Hotter Adult Product Makes Inroads

12/12/1999 7:00 PM Eastern

In the early 1990s, Playboy TV set the standard for the
newly created adult pay-per-view genre, offering more erotic programming fare to consumers
than what could be seen on basic and premium television.

But heading into the new millennium, Playboy's erotic fare
has not only become acceptable for most cable operators' PPV-programming lineups, but its
soft-porn guidelines are all but duplicated on premium cable networks such as Home Box
Office, Cinemax and Showtime.

As a result, a new, more explicit version of adult-PPV
programming is threatening to change the standards by which Playboy and Spice defined the
category nearly a decade ago.

As digital technology and, eventually, video-on-demand
provide consumers and operators with better signal integrity and security -- and as
operators face increased competition from the Internet and direct-broadcast satellite for
adult-PPV dollars -- several PPV executives believe hotter adult programming may soon
become the new standard for PPV.

Services such as Vivid On Demand's The Hot Network and New
Frontier Media Inc.'s The Erotic Network and Extasy are currently vying for both analog
and digital carriage, promising operators buy-rates well in excess of adult incumbents
Playboy TV and Playboy-owned Spice, along with generous rate-card splits.

Looking ahead, both companies are trying to strategically
place themselves with operators to take advantage of new and developing broadband
technologies such as VOD, which, they believe, will generate significant amounts of money
for the industry.

"The kind of product we provide is the perfect
complement for the new broadband services," Hot Network president Bill Asher said.

"There's a real paradigm shift among the operators
toward this type of product," New Frontier CEO Mark Kreloff said. "Digital and
VOD provide a more secure signal and, because of the competition from DBS, cable operators
are in a position where they need to finance their upgrades."

While the majority of cable operators do not endorse nor
carry the hotter adult product, the networks have already made some inroads with

Hot Network and its sister service, The Hot Zone -- which
offers adult programming under the traditional editing standards -- are in front of more
than 20 million combined cable and DBS households, some of which are duplicate households,
according to the network.

TEN and its less-explicit sister service, Pleasure, are in
more than 6 million combined cable and DBS households, some of which are also duplicate

The launches come despite continued fears from operators
concerning adult-scrambling issues in light of Section 505 of the Telecommunications Act
of 1996. The Act forced many operators without effective signal-scrambling technology to
abandon 24-hour carriage of adult programming for distribution only during
"safe-harbor" hours -- between 10 p.m. and 6 a.m.

But both companies said the signal security provided by
digital technology has relaxed operator fears about launching the services.

Of course, there's a financial upside. The hotter adult
product adds to an already lucrative adult-PPV business that is expected to top $367
million this year, versus last year's $310 million take, according to a Showtime Event
Television report.

Operators reported that the hotter adult product gets
buy-rates as much as double or triple those of Playboy and Spice.

MetroCast Cablevision's system in Belmont, N.H., is
thriving with TEN as its main adult-PPV channel on analog. The service is generating
buy-rates as much as three times those of Spice, system marketing manager John Grocki

"When we switched out Spice for TEN, we didn't make
any special announcements, yet our buys went up three times from what we were seeing with
Spice," he added.

"There's huge financial upside with adult because the
splits are much better and there aren't any major marketing expenses," New Frontier
senior vice president of sales Ken Boenish said.


Competition also seems to be driving the more explicit
fare. While cable operators were the initial carriers of the "hot" adult
product, beginning with Spice Hot (now Hot Network) in the mid 1990s, the genre has
flourished on DBS services DirecTV Inc. and EchoStar Communications Corp.'s Dish Network.

TEN, Hot Network, Pleasure and even Extasy, New Frontier's
near-triple-X service, have found homes on the two DBS providers, generating buy-rate and
revenue performances well above those of Playboy and Spice, sources said.

Executives from Vivid and New Frontier pointed to the
success of such adult programming on DirecTV and Dish as a catalyst for cable operators'
push toward hotter adult product.

While it's unclear exactly how many buys the hot adult
product generates on DBS, sources said both companies are enjoying much higher buy-rates
than with traditional adult-PPV services. Neither EchoStar nor DirecTV would comment on
adult PPV fare.

Given the hotter adult services' performance on DBS, some
industry executives believe the more-explicit adult programming could be a major sales
tool for getting digital boxes into the home.

"Clearly, [adult] has been a staple of PPV, and it
certainly would be a part of digital and video-on-demand," The Yankee Group director
of media strategies Bruce Leichtman said. "The thing about adult is that it's
consistent revenue, and we already know that the hotter product generates more PPV

Grocki said many of the MetroCast system's 33,000
subscribers actually requested the more robust adult-PPV programming from TEN instead of
what Spice or Playboy offered. "Many of our customers said the programming seen on
Spice isn't much different than what's shown on Cinemax," he added. "They were
looking for something more from adult PPV."

The rural operator has never received any calls or customer
complaints because of the more-explicit adult service, according to Grocki.

The success of adult product on the Internet also fanned
the interest in both Hot Network and TEN. Internet-distributed adult programming -- much
of it extremely graphic -- is expected to generate close to $1 billion this year,
according to industry experts. And that number is expected to triple within several years.

"The Internet has created an environment where there
can be discreet transactions of adult programming, but DirecTV really raised the bar for
television," Kreloff said. "Now the industry is catching up to regain the lost
viewers that have migrated from the fully edited adult version to the hotter

"The networks will embrace the more edited versions as
they continue to see how well Dish Network and DirecTV do with their adult platform,"
he added.


Thus far, digital providers have closed the doors on the
hotter adult networks.

AT&T Broadband & Internet Services' Headend in the
Sky digital platform only carries Playboy and Spice, and it has no plans to offer the more
explicit adult services, an AT&T Broadband spokeswoman said. Further, the MSO has no
plans to offer such product on a stand-alone basis on any of its services.

Viewer's Choice, which offers Playboy and Spice, also
doesn't have any plans to offer explicit adult services on its 33-channel PPV service, the
company said.

While acknowledging that the hotter product performs better
than Playboy TV, Playboy Networks Worldwide president Jim English said it will be very
difficult for the more explicit adult networks to get carriage on digital systems. "I
don't see how a TEN or Hot Network will get on a Viewer's Choice or a HITS, and those are
the two biggest providers of digital technology," he said.

For an operator to offer such programming on digital
without HITS or Viewer's Choice, it would have to devote six analog channels to the
product, which -- despite its revenue potential -- would be cost-ineffective.

"They would have to take six channels for a channel
they won't promote," English said. "I just don't think it's as much of a benefit
as those other channels that could be offered in the same space."

But General Communications Inc.'s Fairbanks, Alaska,
regional PPV manager Rachael Hodsgen said the hotter product would definitely boost its
current 10 percent digital penetration by as much as 10 percent to 15 percent if HITS were
to put the more explicit adult programming on its lineup.

The system currently offers TEN and Extasy via analog, and
it is generating buy-rates nearly five times those of Spice, which is offered on the HITS
digital platform. TEN's and Extasy's performances are even more impressive considering
that the services are only offered during safe-harbor hours.

Another operator who wished to remain anonymous also said
he would like to see HITS offer the hotter adult product, which would certainly sell
better than Playboy or Spice. "That product would be perfect in a more secure,
digital environment," the operator said.

Boenish said New Frontier wants to create its own digital
tier of six 24-hour adult services by next spring. Along with TEN, Pleasure and Extasy,
the company would include two adult services from its C-band business and a
"clips" network that would show 10-minute adult clips taken from movies and
other New Frontier archival product.

He added that if prompted, the network could create as many
as 15 to 16 channels using time-shifted regional feeds that would run on several pods.
"From there, an operator can carry a full complement of adult channels without going
through HITS," Boenish said.


Stymied on digital PPV so far, the racier adult services
are exploring the potential of VOD. While the technology is still years from critical
mass, the networks are already setting up VOD tests with several operators.

Leichtman noted: "VOD especially adds that extra level
of protection for the consumer because it only comes into the home if the consumer chooses

Hot Network executives believe their product could be one
of the main drivers of revenue for the new technology. The network has already developed
software that operators can adapt to their future VOD operations, taking full advantage of
innovative VOD features like pause, fast-forward and rewind capabilities.

Asher believes that through VOD, buy-rates for the more
explicit adult programming could as much as triple current buy-rate levels. "It's a
marketing device for the operators in that it shows that viewers can watch the movies
however they want," he added.

Asher said Hot Network is currently participating in
several VOD tests, but he would not reveal specific systems.

New Frontier is also exploring VOD opportunities, and it
has set up tests with several distributors. "There's much more rapid movement from a
broadband perspective in the adult category," Kreloff said.

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