Brand Power

John Stuart
Just a few years ago, the Penthouse empire went through bankruptcy. While new ownership and new staffers picked through the detritus of bad management, they hit upon an unexpected gemstone.

Penthouse still had the name.

Armed with this, a new empire is under construction, and the licensing of its brand name is one of the dynamics of this rebirth. Already, the company has put its name on a line of shoes, casual clothes and a variety of other main stream items, the sales of which are fueling a remarkable comeback.

"In the early part of this year," says Mark Rudolph, president of licensing at Penthouse, "we did some consumer and trade research and met with a lot of licensing companies — both licensors and licensees — in a variety of categories. Based on the research and the market feedback, we've been able to locate where there is likely to be the most immediate value for licensing of Penthouse brand."

Rudolph, like many others, has learned that today there is a surprisingly strong mainstream market for adult brand names.

"For certain adult brands that can move into the mainstream," he adds, "it appears as if there's a lot of potential right now because of the way the public is becoming more accepting. I mean, Jenna Jameson is a mainstream brand. Penthouse is also a mainstream brand. We should go forward and expand that mainstream positioning."

"There is no end," insists Theresa Flynt, vice president of licensing at Hustler. "Currently we license Hustler magazine in print to various countries. We also have a sex toy license, a jewelry license, a lingerie license and clothing for strip clubs. We also have a bar and grill license, where somebody who opens a bar and grill can use our name.

Unlimited Potential
"The power of having a brand is that you can put your brand on different things and they're going to sell. So it's unlimited. We could do a Hustler energy drink. It could be anything."

The licensing of adult products into the formerly off-limits mainstream market is strikingly evident in the new business forays of Arrow Productions. One of the oldest production companies in adult entertainment (Arrow made and released "Deep Throat" in 1972), it is currently licensing images from its classic movie collection on a variety of items. And they're selling.

"We have a costume company manufacturing Linda Lovelace nursing outfits," reveals Paul Interlandi, head of production at Arrow. "Same thing goes for a number of our titles. We license costumes, T-shirts and other things that are in the works right now. We're probably the ground-breakers on licensing, at least for movies. We're probably the only ones who successfully license titles and movies."

The Arrow movie collection, which includes "Debbie Does Dallas," "Candy Stripers," and "The Devil and Miss Jones" to name a few, is augmented by the poster art, which is suddenly in demand as a hip image on everything from T-shirts to framed posters.

"We're actually thinking of opening a licensing brokerage company," adds Interlandi, "because we're opening so many doors with so many different product lines right now. We have posters from the movie house displays that can be marketed on T-shirts or be shown on the wall of a record store as a poster for sale. We have a lot of stuff that wouldn't be offensive to people and it's retro-art, which is sort of cool now. You'd be surprised at what companies think at attaching their product to our titles to help them market the product.

"It's just another revenue stream for our company. This year we might make more money on licensing than we did on selling movies."

To further stress that point, Interlandi said that it just struck a licensing deal for video game versions of "Deep Throat" and "Debbie Does Dallas" with Solark LLC.

Some companies, like Vivid, don't see licensing as a revenue stream at all, however.

According to Vivid's vice president of production, Marci Hirsch, the company is more interested in building up its name. In addition to putting the Vivid logo on T-shirts, it also has licensed shirts that say, "Everything I Learned, I Learned from Vivid," and "I Watch for the Dialogue."

"It's really important for us to get our brand out there," she says. "If we make money on it, that's a bonus. But for us, it's about the image that we want to project for the company."

The average licensing arrangement is very basic, and when it's done right, everyone makes money. It's simply a case of giving your brand name or your product to someone who is in a better position to manufacture and distribute it. In return, the licensor receives a royalty, usually 6-12 percent of sales.

Theresa Flynt of Hustler provides an interesting example of how it works.

"We've had a sex toy license with TopCo for 10 years," she points out. "It wouldn't make sense for us to get into the business of making sex toys because we don't own the factories or have the distribution outlets. So they pay us a royalty to use our name because one company can't be everywhere and everything. They're making money off our brand name, and we're making money in royalties."

Although there are general levels of royalty rates that apply across the board, there are also times when it's better to be pliant and make each deal individually. That's how Rudolph handles licensing at Penthouse.

"You need to find out whether the licensee has confidence that they will be able to do the business they project for you," he says. "So it's by agreeing to a minimum payment by a monthly, quarterly or annual basis. That minimum is the ultimate test in how much confidence you have in the amount of business that you say you can do for the licensor. There's a process in arriving at that number, so that it's reasonable and sustainable. There are parameters. We don't start from scratch. The numbers themselves will be different, but the spreadsheet is the same."

Dependable Licensees
Of course, choosing a dependable licensee is vital to the process. It's obvious that some make promises they don't keep, so a good deal of work has to be done up-front before any deals occur. "We do our best to research them on the market," Rudolph explains.

"Then we go through a mating dance and get to know one another. We want to make sure that we both have a similar realistic idea of what the market potential is. We talk to distributors and make sure these are reputable companies. We look at what their ideas are and make sure they are talented creatively, that they have good distributor relationships and that their sales are growing. We also want to make sure they're doing well with other licensors.

"So it's a selective process that takes a little bit of time. But if you take that time, you'll enter into really solid deals that should perform well."

Adds Flynt: "You have to be diligent, and you have to make sure they're legitimate and that they can get it done. You also want to make sure they uphold the quality of our brand and do things the way we would. You have to make sure they are going to make quality stuff and that they are going to pay on time."

Protecting the brand name is the main worry in licensing arrangements, owing to the inevitable loss of at least some control.

"What if they make something you don't like and your name is on it?" Flynt poses. "You have to make sure you retain your creative control in the agreement. We make sure in our agreements that we get the final say on art design. We've been kind of lucky, but I know it could happen."

"There were a couple of deals in place when I came in which I don't think were done particularly well," Rudolph remembers, "and we let them expire. The licensor/licensee relationship is two-way. You need strong communication both ways. You have to know your market, you've got to have a good distribution base, and you have to listen to your customer.

"Our responsibility is to make sure we give good direction to how to use and protect the brand and that we support that brand in all our activities," he adds. "It's the licensee's responsibility to make sure that brand is applied to the right product and distributed through the right channels, so that it's not only consistent with the brand, but it grows the presence of that brand."

Once all of this is accomplished, the next step is pinpointing the target markets. Some licensors take a shotgun approach, spreading the brand name to a variety of places. Others behave more like a sharpshooter and zero in on specific niches. But in all cases, the best targets are youth and the mid-range stores, where most of the population does its shopping.

And who does it best? In the arena of adult licensing, all heads nod toward Playboy.

"I think Christy [Hefner] has done a good job protecting the Playboy brand," says Rudolph, a former Playboy executive. "It has a broad presence globally. They've done an excellent job of buffing the brand and keeping it top of mind. Playboy has many components. It's got the mansion. It's got Hef, the Playmates, the magazine. There are many facets to the Playboy brand and that helps them in licensing.

"Penthouse has some of those facets, but we're growing. Every time we expand upon the licensing presence, we add a facet to the Penthouse brand," he says.

And in the process, they're making the bankruptcy episode a distant memory.