trends

The Trust Gap

Steve Javors
Mind the gap. Anyone who's ridden on New York City's subway system has seen that sign posted before they board the train. The warning refers to the small gap between the train car and the platform.

In the adult entertainment industry, "mind the gap" could refer to the trust divide between traditional production studios and Internet companies that specialize in video-on-demand, pay-per-view, online rentals, affiliate programs, membership sites and content licensing.

As the business converges and more content is brought online via the variety of online distribution methods, relationships between the two sides have begun to crystallize in a way they haven't before. The synergy is undeniable.

Mutually beneficial relationships between the web and studio sides of the biz have sprung out from all corners of Porn Valley in recent years. The stereotypically nebbishy, antisocial, shut-in webmasters that studio heads once ridiculed now represent an integral part of the production studios' business model. And the allegedly uncouth and technologically ignorant studio heads have branded lines and stars that webmasters can and have built sites around to great financial success.

"In the early days there was disdain and mistrust between both sides of the industry for a number of reasons," TheContentStore.com owner Jonathan "J$tyle$" Silverstein told XBIZ. "Initially both sides didn't think they needed one another. The web side had a lot of cocky, arrogant guys who thought they could do everything on their own, while the studio side was filled with old-school cats who didn't understand what the new generation was trying to do online.

"I think they had a fear of this emerging distribution network. Over time, both sides got to understand one another better, the walls were broken down and everyone realized how much business, and more importantly, how much money, was to be made through cooperation and mutual respect."

The latest buzzword in the adult entertainment industry is convergence. Content producers of all stripes are moving their distribution platforms online with an urgency to stem the tide of dwindling DVD sales. Production studios that rely on DVD sales for the lion's share of the company's profit are more than just feeling the crunch — they are fighting for survival.

When Wilt Chamberlain entered the National Basketball Association the league changed the rules to accommodate the Stilt's game-changing skills. So too have Porn Valley's production studios changed entire business models to capitalize on digital distribution.

"I credit the rise of Internet content distribution to the variety of ways a consumer can access adult content," Kick Ass Pictures President Mark Kulkis told XBIZ. "Whether it's a pay-per- minute deal, video-on-demand, streaming video, online rental or burn-to-own, as people become increasingly more computer savvy they will take advantage of that delivery medium. It's supply and demand in the digital age."

In many cases, adult studios had to be dragged kicking and screaming into the Internet age. Others embraced the technology early and built Internet empires from the ground up. Still others felt their wallets get lighter and heard the clarion call of the web beckon them.

After all, high-speed Internet enjoys significant market penetration, and the number of homes equipped with broadband connections grows each year. According to the Leichtman Research Group, 53 percent of all U.S. homes now subscribe to broadband access. The Organization for Economic Cooperation and Development has reported that broadband penetration in U.S. homes grew to 81.8 percent among active Internet users in April 2007. That's a lot of people who now have the capability to download porn quickly and efficiently.

More and more studios are seeing the trend toward Internet delivery, so monetizing content online has become of premier importance — especially with DVD sales down across the board. Whereas the studios once viewed the Internet as a new frontier filled with untrustworthy and unscrupulous pioneers, now that same entrepreneurial maverick spirit is being heralded.

In the DVD salesman's parlance, "moving pieces" refers to selling DVDs, which are a physical product. A plethora of these studio- to-wholesaler or studio-to- distributor relationships have been in place for years. Many salesmen for traditional production studios say that moving pieces is dependant upon the relationships they have with wholesalers, one-stops, regional distribution outlets and retailers.

Why then, have studios been slow to form alliances with webmasters and Internet-based operations? If maintaining close ties to the people buying its DVDs is of paramount importance, why should the web side be looked at, or approached, any differently?

In the initial stages, there was a language barrier. What used to be a fairly simple transaction became more jargon-filled with a techie bent: Pieces, niches and product lines becomes traffic, hits and conversions. The simple lexicon of normal business discussions was upended.

Whether it's willing eagerness, or having to be dragged kicking and screaming into the dawn of a new digital age, there is no doubt that it's becoming a do or die situation for studios to move online.

"I think of killing myself every day because I didn't invest in the smart way to put my content on the Internet," Extreme Associates President Rob Black told XBIZ. "Now I'm forced to play catch-up with big companies that have Internet divisions bigger than their production departments. Instead of spending my money wisely, like the retarded son of a bitch I am, I bought a fucking professional wrestling league. If I took those millions and invested in my own video-on-demand or streaming video program, I'd be buying Lamborghinis right now.

"A lot of the smaller studios are now in trouble because their DVDs ain't selling, and their content ain't on the net the right way, because they sold it dirt cheap to some content-licensing company for the quick buck. They're fucked."

Before we put Dr. Phil on retainer for emergency counseling sessions, let's hear from both sides about how they perceive the growing synergy between the two sectors.

"I have a lot of respect for the Internet side," Kick Ass' Kulkis said. "In a lot of ways its really two different businesses. I don't think the trust gap between the two sectors is all that wide. I think the two just operated on different planes for a while, and now that there's so much business to be done among [seemingly disparate] groups, I think we're seeing new relationships formed every day where there necessarily wasn't that access or need years ago."

Kulkis believed in the power of the Internet early on, creating his own in-house affiliate program. Kick Ass employs a full-time director of Internet operations and an affiliate manager. The Glendale, Calif.- based company recently began putting its content on the web before it reaches DVD.

In addition to the megasite KickAss.com, Kulkis created CampCutie.com, which focuses on exclusive content of never-before-shot amateurs.

For others in the adult business, the level of trust and mutual respect between the sectors that Silverstein describes was slow going. Smashbucks co-founder Mike Hawk had to prod, cajole and convince Golden Age-era studio Caballero into solidifying a deal that put many of Caballero's classics online for the first time.

"We spent more than two years working on this deal with Caballero because it was a very important deal for us," Hawk told XBIZ. "Building the trust between a massive studio such as Caballero and the online world was a harder experience than I thought."

Unlike Kick Ass Pictures, Caballero didn't have an in-house Internet department, so the partnership with the established and widely respected Smashbucks was its opportunity to get into the web game while the getting is good.

"We are a video company and the Internet is a new industry for us," Caballero President Tom Yofe said. "Instead of doing it ourselves to catch up with everybody, we partnered with the right people. So they bring their knowledge to the table, [and with] our content and knowledge, we can build a winner. Many people are looking for Caballero [online]. This company is well known in the industry. With Smashbucks' experience we can reach a lot of new fans on the Internet."

For a new generation of pornographers on the studio side, like uber web-savvy Teravision CEO Evan Seinfeld, making fast cash from Internet content sales doesn't always benefit the content producer in the long run. He implores "bigger studios" to "stand up" and protect their brands from being diluted on the web.

Sure, becoming flush with cash from the quick content sale to third-party VOD sites is nice, but Seinfeld believes in something more dearly — the integrity and branding of the Teravision name as a premium label.

According to the outspoken Seinfeld, adult studios are getting the raw end of these content deals.

"My opinion on the third-party VOD sites is that their commission scale is upside down; they are offering too low a percentage to the studios," Seinfeld told XBIZ. "I think it would behoove the VOD companies to get together and try to preserve the pricing integrity instead of cutting these deals that screw the studios. I would welcome a forum for all the large studio owners to stand together to preserve VOD price integrity and the value of top-notch adult content before it becomes devalued like the DVD market."

So while the inequity of the commission structure is clearly skewed toward the VOD operator, studios are joining because of the huge traffic numbers such sites generate, and because in the end VOD sites represent a revenue stream most studios aren't capable of exploiting on their own.

TheContentStore.com's Silverstein believes the seismic shift to online distribution is only going to grow as more studios realize that different Internet delivery platforms attract diverse audiences. The same guy who signs up for a monthly membership site isn't the same consumer who subscribes to a pay-per-minute plan or VOD rental. He encourages studios to spread their content around numerous platforms to reach different demographics.

With physical distribution, studios only can earn a finite amount. After all, one DVD is just one DVD sold for a set price. Content on the Internet doesn't have such restrictions by virtue of the platform. Once a DVD is pressed and sold, the studio's profit ends. Re-purposing that scene for a paysite could result in infinite conversions.

So where does this all leave us?

It's clear that the dawn of adult entertainment's digital age has spawned new bedfellows. Creating long-lasting partnerships based on respect, understanding and above all, trust, is dependent upon a willingness to work together. However, if you create a partnership and still can't comprehend traffic, splash pages, online billing or meta-tags, perhaps it's wise to page Dr. Phil after all.

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