The porn industry has become enamored with its own size, with dubious estimates exceeding $12 billion. Underlying this market, though, is a fractured landscape with limited transparency caused by a dearth of publicly traded companies, and small businesses (companies with less than $10 million in annual revenues) that hold a large number of minuscule slices of market share. The 13 companies for which revenue estimates are available comprise 9.4 percent of the market, with aggregate revenues of $1.13 billion. That leaves nearly $11 billion in the hands of small production companies, independently operating webmasters, and small retailers who compete for slightly more than 90 percent of the market.
This fragmentation has resulted in a gap between company prominence (i.e. brand) and financial productivity (i.e. revenue).
Brand is difficult to quantify. By definition, it is comprised of intangibles, ranging form production quality to operational efficiency. Brand is what a company has or does that fosters interest and ultimately commitment from consumers. A strong brand typically implies an advantage in the marketplace — an advantage that should translate to financial gain.
The root cause of the brand-revenue gap in adult entertainment is operational effectiveness. While the industry's larger participants have platforms for growth through brand prominence, they have not scaled their operations to capitalize on the opportunities afforded by the growing consumer market for adult content. Quite simply, this is a go-to-market problem, in which flawed strategies are constraining growth that could occur naturally.
The fundamental problem in porn operations is a flawed strategy that relies almost exclusively on new titles to generate revenue growth. New product launch is the lingua franca of porn strategy. When in doubt, add more titles to store shelves as a way to increase consumer spending while crowding competitors out of the market. Despite salient adoption, this approach has yielded results that will prove disastrous over the next five years.
The fact that adult content companies are generating fewer dollars per title obviously puts pressure on top-line revenue as returns diminish.
Behind the diminishing top-line revenue returns on new titles is a resulting pressure on margins. Profit per film, as well as revenue per film, will suffer at a faster rate than revenue per film, which in the extreme could jeopardize the entire operation. The diminishing returns associated with a deluge of new titles indicate that a fundamentally different strategy is necessary in order to help porn companies actually generate more revenue.
(Unlikely) Alternative
The alternative is as risky as it is unlikely. Reducing new title development in favor of more aggressive marketing plans for higher value titles actually could lead to higher revenue and wider margins. The risk is obvious. A reduction in new titles released could cause the fewer remaining films to become crowded from store shelves and lost among countless competitors in online venues. But, pursued carefully, reducing the number of titles released every year could have a positive effect on increasing sales.
The goal in this situation isn't necessarily to spend less money. Instead, the studio should spend money differently. With fewer titles published, this strategy calls for a change in marketing strategy. Dated operational models favor middlemen and put content providers at the mercy of the entire supply chain. While little can be done about downstream relationships (e.g. distributors and retailers), there is no reason why the production company cannot own the relationship with the consumer.
As a result of adult's supply chain and reverence for "tradition" (also known as an unwillingness to change), in-store marketing remains the centerpiece of the retail transaction, a more innovative approach would put the particular film — or at least the studio's overall brand — at the front of the customer's mind before he even enters the store (be it physical or virtual).
This means that the primary marketing effort should be removed from the point of sale and reinforced through online and in-home marketing channels. With this approach, the purchase is influenced long before the customer enters the store or logs onto a website. Indecisive consumers at least will be drawn to the studio's brand, limiting the number of titles considered and increasing the studio's likelihood of winning his or her business.
Closing the Gap
While downstream market factors, such as relationships with distributors and retailers, are largely beyond the control of the production company, how they go to market strategically is not. A shift from point-of-sale advertising to influencing consumer demand prior even to the decision to purchase a film can increase both an individual company's market share and the size of the total market. Managed properly, reshaping the adult-content market through a reduction in titles and a more expansive marketing effort could result in outsized growth, as the company that expands the market by attracting new customers is most likely to own the largest share of that new customer's wallet.
The gap between revenue generated in reality and revenue potential based on the strength of the brand should be easy to close. Brand strength implies that a platform exists for revenue growth, making the problem one of execution. Instead of focusing on increased production, adult content companies need to revisit the strategies that have governed this market from its modernization in the 1990s.
We are past the point of new titles driving market and company growth. That may seem attractive in the short run, but it will lead to losses over a few years.
Adult content providers need to use the brand. Major studios have attained high levels of credibility with consumers, but they follow the market in pursuing growth through the release of more and more films.
Alternatively, these studios could use the power of their brands to sell more of their existing films. Pairing brand strength with rejuvenated marketing budgets is a powerful way to own the consumer from decision to purchase to repeat viewings of a particular film. Don't own space on shelves; own the consumer instead.
