NYTimes.com Article: Technology Sent Wall Street Into Market for Pornography

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From: lrivers@realsoftware.com
Date: Sun Oct 22 2000 - 21:33:46 PDT

This article from NYTimes.com
has been sent to you by Lorin Rivers lrivers@realsoftware.com.

FoRK List

Americans spend 4 Billion a year on porn videos...

Lorin Rivers

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Technology Sent Wall Street Into Market for Pornography

October 23, 2000


PROVO, Utah The video-store chain that Larry W. Peterman owned in
this valley of wide streets and ubiquitous churches carried the
kind of rentals found anywhere in the country from Disney
classics to films about the sexual adventures of nurses. Mr.
Peterman built a thriving business until he was charged last year
with selling obscene material and faced the prospect of bankruptcy
and jail.

 Just before the trial, Mr. Peterman's lawyer, Randy Spencer, came
up with an idea while looking out the window of the courtroom at
the Provo Marriott. He sent an investigator to the hotel to record
all the sex films that a guest could obtain through the hotel's
pay-per-view channels. He then obtained records on how much erotic
fare people here were buying from their cable and satellite
television providers.

 As it turned out, people in Utah County, a place that often boasts
of being the most conservative area in the nation, were
disproportionately large consumers of the very videos that
prosecutors had labeled obscene and illegal. And far more Utah
County residents were getting their adult movies from the sky or
cable than they were from the stores owned by Larry Peterman.

 Why file criminal charges against a lone video retailer, Mr.
Spencer argued, when some of the biggest corporations in America,
including a hotel chain whose board of directors includes W. Mitt
Romney, president of the Salt Lake City Olympics organizing
committee, and a satellite broadcaster heavily backed by Rupert
Murdoch, chairman of the News Corporation, were selling the same

 "I despise this stuff some of it is really raunchy," said Mr.
Spencer, a public defender who described himself as a devout
Mormon. "But the fact is that an awful lot of people here in Utah
County are paying to look at porn. What that says to me is that
we're normal."

 It took only a few minutes for the jury to find Mr. Peterman not
guilty on all charges. His case illustrates what has happened to an
industry that used to be confined to the margins of commerce, in
the seedy parts of most towns, run by people who never dreamed of
taking their companies to Wall Street.

 Spurred by changes in technology that make pornography easier to
order into the home than pizza, and court decisions that offer
broad legal protection, the business of selling sexual desire
through images has become a $10 billion annual industry in the
United States, according to Forrester Research of Cambridge, Mass.,
and the industry's own Securities and Exchange Commission filings.

 Whatever the phenomenon may say about the nature of American
society, the financial rewards are so great that some of the
biggest distributors of explicit sex on film and online include the
country's most recognizable corporate names.

 The General Motors Corporation, the world's largest company, now
sells more graphic sex films every year than does Larry Flynt,
owner of the Hustler empire. The 8.7 million Americans who
subscribe to DirecTV, a General Motors subsidiary, buy nearly $200
million a year in pay-per-view sex films from satellite, according
to estimates provided by distributors of the films, estimates the
company did not dispute.

 EchoStar Communications Corporation, the No. 2 satellite provider,
whose chief financial backers include Mr. Murdoch, makes more money
selling graphic adult films through its satellite subsidiary than
Playboy, the oldest and best-known company in the sex business,
does with its magazine, cable and Internet businesses combined,
according to public and private revenue accounts by the companies.

 AT&T Corporation, the nation's biggest communications company,
offers a hard- core sex channel called the Hot Network to
subscribers to its broadband cable service. It also owns a company
that sells sex videos to nearly a million hotel rooms. Nearly one
in five of AT&T's broadband cable customers pays an average of $10
a film to see what the distributor calls "real, live all-American
sex not simulated by actors."

 For all the money being made on sex legally by mainstream
corporations, the topic remains taboo outside the boardroom. The
major satellite and cable companies do very little marketing of
their X-rated products, and they are not mentioned in annual
reports except in the vaguest of euphemisms.

 None of the corporate leaders of AT&T, Time Warner, General
Motors, EchoStar, Liberty Media, Marriott International, Hilton, On
Command, LodgeNet Entertainment or the News Corporation all
companies that have a big financial stake in adult films and that
are held by millions of shareholders were willing to speak
publicly about the sex side of their businesses.

 "How can we?" said an official at AT&T. "It's the crazy aunt in
the attic. Everyone knows she's there, but you can't say anything
about it."

 For hotels, the sex that can be piped through television generates
far more money than the beer, wine and snacks sold from the rooms'
mini-bars. Just under 1.5 million hotel rooms, or about 40 percent
of all hotel rooms in the nation, are equipped with television
boxes that sell the kind of films that used to be seen mostly in
adults-only theaters, according to the two leading companies in the
business. Based on estimates provided by the hotel industry, at
least half of all guests buy these adult movies, which means that
pay-per-view sex from television hotel rooms may generate about
$190 million a year in sales.

 At home, Americans buy or rent more than $4 billion a year worth
of graphic sex videos from retail outlets and spend an additional
$800 million on less explicit sexual films all told, about 32
percent of the business for general-interest video retailers that
carry adult topics, according to compilations done by two trade
organizations that track video rentals. Chains like Tower Records
now stock nearly 500 titles in their so-called erotic category, far
more than films about history or dinosaurs.

 On the Internet, sex is one of the few things that prompts large
numbers of people to disclose their credit card numbers. According
to two Web ratings services, about one in four regular Internet
users, or 21 million Americans, visits one of the more than 60,000
sex sites on the Web at least once a month more people than go to
sports or government sites.

 Though estimates have been greatly inflated by some e-commerce sex
merchants, analysts from Forrester Research say that sex sites on
the Web generate at least $1 billion a year in revenue, providing a
windfall for credit card companies, Internet search engines and
people who build Web sites, among others in the commercial food

 Some of the most popular Web properties which feature quick
links to sites labeled "Virgin Sluts" and "See Teens Have Sex"
are owned by a publicly held company in Boulder, Colo. That
company, New Frontier Media, has stock traded like any other, and
it expects its video network to be in 25 million homes within a few
years. It does business with several major companies, including
EchoStar and In Demand, the nation's leading pay-per-view
distributor, which is owned in part by AT&T, Time Warner,
Advance-Newhouse, Cox Communications and Comcast.

 Another company, LodgeNet, whose chairman is Scott C. Petersen,
does $180 million in annual business selling sex videos and other
forms of room entertainment to hotels. LodgeNet is a major employer
in Sioux Falls, S.D., its home base. It is a client of the
accounting giant Arthur Andersen, and nearly a fifth of the
company's public shares are held by a Park Avenue investment firm,
Red Coat Capital Management of New York.

 "We feel good about what we do," said Ann Parker, a spokeswoman
for LodgeNet, which trades on the Nasdaq market. "We're good
corporate citizens. We contribute to local charities."

 The biggest provider of hard-core sex videos and adult Web
content, Vivid Entertainment Group of Van Nuys, Calif., whose
founders and principal owners are Steven Hirsch and David James,
has been making the rounds of investment bankers of late, preparing
for an initial public stock offering next year that could
ultimately lead to the first porn billionaire.

 "The adult entertainment business is just exploding," said Bill
Asher, the president of Vivid, whose offices are in a new granite
and glass building that houses investment and venture capital
firms. "Right now there are a lot of people making a lot of money.
Somebody's got to take control of it, and we figure it might as
well be us. We see ourselves as the designated driver of this

 To the astonishment of Mr. Flynt, who began in the pornography
business by selling poor-quality pictures of naked girls as a way
to build interest in his strip clubs, his competitors in the $10
billion annual adult market are mainstream corporations whose board
members are among the American business elite.

 "We're in the small leagues compared to some of those companies
like General Motors or AT&T," Mr. Flynt said. "But it doesn't
surprise me that they got into it. I've always said that other than
the desire for survival, the strongest desire we have is sex."

The Technology Factor: Look, Ma, No Staples!

 Thirty years ago, a
federal study put the total retail value of hard-core pornography
in the United States between $5 million and $10 million or about
the same amount that a single successful sex-related Web site
brings in today. It seemed likely that the industry would remain
where it had always been largely out of sight, but profitable,
and faced with consistent legal problems.

 What kept the market relatively small, in the view of people in
the industry, were the barriers between consumer and product.
Typically, a person would have to go to a run- down part of town,
among people considered less than savory, to find hard-core adult
films or bookstores. These retail outlets frequently were raided by
law enforcement authorities, further adding to the risk for a
consumer a risk of shame, or arrest.

 In 1975, the Sony Corporation released the videocassette recorder
to the broad market, and within 10 years, about 75 percent of all
American households owned a VCR. Once the venue had moved from
theater to the privacy of the home, the adult entertainment
industry was never the same. For example, a single film, "Deep
Throat," generated more than $100 million in sales, thanks in large
part to the popularity of VCR's, Frederick S. Lane III writes in
his book "Obscene Profits: The Entrepreneurs of Pornography in the
Cyber Age" (Routledge, 2000).

 But even with most Americans owning VCR's, people still had to
take a trip to the video store, risking some embarrassment.
Pay-per-view television and the Internet removed the final

 Cable and satellite programmers allow people to buy a variety of
sex-based programming, from Playboy, on the lighter side, to the
Hot Network, owned by Vivid, and the Erotic Television Network,
distributed by New Frontier, on the more explicit end of the
spectrum. Consumers could watch movies of people having sex without
ever leaving home.

 What investors and bigger corporations soon discovered was the
vast audience for pornography once the privacy barrier was
eliminated. Twenty percent of all American households with a VCR or
cable access will pay to watch an explicit adult video and 10
percent will pay frequently, according to the distributors New
Frontier and Vivid. That interest explains, in part, why the
production of pornographic films has grown tenfold in the last
decade. There are now nearly 10,000 adult movies made every year,
according to an annual survey of the films produced in the Los
Angeles area.

 Last year, there were 711 million rentals of hard-core sex films,
according to Adult Video News, an industry magazine that is to
pornographic films what the trade publication Billboard is to
records. It even has its own film awards modeled after the

 But video rentals have reached a plateau over the last two years.
The future is pay- per-view at home driven by the easy access and
good technical quality of digital television and pay-per-view
from the Internet, driven by the technological innovations of new
cable and phone lines that carry far more images, more quickly, to
a computer screen.

 "Videos changed the way people could view porn because they were
able to watch in the privacy of their homes," said Barry Parr, an
electronic commerce analyst with International Data Corporation.
"Internet pornography takes that a step further they can do it
with absolute privacy."

 The number of people visiting sex sites on the Web doubled over
the last year, outpacing the number of new Internet users. Some of
the more popular sex Web sites attract in excess of 50 million
hits, or visits, a month, according to the ratings services
Nielsen/ Net and Media Metrix. About one in a thousand people who
visit a site will subscribe, for fees averaging $20 a month,
according to some of the leading Web pornography providers and
Flying Crocodile Inc., a company based in Seattle that tracks and
services the sexual-content market.

 At the same time that technology was making it easier for people
to view pornography, legal obstacles were falling. The 1973 Supreme
Court case Miller v. California established a threshold for
defining illegal pornography; a major test was that it had to be
considered obscene to the "average person, applying contemporary
community standards."

 Initially, the case helped prosecutors clamp down on publications
and movies. But that proved to be short-lived. If "Deep Throat"
could sell $100 million worth of copies, then what was the
community standard?

 "The court may have handed off the determination of obscenity to
the local community, but the standards of local communities had
fundamentally changed," writes Mr. Lane in "Obscene Profits."

 When Mr. Peterman was prosecuted for distributing obscene material
in Utah last year, he became one of the few video retailers in the
nation charged with such a crime in recent years. In a state long
regarded as a bastion of family-values morality, more than 4,000
people signed petitions supporting his prosecution.

 But Mr. Peterman showed that he had 4,000 regular customers for
sex videos. His lawyer argued that Mr. Peterman was not violating
community standards, because people in Utah County bought 20,000
adult sex videos from one satellite programmer alone in the period
that Mr. Peterman was said to have broken the law; it was double
the volume in most cities the size of Provo. And in the Provo
Marriott, guests were paying for nearly 3,000 explicit adult videos
every year, according to court testimony. After the Peterman trial,
that hotel dropped its adult movies.

 "My client was just a little guy," Mr. Spencer said, "a
mom-and-pop dealer in a very big business."

The Corporate Factor: It's the Demand, Companies Say

 At a time
when political campaigns from the presidential level down to that
of the local school board have made an issue of sexual excess in
broadcasting, the corporate entanglements in the pornography
business have blurred the lines of the debate.

 In Missouri this year, Senator John Ashcroft, a Republican, ran
ads denouncing "Hollywood's decaying influence" on society,
singling out his Democratic opponent, Gov. Mel Carnahan, for
accepting donations from Christie Hefner, the Playboy executive.

 Mr. Carnahan, who died last week in a plane crash, had countered
by pointing to donations to Mr. Ashcroft from Charles W. Ergen,
chief executive of EchoStar, which sells adult pay-per-view through
its fast- growing DishNetwork satellite division.

 "If he's going to start that, he's in greater trouble than I am,"
Mr. Carnahan had said.

 Mr. Ashcroft's supporters had replied that there was still a
distinction between the two companies: EchoStar did not produce
pornography it merely sold it, while Playboy created its own
videos and pictures, they said.

 "We added adult at the request of our customers," said Judiann
Atencio, a spokeswoman for EchoStar. "We have something for
everybody, from Irish hurling to cricket. Adult is there if you
want it."

 When AT&T announced that it would start offering the hard-core Hot
Network to its 2.2 million digital cable subscribers beginning in
August, they were castigated by critics and pressured by religious
and civic groups that hold stock in the company.

 A group of mutual-fund investors, which included the Sisters of
Charity of New York, the Evangelical Lutheran Church of America and
the Mennonite Church, told AT&T its members did not want their
three million shares invested in a company that sold pornography.

 "At the heart of our concern is the concept of mainstream
companies getting into hard- core pornography," said Mark Regier,
who manages a mutual fund for 800,000 members of the Mennonite
faith. "For a company with AT&T's tradition and its charitable work
to be involved with pornography at this level is unbelievable. And
I don't think many people understand what it means to take away the
barriers to this kind of material, such as AT&T is doing."

 For AT&T, there are sound business reasons to start carrying the
highly profitable Hot Network. Unlike distributors of mainstream
Hollywood pictures, sex-film distributors typically offer the
programmers a split of 80 percent of the revenue, compared with 50
percent or less for routine features.

 Impulse buys, in which customers tap a code into a remote and a
movie follows, have also spurred in-home sales of pornographic

 "Impulse technology that's been just incredible," said Mr. Asher
of Vivid Entertainment, which makes hundreds of adult films and
claims that it sells a million copies a month to cable, satellite,
home video and hotel retailers. "You have about 35 million homes
with this kind of technology now," Mr. Asher said, "and it's
growing enormously. It's easy and it's private that's the key."

 Although the companies that program explicit sex films will not
give out their revenue figures for this category, a report by the
Showtime Event Television company found that adult pay-per-view
took in $367 million last year a more than sixfold increase from
the $54 million of 1993, easily outpacing the growth of
pay-per-view "events" like boxing and wrestling.

 Time Warner, EchoStar, General Motors and AT&T all say they are
simply responding to a growing American market that wants
pornography in the home. At the same time, the companies say new
technology makes it possible for parents to keep such programming
away from children.

 "We call it choice and control," said Tracy Hollingsworth, a
spokeswoman for AT&T Broadband, the company's cable division.
"Basically, you use your remote to block out any programming you
don't want. But if you want it, we offer a wide range of
programming that is available in the market we're in."

 Hotel chains have made similar decisions when, this year, several
groups urged them to get rid of the adult pay-per-view programs
that are in nearly 60 percent of all middle- to high-end hotels.
Only one chain, the relatively small Omni Hotels, chose to remove
the sex films.

 "What we noticed was that early on, the content was R-rated, but
then it migrated rather quickly to really raunchy stuff just
hard-core porn," said Jim Caldwell, the president of Omni. "I
thought: What are we doing? We don't have topless waitresses in the

 Mr. Caldwell said more than 50 percent of all guests were buying
the sex films. "The anonymity is the big thing," he said.

 Omni's decision to remove pay-per-view sex videos from the
company's 15,000 rooms will cost the company more than $1.8 million
a year, Mr. Caldwell said. But he said he had received phone calls
and letters of thanks from 50,000 people more than for any other
corporate decision.

 Much larger hotel chains, like Marriott, which calls itself the
world's largest hotel management firm, with nearly 300,000 rooms in
the United States, and Hilton, with 290,000 rooms under its
control, have not made changes.

 Some critics said Marriott, run by several prominent members of
the Mormon Church, though not affiliated in any way with the church
itself, should drop its adult movies, given the stand against
explicit sexual materials that Mormons have long taken. But company
officials said they were mostly franchisers, and could not make
unilateral decisions for the hotel owners who paid to be a part of
the Marriott chain.

 The two companies that provide hotels with pornographic films are
both traded on Wall Street and have enjoyed big run-ups in their
stock prices over the last few years. The leader, On Command, based
in Denver, is worth more than $400 million, and its principal owner
is Liberty Media, controlled by John C. Malone, the cable and
telecommunications magnate who sits on the board of AT&T and
recently agreed to buy up to 15 percent of the shares of Mr.
Murdoch's News Corporation.

 The chairman and chief executive of On Command is Jerome H. Kern,
a former New York corporate lawyer active in civic and volunteer
causes, serving on the board of New York University and as a
director of Volunteers of America in Colorado.

 On Command would not discuss how much money it is making on adult
films. But in its annual report, the company said it was generating
$23 a room each month for the 835,000 hotel rooms it reaches. The
company goal is to get into an additional one million hotel rooms.
Analysts say at least half the revenue comes from adult films. The
company recently began offering all-day erotic television to hotel
customers, for a single price of $15.99.

 "Talk about your captive audience," said Mr. Asher of Vivid. "I've
heard that in some hotels, 85 to 90 percent of all profits from in-
room spending comes from adult channels."

The Money Factor: Big Profits Now, Bigger Ones on Way

 While the
big companies that deliver sex films to homes and hotels will not
talk about how popular explicit sexual materials are, the makers
and distributors say the volume is enormous. And court testimony
and documents that were made public in the Peterman case also
offered some insight into the profit potential.

 "Despite the fact that this material isn't marketed, revenue-wise,
it's one of our biggest moneymakers," said Peggy Simons of TCI
Cable, in court testimony in Mr. Peterman's case. TCI, controlled
by Mr. Malone, has since been bought by AT&T.

 "When we talk to the companies one-on- one, they tell us we're
great, that we're a huge moneymaker for them," said Mr. Asher,
whose company owns the Hot Network, which is available in 16
million homes. "And by the way, I tell my biggest customers don't
say you ever met me."

 In trying to take public his company, which now does about $80
million a year in sales, Mr. Asher said, "The biggest problem I
have is the image of the adult business. People think it's run by
the mob, or a bunch of guys with gold chains. I grew up in Paris,
Illinois. I have a master's of business administration degree."

 The Hot Network portrays people having sex in a variety of methods
what the company calls "widely accepted sexual activity" and
prohibits scenes of violence, nonconsensual sex, drug use, forced
bondage and sex with minors.

 Analysts of electronic commerce and telecommunications say the
mainstream sex market might be leveling off, but new technology is
likely to bring in even more consumers.

 "The novelty of it has not worn off yet, and I don't believe it
will wear off," said Sean Calder, a vice president for e-commerce
at Nielsen/Net Ratings, which gauges the popularity of Web sites.
"The numbers point to a huge personal need. We see lots of people
logging on at 3 in the morning."

 The $30 billion project to rewire the cable industry with lines
capable of bringing more material, and allowing people to buy on
impulse, will play a big part in the emerging home pornography

 "These companies like AT&T, they're thinking ahead to a time,
perhaps in 10 years, when 50 million Americans will have broadband
capability and all their television and Internet will be
interactive through one big box," said Bryn Pryor, technology
editor for Adult Video News, the trade magazine.

 "But it's not just technology that made the big boys get into it,"
Mr. Pryor said. "This just happens to be a business where you can't
lose money."

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