Playboy Sheds 'Gentleman's' Cloak, Buys 'XX' TV Channels

By SALLIE HOFMEISTER and RALPH FRAMMOLINO

July 3, 2001 12 AM PT

TIMES STAFF WRITERS

Playboy Enterprises Inc. on Monday moved to preserve its role as America’s dominant purveyor of sex on television by bringing more explicit movies into the living room.

The Chicago-based company agreed to acquire three XX-rated sex channels from the owners of Van Nuys-based Vivid Video, one of the largest producers of porn movies, for $70 million.

The transaction, as The Times reported Saturday, will put Playboy far out in front of New Frontier Media Inc., which will become the only other significant adult television programmer.

The move is a departure from Playboy’s carefully cultivated image as a “gentleman’s” brand. The three channels it is acquiring--Vivid TV, Hot Network and Hot Zone--carry more extreme programming than anything on Playboy’s three X-rated networks--Playboy TV, Spice and Spice 2.

Playboy’s strategic about-face underscores the growing acceptance of racier sex on television. Hard-core pornography has become increasingly popular and hugely profitable for satellite and cable operators, forcing Playboy to give up its singular devotion to soft-core programming.

Monday’s deal “dramatically expands the number of U.S. television households that we reach and therefore clearly positions us as the leading supplier of a range of adult entertainment,” said Christie Hefner, Playboy’s 48-year-old chief executive, in a conference call with investors. “We will be able to serve [our] constituencies better, by providing a range of nonviolent erotic entertainment to meet market demand.”

In doing so, the Playboy empire hopes to stay at the vanguard of the sexual revolution that founder Hugh Hefner kicked into high gear nearly 50 years ago with the famous Marilyn Monroe magazine centerfold. The company also is trying to protect its star television business at a time when Playboy’s flagship magazine and its fledgling Internet operation are losing money.

Many industry experts said Playboy was losing ground to upstarts that are fast redefining adult television with extremely hard-core channels.

“Playboy had the advantage of a brand name and a lot of real estate on cable,” said Jedd Buss-Palmer, a Denver-based programming consultant and cable industry veteran. “But they missed the market. They were becoming marginalized.”

Christie Hefner declined to be interviewed for this report. But her father, Playboy founder Hugh Hefner, said he has no regrets about the company’s late entry to the hard-core arena.

“If we wanted to get in [earlier], we would have,” Hefner said last month at the 75th birthday bash for the late Marilyn Monroe held at his mansion in Holmby Hills.

According to interviews with dozens of cable, satellite and company executives, Christie Hefner--who with her father owns 71% of Playboy--was protective of the company’s image and personally uncomfortable about pushing into graphic fare. One former employee said Christie Hefner describes the company as a “Disney for grown-ups.”

“It stems from coming out of the Midwest,” explained Jim English, president of the Beverly Hills-based Playboy Television Networks. “You wouldn’t want to go to a cocktail party and have someone come up and say, ‘I hear you’re making porn movies now?’ It’s OK for me, but not for Christie.”

Once a pioneer in breaking sexual taboos, Playboy became so comfortable with its own brand of 1950s “stylized eroticism”--symbolized by the ubiquitous bunny logo--that the Hefner empire failed to keep pace with America’s growing appetite for more graphic porn on television.

The line between mainstream and pornography has blurred. Porn stars date rock stars, chat on radio programs and appear on album covers. R-rated films veer into X-rated territory. Television tilts toward the risque, from bare buttocks on “NYPD Blue” to the bed-hopping antics of HBO’s “Sex in the City.”

“Playboy has always been the class act, more creative and thoughtful,” said Larry Gerbrandt, chief content officer at Kagan World Media, a market research firm in Carmel. “But that’s not necessarily what people wanted. The company has suffered for not plunging into dirtier waters.”

Satellite providers such as DirecTV and EchoStar Communications Corp. have been selling XX-rated pay-per-view movies for at least two years. Some major cable companies have started carrying XX-rated channels in the last year. And one of the last and largest holdouts, AOL Time Warner Inc., the nation’s second-largest cable operator, is expected to change its policy against carrying XX-rated material within the next year, according to sources close to the company.

Cable and satellite sales of adult pay-per-view programming are expected to nearly double by 2005 from $465 million in 2000, according to Kagan World Media.

Satellite operators have aggressively devoted pay-per-view channels to XX-rated movies, leading many cable operators to follow suit. These movies show intercourse, oral sex and close-up shots. Triple-X shows are more graphic still. The X-rated “soft” porn featured by Playboy is characterized by nudity, wide- and medium-camera shots, simulated sex and sex between women.

For Playboy, a defining moment came two years ago, when the company passed up the chance to buy what became the Hot Networks. Hot was the raciest of three networks that were part of Spice Entertainment Companies Inc., which Playboy agreed to buy in 1998 for $127 million. Playboy kept the two tamer channels--Spice and Spice 2--but sold Spice Hot to the Vivid principals and retained an option to buy it back.

English said there was no way of knowing at the time how acceptable hard-core programming would become. “We did not misjudge the market,” he said.

Playboy is having to pay a steep price to recover lost ground. Monday’s deal values Hot and Hot Zone at $28.3 million--nearly three times what Playboy sold them for in 1998.

The television business is the lifeblood of Playboy. The three U.S. channels account for the bulk of the revenue in its entertainment group, which was the only profitable division in the first quarter. The unit, which also includes international television, worldwide home video and movie sales, reported a $5.2-million profit on revenue of $24.7 million in the three months ended March 31.

Of that total, the three U.S. channels took in $19 million, down slightly from $19.1 million in the year-earlier period. The Spice acquisition allowed Playboy to increase revenue even as competitors such as Hot gained market share. The continued expansion on cable and satellite of Playboy’s three channels also helped sustain revenue levels.

Although the magazine still ranks among the nation’s top 10, its circulation has dropped from a peak of 5 million in the early 1980s to 4.5 million today. Lately, the magazine has suffered from an industrywide advertising and subscription downturn, losing $1 million in the first quarter, compared with a $1.6-million profit a year earlier.

But publishing isn’t losing nearly as much money as the company’s foray into cyberspace. Though Wall Street considers the Internet a key to Playboy’s future, the company’s push largely was responsible for a companywide operating loss last year of $16.9 million.

Playboy shares dropped to a low of $8.38 in late December from a high of $29.81 in 1999 in large part because of increasing losses.

The stock bounced back as Playboy sharply cut Internet spending in the first quarter. After a 26% rise this year, shares inched up $1.33 on Monday, to close at 17.50 a share.

Initially, the prospects of Playboy going hard-core troubled some major cable operators. Tele-Communications Inc., the nation’s most powerful cable company before its sale two years ago to AT&T; Corp., pressured Playboy to tone down the XX-rated Spice channel, hoping to eliminate any regulatory threat or migration to harder-core movies

The cable industry still has a love-hate relationship with adult programming, which one insider calls the “secret hidden asset.” Although porn is a touchy subject, no television executive disputes its high profit margins.

Few cable or satellite TV executives are willing to talk publicly about adult programming for fear of inciting criticism from investors, subscribers and politicians who might revoke their licenses.

AT&T; came under fire from some shareholders this year for refusing to disclose the profit it earns from porn programming on its cable systems. The shareholders petitioned the Securities and Exchange Commission to order the phone giant to disclose the profit, but the SEC declined.

Adelphia Communications Corp., Southern California’s largest cable provider, refuses to carry any adult channels because its founder and chief executive, John Rigas, believes it is immoral.

Most others, however, quietly have carried low-voltage adult programming since the late ‘80s, when pay-per-view technology made it more secure.

Playboy will remain devoted to softer material, whereas Spice will be more extreme, Christie Hefner said in the Monday conference call. Two of the Vivid channels will be renamed Spice Hot and Spice Zone. The more graphic Vivid TV will be renamed Spice Platinum Live.

English said Playboy will abandon a yearlong effort to launch two hard-core movie channels of its own because of a lack of interest among distributors, which saw them as redundant.

The company will move forward with a new live format that will draw content from the Internet and be hosted by Jenna Jameson, a leading porn star who is under contract with Vivid.

Playboy officials are acutely aware of the success of new hard-core rivals.

“Do we know those numbers? Yes,” English said. “Does it indicate that the public’s taste and acceptability of [hard-core sex] has changed? Yes. So ‘yes’ and ‘yes’ equal ‘got to do something.’ ”

For distributors, the more explicit porn has the highest profit margins in the pay-per-view business.

Although cable operators usually pocket less than 50% of revenue from a pay-per-view mainstream movie, they keep as much as 90% of the money from porn provided by Playboy’s competitors.

The attractive terms partly were the result of fierce competition among Vivid, Playboy and New Frontier, as well as the low cost of producing porn.

Ultimately, Playboy’s acquisition “is about generating revenue and profitability and maximizing shareholder value,” said Mark Kreloff, president of Colorado-based New Frontier, which owns the only XXX-rated channels. “This programming sells. It will always sell.”

Times staff writer P.J. Huffstutter contributed to this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Playboy’s Problem

Playboy Enterprises Inc., whose founder, Hugh Hefner, helped launch the sexual revolution of the 1960s, finds its television business--its most profitable division--under siege. After deciding not to enter the hard-core segment nearly two years ago, the company did an about-face Monday and purchased three hard-core channels from the owners of Vivid Video, which quickly became one of its largest competitors. Playboy Chief Executive Christie Hefner said the deal positions the company as “the leading supplier of a range of adult entertainment.”

Porn continues to gain popularity ...

Satellite and cable operators expect pay-per-view revenues from adult TV channels to nearly double over the next five years.

2006 (estimate): $945 million

Net sales, in millions

2000: $307.7 million

Net income, in millions

2000: -$47.6 million

After a spike in 1999, the company’s stock price has fallen back to 1998 levels.

Monthly closes and latest for PLA

Monday: $17.50

Sources: Times research, Bloomberg News, Kagan World Media

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)