The row of single-story, aluminum-clad buildings that serve as Vivid Entertainment's headquarters in Van Nuys, Calif., is unprepossessing - except for the Porsches and Corvettes that jam the parking lot. Inside, the main office is divided into rows of computer workstations. The only hint of the nature of Vivid's business is the occasional moan that escapes from speakers in the editing bays.
Vivid is the country's leading producer and distributor of pornographic videos. For 15 years, it has cranked out hundreds of hard-core sex flicks with names like Mission Erotica, Interactive Parts and Devi's Blackjack. Vivid's revenues this year are expected to exceed $80 million, up from $25 million just three years ago. Less than half that amount comes from the sale of videos and DVDs; 35 percent comes from cable pay-per-view; and the rest comes from the company's network of Web sites such as XXXAsianhardcore and XXXscreentest. Vivid President and COO Bill Asher says nearly 25 percent of the company's pretax income is profit.
Around $5.1 billion of the porn industry's $11 billion annual sales comes from videos, according to Adult Video News, a trade publication. But, Asher says, "we can't keep selling movies forever." Cable and the Internet are challenging the very fundamentals of the skin trade. With broadband and its interactivity slowly gaining a foothold, simple video-watching is no longer going to cut it with consumers. Why settle for pay-per-view when you can click into a virtual date with an onscreen lover who responds to your wishes? That's the promise of broadband, and that's why Asher estimates that Vivid's video revenues will drop nearly 50 percent in the next few years.
So it's change-or-die time for Vivid and its competition, not unlike the late '70s, when the VCR wiped out an entire generation of pornographers unable or unwilling to evolve. "Going forward, you're either going to have to have something that's so outrageous that people are talking about it at the water cooler, or something that's more personal that people won't tell their own friends that they're doing it, almost like an illicit love affair," says Asher. He's talking about the holy grail of online porn - live one-on-one porn teleconferencing. "For $19.95 a month, you're in love."
To survive, Vivid's executives are determined to transform broadband into the company's salvation. In order to build or buy the technology to exploit broadband interactivity, Vivid needs money. And so Vivid, according to Asher, will go where few in pornography have gone before: to the public markets. Company executives say they are still in the early stages of the IPO process; in fact, they haven't signed an underwriter, but Asher says that will happen in the next few months. He declines to name the shortlist of candidates.
With the capital and currency from its offering, Vivid hopes to either purchase or develop technology to deliver high-quality, low-cost, live, nude chats over broadband. Vivid won't abandon its film roots entirely; it will offer videos online and has already begun streaming a portion of its feature-film archive online through its sites Vividvideo.com and Vividtv.com. But viewing the movies online is hardly ideal, as the video quality is relegated to a tiny Web applet box. Over broadband, however, these movies will be close to TV quality.
In the five years since pornography established itself as a Net mainstay, online sales of videos, DVDs, site subscriptions and sex toys have been brisk. This year, they'll total $1.4 billion, up from about $980 million in 1998, according to Datamonitor. That puts online porn revenues on par with online sales of books and way ahead of airline tickets.
A new generation of dot-com porn sites with names like New Frontier and Cybererotica are raking in the profits. Perhaps the best known is Internet Entertainment Group (dossier), whose CEO, Seth Warshavsky, has said his company cleared $50 million in revenues and $15 million in profits in 1998. (The FBI and IRS are currently investigating IEG's accounting practices and charges of credit-card fraud against the company; citing his legal troubles, Warshavsky refuses to update his revenue and profit numbers.)
It's easy to see why Vivid wants to build up its online operations. The company already has a year-old Web business, offering the usual mix of photos, videos and toys, but to set itself apart from the saturated online porn market and to maintain its industry leadership, it needs to develop interactive broadband content. On the cable side, Vivid is betting cable providers like ATT (T), Cablevision and Cox, to which Vivid currently supplies content for pay-per-view, will figure out so-called convergence plays, which combine conventional TV programs with interactive functions. When that happens, Vivid wants to be prepared to provide content.
