(the net's dirty little secret)

Online unit drives Playboy resurgence
Sex sites emerge as survivors of Internet boom and bust
National Post, May 8, 2003

Through boom and bust, one darkened corner of the Internet continues to make money, proving the old adage that sex sells. Dominated by smaller, private firms which sell products or services on the Web, size and profitability of the cybersex trade has always been difficult to measure.

However, Playboy Enterprises Inc. yesterday provided a rare peep into the shadowy business. The Chicago-based company's online unit reported its first quarter in the black as it doubled subscriber revenue to US$4-million. The online success helped Playboy report a US$632,000 first-quarter profit after 16 straight quarterly losses. "It underscores our expectations that the [online] business will report an operating profit for the full year, compared to an US$8.9-million operating loss in 2002," said Christie Hefner, Playboy's chairman and chief executive.

One of the tamer providers of adult fare over the Net, Playboy is following a well-worn path. "That area of the Internet has been making money for a long time, it is just more acceptable to talk about it now," said Rick Broadhead, a Toronto Internet consultant. "It was the Internet's dirty little secret."

Since the dot-com bubble burst, the "virtual red-light district" of the Internet has lured hundreds of veterans from more respectable, though unprofitable, neighbourhoods. Those joining the naughty side of the Net include formerly high-profile dot-com executives looking for steady paycheques, Business Week reported this week. Online operators like Playboy are providing more than a safe haven for workers, however.

"Now other businesses actually look to sites like Playboy and others like it for guidance on how to create a business model like that and make it worth," Mr. Broadhead said. "Rather than scorning these sites we should actually use them for inspiration."

Unlike famous flameouts such as selling pet food and furniture and groceries over the Internet, selling titillation has the advantage of offering a borderless product and requiring little or no inventory to warehouse and ship, the analyst said.

Playboy does sell licensed merchandise from its Web site, accounting for US$3.9-million last quarter, but the fastest-growing part of Hugh Hefner's empire is selling online subscriptions. That part of the business doubled to US$4.1-million in the quarter, while the subscribers to its multi-tiered online services grew just 34% to 160,000."At the same time that we are obviously growing the subscriber base we are upselling, selling [services] at a higher cost, and realizing that people are paying for it."

The sex industry, and sin generally, has proven to be recession proof. One of the few profitable areas on the Internet along with gambling, "sex" has long been the most popular online search term. Much of the sex industry, which includes videos, Web sites, phone sex, adult toys and the old-fashioned magazine, is based in the San Fernando Valley, nicknamed "San Pornando Valley" by those who toil there.

Revenue from the area of unmarked warehouses, walled estates and hidden studios is estimated to be anywhere from US$4-billion to US$10-billion annually. "The adult industry doesn't follow the same ups and downs that other businesses do," said Paul Fishbein, publisher of Adult Video News, the trade paper of the adult industry.