April 9, 2001

New Economy: Even in Downturn, Sex Still Sells

By JOHN SCHWARTZ

With the dark clouds of hard times filling the skies, many high-technology companies are cutting back and hunkering down. But some brave entrepreneurs are continuing to innovate. Take Duocash, a New York company that is pursuing one of the fondest longtime dreams of technology entrepreneurs and privacy advocates alike: anonymous, secure payments over the Internet.

One of the biggest stumbling blocks for such systems so far has been to come up with a form of online cash that businesses and customers will actually use. Duocash has found a way around the problem - it uses prepaid telephone long-distance cards, a system already in widespread use.

And what was the first Web company to sign up with Duocash? Entertainment Network Inc., which runs thousands of so-called "adult" sites. The company, based in Florida, made headlines a couple of years ago by introducing "Voyeur Dorm," a Web precursor to reality television programs like "Survivor" and "Big Brother."

The interest of an adult-entertainment company should come as no surprise, according to Bruce Fancher, the vice president for marketing at Duocash. "They're always the first," he said. "This industry has led the market in new technologies."

There aren't many industries that can call themselves recession-proof, but pornography companies can make the argument more credibly than most. Over all, X-rated Web sites continue to grow, according to figures tallied by analysts at Jupiter Media Metrix.

The number of individual visitors at such sites grew more than 27 percent from December 1999 to February this year - to nearly 28 million from 22 million. In the same period, retail sites measured by Jupiter Media Metrix showed growth of less than half that rate, edging up to 55 million from nearly 49 million.

And the adult-content companies have profit margins that their owners cheerfully acknowledge are obscene. Though not being too specific, Gerard Vanderleun, director of the online site for Penthouse magazine and vice president for Internet ventures at the parent company, General Media, says that the Web sites' profit margins "would be well above 50 percent and well below 200 percent."

Or, as Entertainment Network's founder, David Marshlack, put it, "It's almost like I owned a bank and was printing my own money."

One reason the online fleshpots can weather recession is that they don't depend on income from what has become one of the biggest problem areas for other kinds of sites. "We don't rely on advertising," said Bill Asher, who heads the Vivid Entertainment Group, a company that produces X- rated videos and owns a cable channel and Web sites. Like many of the adult-content producers, Vivid Entertainment's Web sites charge a subscription fee.

Of course, no company is totally immune to the business cycle, Mr. Vanderleun of General Media acknowledged. "We're still making profits," he said, "but it's not what it used to be."

The 45 percent growth curve the sites enjoyed in 1999, he said, look "more like a 25 percent curve today." That has led to General Media's version of belt tightening.

"We're not laying off anyone, but it's not as easy for me to get authorization to hire two more people," Mr. Vanderleun said.

The reason for the slowdown, Mr. Vanderleun suggests, is the decline of the kind of extravagance that marked the last few years. Web surfers who thought nothing of having high-speed Internet connections, which make the photograph-rich pornography sites more attractive, are harder to find. Now consumers are paying more attention to their budgets, and that sometimes means going back to less expensive, plain old telephone modem connections - and those people "don't look at a $20-to-$25-a-month Web site as something they can afford anymore."

He said his company had recently introduced $10, two-day memberships to meet the new realities of a tougher marketplace.

The adult companies are also profiting from the misfortunes of other Internet concerns, said Mr. Asher of Vivid Entertainment. He said he had noticed the greatest change when it came to hiring technical talent.

"Now it's easier to afford the Internet guys," he said. "I don't have to pay some 27- year-old $250,000 to get him to talk to me. You had to have a basketball court in their office and a Ping-Pong table to keep them." The company is taking advantage of the economic lull and the bumper crop of available technical talent to begin digitizing its archive of movies and prepare for the next generation of high-speed Internet delivery, when customers will want to download and view whole films.

Mr. Marshlack, meanwhile, has expanded Entertainment Network beyond naked men and women to include other ventures. One is askoj.com, the site formed to allow people to pay for the privilege of communicating with O. J. Simpson. Another is Second Stroke, a site that sells used golf balls.

But Mr. Marshlack said that there was something special about pornography, a business he compared to the bar he used to own. "During recessions," he said, "people still drink." The adult entertainment business, he added, provides the kind of cash flow that lets him operate nimbly and without debt.

Meanwhile, innovations like the Duocash deal help address credit card fraud, the biggest problem facing pornography sites. The industry has a high percentage of "chargebacks," or cancellations by credit card holders who claim that they did not authorize a purchase. In many cases, site owners complain, the credit card holder did in fact use his own credit card on a late-night pornography cruise but canceled the charge in the remorse of day; others cancel when their spouses confront them with the strange charges, Mr. Fancher of Duocash said.

Duocash estimates that $5.2 billion is currently stored on phone cards, which can be bought at kiosks, in convenience stores and elsewhere. Consumers buy the cards and make their long-distance calls through an "800" number and then punch in a number found on the card. The Duocard system simply requires users to enter the same number into a form on the participating Web site, and bills the calling-card company.

Duocash, Mr. Fancher said, plans to expand into many markets, not just the X-rated one. "We don't want to be the porn card," he said.

But pornography companies, he added, move very quickly. "If it's a corporation, you have to go through a committee and the vice president and all the usual nonsense," Mr. Fancher said. "Where with these guys, it's `great, let's do it.' "

And that might partly explain why, even as the new economy falters, the nude economy keeps going strong. ?