Perfect storm changes course of adult film industry

© Icqurimage 2009


Not so many moons ago it was widely held that the adult industry was essentially resistant to recession. Although designer handbags, high performance cars and five star travel serve as canaries in the economic coal mine, the demand for essential commodities such as food, fuel and sex is predicted to be relatively unscathed by a bear market. Certainly sales of groceries and gas have remained buoyant, although a deteriorating credit market and reduced spending have conspired with a rising Internet culture of free adult content and piracy to create a perfect storm for the adult film industry.
Even the conservative Los Angeles County Economic Development Corporation has estimated that the (declared) revenues of the US adult film entertainment industry, based in Chatsworth, California , are worth in excess of $12.6bn to the regional economy. The importance of the revenues which the adult industry brings to the Californian economy in the form of tax, tourism and trade cannot be understated, especially when other labor markets are in deep decline. At times like these it would seem that high morals are a privilege of affluence, as during a global depression the adult industry becomes a valuable economic player. As though to emphasize this point, both Larry Flynt, founder of the Hustler Empire, and Joe Francis, creator of 'Girls Gone Wild', have travelled to Washington to request a $5 billion bailout for the adult industry from the Congressional TARP fund. While this may be widely regarded as a publicity ploy, it nonetheless does make a valid point about the importance of the adult industry to the US economy. Meanwhile in Las Vegas, legislators are so desperate to reverse the downward trend in tourism, triggered by the recession and President Obama's cautionary tone on the use of public tax dollars, that they are even debating whether to formally legalize prostitution within the city's strip clubs and casinos.
Intuitively one might imagine that public spending behaves much like a glacier on a slope, in that there are bands of expenditure that will slide up and down the incline depending upon whether the ice sheet is actively expanding or contracting. For example, let us suppose that there is a deep recession and that household disposable incomes fall on average by 30%. People who frequented the theatre or the opera may now prefer to 'downsize' to the cinema, groups which previously visited the cinema now elect to share a DVD, while those who usually rented DVDs now have to be content to entertain themselves with the television or the Internet. Thus an entertainment market, in this case the cinema, loses and gains social bands as disposable incomes fall or rise. In theory this should also apply to the adult industry in a downturn, as those who used to buy high quality DVDs downsize to cable subscriptions, those who cancel subscriptions turn to rentals, and so forth. In the case of the adult industry, this logic has not prevailed due to the collision of a number of factors.
The tidal wave of free content on the Internet has overwhelmed the adult industry, while clandestine piracy networks have caused it to haemorrhage vast sums. Those who traditionally paid for adult content have abandoned 'hard copy' adult media for the cultural freedoms and flexibility of the Internet. When those who surf for online adult entertainment eventually make a purchase, perhaps seduced by the abundance of free clips provided by a new generation of production companies like 'Brazzers' or 'Bangbros', they are able to access vast catalogues of adult material for less than $25 a month. Instant gratification is now available online without the costs of driving to an adult store to purchase DVDs or waiting for purchases to arrive by mail. As these new production companies pare back their operating costs and focus upon the wholesale distribution of individual scenes featuring popular adult actresses, they are able to amass vast digital libraries and generate substantial revenue streams from large numbers of individual subscribers. This simplified approach has challenged the established business model of successful production studios such as Digital Playground, Vivid and Wicked Pictures, forcing many adult content producers to follow suit and focus upon subscription-based Internet models rather than the 'traditional' sale of DVDs, syndication rights and lavish promotions.
This radical market shift from hard products like DVDs and magazines to digital subscriptions and downloads has challenged the industry's vested interests. Many have reported expanding their web divisions while downsizing both film production staff levels and expenditure. Even this polarizing solution has become problematic during the current economic climate as collapsing credit markets directly impact upon Internet sales. There have also been profound changes in consumer tastes, as earthier genres, dominated by 'reality', amateur and gonzo productions, erode the market share and profitability of companies which made their fortunes from glossy 'adult fantasy' productions. Even providers of adult cable networks have suffered from the economic downturn as hotel room sales fall and cost conscious households cancel their subscriptions. It was said that even during the Great Depression of the 1930s, the movie industry remained an affordable dream time in which most Americans could momentarily forget their troubles. It is perhaps ironic that the very Internet medium which turned the nascent adult film industry into a global economic phenomenon ultimately became its nemesis as a vast clearing house of free and pirated material.
Samantha Lewis, CEO of Digital Playground, recently claimed that her company was losing between 150,000 and 200,000 downloads per day as a result of piracy. Digital Playground and Vivid are currently leading the fight against digital piracy on the Internet, with the likelihood of class action law suits being filed in the near future. Despite employing high level security codes in an attempt to thwart the IP raiders, recent reports suggest that the pirates have succeeded in routinely cracking the upgraded Blu-Ray and Windows DRM encryptions. Media piracy naturally impacts low cost production companies, whose business models focus upon subscriptions and the streaming of individual scenes, far less than it does the big budget production studios which spend vast sums upon features, glossy packaging and encryption technologies. The new digital tigers such as BangBros and Brazzers have little to fear from pirates when they effectively offer access to vast content libraries for less than 2¢ per download. The cost of deciphering, copying and uploading such content would leave no effective margin to make piracy a gainful activity.
The prevailing mood was somber amongst delegates at a recent Adult Expo in Las Vegas, with 20% fewer companies attending this popular adult film and technology convention. As omens go this is not encouraging, especially in light of the recent spate of prosecutions filed by the recent Bush administration against adult film companies. On the other side of the convention center however there were more encouraging portents for the adult industry, notably a buzz of excitement surrounding the new generation of mobile platforms set to 'hit' the market. Faster processing speeds, greater memory capacity, and improved wireless bandwidths mean that the adult industry has a new primary platform and a vast new prospective audience. Mobile downloads and SMS billing appear to be the shining future of adult entertainment.
Paul Fishbein of AVN, the industry's leading business news publication and awards show, now believes that the adult industry is entering its first recession in the four decades of its history. Across the board, all adult companies are reporting a 20 to 30% decline in sales, in line with the general economy. The prevalence of free adult content on the Internet, and a surfeit of over 13,000 new adult titles released in 2008, have left too many content producers flooding a contracting market. This is not to say that the actual consumption of adult content has declined, merely the capacity and willing of the end user to pay for it. According to Hustler's President Larry Flynt, there was a 22% fall in DVD sales in 2008, continuing a trend in which adult industry revenues have fallen on average by 15% year-on-year since 2005, pre-dating the present recession and serving as a harbinger of job losses to come.
'Girls Gone Wild', a popular 'soft-core' brand, has not escaped the pincer-like grip of the recession and online piracy. PornTube and other online video clearing houses are to the 21st Century adult industry what Napster was to the music industry in the late nineties, slashing its profits and capturing much of its traffic. Even leading adult film studios such as Vivid, which depend upon high quality productions and established stars, are changing tack in favor of subscription models to remedy to the 20-30% year-on-year fall in DVD sales. Steven Hirsch, CEO of Vivid, is rumoured to be turning his attentions towards emerging technologies on cell phones and pdas to recoup lost revenues from the free falling DVD market. Neither Vivid, nor Girls Gone Wild are anticipating redundancies within the near future, although they may have to consider trimming their production costs in order to maintain their profitability.
Even Playboy, iconic flagship of the adult glamour industry, has recently hit the rocks. Stocks in Playboy Enterprises fell by almost 80% over the past year, even before the announcement of an 18.7% decline in 4th quarter sales which contributed to an annual operating loss of $156 million. This means that Playboy's annual revenues of $292 million were only 65% of its operating costs. Analysts have blamed declining advertising budgets and falling magazine subscription rates, on top of the write-downs incurred from television channels acquired during the 1990s. After reporting losses for six of the past ten years, the company decided to lay off eighty employees last October when it closed its New York office. This was followed in January of this year by the departure of CEO Christie Hefner, who was given a $2m golden handshake. Although there are rumours that the Playboy brand is up for sale, it is hard to imagine that there are buyers in the current market with the liquidity to meet Mr. Hefner's likely asking price of over $2bn.
We will however leave the divination of the industry's future to someone who has experienced the dawn, the dizzying heights, and the recent decline of the adult industry:
'The industry, as most people know it, will be gone in 5 years. The future is in immediate content delivery, in high definition directly to the consumer. Porn production will continue to decrease and as a result more 'stars' will rise, unlike the current situation where any model who has shot more than once calls herself a porn star. I also expect the consumer to move towards more sophisticated erotica, movies with real scripts, plots and character arcs. Real directors, dialogue coaches and script doctors will merge erotica into entertainment.' Mike South
www.mikesouth.com
So the adult industry has been hit by a perfect storm surge of free online content, piracy, a global economic downturn and rapidly changing consumer tastes. If is to avoid the fate of the Spanish empire which suffered a similar malaise centuries ago, it must radically change course, address a highly fragmented market, and move from digital hard copy towards the Internet and VOD subscription models. Given the prevalence of online adult material, production costs will have to fall and the essential unit of adult cinema production will change from the film to the individual 'scene', as dwindling attention spans and diminishing patience for downloads on mobile devices reinforces the growing 'clip culture'. Yet if the industry has shown anything over the past thirty years, it is that is highly resilient, innovative and quick to sense a change in the prevailing wind. The five year forecast is that only mass content providers and 'high end' content studios will survive the downturn as viable businesses. Costs will be down, profits will be up, and the number of highly paid starlets that the industry can afford to support will fall. Leading studios will focus upon producing blockbusters with stars as famous as any that Hollywood have to offer, although the majority of producers will be focusing upon more earthly fare for a mass market that will no longer support the industry's once generous production costs. One thing though is for sure, that human nature is here to stay and so is the adult film industry...