Source: Reuters
By: Lucas van Grinsven
(LONDON) — The dress code and business cards in the adult entertainment industry may be tacky, but Internet start-ups should not be put off by appearances and pay close attention to lessons learned by porn Web sites.
Not only were sex sites the earliest to recognize the opportunities of the Web, but they went through the learning curve much quicker than mainstream Web sites, sex industry entrepreneurs told Reuters at a streaming media conference here.
Where e-tailer Amazon.com (news – web sites) (NasdaqNM:AMZN – news) is still nowhere near profitability, four years after its launch, most porn Web sites achieved black figures six months after introduction, which is in many cases five years ago.
In fact, most premier names do not settle for profit margins below 20 percent.
Nasdaq-listed Private (NasdaqNM:PRVT – news), which is growing its Internet business by over 200 percent every quarter, had a first quarter net profit margin of 29 percent.
Canada-based Casa Rosso, which started as a spin-off of the Amsterdam-based red light district club, has a gross profit margin of 20 percent, said it general manager Toine Rodenburg, a towering Dutchman dressed in jeans and a black turtle neck jumper.
They may sport a five day beard and long curly hair, like Rodenburg, or wear shiny suits such as Greg Clayman who has three porn studios, but they run their operations like any enterprise where costs and profits are leading targets.
Like global multinationals, sex sites have set up studios in low wage countries like the Czech Republic, running away from high wages and rigid employment laws in the European Union.
They focused on profitability long before mainstream dot.coms, because most of the porn operations have to be funded from their own cash flow.
“I can’t even get a bank account, because I’m in the sex industry,” said Rodenburg, challenging the tolerant image of his Dutch home nation.
Growth Of Sex Sites Is Paid For By Own Cash
Profitability is a challenge considering that these sites are among the most popular on the Web and constant investments are needed to keep up with rapid growth. Private now has three million unique visitors to its flagship site every month, said managing director Bjorn Skarlen.
The popularity shows up in the charts.
“Porn sites are among the top 20 sites in some countries. Adult entertainment is the 11th most popular category on the Internet in Britain,” said Mari Kim Coleman, Britain’s managing director of Internet research group MMXI.
Porn sites are also big bandwidth consumers because they pioneered streaming video over the Web by sending sex films to personal computers.
Casa Rosso claims to be one of the largest customers of Canadian network operator Teleglobe Inc (Toronto:TGO.TO – news).
The video maker, who generally refers to its products as ”content,” set up its computers in Canada to cut costs of transatlantic data traffic to its main market of the U.S..
At the same time it is bypassing stricter U.S. regulations on sex businesses.
Clayman’s privately-run Video Secrets runs 120 big computers from its Los Angeles studios where it produces 430 hours of live sex shows every day. It has two other studios in Canada and Eastern Europe.
Porn Sites Are Kept Simple To Please All
But it is not just cost control which should be a beacon to mainstream dot.coms which have only started trimming expenses after impatient investors threw in the towel this summer.
Porn sites also quickly understood that it should keep its sites easy to navigate and they were among the first ones to adopt java software programs that eliminated the need for ”plug-ins” to play videos.
“When we started we were too focused on technology,” Rodenburg said. “But we found that consumers lose interest if they have to download plug-ins before they can watch anything.”
This was confirmed by Danni Ashe, reputedly the most downloaded woman on the Web, and chief executive of her $30 million a year Web site Danni’s Hard Drive.
“We have to give people option to watch content that fits best with their computer,” she said.
Boo.com, the high profile sports fashion retailer which collapsed this spring, clearly never listened to these entrepreneurs as only people with the latest software could enter its Web shop.
The adult entertainment industry, which also cross-links to rivals because this has proven to drive up traffic, is now getting to grips with another major issue that is threatening the on-line industry: credit card fraud.
Visa recently released exploding fraud figures, mostly related to Internet and telephone transactions where fraud rose by 138 percent year-on-year.
While the average card fraud was 0.1 percent overall, porn Web sites such as Ashe’s counted itself lucky with 0.5 percent. Casa Rosso conceded a 1.5 percent fraud rate which is still seen as lower than the industry’s average.
Credit card companies are now charging huge fines to companies that crossed certain fraud thresholds, but solutions to prevent fraud are inadequate, said Ashe.
“We have made e-commerce big on the Web and are now being punished for it.”
Unsurprisingly, sex sites are working on alternative payment methods that should help their business models.
No doubt mainstream e-commerce companies can draw a lesson or two when the porn industry has figured this one out.
