The debate about revenues in the adult industry is everywhere and Christ-on-a-dildo is it wrong. Too many smart people with too little experience of major adult websites are dismissing the value of the internet.

Newspaper hacks can’t do much better. Websites, as private concerns, don’t publish books and are thus impervious to journalist driven forensic accounting. Given the big companies aversion to being investigated by the tax authorities (though I’ve watched it happen to zero effect – my porn guys are the good guys) the only people able to honestly discuss the income of the web-industry are insiders who’ve seen the books and even one of those isn’t enough.

To asses the web business you have to know about the workings of more than one company, and the only people fitting that description have been inside the handful of billing companies which handle transaction processing for the big websites. Your ideal informant has worked within a major billing company and has had board level access to companies on every side of the online adult industry, content sites, TGP and video-chat.

That’d be me then.

Forbes are quoting Playboy (which is like interviewing Huell Howser for a piece on ‘The best paid people on TV’) and everyone else has assumed the video retail industry is the bulk of modern porn because they don’t know any better. I do. As someone who’s seen the subscriber and revenue numbers for more of the major adult companies than any-one else writing on the subject, I can tell you that there are billions missing from the current debate.

Allow me to break it down:

• The average tier-1 adult website charges $20 a month and has 20-40K subscribers. That’s $400k a month per site, or $4.8M a year, and a conservative estimate puts the number of sites on that level world wide at 100. That’s $500M a year of business without looking at the talented amateurs, the top tier of whom are also clearing $1M per anum and who number in the hundreds.
• Video-chat sites (iFriends, IMLive, CamContacts, LiveJasmin etc) charge an average of $1.50 a minute and the biggest players have an an average total take of about $150 a minute. That’s $216K a day which, even when split 50/50 with chat-hosts and minus running costs provide $100K a day, or $3M a month (yes, there are the costs of running an affiliate program to factor in, but I’m being conservative in my other assumptions and accounting for that expense by underestimating in other areas. E.g. Most companies don’t split 50/50 with chathosts, and 100 active conversations at $1.50 a minute is less than the big guys are averaging – most of them handling fewer chats but at significantly greater average revenue). There are roughly 10 sites of that size and, though the drop-off is sharp, the top 3 are all making over $100M a year and the #1 player is bringing in well over $300M. These figures are not guesses and the top 10 live video-chat sites thus represent over $1B in revenue.
• More philosophically, can our definition of ‘porn’ remain rational while including Playboy and excluding Nuts and Loaded, while all three publish identical photos with identical intentions. If porn is defined by content, not the press releases put out by fearful publishers, we should include everything that’s designed as sexual entertainment and include NN (nearly nude) sites too (tell me this nudity-free site isn’t porn). ‘Demi-porn’ is a growing sector which isn’t being counted by anyone but which can only be left out of industry discussions using the same blinkers the video guys use to ignore the web.

Jenna Jameson doesn’t make as much hard-cash as some of the biggest amateurs in Canada and she’s at the top of the performer tree (though she performs so little it’s get-ting hard to put her in that category). Though the average porn-performer makes more than the average adult webmaster, there are just a few hundred working adult performers on the planet, there are tens of thousands of webmasters. Sites you’ve never heard of are making $1M a month and many more in the $10-$100K range operate completely under the radar. No one who understands the difference between gross and net would rather own Vivid Pictures than The Hun because in porn a sole-trader with a PC and a basement can easily out-perform a corporation with product in every adult store in America.

Yes, the porn industry’s smaller than the $10-12B so often bandied about and enthusiastically swatted down, but video, TV and cable are just the public face of a very private enterprise. The global internet business is worth billions, even if estimates are limited to the conservative back-of-the-envelope sketches presented here. Factoring in the long-tail and demi-porn you’d have to double those estimates. Suddenly those ridiculous numbers don’t look as off as some are suggesting – and the web looks a hell of a lot bigger than the video market. Amazingly, in 2006, this seems to be news.

Popularity: 75% [?]

This isn’t the post I intended to write. I’d planned a detailed interview on capital and porn which would explain why business’s which deal with explicit sexuality are more likely to get funding from the Taliban than banks, financiers and other traditional lending institutions. I wanted to find out what the barriers are to adult business, how they might be overcome and which things are guaranteed to make an adult business seem untouchable.

My interest was born of experience. I know adult companies which have eight-figure sums of cash in the bank and aren’t allowed to provide their executives with corporate VISA cards as they’re considered to be ‘high risk’. Porn companies invariably have to grow without the benefit of external investment. Given most of them operate entirely legally, and that venture capitalists aren’t known for operating within a nuanced ethical framework, logic suggests the reason porn is so bad and getting funding is due to a misunderstanding of the rules which govern finance. I wanted to talk to an expert about those rules and see if we could provide some advice for people interested in doing it right.

It would have been great.

Looking for an expert opinion I contacted Fred Wilson, a venture capitalist who’s better known in blogging circles than he is in the world of finance (which is not an insult, but is the sign of a successful blog). Over the course of a few emails it became clear I wasn’t going to have the conversation I’d been hoping to and I gave up on getting detailed responses. Looking back on those emails today though, I see they provide a perfect example of the difficulty faced by the adult industry when attempting to mix in polite society. If you run an open-cast mine, sell advertising into school textbooks or design land-mines you can hold your head high at any table in America. Show people boobies? I think I’m feeling a little sick. I mean how can you live with the harm you cause?

Our conversation says more about ‘mainstream’ attitudes to porn than anything I could extrapolate. The mixture of revulsion and aggression in his answers to my, really pretty damn polite, questions mirrors many conversations I’ve had with people and companies who only have a problem with the commercial exploitation of sexuality if it’s done honestly. I offer our exchange here as an object lesson.

Sam to Fred:

Fred,

I’m a reader of yours with a blog about 10% as popular as yours on a good day. I’d like to ask you a few questions for a VC related post on mine.

My blog concerns the adult industry and you don’t need to be a fan, or even approve, to provide great answers. I’d like to get a sense for why VC firms avoid legitimate adult content, how that may change and what your own advice is regarding adult business’ seeking investment.

Is this doable?

Cheers,

Sam.

Fred to Sam:

It just has a taint that they’d rather not deal with

fred

Sam to Fred:

Thanks Fred – pretty pithy. Care to talk about why that is? I’m sure many VC’s have dealt with Playboy stock, why then would someone trying to emulate that company not be treated the same way?

It seems that there’s a degree of confusion. What would you say the limits are? How sexy do you have to be before VC’s close the door?

American Apparel have very sexy ads (featuring porn stars) and MTV specializes in teenage girls behaving sexually. I don’t mean to sound accusing, I’m simply trying to get a grasp of where the lines lie.

Sam.

Fred to Sam:

You know the old saying “I can’t define pornography, but I know it when I see it”

That’s how the VCs behave

fred

Sam to Fred:

I’m very familiar. Regarding legality though, I’m surprised that no VC’s have seen the potential and thought “This is perfectly legal, ethically sound in my book and a huge opportunity”. Do you think that if a single VC firm was bold enough to back a defendable adult business they’d start a flood? Could the hesitancy be due to fears regarding the difficulty of selling an adult company – however successful?

Many of the big online companies make a fortune from porn and receive funding but are careful about not being “only” porn. GUBA’s just done a deal with Time Warner and they make a fortune selling access to porn newsgroups. Would you say the smart way to pitch an adult company is as general interest with adult entertainment potential (like Yahoo! Groups for instance) and stealthily sneak in the back door?

Sam.

Fred to Sam:

You may be right but I wont do it.

Just isn’t my thing

fred

Sam to Fred:

Got it. Do you have any thoughts on why other VC’s aren’t doing it? Universal conservative morality? Fear of reprisal?

Sam.

Fred to Sam:

Its the taint I mentioned

I could give a fuck about morality

But I don’t want to be associated with porn

Fred

Sam to Fred:

I appreciate the honesty.

I’m sorry if you feel ‘tainted’ by this exchange. If you knew about the other work I did I’m sure you’d be surprised. I’m not a bad guy and I love your blog. Exploitation disgusts me too.

Cheers,

Sam.

Fred to Sam:

I don’t feel tainted by the exchange.

I was just trying to explain the situation to you in the most colorful way I could.

fred

Sam to Fred:

Glad to hear it. It’s really useful feedback too.

Cheers,

Sam.

NB: Fred’s blog is well worth reading if you’re interested in the business of money (or AOR – as the above suggests he’s not very ‘Rock-n-Roll’)

Popularity: 33% [?]

The last time I spoke about affiliate programs it was in the high-minded PowerPoint speak of someone explaining a concept. Terribly pretty, rigorously researched and less than 100% useful. Now I’ve spent a few months using a range of currently popular affiliate programs across a number of blogs, owned by me and others, I want to share some frank been-there-done-that (recently) feedback.

You can never tell how programs work until you try them, unless you have access to someone else’s numbers, so to that end, I’ve included a few of mine.

Though conversion rates are pretty stable across sites, the amount of clicks you can send is highly variable. A program with a lower conversion ratio might be more profitable than one with a high conversion ratio IF the program give you banner and content that people want to click on. For that reason don’t look at the conversion figures I’ve included as ’scripture’. My ad might be bad (are you mad!?) or perhaps they’re in the wrong place (right – I’ve had just about enough of this insubordination!)

Skin Video – Highly Recommended
Skin Video offers some of the most advanced webmaster tools I’ve seen, and the only weakness I can find is a difficulty making separate, trackable links to the same page (i.e. you might want to see how two text links with different wording perform). You can create custom banners, organize links from multiple sites and check your performance against other webmasters. Knowing where you stand vs. other advertisers is a real bonus if you think you’re having a bad week and want to see if everyone else is too, it also provides an idea of what you should be aiming for. You might be doing better, or worse, relative to the average affiliate, than you think.

There’s not much content, they don’t produce any and because most of the stuff posted to the newsgroups they provide access to is under someone else’s copyright. That’s limiting if you want to use their images to build ads of your own (I do – custom work, works better).

(NB: Some people hate Skin Video on principle – seeing them as profiting from piracy because they sell access to material on NewsGroups much of which is copyrighted. Personally I don’t see how they differ Google, who provide access (and cache on their server) masses of copyrighted material, or an ISP who provides access to the web. Blaming SkinVideo is shooting the messenger.

Average conversion: 1:700 (i.e. I make one sale on average for each 700 clicks I send)

Adult Webmaster Empire – Highly Recommended
AWE have sites which offer live video chat and the economics of that are significant. Most programs pay a percentage of what each user spends each month so, on a subscription site that tends to be from $5-$20. Video chat is billed by the minute, so a single customer can spend $100-$1,000 in a month and the biggest/most obsessive video-chat customers can spend $1,000 in a day. Obviously referring even one big spender can be worth a huge amount if you’re paid the right way.

They offer a lot of free content and highly advanced webmaster tools. Not only useful but a sure sign they take your business seriously.

Average conversion: 1:380

New Nude Cash – Recommended
Spectacular looking women photographed beautifully are the draw and these guys are very, very generous with content. The only thing stopping them from being ‘Highly Recommended’ is the softness of their material. Whatever people say, I always find more explicit ads out-perform softer ones. With such soft content, it can be hard to drive enough clicks if there’s harder material on the pages you’re using to promote their sites. Placement is everything.

Their webmaster tools are good and their affiliate site is as elegantly designed as their sites.

Average conversion: 1:600

AdBrite/AVN Ads – Neutral
If you leave AdBrite to set your advertising rates and don’t get many page-views it’s almost pointless joining the program.

Most ad buyers in their network will only know they can buy space on your site if you promote the fact. The fantasy that there’s a team of people working on your behalf is a fantasy unless you’re a significant site with serious traffic. In that case, you could probably sell your advertising direct anyway without AdBrite’s assistance or cut.

A lot of people like the simple, ‘Google style’ presentation of AdBrite’s ads but I find the javascript behind their links can be slow, making it’s placement near the head of a page risky. Anyone who follows Google knows that pay-per-click advertising is so vulnerable to fraud that many big advertisers have turned away from it entirely. Don’t bank on it paying for your retirement.

AdBrite are increasingly worthwhile as your site grows and work best if you actively promote your ad placements and adjust your prices to the market manually. Using AdBrite to handle the money, and selling the ads yourself is another option if you have a narrow enough audience to make that viable.

Average conversion: N/A

VideoBox – Questionable
Despite having a great website from a users point of view, VideoBox’s all-you-can-eat for $9.99 model hurts their affiliates. As an affiliate you only earn about $7 a sale, you’re onto a loser unless they convert twice as well as the competition and they don’t. Their stats have a nasty habit of showing you a gross figure and then a ‘processing fee’ which has been deducted. I don’t mind the fee but Jesus, why rub my nose in it?

Average conversion: 1:600

Friend Finder/Alt.com – Questionable
Probably the most advertised affiliate program online, mainly due to their programs age. It’s the unoriginal choice, kind of porn’s own ‘X10 Webcam’.

They offer a range of different payment schemes which change the bounty paid for each click or sale depending on a number of complicating factors. It’s confusing and makes their performance hard to predict. I suspect most people would prefer a lower fixed number than the ‘potential’ to earn $50 a sign-up but in fact earn a variable amount which changes seemingly at random.

Once again, the program’s biggest drawback is the low cost – as low as free – of signing up with their sites. That makes for a low average bounty and means your traffic is under exploited here relative to other, richer programs.

Average conversion: 1:700

I hope that bit of business exhibitionism’s useful. Got affiliate heroes? Horror stories? Let me know.

Popularity: 35% [?]

Yesterday I commented on the futility of trying to beg your way to riches via your blog. I was pooh-poohing. Bastard. Today I’m going to accentuate the positive and run down five business models I believe can work for (sex) blogs and we’ll see in increasing numbers this year.

Charged Archives
What is it?: Placing blog archives in a member’s area where people have to pay for access to old content.

Who’s it good for?: Sex podcasters could do very well with this. The difference between their content and the stuff that’s traditionally used to fuel a pay-site is minimal. By keeping new shows free via RSS, the marketing for the locked archives is built in. It doesn’t hurt regular readers, your content remains free to anyone who grabs it when it’s new.

A softened version of this idea involves putting out a ‘decaf’ version of your content and then keeping the ‘caffeinated’ version for members only. It’s a far weaker implementation and not the version I’d recommend. I can’t see written content having enough appeal to make this work either (with a couple of rare exceptions).

Product Placement
What is it?: Advertisers pay bloggers to include product names, images and references in their posts.

Who’s it good for?: Big mainstream blogs mostly. It’s a very low-return form of advertising, and only works for companies prepared to invest a lot in a brand. The downside is that being discovered doing this will make you appear ’sneaky’ in the eyes of many (don’t worry, they’ll be making less money than you.) This is happening already in a couple of blogs and, reading their comments, it’s clear the readers don’t know it’s happening. Are you sure that blogger you read really likes that record and isn’t just being paid to mention it in their sidebar? Couldn’t you go for a cool, refreshing Coke right now?

Offsite Advertising
What is it?: Making money from selling ads on a website that’s not your blog. Your blog links to a network ‘hub’ that carries ads, you get a slice of the ad-revenue equivalent to the amount of traffic you send. Your blog stays ad-free, you get paid and you can sell ads you wouldn’t want seen on your blog.

Who’s it good for?: Almost everyone. The appeal of having an ‘ad-free’ blog and still making money from advertising is huge. It’s very easy to set up, and because a network of blogs can send more people to an ad than one blog alone, the bigger the network of sites involved, the more profitable the network becomes. Who said Sugasm? What!? Oh… that’s an idea…

Ad-extortion
What is it?: You place ads on your blog, and then offer people the opportunity not to see them if they pay for a ‘clean’ version.

Who’s it good for?: Bloggers with large audiences but who aren’t successfully selling advertising. This model doesn’t use ads to sell, they’re placed as an annoyance and the more annoying they are, the more likely someone will pay to turn them off (assuming your content’s worth sticking around for). Porn consumers are generally prepared to put up with a lot, but I won’t be surprised to see one of the bigger adult-magazine-style blogs take a crack at this. Salon and IMDB have been doing this for years and if your content’s ‘essential’ it can work, particularly If you throw in a couple of enhanced features.

See, no pooh-poohing today, all positively (and yes – I am going to be rolling out a couple of blogs using these approaches myself). Now where’s that Coke?

Popularity: 33% [?]

Jason Kottke.

It’s a little sad, and a lot inevitable, to hear that Jason Kottke of kottke.org (an old-school super-blogger with a lot of readers) has stopped taking donations in a bid to make his site his sole source of income.

A lot of bloggers are living in the hope that at some point enough people will want to give them money to make pro-blogging viable. Kottke, who according to Technorati has the most popular blog being published, raised a total of $39K in the last year. Better than minimum wage but not enough to justify a 12hr a day blogging habit.

Can sex blogs, who’ll always have smaller audiences than the largest of the mainstream blogs, ever hope to profit from good-will if Kottke can’t? When is (sex-)blogging going to get a business model that doesn’t rely on having enough readers to make ad sales viable? Is the very idea of free-content without a revenue-driven agenda a little quaint?

Popularity: 33% [?]

People are talking to me about the problems of making money from podcasting. It’s a uniquely challenging dilemma, podcasters spend enormous amounts of time (and money) producing shows and most get nothing in return – even people producing public television get a check.

Right now the focus seems to be on getting sponsorships and advertising. It forces a return to the old ‘free-ness’ debate. Should everything digital of value be available ‘free’ and supported by advertising? Is anything which contains ads free, when ads take up time that’s got real value? (I’d say no on both counts.)

I suspect the next step we’ll see in adult podcasting will be the launch of a subscription model. A few podcasts will charge a nominal amount for access, perhaps offering limited free access in parallel. Will this work? Is there any price you’d pay for a weekly audience with Violet, Kitka or SoccerGirl? If not, would you be happy to spend your time downloading shows that are 20-33% advertising like TV?

I can’t imagine things will stay as they are over the next twelve months. Steve Jobs has already hinted at putting advertising supported podcasts in iTunes. The question is, do we really want the internet to be more like commercial TV?

Popularity: 39% [?]