JJRAKMAN
11-21-2007, 03:17 AM
Obscene Losses
by Claire Hoffman November 2007 Issue
DVD sales are in free fall. Audiences are flocking to pornographic knockoffs of YouTube, especially a secretive site called YouPorn. And the amateurs are taking over. What’s happening to the adult-entertainment industry is exactly what’s happening to its Hollywood counterpart—only worse.
On Friday, May 18, Steve Hirsch, founder of Vivid Entertainment Group, the world’s largest producer of adult videos, was expecting a mysterious visitor. But Stephen Paul Jones was late. When Jones, an unknown figure in the pornography world, finally arrived in the all-white reception area of Vivid’s Los Angeles offices at 2 p.m., he was apologetic. His private plane had broken down, he explained, and he was forced to fly commercial. Hirsch, dressed in a T-shirt and jeans, found that excuse a little slick. But he was eager to speak with Jones, so he let it slide and introduced him to two Vivid colleagues. When the four men sat down in the company’s conference room, Jones got right to the point: He wanted Vivid to buy his website, YouPorn.com.
As its name suggests, YouPorn lets users upload and watch a virtually unlimited selection of hardcore sex videos for free. The user-generated clips on YouPorn—like those on YouTube, the site it mimics—range from the grainiest amateur footage to the slickest professional product. Also, like YouTube, the site has far more traffic than income. Just nine months after going live, in September 2006, YouPorn was on pace to log about 15 million unique visitors in May, Jones told the Vivid executives, and its audience was growing at a rate of 37.5 percent a month. Today, YouPorn is the No. 1 adult site in the world; Vivid.com, a pay site, is ranked 5,061. According to Alexa, a website-ranking company, YouPorn’s overall rank is higher than CNN.com (84), About.com (114), and Weather.com (195). (Those numbers are averages for the three-month period from mid-June to mid-September.)
Blond, barrel-chested, and wearing a sport coat, Jones oozed Silicon Valley confidence. According to Hirsch, he mentioned his Stanford M.B.A. repeatedly. He offered reams of documents and audience data, emphasizing YouPorn’s global reach. (Only 12 percent of the site’s traffic comes from the U.S., he said.) Jones told the men that he and one other executive, a young Malaysian man living in Australia, were the owners of YouPorn, and he stressed that with the site’s traffic, its opportunities were manifold: dating, gaming, mobile content, pay-per-view, webcams (“already very popular in China”), and more. He shared his vision of turning YouPorn into a “very cool brand, perhaps the Virgin of adult entertainment.” As Jones rambled on, Hirsch and his executives traded raised eyebrows. Malaysia?
Still, they were intrigued by YouPorn—and more than a little intimidated by its size. In recent years, competition from the internet had cut deep into the porn studio’s revenues. DVD sales, once Vivid’s financial bedrock, were down almost 50 percent since 2004, and the proliferation of cheap Web-based videos was stealing market share from the company, which specializes in high-end sex films. Vivid and its top rivals—Wicked Pictures, Evil Angel, Digital Playground, Red Light District, Penthouse Media Group, and Hustler, to name a few—had lately been getting an unwanted glimpse of the overnight crisis that the file-sharing revolution brought to the music industry and Craigslist brought to newspaper classified ads.
The meeting lasted an hour. As Hirsch listened to Jones’ pitch, he considered the risks of acquiring YouPorn. Hirsch had been in the adult-entertainment business long enough to be mindful of its legal pitfalls, and that was a chief concern. How do you verify the age of the participants in these thousands of sex videos—or, for that matter, the age of the audience?
For the time being, Hirsch put those questions aside and focused on the business challenge: How, exactly, would you monetize this site? All the features were free, and, as Jones admitted, the advertising revenue was meager—about $120,000 a month. Jones said he wasn’t too interested in figuring that out himself. He planned to grow the audience as large as possible and then “exit” to an established company with the resources and know-how to parlay the traffic into revenue. Not that he’s expecting the $1.65 billion Google paid for YouTube or even the $580 million Rupert Murdoch coughed up for MySpace. Jones told Hirsch he’d be willing to part with YouPorn for $20 million. Hirsch said he’d be in touch.
“It doesn’t make any sense!” Hirsch tells me a month later. It’s a hazy afternoon in June, and he is sitting behind his oak-slab desk, his eyes flickering between a pair of flat-screen monitors, one tuned to Bloomberg News and the other showing a YouPorn clip featuring a gaggle of naked women and an oxygen mask. “They’re giving porn away. You can’t make money on this.”
A compact, well-exercised man of 46, Hirsch is one of the biggest names in the $12 billion adult-entertainment business. The very picture of a respectable, down-to-earth smut peddler, he lives with his wife and two young children in a gated community in a quiet suburb in California’s San Fernando Valley, the industry’s global capital. He’s proudly sober, eschewing the rollicking parties of the sex business for quiet passions, such as his prehistoric-amber collection.
Hirsch’s life in the industry started early. In 1970s Cleveland, his father left a career as a stockbroker, says Hirsch, to sell stag films for Reuben Sturman, the porn pioneer who eventually went to jail for tax evasion. Hirsch went to work for Sturman during high school, and Sturman nurtured the young man into a sort of porn prodigy. In 1984, when Hirsch was 23, he co-founded Vivid with the then-novel idea of signing actresses to exclusive contracts and marketing them like Old Hollywood stars. He was just in time for the dawn of the VCR, and Vivid grew quickly. It has been the largest producer of adult videos in the world for more than a decade now, in part because Hirsch borrowed heavily from the Hollywood studios he can see from his office window: expensive sets, big names (most famously Jenna Jameson), and slick packaging. By porn-industry standards, his films are expensive. He says they typically cost $50,000 to $300,000 to produce and $20,000 to market and distribute; they sell for about $25 on DVD. The company makes approximately 60 movies a year and posts roughly $100 million in annual revenue.
But lately, success hasn’t come easily for Vivid and its upmarket rivals. Three years ago, 80 percent of Vivid’s income came from DVD sales. Today, Hirsch puts that number at about 30 percent, with the rest coming from a fragmented range of sources: subscriptions to Vivid.com, pay-per-view TV, internet video-on-demand, merchandising, and mobile-phone deals. Domestic DVD sales are down 35 percent this year alone. His revenue is flat, he says, but that’s mainly because he’s been cutting costs. Within five years, he claims, DVD sales will be close to zero.
Vivid’s situation is grim but not unusual. DVD woes plague the entire Valley, from multimillion-dollar corporate operations to backroom bottom-feeders: Total sales fell 11 percent in 2006, to an estimated $3.8 billion, according to Adult Video News, the industry’s leading trade publication. Hirsch’s company shares the high end of the market with about 20 other studios that each claim more than $20 million in annual revenues. Outside of those are at least 100 small producers who bring in $500,000 to $5 million a year, estimates Paul Fishbein, president of Adult Video News. These companies shoot on shoestring budgets of $10,000 or less (sometimes much less) per film. “Those rinky-dink companies are struggling to get 1,000 to 1,200 DVDs out at $8 to $10 wholesale,” says Fishbein. “That barely pays for the cost of a cheap production.”
And the decline of DVDs will only accelerate. “You’re going to see a precipitous drop now,” Fishbein says. “Hopefully for producers here in the Valley, that will be offset by internet sales. Hopefully.”
As the portion of Americans with broadband connections (47 percent and growing) continues to rise, consumers are becoming increasingly addicted to the immediate gratification of Web video. But suddenly, there’s a chasm between porn consumption and porn sales. While sales of internet-based adult entertainment grew 14 percent last year, to $2.8 billion, that figure would be substantially higher if there wasn’t so much free competition, especially from the user-generated adult sites.
So far, the Valley’s biggest players have tried to combat this by offering subscription sites, which give users access to a deep trove of content in exchange for a membership fee, usually paid monthly. Vivid.com is one of the more successful. With about 40,000 subscribers paying $30 a month, Hirsch says, the site generates roughly $15 million in annual revenue. Ali Joone, the founder of Digital Playground, charges the same monthly rate and says he has a comparable number of subscribers.
Much like the TV networks, movie studios, and record labels on the other side of town, porn companies are also engaged in a frantic attempt to diversify their offerings, filleting their films into smaller pieces that can be easily sold via an ever-shifting variety of digital distribution channels. From the pay-by-the-minute model on video-on-demand sites such as Adult Entertainment Broadcast Network and Hotmovies.com, to the four- to six-minute clips edited for mobile devices, the industry is looking to take the 90-minute sex videos from its old business strategy and carve them into bite-size moneymakers.
But for many companies, the sum of these new revenue streams doesn’t even come close to offsetting the decline in DVD sales. What’s happening in porn right now is directly analogous to what’s happening to the music industry—CD sales are down 16 percent since 2005, according to Nielsen SoundScan—but worse.
“What you’re losing in the DVD market, you’re not making up on the paid internet side,” says Fishbein. “Instead of 99 cents a song on iTunes, these guys are doing 10 cents a minute for porn.”
The irony is that Hirsch and his ilk have always been the first to experiment with—and profit from—new technologies. The revolution began with VHS, which moved porn out of the theater and into the home. This made watching pornography private, an advance that created millions of new customers overnight. But to buy the stuff, you still had to venture out to the store, and who knew who you might run into?
The Web, in its early days, solved this problem. Few industries, if any, figured out e-commerce faster than the adult-entertainment business, and online DVD sales soared as a result. But Web 2.0, the catchall term for the crush of user-driven startups that have emerged in the past few years, has left the porn industry’s biggest players scrambling to keep up. For the first time, technology is hurting Big Porn. “Everyone was excited because they thought the internet was going to affect our business in a positive way, and it’s been the opposite,” says David Joseph, the founder of Red Light District. “It’s been a little scary.”
“Instilling the most fear are YouPorn and its closest competitors, Adult Entertainment Broadcast Network’s PornoTube and Megarotic, which draws in users with a limited layer of free videos, then tries to sell premium memberships that offer more content and faster video streaming.
These sites didn’t invent free porn; they just made it exponentially easier to access. Of the three, YouPorn most closely resembles YouTube, with its stripped-down interface, unobtrusive advertising, and—for now, at least—content that’s 100 percent free. PornoTube and Megarotic feel more commercial, with plenty of links to the for-pay features. But the free parts of all three sites are basically the same. Some videos are lengthy (30 minutes or more), but most are closer to three minutes. Some are bona fide amateur videos, shot and uploaded by exhibitionists, but most are clips of copyrighted professional pornography. Of these, some are scenes from high-end features, but a larger percentage are so-called gonzo clips—unscripted, rough-cut footage in which the camera operator often jumps into the action. Some clips are posted by the porn companies themselves, as trailers for the full-length versions available on their own sites, but most are uploaded by users from their own collections. Some are gay, some are straight.
In other words, there’s something for everyone—and the sites are ridiculously easy to use. You don’t even have to log in to watch videos, much less pay. (You’re simply required to say you’re 18 or older.) And the sites can’t prevent users from uploading proprietary material produced by the major porn studios. All of which is why Hirsch and his counterparts in the Valley are at least as nervous as the Viacom executives who have filed a $1 billion copyright suit against Google, YouTube’s owner.
But for now at least, there’s no significant push to shut down the sites. Although producers in the Valley have largely resigned themselves to the fact that the copyright genie is out of the bottle, they’re putting user-generated sites on notice about former moneymaking features that are now posted for all to enjoy. A few major porn companies say they regularly monitor postings on PornoTube and YouPorn and email requests to take down copyrighted material. In July, Red Light District sent a cease-and-desist letter to YouPorn after a user posted “One Night in Paris,” the “official” full-length version of the Paris Hilton sex tape, which Red Light distributes. YouPorn removed the video.
By their very nature, though, user-generated sites might be vulnerable to other kinds of legal problems. If anonymous users post child pornography, it could be difficult for site owners to verify the ages of the performers. While these sites generally require viewers to confirm that they’re over 18, “my 11-year-old could go on at any point,” says Red Light’s Joseph. Earlier this fall, a German internet provider temporarily blocked access to YouPorn because the site didn’t comply with German age-verification laws. Up to now, U.S. user-generated porn sites have not been prosecuted.
There’s no sign on the door of PornoTube’s headquarters, in Charlotte, North Carolina. The building is concealed in a low-slung office park on the outskirts of the city, next to the railroad tracks and an aluminum factory.
Inside the air-freshened warren of bunkerlike offices, Suzann Knudsen, a PornoTube marketing executive who moonlights as a D.J. for sex-fetish parties, shows me around. She explains that despite PornoTube’s 15 million monthly visitors, the website’s parent company, Adult Entertainment Broadcast Network, views it as a marketing expense, not a profit center. The site was originally conceived as a feature within Xpeeps.com, A.E.B.N.’s X-rated social-networking site, to provide a way for members to trade sex videos. But soon after it launched, in July 2006, PornoTube had dwarfed Xpeeps’ traffic, and A.E.B.N. decided to turn it into a separate site. The company has tried to monetize it by striking profit-sharing deals with two dozen porn studios to create promotional channels that funnel traffic toward the studios’ own sites. A.E.B.N. won’t disclose the value of these agreements or the small amount of advertising revenue generated by the ads placed on page margins, saying only that PornoTube breaks even. It’s worth it, Knudsen says, for the traffic.
But when traffic means tens of millions of people sharing porn, there are some unique business challenges. Daphne Reeder, a customer-service rep for PornoTube, spends her days trolling the site, investigating clips that have been reported as problematic. On the July morning when I visit, she had more than 500 videos to review, most of which had been red-flagged because their descriptions included words such as little boys, force, or rape. She says the community polices itself, with users and porn companies emailing to alert the site about child pornography, copyrights being violated, ex-boyfriends uploading once-private videos, and other issues.
Adult-video producers are legally required to verify that performers are of legal age. The 2257’s, as the verifications are known (after the corresponding section of the federal code), are a costly hassle to the porn studios. Vivid, for example, has an employee whose sole responsibility is 2257 compliance, and Vivid makes only 60 films a year. Reeder is one of 10 people working on compliance at PornoTube, which has about 210,000 videos. Every clip on the site is supposed to contain a link to “2257 info” documenting the age and identity of the performers, but many of the clips (mostly the genuine amateur videos) include no such information. In these cases, PornoTube attempts to perform its own verification. If it can’t, the clip is removed.
One of the items on Reeder’s to-do list is an age-verification complaint about a video called “Adriana Lima Blowjob.” It has no 2257 info. So Reeder cuts and pastes the name into a search engine and clicks through a few sites that say Adriana Lima was born in 1981. Reeder is about to move on when I point out to her that Adriana Lima is in fact a fairly well-known model and that the woman in the video is probably not she. Is PornoTube concerned about that? Knudsen, standing behind Reeder, tells her to take it down quickly. “We do the best we can,” Knudsen tells me repeatedly.
So how are big adult-video companies coping with the borderless erotic geography of the Web? By creating ever more expensive product. Like their counterparts on the other side of the Santa Monica Mountains, the studios realize they can’t fight amateur with amateur. Instead, Penthouse, Vivid, and others are more committed than ever to their version of the Hollywood model—big budgets, big names, big marketing, and content distributed across a range of platforms.
In a hilltop home in an affluent corner of the Valley, Kelly Holland, the 47-year-old head of production for Penthouse Media Group, stands behind a camera monitor. She wears crisp khakis and well-worn white sneakers, and her lens is trained on a performer named Dee Lilly, who is wearing a beaded black corset. Lilly sways lazily to soft rock. Curtains billow in a fan-generated breeze.
“Beautiful, baby girl, it looks gorgeous,” Holland encourages, as she watches on the monitor 10 feet away. Sitting beside her, a beefy lighting guy stares blankly out the window at the dirty swimming pool. The rest of the heavily tattooed crew—more than two dozen—wander in and out of the kitchen, where the caterer has laid out platters of just-cooked salmon, rice, and vegetables. James Sullivan, the chief operating officer of Penthouse, is visiting from New York. He stands behind Holland, studiously casual in dress shoes and a T-shirt. As the scene wraps up, Holland asks the actress to leave the frame. When Lilly stumbles, tripping over her towering plastic stilettos, Holland sweetly reassures her. “You’re so cute,” she says, “you don’t have to know how to walk.”
Holland’s plan for the day is to shoot two features, each cut in a hardcore and softcore edition, plus softcore and topless content for the Web and on-demand cable. Time is tight, and the director hustles the performers around the set in order to get the most footage for their day rate: usually about $800 to $1,500 for women, less for men. Today’s shoot is a conscious counterjab at the cheaply produced, handheld hardcore videos that flood user-generated adult sites and chip away at the big studios’ bottom line. The total budget for three days of filming is about $110,000.
As Holland shoots Lilly for the softcore episode, designed to be downloaded onto a cell phone, another director is shooting a feature in a nearby room. Titled The Looking Glass, it’s the story of a young suburban couple who buy their first home, only to discover that one of its sliding glass doors is a portal into an alternate universe where people have nonstop sex. In a bedroom done up like a Pottery Barn showroom, performers Alec Knight and Carolyn Reese are staging a crucial scene. With blond extensions and a thick mask of makeup, Reese is attractive in a girl-next-door-in-L.A. kind of way. Knight is equally average, for the most part. As they go through the motions, the cameraman urges them to act lovingly toward each other. No matter what position they’re in, they find a way to gaze into each other’s eyes.
Holland, a veteran in the growing ranks of female directors, believes women—and the men who want to watch with them—are customers she won’t lose to online viewing. “Women are more reliable, they are more loyal, and they spend more money,” she says. “For women, you have to make sure the girls have great manicures, great pedicures, and great lingerie—put them in La Perla or Agent Provocateur—and you can serve up some pretty explicit material.” Holland cites HBO’s new sexually explicit miniseries Tell Me You Love Me as evidence of just how mainstream pornography has become.
“It’s not just a man thing,” agrees Samantha Lewis, the C.E.O. of Digital Playground, who estimates that 45 percent of her Web-based sales (which include site subscriptions and DVDs sold online) are to women. “As each year goes by, we’re realizing, Oh my goodness. The percentages are climbing.”
The porn industry has long wanted to expand its female audience, but some producers concede it will take more than fancy sets, gauzy lighting, and a story line. “Women are just as unpredictable as men, only more so,” says Phil Harvey, the 69-year-old Harvard grad who 35 years ago founded Adam & Eve, a $90 million adult-film producer and sex-toy retailer based in Hillsborough, North Carolina. Harvey is a pioneer in marketing toys and videos to women and couples, having instituted a “sex positive” approach to pornographic retailing in the late 1980s. But as important as women are to Adam & Eve’s business—Harvey says 40 percent of its Web customers are female—he cautions against overgeneralizing. “At least five times we’ve tried to produce a women’s catalog, with cuddling and coupling,” he says drily. “It didn’t work.”
What has worked, Harvey says, is porn that is best appreciated on the big screen—or at least a television. Last year, Adam & Eve teamed with Digital Playground to make Pirates, an adult take on Disney’s billion-dollar Pirates of the Caribbean franchise. Shot in high definition, set to an original score, and driven by a plot involving Incan magic and sea battles, Pirates was billed by its producers as an “electrifying and swashbuckling sex tale.” Digital Playground’s Joone says the film cost the two studios more than $3 million to make—one of the biggest budgets ever for an adult video—and the resulting three-disc set initially sold for $50. Harvey credits Pirates, Adam & Eve’s bestselling film of all time, with helping to pull the company out of a five-year growth slump that he attributes directly to intense competition from free porn on the Web.
YouPorn—the site Stephen Paul Jones tried to sell to Vivid in May—is a strange and mysterious business. There are no links to founders’ biographies, no contact information, no hint of who is behind this booming Web entity. Its domain is registered using a service designed to mask the registrant’s identity.
Back in July, I sent an email to the lone address on the site. It went unanswered. I asked around and, after a series of dead ends, was told that a Stanford alumnus—an outsider to the industry—had started YouPorn. A porn producer gave me the man’s cell-phone number. I left a voicemail. Jones called back a few hours later.
“It’s a brave new world, man. People are crazy. What can I say?” he said, during a freewheeling two-hour conversation that swung wildly from the subjugation of female porn stars to federal regulations governing obscenity to the existence (or nonexistence) of God. Jones insisted that the site was not intended to make money. “It’s not a profit center; it’s more of an experiment. If you wanted to be philosophical about it, it’s kind of an exploitative industry, and this is sort of the opposite.”
Jones said that “Stephen Paul Jones” was an alias. He said that he was 27 years old and worked at a Newport Beach, California, hedge fund, where he managed billions in assets. He used the alias, he said, because his bosses would fire him if they knew about YouPorn. He said he wasn’t the owner of the site anyway. He said it was founded by “a German” who wrote the underlying software and now runs the site’s day-to-day operations.
Still, Jones seemed proud of YouPorn. “People have been telling me that this site would die and the traffic would go away, and they’ve all been wrong,” he said. “When a new model enters the market and impacts other companies’ business by 15 percent of their revenue in a year, that’s historymaking.
“Porn is recession-proof,” he went on, “so if other companies’ sales are going down, there’s a reason. If the reason is the world saying ‘We like to blast ourselves over the internet,’ and the consumers of the world saying ‘We like the amateur stuff better,’ then that’s significant. You could call it a revolution.” He liked the sound of that. “Sure, why not?”
It turns out there is a Stanford alum named Stephen Paul Jones. But he’s fortyish, not 27, and he lives in South Lake Tahoe, California, not Newport Beach. In the past two decades, this Stephen Paul Jones seems to have had no connection to the adult-entertainment business. Public records show that he was involved in a handful of security companies. According to Stanford alumni records (he earned his M.B.A. last year), he enjoys skydiving, stunt piloting, and snowboarding.
Meanwhile, the man who says he’s 27 and uses Jones as an alias has stopped returning my calls. So I drive north to Lake Tahoe.
I knock on the door of a lodgelike three-story house with an enormous backyard. A blond, barrel-chested man answers, an entourage of children in tow. I tell him my name and ask to speak to Jones. “Wrong house,” he says, as his face goes hard. His wife asks what this is about. I say I am a reporter writing about an internet company. “Oh,” she says and gives him a look.
He hustles his family inside, grabs a pack of cigarettes, and comes back outside to yell at me. And from the minute he starts talking, I recognize his voice and his patterns of speech. This is the man I spoke to on the phone. This is the same Stephen Paul Jones.
Jones confirms this, apparently without meaning to, saying he knew during our phone conversation that I had an agenda because I told him that I didn’t like porn. (I told him no such thing.) He threatens to sue me, saying he has “Google’s lawyers.” Then he asks if we can talk somewhere farther away from his home. He drives his S.U.V. about a mile down the road, with me following. For the next 2½ hours, in a diatribe that is always convoluted and occasionally hostile, he keeps returning to one theme: his amazement at the sheer number of people who visit YouPorn every day. And he repeatedly insists that he is not the site’s owner.
But in his emails to Vivid executives, Jones had described himself as “the decisionmaker at YouPorn” and said that he and his Malaysian partner, Zach Hong, “own 100 percent of the company.” (Hong, when reached at his home in Australia, confirmed his involvement with YouPorn but declined to answer further questions.) In these emails, Jones sounded like a no-nonsense M.B.A. with an articulate, if familiar, vision for growing his Web 2.0 company. Among other things, he said he would follow “the Skype model” and cited a quote he attributed to one of Skype’s founders: “If we have 100 million users, and if just 1 percent of them give us $10 per month, we will have $120 million in revenue.”
Now, though, leaning against my car on a dark country road, Jones refuses to answer the most basic questions about the financial particulars of YouPorn or his plans for its future. As the conversation wears on, he sounds proud of the site one minute and worried about tarnishing his family’s reputation the next. After all, he says, he has five kids. He seems deeply conflicted about being in the sex business, much less a mastermind of the most popular adult site in the world.
Back in the Valley, Vivid’s Hirsch says that while he envies YouPorn’s traffic, he has no plans to buy the site, mainly because of the legal exposure associated with hosting user-generated pornography. But he also says that he can’t figure out how to make money through YouPorn and that it would be inconsistent with his strategy of focusing on high-end feature films. A.E.B.N. was also approached by Jones, says an executive there, and passed on YouPorn too.
According to several industry executives who say they would have heard otherwise, YouPorn hasn’t been sold. After our conversation near his home, Jones continued to deny that he owns the site.
As this issue went to press, YouPorn’s Alexa rank was 51—and rising.
http://www.portfolio.com/culture-lifestyle/culture-inc/arts/2007/10/15/YouPorn-Vivid-Entertainment-Profile/?print=true
I thought this article was interesting and there's actually a reason why I'm posting it.
Don't they always say that the rest of the entertainment industry generally follows the trends of the porn industry?
If that's the case, how far off can we be when "amateurs" are creating Sci Fi TV shows and movies with their local theater troupe and some homegrown CG FX for free, or at least for a minimal fee, or the hassel of viewing some advertising.
by Claire Hoffman November 2007 Issue
DVD sales are in free fall. Audiences are flocking to pornographic knockoffs of YouTube, especially a secretive site called YouPorn. And the amateurs are taking over. What’s happening to the adult-entertainment industry is exactly what’s happening to its Hollywood counterpart—only worse.
On Friday, May 18, Steve Hirsch, founder of Vivid Entertainment Group, the world’s largest producer of adult videos, was expecting a mysterious visitor. But Stephen Paul Jones was late. When Jones, an unknown figure in the pornography world, finally arrived in the all-white reception area of Vivid’s Los Angeles offices at 2 p.m., he was apologetic. His private plane had broken down, he explained, and he was forced to fly commercial. Hirsch, dressed in a T-shirt and jeans, found that excuse a little slick. But he was eager to speak with Jones, so he let it slide and introduced him to two Vivid colleagues. When the four men sat down in the company’s conference room, Jones got right to the point: He wanted Vivid to buy his website, YouPorn.com.
As its name suggests, YouPorn lets users upload and watch a virtually unlimited selection of hardcore sex videos for free. The user-generated clips on YouPorn—like those on YouTube, the site it mimics—range from the grainiest amateur footage to the slickest professional product. Also, like YouTube, the site has far more traffic than income. Just nine months after going live, in September 2006, YouPorn was on pace to log about 15 million unique visitors in May, Jones told the Vivid executives, and its audience was growing at a rate of 37.5 percent a month. Today, YouPorn is the No. 1 adult site in the world; Vivid.com, a pay site, is ranked 5,061. According to Alexa, a website-ranking company, YouPorn’s overall rank is higher than CNN.com (84), About.com (114), and Weather.com (195). (Those numbers are averages for the three-month period from mid-June to mid-September.)
Blond, barrel-chested, and wearing a sport coat, Jones oozed Silicon Valley confidence. According to Hirsch, he mentioned his Stanford M.B.A. repeatedly. He offered reams of documents and audience data, emphasizing YouPorn’s global reach. (Only 12 percent of the site’s traffic comes from the U.S., he said.) Jones told the men that he and one other executive, a young Malaysian man living in Australia, were the owners of YouPorn, and he stressed that with the site’s traffic, its opportunities were manifold: dating, gaming, mobile content, pay-per-view, webcams (“already very popular in China”), and more. He shared his vision of turning YouPorn into a “very cool brand, perhaps the Virgin of adult entertainment.” As Jones rambled on, Hirsch and his executives traded raised eyebrows. Malaysia?
Still, they were intrigued by YouPorn—and more than a little intimidated by its size. In recent years, competition from the internet had cut deep into the porn studio’s revenues. DVD sales, once Vivid’s financial bedrock, were down almost 50 percent since 2004, and the proliferation of cheap Web-based videos was stealing market share from the company, which specializes in high-end sex films. Vivid and its top rivals—Wicked Pictures, Evil Angel, Digital Playground, Red Light District, Penthouse Media Group, and Hustler, to name a few—had lately been getting an unwanted glimpse of the overnight crisis that the file-sharing revolution brought to the music industry and Craigslist brought to newspaper classified ads.
The meeting lasted an hour. As Hirsch listened to Jones’ pitch, he considered the risks of acquiring YouPorn. Hirsch had been in the adult-entertainment business long enough to be mindful of its legal pitfalls, and that was a chief concern. How do you verify the age of the participants in these thousands of sex videos—or, for that matter, the age of the audience?
For the time being, Hirsch put those questions aside and focused on the business challenge: How, exactly, would you monetize this site? All the features were free, and, as Jones admitted, the advertising revenue was meager—about $120,000 a month. Jones said he wasn’t too interested in figuring that out himself. He planned to grow the audience as large as possible and then “exit” to an established company with the resources and know-how to parlay the traffic into revenue. Not that he’s expecting the $1.65 billion Google paid for YouTube or even the $580 million Rupert Murdoch coughed up for MySpace. Jones told Hirsch he’d be willing to part with YouPorn for $20 million. Hirsch said he’d be in touch.
“It doesn’t make any sense!” Hirsch tells me a month later. It’s a hazy afternoon in June, and he is sitting behind his oak-slab desk, his eyes flickering between a pair of flat-screen monitors, one tuned to Bloomberg News and the other showing a YouPorn clip featuring a gaggle of naked women and an oxygen mask. “They’re giving porn away. You can’t make money on this.”
A compact, well-exercised man of 46, Hirsch is one of the biggest names in the $12 billion adult-entertainment business. The very picture of a respectable, down-to-earth smut peddler, he lives with his wife and two young children in a gated community in a quiet suburb in California’s San Fernando Valley, the industry’s global capital. He’s proudly sober, eschewing the rollicking parties of the sex business for quiet passions, such as his prehistoric-amber collection.
Hirsch’s life in the industry started early. In 1970s Cleveland, his father left a career as a stockbroker, says Hirsch, to sell stag films for Reuben Sturman, the porn pioneer who eventually went to jail for tax evasion. Hirsch went to work for Sturman during high school, and Sturman nurtured the young man into a sort of porn prodigy. In 1984, when Hirsch was 23, he co-founded Vivid with the then-novel idea of signing actresses to exclusive contracts and marketing them like Old Hollywood stars. He was just in time for the dawn of the VCR, and Vivid grew quickly. It has been the largest producer of adult videos in the world for more than a decade now, in part because Hirsch borrowed heavily from the Hollywood studios he can see from his office window: expensive sets, big names (most famously Jenna Jameson), and slick packaging. By porn-industry standards, his films are expensive. He says they typically cost $50,000 to $300,000 to produce and $20,000 to market and distribute; they sell for about $25 on DVD. The company makes approximately 60 movies a year and posts roughly $100 million in annual revenue.
But lately, success hasn’t come easily for Vivid and its upmarket rivals. Three years ago, 80 percent of Vivid’s income came from DVD sales. Today, Hirsch puts that number at about 30 percent, with the rest coming from a fragmented range of sources: subscriptions to Vivid.com, pay-per-view TV, internet video-on-demand, merchandising, and mobile-phone deals. Domestic DVD sales are down 35 percent this year alone. His revenue is flat, he says, but that’s mainly because he’s been cutting costs. Within five years, he claims, DVD sales will be close to zero.
Vivid’s situation is grim but not unusual. DVD woes plague the entire Valley, from multimillion-dollar corporate operations to backroom bottom-feeders: Total sales fell 11 percent in 2006, to an estimated $3.8 billion, according to Adult Video News, the industry’s leading trade publication. Hirsch’s company shares the high end of the market with about 20 other studios that each claim more than $20 million in annual revenues. Outside of those are at least 100 small producers who bring in $500,000 to $5 million a year, estimates Paul Fishbein, president of Adult Video News. These companies shoot on shoestring budgets of $10,000 or less (sometimes much less) per film. “Those rinky-dink companies are struggling to get 1,000 to 1,200 DVDs out at $8 to $10 wholesale,” says Fishbein. “That barely pays for the cost of a cheap production.”
And the decline of DVDs will only accelerate. “You’re going to see a precipitous drop now,” Fishbein says. “Hopefully for producers here in the Valley, that will be offset by internet sales. Hopefully.”
As the portion of Americans with broadband connections (47 percent and growing) continues to rise, consumers are becoming increasingly addicted to the immediate gratification of Web video. But suddenly, there’s a chasm between porn consumption and porn sales. While sales of internet-based adult entertainment grew 14 percent last year, to $2.8 billion, that figure would be substantially higher if there wasn’t so much free competition, especially from the user-generated adult sites.
So far, the Valley’s biggest players have tried to combat this by offering subscription sites, which give users access to a deep trove of content in exchange for a membership fee, usually paid monthly. Vivid.com is one of the more successful. With about 40,000 subscribers paying $30 a month, Hirsch says, the site generates roughly $15 million in annual revenue. Ali Joone, the founder of Digital Playground, charges the same monthly rate and says he has a comparable number of subscribers.
Much like the TV networks, movie studios, and record labels on the other side of town, porn companies are also engaged in a frantic attempt to diversify their offerings, filleting their films into smaller pieces that can be easily sold via an ever-shifting variety of digital distribution channels. From the pay-by-the-minute model on video-on-demand sites such as Adult Entertainment Broadcast Network and Hotmovies.com, to the four- to six-minute clips edited for mobile devices, the industry is looking to take the 90-minute sex videos from its old business strategy and carve them into bite-size moneymakers.
But for many companies, the sum of these new revenue streams doesn’t even come close to offsetting the decline in DVD sales. What’s happening in porn right now is directly analogous to what’s happening to the music industry—CD sales are down 16 percent since 2005, according to Nielsen SoundScan—but worse.
“What you’re losing in the DVD market, you’re not making up on the paid internet side,” says Fishbein. “Instead of 99 cents a song on iTunes, these guys are doing 10 cents a minute for porn.”
The irony is that Hirsch and his ilk have always been the first to experiment with—and profit from—new technologies. The revolution began with VHS, which moved porn out of the theater and into the home. This made watching pornography private, an advance that created millions of new customers overnight. But to buy the stuff, you still had to venture out to the store, and who knew who you might run into?
The Web, in its early days, solved this problem. Few industries, if any, figured out e-commerce faster than the adult-entertainment business, and online DVD sales soared as a result. But Web 2.0, the catchall term for the crush of user-driven startups that have emerged in the past few years, has left the porn industry’s biggest players scrambling to keep up. For the first time, technology is hurting Big Porn. “Everyone was excited because they thought the internet was going to affect our business in a positive way, and it’s been the opposite,” says David Joseph, the founder of Red Light District. “It’s been a little scary.”
“Instilling the most fear are YouPorn and its closest competitors, Adult Entertainment Broadcast Network’s PornoTube and Megarotic, which draws in users with a limited layer of free videos, then tries to sell premium memberships that offer more content and faster video streaming.
These sites didn’t invent free porn; they just made it exponentially easier to access. Of the three, YouPorn most closely resembles YouTube, with its stripped-down interface, unobtrusive advertising, and—for now, at least—content that’s 100 percent free. PornoTube and Megarotic feel more commercial, with plenty of links to the for-pay features. But the free parts of all three sites are basically the same. Some videos are lengthy (30 minutes or more), but most are closer to three minutes. Some are bona fide amateur videos, shot and uploaded by exhibitionists, but most are clips of copyrighted professional pornography. Of these, some are scenes from high-end features, but a larger percentage are so-called gonzo clips—unscripted, rough-cut footage in which the camera operator often jumps into the action. Some clips are posted by the porn companies themselves, as trailers for the full-length versions available on their own sites, but most are uploaded by users from their own collections. Some are gay, some are straight.
In other words, there’s something for everyone—and the sites are ridiculously easy to use. You don’t even have to log in to watch videos, much less pay. (You’re simply required to say you’re 18 or older.) And the sites can’t prevent users from uploading proprietary material produced by the major porn studios. All of which is why Hirsch and his counterparts in the Valley are at least as nervous as the Viacom executives who have filed a $1 billion copyright suit against Google, YouTube’s owner.
But for now at least, there’s no significant push to shut down the sites. Although producers in the Valley have largely resigned themselves to the fact that the copyright genie is out of the bottle, they’re putting user-generated sites on notice about former moneymaking features that are now posted for all to enjoy. A few major porn companies say they regularly monitor postings on PornoTube and YouPorn and email requests to take down copyrighted material. In July, Red Light District sent a cease-and-desist letter to YouPorn after a user posted “One Night in Paris,” the “official” full-length version of the Paris Hilton sex tape, which Red Light distributes. YouPorn removed the video.
By their very nature, though, user-generated sites might be vulnerable to other kinds of legal problems. If anonymous users post child pornography, it could be difficult for site owners to verify the ages of the performers. While these sites generally require viewers to confirm that they’re over 18, “my 11-year-old could go on at any point,” says Red Light’s Joseph. Earlier this fall, a German internet provider temporarily blocked access to YouPorn because the site didn’t comply with German age-verification laws. Up to now, U.S. user-generated porn sites have not been prosecuted.
There’s no sign on the door of PornoTube’s headquarters, in Charlotte, North Carolina. The building is concealed in a low-slung office park on the outskirts of the city, next to the railroad tracks and an aluminum factory.
Inside the air-freshened warren of bunkerlike offices, Suzann Knudsen, a PornoTube marketing executive who moonlights as a D.J. for sex-fetish parties, shows me around. She explains that despite PornoTube’s 15 million monthly visitors, the website’s parent company, Adult Entertainment Broadcast Network, views it as a marketing expense, not a profit center. The site was originally conceived as a feature within Xpeeps.com, A.E.B.N.’s X-rated social-networking site, to provide a way for members to trade sex videos. But soon after it launched, in July 2006, PornoTube had dwarfed Xpeeps’ traffic, and A.E.B.N. decided to turn it into a separate site. The company has tried to monetize it by striking profit-sharing deals with two dozen porn studios to create promotional channels that funnel traffic toward the studios’ own sites. A.E.B.N. won’t disclose the value of these agreements or the small amount of advertising revenue generated by the ads placed on page margins, saying only that PornoTube breaks even. It’s worth it, Knudsen says, for the traffic.
But when traffic means tens of millions of people sharing porn, there are some unique business challenges. Daphne Reeder, a customer-service rep for PornoTube, spends her days trolling the site, investigating clips that have been reported as problematic. On the July morning when I visit, she had more than 500 videos to review, most of which had been red-flagged because their descriptions included words such as little boys, force, or rape. She says the community polices itself, with users and porn companies emailing to alert the site about child pornography, copyrights being violated, ex-boyfriends uploading once-private videos, and other issues.
Adult-video producers are legally required to verify that performers are of legal age. The 2257’s, as the verifications are known (after the corresponding section of the federal code), are a costly hassle to the porn studios. Vivid, for example, has an employee whose sole responsibility is 2257 compliance, and Vivid makes only 60 films a year. Reeder is one of 10 people working on compliance at PornoTube, which has about 210,000 videos. Every clip on the site is supposed to contain a link to “2257 info” documenting the age and identity of the performers, but many of the clips (mostly the genuine amateur videos) include no such information. In these cases, PornoTube attempts to perform its own verification. If it can’t, the clip is removed.
One of the items on Reeder’s to-do list is an age-verification complaint about a video called “Adriana Lima Blowjob.” It has no 2257 info. So Reeder cuts and pastes the name into a search engine and clicks through a few sites that say Adriana Lima was born in 1981. Reeder is about to move on when I point out to her that Adriana Lima is in fact a fairly well-known model and that the woman in the video is probably not she. Is PornoTube concerned about that? Knudsen, standing behind Reeder, tells her to take it down quickly. “We do the best we can,” Knudsen tells me repeatedly.
So how are big adult-video companies coping with the borderless erotic geography of the Web? By creating ever more expensive product. Like their counterparts on the other side of the Santa Monica Mountains, the studios realize they can’t fight amateur with amateur. Instead, Penthouse, Vivid, and others are more committed than ever to their version of the Hollywood model—big budgets, big names, big marketing, and content distributed across a range of platforms.
In a hilltop home in an affluent corner of the Valley, Kelly Holland, the 47-year-old head of production for Penthouse Media Group, stands behind a camera monitor. She wears crisp khakis and well-worn white sneakers, and her lens is trained on a performer named Dee Lilly, who is wearing a beaded black corset. Lilly sways lazily to soft rock. Curtains billow in a fan-generated breeze.
“Beautiful, baby girl, it looks gorgeous,” Holland encourages, as she watches on the monitor 10 feet away. Sitting beside her, a beefy lighting guy stares blankly out the window at the dirty swimming pool. The rest of the heavily tattooed crew—more than two dozen—wander in and out of the kitchen, where the caterer has laid out platters of just-cooked salmon, rice, and vegetables. James Sullivan, the chief operating officer of Penthouse, is visiting from New York. He stands behind Holland, studiously casual in dress shoes and a T-shirt. As the scene wraps up, Holland asks the actress to leave the frame. When Lilly stumbles, tripping over her towering plastic stilettos, Holland sweetly reassures her. “You’re so cute,” she says, “you don’t have to know how to walk.”
Holland’s plan for the day is to shoot two features, each cut in a hardcore and softcore edition, plus softcore and topless content for the Web and on-demand cable. Time is tight, and the director hustles the performers around the set in order to get the most footage for their day rate: usually about $800 to $1,500 for women, less for men. Today’s shoot is a conscious counterjab at the cheaply produced, handheld hardcore videos that flood user-generated adult sites and chip away at the big studios’ bottom line. The total budget for three days of filming is about $110,000.
As Holland shoots Lilly for the softcore episode, designed to be downloaded onto a cell phone, another director is shooting a feature in a nearby room. Titled The Looking Glass, it’s the story of a young suburban couple who buy their first home, only to discover that one of its sliding glass doors is a portal into an alternate universe where people have nonstop sex. In a bedroom done up like a Pottery Barn showroom, performers Alec Knight and Carolyn Reese are staging a crucial scene. With blond extensions and a thick mask of makeup, Reese is attractive in a girl-next-door-in-L.A. kind of way. Knight is equally average, for the most part. As they go through the motions, the cameraman urges them to act lovingly toward each other. No matter what position they’re in, they find a way to gaze into each other’s eyes.
Holland, a veteran in the growing ranks of female directors, believes women—and the men who want to watch with them—are customers she won’t lose to online viewing. “Women are more reliable, they are more loyal, and they spend more money,” she says. “For women, you have to make sure the girls have great manicures, great pedicures, and great lingerie—put them in La Perla or Agent Provocateur—and you can serve up some pretty explicit material.” Holland cites HBO’s new sexually explicit miniseries Tell Me You Love Me as evidence of just how mainstream pornography has become.
“It’s not just a man thing,” agrees Samantha Lewis, the C.E.O. of Digital Playground, who estimates that 45 percent of her Web-based sales (which include site subscriptions and DVDs sold online) are to women. “As each year goes by, we’re realizing, Oh my goodness. The percentages are climbing.”
The porn industry has long wanted to expand its female audience, but some producers concede it will take more than fancy sets, gauzy lighting, and a story line. “Women are just as unpredictable as men, only more so,” says Phil Harvey, the 69-year-old Harvard grad who 35 years ago founded Adam & Eve, a $90 million adult-film producer and sex-toy retailer based in Hillsborough, North Carolina. Harvey is a pioneer in marketing toys and videos to women and couples, having instituted a “sex positive” approach to pornographic retailing in the late 1980s. But as important as women are to Adam & Eve’s business—Harvey says 40 percent of its Web customers are female—he cautions against overgeneralizing. “At least five times we’ve tried to produce a women’s catalog, with cuddling and coupling,” he says drily. “It didn’t work.”
What has worked, Harvey says, is porn that is best appreciated on the big screen—or at least a television. Last year, Adam & Eve teamed with Digital Playground to make Pirates, an adult take on Disney’s billion-dollar Pirates of the Caribbean franchise. Shot in high definition, set to an original score, and driven by a plot involving Incan magic and sea battles, Pirates was billed by its producers as an “electrifying and swashbuckling sex tale.” Digital Playground’s Joone says the film cost the two studios more than $3 million to make—one of the biggest budgets ever for an adult video—and the resulting three-disc set initially sold for $50. Harvey credits Pirates, Adam & Eve’s bestselling film of all time, with helping to pull the company out of a five-year growth slump that he attributes directly to intense competition from free porn on the Web.
YouPorn—the site Stephen Paul Jones tried to sell to Vivid in May—is a strange and mysterious business. There are no links to founders’ biographies, no contact information, no hint of who is behind this booming Web entity. Its domain is registered using a service designed to mask the registrant’s identity.
Back in July, I sent an email to the lone address on the site. It went unanswered. I asked around and, after a series of dead ends, was told that a Stanford alumnus—an outsider to the industry—had started YouPorn. A porn producer gave me the man’s cell-phone number. I left a voicemail. Jones called back a few hours later.
“It’s a brave new world, man. People are crazy. What can I say?” he said, during a freewheeling two-hour conversation that swung wildly from the subjugation of female porn stars to federal regulations governing obscenity to the existence (or nonexistence) of God. Jones insisted that the site was not intended to make money. “It’s not a profit center; it’s more of an experiment. If you wanted to be philosophical about it, it’s kind of an exploitative industry, and this is sort of the opposite.”
Jones said that “Stephen Paul Jones” was an alias. He said that he was 27 years old and worked at a Newport Beach, California, hedge fund, where he managed billions in assets. He used the alias, he said, because his bosses would fire him if they knew about YouPorn. He said he wasn’t the owner of the site anyway. He said it was founded by “a German” who wrote the underlying software and now runs the site’s day-to-day operations.
Still, Jones seemed proud of YouPorn. “People have been telling me that this site would die and the traffic would go away, and they’ve all been wrong,” he said. “When a new model enters the market and impacts other companies’ business by 15 percent of their revenue in a year, that’s historymaking.
“Porn is recession-proof,” he went on, “so if other companies’ sales are going down, there’s a reason. If the reason is the world saying ‘We like to blast ourselves over the internet,’ and the consumers of the world saying ‘We like the amateur stuff better,’ then that’s significant. You could call it a revolution.” He liked the sound of that. “Sure, why not?”
It turns out there is a Stanford alum named Stephen Paul Jones. But he’s fortyish, not 27, and he lives in South Lake Tahoe, California, not Newport Beach. In the past two decades, this Stephen Paul Jones seems to have had no connection to the adult-entertainment business. Public records show that he was involved in a handful of security companies. According to Stanford alumni records (he earned his M.B.A. last year), he enjoys skydiving, stunt piloting, and snowboarding.
Meanwhile, the man who says he’s 27 and uses Jones as an alias has stopped returning my calls. So I drive north to Lake Tahoe.
I knock on the door of a lodgelike three-story house with an enormous backyard. A blond, barrel-chested man answers, an entourage of children in tow. I tell him my name and ask to speak to Jones. “Wrong house,” he says, as his face goes hard. His wife asks what this is about. I say I am a reporter writing about an internet company. “Oh,” she says and gives him a look.
He hustles his family inside, grabs a pack of cigarettes, and comes back outside to yell at me. And from the minute he starts talking, I recognize his voice and his patterns of speech. This is the man I spoke to on the phone. This is the same Stephen Paul Jones.
Jones confirms this, apparently without meaning to, saying he knew during our phone conversation that I had an agenda because I told him that I didn’t like porn. (I told him no such thing.) He threatens to sue me, saying he has “Google’s lawyers.” Then he asks if we can talk somewhere farther away from his home. He drives his S.U.V. about a mile down the road, with me following. For the next 2½ hours, in a diatribe that is always convoluted and occasionally hostile, he keeps returning to one theme: his amazement at the sheer number of people who visit YouPorn every day. And he repeatedly insists that he is not the site’s owner.
But in his emails to Vivid executives, Jones had described himself as “the decisionmaker at YouPorn” and said that he and his Malaysian partner, Zach Hong, “own 100 percent of the company.” (Hong, when reached at his home in Australia, confirmed his involvement with YouPorn but declined to answer further questions.) In these emails, Jones sounded like a no-nonsense M.B.A. with an articulate, if familiar, vision for growing his Web 2.0 company. Among other things, he said he would follow “the Skype model” and cited a quote he attributed to one of Skype’s founders: “If we have 100 million users, and if just 1 percent of them give us $10 per month, we will have $120 million in revenue.”
Now, though, leaning against my car on a dark country road, Jones refuses to answer the most basic questions about the financial particulars of YouPorn or his plans for its future. As the conversation wears on, he sounds proud of the site one minute and worried about tarnishing his family’s reputation the next. After all, he says, he has five kids. He seems deeply conflicted about being in the sex business, much less a mastermind of the most popular adult site in the world.
Back in the Valley, Vivid’s Hirsch says that while he envies YouPorn’s traffic, he has no plans to buy the site, mainly because of the legal exposure associated with hosting user-generated pornography. But he also says that he can’t figure out how to make money through YouPorn and that it would be inconsistent with his strategy of focusing on high-end feature films. A.E.B.N. was also approached by Jones, says an executive there, and passed on YouPorn too.
According to several industry executives who say they would have heard otherwise, YouPorn hasn’t been sold. After our conversation near his home, Jones continued to deny that he owns the site.
As this issue went to press, YouPorn’s Alexa rank was 51—and rising.
http://www.portfolio.com/culture-lifestyle/culture-inc/arts/2007/10/15/YouPorn-Vivid-Entertainment-Profile/?print=true
I thought this article was interesting and there's actually a reason why I'm posting it.
Don't they always say that the rest of the entertainment industry generally follows the trends of the porn industry?
If that's the case, how far off can we be when "amateurs" are creating Sci Fi TV shows and movies with their local theater troupe and some homegrown CG FX for free, or at least for a minimal fee, or the hassel of viewing some advertising.