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Employers pay for 'hidden' in-room entertainment
The hotel invoice lists a $9.95 charge for entertainment. It flies straight through the corporate expense reporting system for payment. What the company doesn't know is that the entertainment the executive purchased on his last business trip was a pay-per-view sex film.
Hilton, Marriott, Sheraton and the other large hotel chains keep that a secret. Disclosure might threaten the several hundred million dollars that flow through U.S. hotel chains annually for pornographic movies -- everything from the famous home video romp between actress Pamela Anderson and rocker Tommy Lee to "Dreamquest," featuring the Vivid studio popular porn star Jenna Jameson.
Travelers spend about $500 million annually on hotel pay-per-view entertainment -- porn, major studio films and even video games.
Two companies, On Command Corp. of Denver and LodgeNet Entertainment Corp. of Sioux Falls, S.D., dominate the business.
They don't disclose how sales divide between mainstream fare and adult videos, but industry analysts say porn represents at least half their business, or about $250 million annually. Hotels see 10 percent to 15 percent of that, about $15 for each of the 2 million rooms wired into the systems of either On Command or LodgeNet, according to analysts.
The biggest customers are "road warriors, people on the road a third of the year, and they are bored," said Gary Rohr, president of Stonebridge Cos., an Aurora, Colo., owner of 32 hotel properties totaling 3,000 rooms.
Still, only one of every 10 guests purchases a movie of any type, said Bailey Dalton, who follows the industry for C.E. Unterberg, Towbin in New York.
For the big money, porn movies, as well as feature films and video games, account for a tiny slice of hotel profits, Rohr says. He calls the movies "amenities" that are far more important to guests than the bottom line.
But when a traveler does order up a movie, it's delivered by way of surprisingly archaic technology. In an era when 15 million homes get television from a satellite, the typical business traveler is watching a pay-per-view film that is running off a videocassette player.
LodgeNet owns 150,000 videotape players and employs a staff of 250 to keep them running, said Peter F. Klebanoff, a company vice president. Their duties include driving from hotel to hotel and loading new tapes, which have been copied from master prints, into machines as the movie lineup changes.
The typical 200-room hotel has a video room with 30-40 tape decks connected to guest rooms through an in-house network. A large hotel might have double that number of decks and offer up to 40 separate movie titles. When a visitor buys a movie, the television signals the deck holding the correct tape in the video room to switch on.
"The objective is have a sufficient number of titles for the guests and to have enough copies in the decks to supply peak demand," Klebanoff said.
Deciding how many players to load with "Gladiator" and how many with "Porn Star Yearbook Y2Kcq" is a balancing act. If more guests order "Gladiator" then there are tapes, someone gets blocked out. LodgeNet employs a full-time statistician and additional consultants who try to match tape supply with demand to maximize sales.
Both LodgeNet and On Command are moving to computer-based, digital systems that will offer more services and different types of selections. The new systems will be less expensive to maintain and keep guests from being shut out of a movie at their preferred time. On Command expects to have about 350,000 of its 1 million rooms on the digital system by year-end.
Movies can be downloaded to the computer via high-speed lines and satellite links. Within a few years, the systems will surpass what most consumers can get from their in-home pay-TV services. Hotel guests will be able to fast-forward, pause and rewind, making viewing more convenient.
And that's one of the goals of the new system: to coax more hotel guests to make purchases, said Jerry Kern, On Command's chief executive.
Digital systems can offer music, sports and fitness programming, Internet connections, original programming and reruns of hit TV shows such as "The Sopranos" or "Sex in the City," said Kern.
Shorter programming is a key to selling more, Kern said.
"If you are a business traveler and you get back to your hotel room at 10 at night, do you really want to watch a two-hour movie?" he said.
On Command edits the porn films down to 60 minutes, in part because almost all of the films are too risque for the hotel trade, said Kern.
While adult movies are the most controversial segment of the business, they also keep it alive.
"Adult content is the stepchild of our business," said Klebanoff. "But it would be hard to run the business without it. That's an economic reality."
It's the adult movie companies and conventional studios that make the most from the hotel pay-per-view business.
That's because sex films are both popular and profitable. Conventional movie studios collect about 50 percent of the $10 movie sold through a hotel. The hotel keeps $1 to $1.50. That leaves just over a third of the fee -- about $3.50 per film -- for delivery services such as LodgeNet or On Command.
For a porn flick, only 20 percent to 25 percent goes to the studio. The hotel gets its regular cut. That leaves about 60 percent, or about $6 per film, for the distributors.
Hotel operator Rohr figures his company pockets about 10 percent of the purchase price after expenses. Hotels constantly write off a percentage of the purchases for guests who dispute their bills. Moreover, hotels also absorb the credit card fees, typically 2 percent of the price, for the purchases.
Vivid Entertainment Inc. of Sherman Oaks, Calif., the adult film company that provides more content for hotels than any single provider of any type, often sells the rights to its movie for a flat fee rather than a percentage of the profits, said Bill Asher, Vivid's president.
Though hotels account for less than 2 percent of Vivid's revenue, they are an important marketing tool.
"They give you exposure," said Asher.
A traveler, for example, might see a movie with a porn star such as Jenna Jameson or Kobe Tai and decide to rent movies with the same stars for his home, or purchase more of their movies on his next business trip.
Although the studios and hotels make money offering the in-room entertainment, On Command is bleeding red ink -- $39 million last year and $29.4 million in the prior year. LodgeNet also is a money loser -- $20.6 million last year and nearly $3 million in the prior year.
LodgeNet looks to be in the black within two to three years, said Dalton. She expects On Command to face a rougher road because it is strapped for cash.
Much of their current losses result from heavy investments in technology as they replace older systems, said Dalton.
Executives at the two companies compare their business to cable television, where there are huge front-end fees to wire communities. But after the money is spent, cable businesses can become cash cows. The in-room entertainment companies figure much of the same economics apply to their business. It's just reduced to smaller communities -- hotels.
On Command's partners are some of the biggest chains in the business, including Marriott, Sheraton and Hyatt. Hilton Hotels Corp., which operates the Hilton, Embassy Suites and Red Lion chains, is a major investor in LodgeNet.
Not surprisingly, a spectrum of anti-pornography and religious groups have objected to the business of selling porn movies in hotel rooms, but it hasn't had much of an impact on the industry.
Omni Hotels, a 40-property hotel chain based in Irving, Texas, eliminated sex films from its in-room entertainment menu last year. Walt Disney Co. doesn't offer adult films at the 35 hotels and 37,000 rooms in its resorts.
But the movies remain popular even in regions of the country known for their conservative attitudes. In court testimony at the obscenity trail of a Provo, Utah, video dealer, lawyers for the defendant proved he didn't violate community standards when they revealed that guests at the Provo Marriott bought nearly 3,000 pay-per-view sex films annually.