04/26/2001

By DOUG BEDELL / The Dallas Morning News

Yahoo may have pulled out of the sex business, but adult entertainment and the Internet are entwined in a love embrace that shows no signs of slipping.

The Web's dirty little secret is not that sex sells, but that online adult entertainment has turned profits by creating technologies and business models that are the envy of the e-commerce world.

As dot.coms bomb, many X-rated Web companies say they're suddenly finding suitors from mainstream media companies that previously shunned them.

"Companies are finally willing to admit to themselves that the adult part of the Internet is where the money is," says Kathee Brewer, researcher for Adult Video News Online. "They're starting to say to themselves, 'We really need to approach these people.'"

Yahoo, a huge online portal facing sagging profits, had planned to expand its 2-year-old adult entertainment selections until publicity caused it to back off earlier this month.

But the cash flow from delivery of soft-core and hard-core content continues to tantalize.

Last year, for example, AT&T began distributing the Hot Network to its digital cable customers. General Motors now offers adult content through DirecTV. On the Web, eBay's section for "mature audiences" offers auctions of more than 40,000 sex-related items every day, contributing in large measure to the company's success.

Mainstreaming of successful adult site innovations will undoubtedly continue as unprofitable "straight" e-commerce efforts shrink into oblivion, says Danni Ashe, a former exotic dancer and Internet pioneer.

"Because there's still a stigma about adult entertainment, we don't have investors beating our doors down to give us money," says Ms. Ashe, owner of Danni's Hard Drive, a soft-core site that she says pulled in more than $6 million last year. "That forces us to streamline technologies and cut right to the chase."

And, suddenly, the Yahoos of the online world want a piece.

Long before the arrival of RealPlayer, Windows Media Player, Apple's QuickTime and other tools for streaming video, Ms. Ashe and other purveyors of X-rated content were developing sophisticated ways of distributing their wares on computer networks.

With banks of 300-baud modems, sex shops set up bulletin boards that could be accessed through toll-free 800 lines.

Later, in the pre-browser days when the Internet was text-based, adult businesses sold or gave away samples of their wares inside Usenet groups. Sex sellers helped develop techniques such as Uuencode, which allowed a series of downloaded data chunks to be miraculously reconstituted into images at the user's end. Those first free downloads often carried ads for magazines and other 800-line bulletin boards.

"They've always been ahead, and they continue to push the envelope further and further all the time – as far as the technology will go," says Ms. Brewer, the researcher.

As the graphical Internet grew, adult sites quietly explored methods of digital delivery – compression of video streams and rapid sequencing of still images into flip-card-like movies. Others blazed the way into development of Java-based methods to display moving images without the need for browser plug-ins. On the business side, adult sites designed the first password-protected private sites that charged user credit cards for access.

When tech companies such as Apple and RealNetworks began distributing their own advanced video delivery formats, adult sites were largely cut out of cooperative business ventures. Video streaming technology companies were charmed that the sex industry was using and promoting streaming software for a growing number of Web users but were scared to reciprocate.

In the industry, it was called, "Don't ask, don't tell, do sell."

"We're oftentimes approached by large corporations," says Ms. Ashe, who recently celebrated the billionth download of her image. "They want to get in on the action, but they're always skittish about how to do it."

Moving into the mainstream Here is a glossary of online innovations pioneered by the adult industry: Banner ads Advertisements that typically appear across Web pages. Cross-selling When a customer shows up for one item and buys an adjoining item as well. Digital distributions The compression of video streams and rapid sequencing of still images into flip-card-like movies. Encoded images The process of breaking down an image into digital bits that can be sent online to users and reassembled on a monitor. Exit traffic sales Exit traffic technology tracks those who leave a site without buying anything. Exit traffic buyers pay sites to hand these surfers over to them, popping up a console linking to their own sites or sites to which they've brokered traffic. Internet copyright policing Companies are receiving "bounties" for helping enforce copyright claims to X-rated images and video. Interstitial ads Meaning "in between," these are advertisements that appear in separate browser windows while you wait for a Web page to load. Keyword purchasing Paying to have ads pop up on a search engine when a certain word is entered. Online subscriptions Sites that feature subscription services to view their wares. Online credit card billing The adult industry perfected the art of credit card number encryption, which allows customers to charge online orders and subscriptions. Outsourcing video streams Sites that contract with outside firms to provide bandwidth on demand, thus cutting infrastructure costs. The outsourcing of content, a popular move in the e-porn world, is showing up elsewhere. Pop-up browser windows and Java consoles Site windows that don't let you leave until they suggest a half-dozen other sites you should visit. Specialized search tools Search engines that look for specific subjects, such as adult topics. Streaming techniques The delivery of continuous audio, video, and/or text over the Internet. Typically, audio files and video files are streamed. Upselling When a customer shows up for one thing but ends up buying something more expensive. Paying customers get video feeds as part of their memberships to adult sites, but if they want to talk with others watching the same feed or to direct the actions of models, they must pay extra to the content provider, not the pay site. Web affiliate programs As the market has expanded and competition has grown, pay sites have increased the bounties they pay to free sites that can deliver new visitors. Web rings A Web ring is a group of linked sites with a common theme or similar interest. The most trafficked Web rings are found in the amateur e-porn and adult Webcam communities. SOURCE: Dallas Morning News research

Bottom lines

To this day, RealNetworks and the rest of the streaming technology companies refuse to break out sales figures to show adult Web site usage.

Likewise, major hardware companies such as Sun Microsystems don't advertise the number of adult sites using their machines as servers.

X-rated Web enterprises provide a vast and valuable testing ground. As Sun Microsystems spokesman Susan Struble recently told market research firm IDG.net: "The way you know if your technology is good and solid is if it's doing well in the porn world."

Even those who keep official-sounding statistics on most-visited Web pages have largely ignored wildly escalating adult site traffic in the last five years.

"There's no real measurement by metric companies any more," says Ms. Brewer of Adult Video News Online.

But today, "sex" remains the No. 3 most often requested search term, just behind "autos" and "travel," according to SearchTerms. com. And to those mired in failing e-businesses, the resulting sex site profits must seem positively obscene.

Analysts occasionally take a stab at estimating the net worth of the adult Web. Datamonitor put online porn revenue at $1.4 billion in 1999, on par with online book sales and way ahead of airline tickets.

The Industry Standard in November ranked adult sites as part of an assessment of "membership entertainment" Web sites.

In 2000, the publication said, revenue for the most profitable nonsex sites – online gaming – raked in $150 million. Adult site revenue, meanwhile, hit $1.7 billion.

"Yahoo had a good little thing for a while. They were kind of under the radar," says David Levine, who runs the Sextoy.com adult appliances site.

"Some day there will be a media company that stands up and says, 'Sex is a part of life and communication, and we're not going to apologize.'"

Learning tactics

The adult Web world is clearly clicking with its audience.

In March, Jupiter Media Metrix estimated that more than 30 million users made their way to an adult site. More than 81 million accessed portals such as Yahoo and MSN.

"What they don't tell you is that 50 percent of the people going to portals are searching for sex-related stuff," Ms. Ashe says.

Inevitably, they find exactly what they seek.

Adult Web sites are the essence of personalization – a facet of Internet commerce that has largely eluded many other e-commerce efforts.

The Net delivers images quickly and privately to your monitor. Chances are you'll even have the option to see video in multiple formats and adjusted for the speed of your Internet connection.

While high-profile general entertainment efforts of Den.com and Pseudo.com have flopped, adult sites have flourished with a mixture of marketing savvy and technical know-how.

Ms. Ashe and other leaders of online adult entertainment now find themselves in demand as lecturers on subjects such as:

Interactivity – X-rated site managers quickly realized the Internet was perfect for "upselling" – giving people a taste of what they want, then charging for additional services. The first widely distributed Webcam software programs, such as Webcam32, were outfitted with chat room capabilities at the behest of sex sellers.

That same software, now in mass distribution, has fostered a whole new section of the industry – private Webcam adult subscriptions that allow computer users to entertain each other with sex acts.

(On another, unrelated front, widespread availability of adult material has created a micro-industry for software companies catering to parents and businesses trying to limit access by children and employees.)

Massing traffic – Adult sites saw early in the game that huge numbers of visitors had to be funneled into their sites to convert even a fraction to sales.

"What the adult industry started doing was trading traffic," says Ms. Ashe. "We said, 'Hey, if they don't like mine, they might like yours.'"

Affiliate programs – As competition has grown fiercer, adult sites have increased the bounties they pay to free sites that can deliver visitors.

Nonporn sites such as Amazon.com have attempted to employ this technique. But nonporn affiliate programs have low commissions when compared with those offered by sex destinations.

"In the adult world, there are people who all they do is promote Web sites," says Mr. Levine. "And they make a lot of money."

Search engine manipulation – Sex purveyors gobble up huge amounts of traffic by making sure their Web addresses come up first when certain keywords are entered into search engines. They also pay to have ads pop up on some search sites when certain words are entered. Some sex-related words often attract six-figure fees.

Boxing in traffic – Adult sites led the way in production of effective pop-up browser windows using Javascript and Java consoles that suggest other sites you should visit.

Subscription models – The typical monthly rate for a niche sex site is $9.95 to $14.95. Danni's Hard Drive charges $24.95 a month for its "HotBOX" membership, and CyberErotica charges $39.95 a month. Consumers get access to thousands of images and videos. By contrast, a Playboy magazine costs $5 at a newsstand and contains only a handful of photos.

Copyright policing – To prevent their wares from unauthorized reuse on Web sites around the world, adult sites pioneered the used of specialized policing firms such as Web Posse.

The music industry, spurred by Napster, is only now getting into this realm of Internet commerce.

Follow the leader

Failing e-commerce ventures might look to the adult Web for clues to profitable business models in all those areas, observers of the X-rated Web say.

"The adult part of the Internet is the one that has developed a successful product strategy and marketing techniques," Ms. Brewer says.

"The word in the adult industry is, basically, the others just don't get it."

While the rest of Internet content providers fret over suspect business models, Ms. Ashe says, the adult Web industry will press on, leading the way for other entrepreneurs.

"Sure, sex sells," she says. "But soda sells and books sell, too. They've got to figure it out for themselves."

Technology writer Doug Bedell can be reached by writing dbedell@dallasnews.com.