PORN WORTH WATCHING 10-31-07

Porn stocks worth, um, watching
In an industry that counts on impulse buys, video on demand and faster cell-phone Internet access should be a boon for publicly traded adult-entertainment companies.

Technology has made pornography easier to produce and to distribute. By some estimates, pornography accounts for 40% of all Internet traffic and pay-TV sales. But, for shareholders at least, technology has yet to make pornography wildly profitable.

Playboy Enterprises (PLA, news, msgs) has seen its share price fall by 30% since the start of 2004, compared with a 39% gain in the S&P 500 Index ($INX). New Frontier Media (NOOF, news, msgs), a Boulder, Colo., business that distributes pornographic videos, trades lower than it did three years ago. And a smaller video distributor in Europe called Private Media (PRVT, news, msgs) trades where it did at the beginning of 2004, while the Russell 2000 Index ($RUT.X) of small-cap stocks has advanced more than 45% in the same time frame.
There are lots of reasons why: low-cost, high-quality digital-video cameras that have enabled small private companies; technology-enabled piracy of costlier content; and the abundance of free porn on the Internet.

But new technology appears to offer new hope for porn profits. Innovations such as video on demand (VOD) and faster cell-phone Internet access mean consumers will be better able to get the kind of porn they want, when and where they want it. That should boost sales for the publicly traded adult-entertainment companies supplying these channels.

On demand in demand Playboy, New Frontier Media and other adult-video providers have sold pay-per-view content for years through cable and satellite partners such as Time Warner Cable (TWC, news, msgs), Comcast (CMCSA, news, msgs) and EchoStar Communications (DISH, news, msgs). But this delivery system has had one big shortcoming: Because specific content is pre-scheduled, it isn't always available when a user wants it.
B
ut video on demand solves the problem, and consumers have responded. As New Frontier Media delicately put it in a recent filing, "Instant start times assure that an impulse demand results in a transaction, whereas with pay-per-view, the scheduled start time may not be synchronized to a viewer's requirements."

Private Media's chief operating officer, Peter Cohen, says adult entertainment "is particularly an impulse buy. So the on-demand functionality of VOD suits our content very well."
The numbers are impressive. Pay-television revenue overall was up just 1% at New Frontier Media in the first quarter, but VOD revenue jumped 10%. In the second quarter, overall pay-TV revenue at the company fell 17%, but VOD revenue was up 18% at New Frontier's biggest cable partner, and VOD sales were up at all of its top 10 cable partners. At Playboy, revenue weakness at the magazine and in pay-per-view TV has been offset by strength in VOD sales.

VOD offers other distinct advantages for adult-entertainment providers. VOD broadcasts can't be copied, so piracy is reduced. Also, it's easier to track consumer interests and behaviors with VOD.
"You get better and more specific actionable data about what works, and we have been responding to that," Playboy Enterprises Chief Executive Christie Hefner said in a recent conference call.

Cable providers have been rolling out VOD in the U.S. for several years. However, it has reached less than half the households that will be able to get it, so there is plenty of room for growth. In Europe, the potential is even bigger because cable operators there have lagged on offering VOD. Now, a new technology making up for the shortfall should help adult-entertainment companies deliver porn to viewers in the VOD format: Internet protocol television, or IPTV.

Undressing Playboy's planPlayboy magazine is changing its digital business strategy and giving away more content online. The Wall Street Journal's Lee Hawkins explains why.
"Europe is projected to be the fastest-growing territory for this platform," Private Media's Cohen says. "Everybody has ramped up their activity with these new digital platforms. I think we will see it grow quite quickly now."

Multimedia Research estimates the number of IPTV subscribers in Europe will grow to more than 27 million by 2011 from about 4 million last year. To catch the trend, Private Media is busy forging alliances with the major telecom providers across Europe who are rolling out VOD. The company says it already has access to 75% to 100% of the current and prospective IPTV viewers in France and Germany.

Porn on the go I'm not sure I really get this one because the screens are so small, but more consumers are watching porn on mobile phones, especially in Europe, where carriers are more likely to offer it.
"It's highly, highly popular," says Tim Clausen, who heads the wireless division at Private Media, which is based in Barcelona, Spain. "People watch entire movies for an hour and a half on their mobile phone." He says revenue from cell-phone-based porn doubled last year to $2.8 million.

Juniper Research analyst Windsor Holden estimates consumers around the world will spend $1.8 billion on cell-phone porn this year. He thinks that will grow to $4 billion by 2012. Strategy Analytics, another research firm, forecasts the mobile-adult-services market will reach $5 billion worldwide by 2010. Holden chalks it up in part to the cell phone's "anytime, anywhere" availability.
"The mobile phone affords the user of mobile adult services the opportunity for privacy, which many users may find attractive," Holden says.
Private Media says its content is available to more than 745 million cell-phone users in 33 countries via 78 operators, and it expects big growth. "We think that wireless will be an explosive top-line revenue opportunity for the simple reason that the cell phone is the ubiquitous device in the world," Cohen says.

Consumers aren't just looking at pictures, watching video and downloading naughty ring tones or video games. "Adoption is really rising rapidly in Europe, and one of the key drivers is video chat," says Holden. Several services provide one-on-one video chat with models for $3 a minute, he says, and the average length of the chat is six to seven minutes.

Compared with Europe, U.S. demand has lagged because high-speed data connections aren't as prevalent and carriers are more reluctant to offer cell-phone porn. But Cohen thinks the rollout of faster data service in the U.S. and better age-verification systems will change that. "As those two obstacles get worked out, we see enormous upside," he says.

Internet imitators In the Internet space, adult-entertainment companies are busy copying successful mainstream models like the auction site eBay (EBAY, news, msgs), the virtual world Second Life and even the social-networking site MySpace.
Rick's Cabaret International (RICK, news, msgs), which owns and operates adult nightclubs, has set up NaughtyBids, the eBay of adult material. The Web site, however, brings in only a small portion of overall revenue. Instead, the company is growing by acquiring and opening more clubs.

Red Light Center, run by a company called Utherverse Digital, offers an adult version of Second Life, one of the popular Internet-based worlds in which people interact through virtual identities known as avatars.
Video on MSN Money

Undressing Playboy's planPlayboy magazine is changing its digital business strategy and giving away more content online. The Wall Street Journal's Lee Hawkins explains why.
Zivity lets models post their pictures and accept payments from users who like what they see. They can also chat with models in a format that resembles MySpace.
If these last two are commercial successes, I'd expect the public companies to make an acquisition or, more likely, roll out similar products. Indeed, Private Media says it plans to launch Internet community and interactive services in the next three to six months.
A caveat With the exception of Playboy, the public companies I've mentioned in this column are small -- small enough so that the attention this column generates could send their stocks temporarily higher. The key word here is "temporarily."

Typically, when an investment column moves a stock, it retraces. So that you don't wind up buying the spike and regretting it, I strongly urge you to avoid buying New Frontier Media above $6, Private Media above $3.30 and Rick's Cabaret above $15.50. It may pay to wait for pullbacks in both Private Media and Rick's Cabaret to even-lower levels, given that both stocks have advanced so much in the past few weeks.
At the time of publication, Michael Brush did not own or control shares of any companies mentioned in this column.