An Adult Slowdown? 1

John Scura
In the U.S., there are more than 400 adult production companies, and in 2005, more than 13,600 titles were released. The number of adult websites is almost infinite. Compare these numbers to those of a decade ago, and the difference is staggering. So how is this affecting the adult entertainment business and what happens when slices of the big pie get smaller and smaller?

Easy. Individual sales are down — in some cases, way down — for both the online and offline sides of the industry.

The danger to new investors hoping to jump on the adult bandwagon is evident all over the industry, including the third-party billing field. Ron Cadwell, chief executive officer of CCBill, has seen the sad scenario repeated dozens of times, and in all facets of adult entertainment.

"It's not a good time for anyone to come into this business," he advises. "The barrier of entry is just way too high. You can't get enough volume to keep your chargebacks under control, and you don't have the databases to be able to scrub correctly. It's no different than if I wanted to become Chase Manhattan Bank. Where do I start? I see guys open a paysite. They don't really have any original content. They have no real capital behind them. They think their day can be spent on GFY, talking trash to people and that's somehow going to make their program do something. They go nowhere. They fold."

Jason Tucker, president of Falcon Enterprises, sees the danger to new businesses as being even greater in the offline market.

"A new company is going to run into some problems," he points out. "Our industry is a very tightly knit group, and it's become tighter in the last two years. There has been a major consolidation of relationships, and the result of that has been the consolidation of traffic that would have otherwise been available to newcomers.

Tucker says surviving in today's marketplace is analogous to making a mainstream Hollywood movie.

"You may have the money to make your movie, but it always comes down to distribution," he says. "Distribution is king. In our business, the major distributors rely on the known studios for the bulk of their product. There are a lot of little, stupid titles that are coming out on the market now, and they're not doing well. To me, it means people don't want that product."

It's clear from the reduced unit sales figures each company experiences now that the effects of runaway competition have fallen hardest on the DVD market. And while it's become a matter of life or death to the new producers, the bigger, established companies are suffering, too.

"It's definitely dropping," admits Luke Ford, author and one of the few people who has done statistical research on the adult industry. "You'll have the occasional 'Evil Angel,' release, which averages about 5,000 units in initial sales, but on median average, it's probably below 1,000 units per release. Five years ago, companies could expect about 2,000 units sold per release. Because there are more and more people coming into the industry and setting up production companies, the total sales figures have remained stable, but the pie keeps getting sliced smaller for each producer."

Many industry watchers also agree that the online side of the business is suffering too. Since the golden years of the mid-1990s, when many of today's most successful adult companies were founded, it's gotten tougher and tougher to earn a living online.

"There's just so much free porn available that fewer people are willing to pay for it," Ford says. "Ten or so years ago, consumers weren't as educated and there wasn't as much free product around. Consumers hadn't been burned as much by fraudulent websites that would get your credit card and start billing it at rates you had not agreed upon. There aren't as many of these newbies anymore."

The Newbies
There may not be as many newbie consumers, but there are a plethora of newbie production houses and websites, all fueled by the hope of tapping into an adult El Dorado. But like the El Dorado of the conquistadores, the pot of gold at the end of today's adult rainbow is proving to be just as mythical.

"My advice to anybody looking to come into the adult movie business from a production standpoint is... don't," says Jeff Mullen, president of All Media Play. "Competition for shelf space in DVD retail is at an all-time high, and the consumer is getting ripped off by inferior product. The public is easily fooled by new companies that are springing up left and right. The big boys stay around because they have a reputation for putting out quality product."

But are the "big boys" really skating in this new, saturated marketplace? Despite claims to the contrary, there are concrete signs that the major producers and distributors are feeling the crunch, too.

"Some major gonzo companies have ceased production over the last 90 days," says Lexington Steele, president and owner of Mercenary Pictures. "One major, major company put all production on hold for the summer months, causing the loss of a couple of directors who exited that company based on that. A major company putting production on hold is hard evidence that there's a problem. Whenever a company that does eight to 10 releases a month ceases production, it's got to be based on financial health."

The Survival Game
For some companies, the issue has boiled down to survival, and how best to stay in the game without losing an eye on future financial health. In some cases, that means changing business direction — all because the competition has become too intense.

"I've been in the web business since 1995," says Greg Dumas, president of GET Media, "and in the last couple of years, we've transitioned from buying traffic business to the selling of traffic business. We marketed websites for many years, and that was our niche. But we looked at the market and realized there is so much out there, it was getting harder to compete. Some were marketing from Budapest with no expenses, and others were in Manila with 40 people cranking out galleries. It's because of this glut in the market that we decided to focus on new avenues. There is a huge glut in the market of content, product, marketing niches — all those things combined. It impacted us to such a degree that we shifted gears."

Surprisingly, in the face of all the evidence to the contrary, there are still those who paint a rosy picture of the financial prospects of adult companies. They point to the fact that the appetite for adult material is more voracious than ever, which is certainly true. However, some of these optimists choose to ignore the astronomical increase in companies and outlets feeding that appetite, especially over the past decade.

"People who try to paint a rosy picture about this are just cutting their own throats," Mullen insists. "They're just inviting new competitors. I get calls once a week from investors who say they want to get into the adult industry and ask me for advice on how to start. I always tell them, 'Don't do it. We don't need you.' I personally think it's suicide for any new people to attempt to come into this business as a producer of adult content. They might as well flush their money down the toilet. Everybody is being hurt by the glut. When a major company calls out for their sales draws, their piece numbers are being dropped. Their overall numbers are being dropped. For instance, 'Britney Rears' is set to come out and, instead of a little store in Dubuque, Iowa, ordering 20 copies, they might order just four copies. It's because they have already bought so many other titles, and they just can't buy any more than that."

Steele, who frequently compares notes with other DVD producers, sees the same picture from where he sits, and he doesn't like what he's hearing.

"It's been a pervasive point of discussion throughout the summer," he admits. "You have 1,500 brand-new titles hitting the market every month, and there is a myriad of companies that are established or seeking to become established. There's just not enough shelf space, so there are companies that are willing to discount their prices to well below the standard market price in an attempt to gain shelf space. The problem this creates for those who've earned their market price is that they're competing with those companies willing to undersell them."

Mullen agrees.

"The DVD makers are the ones most affected by this preponderance of product," he says. "And so are the traditional retailers. Whenever somebody releases a DVD and offers it on video-on-demand at the same time, they're basically screwing the retailers. This has also hurt the sales of DVDs."

Part of the problem in DVD sales is that the Internet has become a direct competitor. As the number of people with Internet access has skyrocketed over the past five years, the easy availability of adult content online has kept pace — to the detriment of DVD sales. As CCBill's Cadwell points out, "Why would you go to an adult book store and pay $40 for a DVD if you can just download it on your computer?"

In many ways, Mullen calls the Internet age a double-edged sword.

"There are now more ways to deliver porn than ever before," he says, "and that's a problem. The bigger players have the ability to send out content in a variety of ways, and so do the small players. In my opinion, there is a chance of some big players going belly up because of this. I still think the bigger companies are in it for the long haul, but some of the midlevel companies that have names could disappear in the next year. Most people running these adult companies are intelligent people who could very easily be running companies in other businesses. Once their adult market starts going down and they see they're only making X amount of points on each dollar they invest, they might go into something else."

Of course, the online adult industry isn't immune from the effects of heightened competition, either. A medium that has been "new business friendly" for years also is starting to sort itself out as the bigger fish gobble up the smaller ones.

In part two, we'll look at getting comfortable, building a better mousetrap, creativity and beyond.