sense.

If you only provide one piece of the puzzle, perhaps it’s time to diversify, form strategic partnerships and expand your operation to include as many of the ingredients to success as you can. This can be as simple as shooting your own content, building your own paysite and starting a TGP to feed traffic to it. Upsell your members on the DVD and offer content for download to their favorite mobile device as well, and for customers who don’t want to purchase a membership to your website, make your content offerings available ala carte as well as by the minute. The more successful companies will scale this process accordingly, adding content types and distribution channels as needed.

In the end, this might spell the demise of the one-man shop that the online adult industry was largely built upon, but given the political, economic and legal realities of 2006, where else can we go from here?