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Sex Sells

Well, you knew that already. But we wondered what those frisky X-rated sites could teach other Web sites struggling to find a way to turn eyeballs into cash. Here are five profit-generating strategies from an erotic B2C site that’s been in the black since day one: Penthouse.com.

Name one pure-play dotcom that’s turning a profit by hawking content today. I can name two dozen — and they’re all banned by your corporate Web policy.

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Porn is hot. The domain name sex.com just garnered $65 million. Two weeks ago, Yahoo! grudgingly yanked profitable adult-related products from its site after prudish users protested. And if my inbox is an indication of corporate virility, those hot college sluts are jiggling all the way to the bank.

Yes, they have a rabid user base, but sex sites face the same pedestrian challenges — fickle users, spotty advertising — that have capsized so many consumer Web sites. So are sex sites really making big money? Are they hiding some profit-generating secret? And if they are hiding something, why aren’t they sharing it with the rest of the B2C folks?

David Card, vice president and senior analyst at Jupiter Media Metrix, doubts whether porn can offer any winning formulas that may benefit standard e-commerce sites. In a Jupiter report published in August 1999, Card pointed out that consumers of online pornography tolerate advertising disruptions, poor quality, and “a generally unpleasant online experience” that no CDNow customer would ever willingly endure.

“The idea that online porn can teach valuable lessons in community- and brand-building, and in paid content in general … is absurd,” Card writes. The only thing worth studying, he says, is adult entertainment’s effective syndication of content and promotion networks.

Gerard Van der Leun begs to differ. Vice president of Internet ventures at Penthouse, Van der Leun believes that his scrappy site has hit upon several attractive, albeit elementary, principles for generating revenue online.

Second only to Playboy bunnies, Penthouse pets no longer only live beneath adolescents’ mattresses and behind gas-station toilets. In fact, Penthouse models have frolicked on millions of Web browsers around the world since 1988, when Kathy Keeton, the late wife of Penthouse publisher Bob Guccione, encouraged her husband to develop an online presence for his X-rated magazine. A rabid technology consumer and early adopter of electronic publishing, Keeton first made Penthouse articles available on the Net, but quickly learned that text was not a turn-on. Photos followed shortly after.

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In 1995, Penthouse officially launched Penthouse.com. Today, the site generates approximately 30 million page views and claims about 2.5 million unique visitors each month. (By contrast, Amazon.com had about 18 million unique users in February 2001.) Van de Leun says that his profit margins are “above 50% and below 200%.” Not bad for a B2C in 2001.

Fast Company spoke with Van der Leun about Penthouse.com’s online strategy and the ways traditional dotcoms can profit from learning how adult-entertainment sites make money from loyal users.

Don’t Give It Away

“Penthouse.com learned very quickly not to rely on ads to pay the bills,” Van der Leun says. “We’re more than happy to take advertisers’ money, but we won’t live and die by their whims.”

Rather than courting potential advertisers, the Penthouse.com staff devoted its early days to developing an e-commerce model that would generate immediate revenue and satisfy demanding users. While other publications introduced Web sites with free content and services, Penthouse.com demanded payment for every peek.

U.S. federal laws require Web sites containing obscenity to block that content from minors. The Federal Telecommunications Act of 1996 states that no one under the age of 18 may view obscene or pornographic material online. To guard its site against underage users, Penthouse.com requires users to submit credit-card information before entering its online galleries and merchandise areas. (A credit-card account represents a binding contract; minors are forbidden by federal law to enter into binding contracts without the consent of an adult.)

Some adult-entertainment sites collect credit-card information only to verify a user’s age; they don’t actually charge the card for content and services found online. Penthouse.com, however, charges a premium for the majority of its content — without apologies. Satisfy your users’ basic needs and desires, Van de Leun says, and they will pay top dollar.

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“Penthouse.com was in the red for about two and a half hours on the day it launched,” he says. “We’ve been in the black ever since.”

Members Only

Penthouse.com recognizes that every user arrives at its site with a unique set of expectations and objectives. To accommodate this diverse clientele, Van der Leun introduced five membership options to serve first-time visitors and loyal regulars alike. New, recession-minded price points range from $9.99 for a two-day pass, to $120 for a yearly preferred membership.

Members receive more than just affordable porn. They gain admittance to an elite club — a cadre of Penthouse.com loyalists who regularly return to the site for a fix. Those enthusiasts remain faithful partially because Van der Leun has worked hard to make sure that they can’t find pictures of Penthouse pets anywhere outside his domain.

Penthouse.com doesn’t tolerate piracy. Van der Leun guards content with an iron fist, and he refuses to license or sell pictorial content to other Web sites for publication or sale. If you want to see Penthouse models on your computer, you either pay Van der Leun’s prices or take a cold shower and call it a night.

“We have a global pack of attack lawyers who go after any site that tries to steal content from Penthouse.com,” he says. “Our corporate policy is to shoot the pirates.”

Take the Money and Run

There is a difference between self-reliance and independence. Though Van der Leun says that Penthouse.com could survive without advertising, he certainly isn’t eager to test the theory. Unregistered users who arrive at Penthouse.com receive five simultaneous pop-up windows, stacked one on top of another, advertising everything from subscription discounts, to photos of “Asian sluts,” to X-rated cartoons. In short, the introduction to Penthouse.com is far from subdued.

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Van der Leun knows that this barrage of advertisements may turn away some viewers, but he’s done the math and honestly couldn’t care less. “When I total up the advertising revenue that those pop-ups bring in, I figure that I’ve got to turn away a hell of a lot of people to make using pop-ups a losing proposition.”

Penthouse.com’s message to its users: Chill out. “I can’t understand the nerve of some Web users who complain about seeing a pop-up ad on our site,” Van der Leun says. “I give you a photo of a beautiful woman, and you bitch and moan about a stupid pop-up window? Give me a break!”

Understand Your Man

By requiring users to sign up for site membership, Penthouse.com keeps close tabs on regular site visitors. Every time a user lets his membership expire, the site conducts an exit interview. The online survey asks about specific likes and dislikes, as well as suggestions for site improvements.

Last year, exiting users complained that online movies weren’t streaming as well as they should. Immediately, Van der Leun deployed his troops. He spent two months reworking movies offered over the Web. That investment is steadily paying off as video becomes an increasingly popular feature on the site.

As bandwidth improves and more users upgrade their personal computers, Van der Leun expects X-rated movies to surpass photos in popularity among online enthusiasts. And Penthouse.com intends to own that category when it fully emerges.

Right now, Van der Leun is working with a company called LockStream that specializes in direct digital-content delivery. He hopes to launch an application that will prevent users from passing along content for free to friends. This mechanism will protect the hundreds of Penthouse films being unearthed from the archives and digitized for online use.

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Size Matters

Even during the most inflated days of Internet mania, the staff of Penthouse.com never exceeded 30 people. Today, Van der Leun employs about 25 people — a rough mix of production folks, programmers, and content specialists. That’s a very lean and mean staff for a site with such grand ambitions and healthy profit margins.

“Our team may be small, but we will survive,” says Van der Leun, who predicts that his staff will remain modest until consumer confidence increases alongside computer sales.

One grossly understaffed department at Penthouse.com is online publicity. Van der Leun has never felt that it was necessary to publicize the Web site as an independent entity — to differentiate it from the magazine in users’ eyes. Therefore, he lets the magazine, and its relatively large budget, worry about promoting the brand.

“If you’re a heterosexual guy and you’re on the Net, I’m going to see you within your first week online,” Van der Leun says. “I don’t rely on focus groups, advertising executives, or consultants — I rely on the Penthouse brand and its loyal customers. If Penthouse doesn’t have a gut instinct about its customers after all these years, we’re in trouble.”

If nothing else, this strategy differentiates Penthouse.com from the scores of hard-core sex sites littering the digital landscape. Erotic Networks, for example, owns more than 1,300 domain names — various X-rated words that Web surfers often type into their browsers when searching for adult content. Those URLs redirect to one of Erotic Networks’s sanctioned Web sites, each one serving a distinct niche of the porn audience. While Erotic Networks is canvasing the Web for any and every curious surfer, Van der Leun is concerned only with satisfying the discriminating group of Penthouse.com readers who come looking for his ladies.

“If your content is really valuable, charge money for it,” Van der Leun insists. “If only 10% of your site visitors will pay you, then that 10% is your audience. Forget the others. Satisfy a basic human need for your core audience, and you will win.”