An Industry Out of Whack

Zoltan Csesznik
Have you ever seen a market as competitive as the online adult industry? First of all, if you open your web browser, you will be literally flooded with sex for free. If you download and install DC++, or any torrent software, you will get it all for free – certainly illegally, but this doesn’t seem to be disturbing the users’ mind that much. Second, we all have to face one of the most saturated markets imaginable and we all have to fight with each other for traffic and affiliates, from day to day.

These issues in my opinion are causing the adult industry to go out of whack!

Those in the adult business for more than 10 years will remember the late 90’s, when everything was different. There were certainly less participants and far fewer services then, inxluding less content and less value added services, offered to paying members. Furthermore, the average affiliate payouts reached $20 per sale, while the subscription prices stayed the same – around 30 bucks per month.

And what is happening today? Some sites offer $75 and more in commission for a single sale; which is more than double the billed fee to the end user.

What happened? Has retention increased so much that sponsors can rebill each member three to four times? I don’t think so; the best sites often have no more than a 2-2.5 month retention rate (I’m not talking about small niches where the lack of variety results in higher retention). Then what else is involved? Have the sponsors’ payment processing fees gone under the sea? The answer is a definitive “no” for this too. Have production costs fallen? In some ways yes; but you still need a fairly big junk of cash to produce and run exclusive sites.

The fact is that the relatively big incensement in the number of paysites, which was certainly followed by stronger and stronger competition, forced us to give up more and more from our profit and/or apply tricks such as cross-sales. Once I saw a site offering three cross sales (each selected by default) with two immediate sales to two other sites and one trial, so the unaware user could easily get billed for over $120!

And where are the profits? Paying an average of $30-35 to affiliates for a sale is way too excessive and caused solely by the continuous fighting and relentless competition between paysites, which – also in my opinion – has made affiliates way too greedy.

Recently we tested a few big, free adult sites (TGP, community-based sites), to see if their advertising rates make any sense and allow us to keep at least a small profit in our pocket. I do not want to disclose the names of these sites, nor the amount of money spent. All the campaigns were carefully designed with custom creatives, considering the targeted niche, and the campaign size was large enough for accurate statistical testing. None of the campaigns turned out to be profitable on the first-sale basis.

We have to rely on rebills? Well, let’s make a small calculation: Supposing a 2.0 rebilling ratio and a $30 advertising cost per sale, we can then make a $30 profit. But don’t forget that you have to deduct the payment gateway fee, which is at least $6 for two transactions. Oh, well, a $24 profit is still nice. But think it through further; we also have the cost of the infrastructure; for example, one of our servers (including bandwidth) can serve approximately 1000 paying members with a $2000 server fee per month. So the server takes another $2 from our profit. That’s $22 now, which is still fair.

Okay, but we need fresh content too, so we want to add at least one new movie each week. The more members you have, the less this relative cost is. If you pay $2000 per scene, you will have to deal with an $8000 monthly cost just for the production, which takes another $8 from your profit, supposing 1000 rebills (remember you don’t make a dime on signups). We are now back to $14 and we still haven’t considered the manpower. At the end of the process you can keep around $4-8 from $60 in income. Actually, it’s almost better to put your money into the bank.

Lately we received an offer from a company dealing with live web cams. Their service is fairly good, because you can seamlessly integrate their webcam solution into your site and eventually squeeze out extra traffic from your paying members. But my point is that if we pour hundreds of thousands of dollars into content production, we need to make money on that, otherwise it just doesn’t make sense.

Do the above mentioned problems matter really? I firmly believe that they do, because we all have to eat. In other words, we all need to produce or buy fresh content and we all have a structure to maintain and keep alive, and last but not least, we all want to make a profit.

I don’t want to draw any conclusions here, but I think that the adult industry is getting less and less profitable for paysites which are still trying to form a long-term business model and trying to operate more or less honestly. And what sort of future will these factors result in? Your answers are welcome on the discussion thread below: