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Porn Industry – Analysis

Preface

This paper is to try to analyse the fictional German porn-producing business XXX with ten permanent employees (management, casting, post-production, sales, distribution). They are producing high-quality porn-movies (mainstream content, without any fetish) distributing it mainly online through a premium-membership-based website called XXX and licencing it to major hotel chains for their ‚in-room entertainment-systems‘.  Every week they are producing about 4-5 clips (15-30 min.), which are published directly in a weekly executed update of the website, which now contains about 2.500 premium-video-clips. Due to a very early market-entrance, the company was growing increasingly between 2009-2015 (rising revenues and profits). Since this time revenues and profits are languishing on a stable level.

The management asked Ingo Herrmann to develop a strategic evaluation, considering different strategic approaches to reinvigorate the growth of the company in terms of revenues and profit. The short study aims to consider the changing market-situation, especially the arising free-porn offers, to find strategic options and give main recommendations for the company how it should innovate its strategy in order to be ready to respond to potential strategic disruptions or to leverage disruptive opportunities in other markets (reinvigoration-process).

Diagnosis

Political environment

The XXX is a successful company operating a political environment that made pornography a commodity as other products. The legal framework offers a wide range of freedom and only the requirements of morality (age limit, violence, animal protections, etc.) constituting restrictions in the production-process. Even within other polity’s (autocratic, etc.) a fundamental questioning of this business-model seems not possible. In general, a „Porn-Blossoming“ can be perceived. By implication, no political restrictions are constraining the development of content, e.g. producing more niche porn, to address customer needs more precisely. [1] Also, the range of complementary products could easily be extended to blend the focus from soft erotic aspects to the origin of porn, e.g. with lingerie, toys or the distribution of DVDs  (shop-system).  Also live webcams, or the reinvention of porn-magazines, that bounced back over last years because of the awareness of being monitored by internet companies.[2] Cooperative business models can also be considered (building up a new platform with other high-quality-producers to share content and offer a variety of porn).

Technological environment

Technologically two spheres need to be considered: Firstly, the production of porn for XXX is fundamentally based on high-quality-pictures, thus on high-quality recording-equipment. During the last years, the expectations of customers grew from generally digitalised pictures to high quality, high definition to nowadays ultra-high definition movies. Within the next years, 3D-porn and VR-porn have assumed developments that need to be considered. Because of the moderate prices even for high-quality-equipment, effects on profit – even for disruptive technology changes – for recording-equipment are moderate. 

Secondly, distribution-technologies are changing. Even if the first disruptive development of the upcoming internet-pornography is inscribed in the DNA of the company, some fundamental aspects have changed and will further be challenging the development of the branch. Predictably for XXX: 1.) more substantial, more powerful servers are needed, to keep the availability and distribute the movies; 2.) the ensurance of broadband internet connection; 3.) powerful tools to protect the proprietary movies and copyrighted content (cybersecurity); 4.) a constant adjustment of the website to fulfil the needs of a growing community of consumers using mobile devices.

 Ecological environment

Even if the awareness of the ecological needs of our society is rising, there is no awareness for an ecological porn-production or consumption. Nevertheless, the use of green electricity for server supply or the abandonment of remote sets for the shoot could be considered as a distinction for marketing reasons.

Socio-demographic environment

More complex is the socio-demographic environment. Shortened it is enough to state, that the consumption of porn has grown enormously in the past, [3] and as long as no legal restrictions on consumption will appear, consumption will be further growing.  Due to the rising consumption of porn within the female audience on the internet, the new generations of performers is also secured, because many young women aspire to be stars (fame-seeking).  Whereas the market (consumption) is growing, the number of available workers (apart from the performers) is declining. The employees of XXX are composed mainly of digital natives. When targeting growth, new talents are needed, especially with sufficient IT-background. The „war for talents“ in this sector will be a crucial challenge, particularly because of the shady and sleazy image of a porn-production-company as an employer. In the production-sphere, there are no bottlenecks expected because film crews are available to affordable prices on the market.

Economic environment

The economic environment changed, especially in response to free content. While XXX depends on its premium-membership-based revenues, to capture their value, the business model of the free-content-websites like pornhub.com relies heavily on (illegally) aggregating content and selling advertising on the back of the volume of (often illegally acquired) visitor traffic.[4] Furthermore, the production conditions made it even for amateurs affordable to produce DIY-porn (Amateur Porn). Even if the quality of these productions is not comparable to the high-quality standards of XXX, it is absorbing potential customers to free content websites, where amateurs can upload their content unedited. On the other side, there are smart performers of large labels diversifying and building their own brands, websites, labels, etc.

Competitive advantage

Due to the situation, of the jeopardised joyful-juicy-entertainment value, that is created during the production process of XXX, the capability of producing high-quality-content and a sufficient number of customers, willing to pay, enables XXX, for example, to build up their own brand „porn-stars“ who are exclusively contracted over a certain number of movies, creating uniqueness for XXX. This rare ingredient of being able to have such a number of actors/performers from which some „stars“ can be formed and contracted, makes the inimitability of the products of XXX. The organisational efficiency from casting those perfect performers to maintaining these contacts and crafting a familiar atmosphere within the company finally creates the competitive advantage that tells XXX apart from other producers.[5]

Concerning the five forces by Michael Porter,[6]  one import factor influencing the costs are the suppliers.

Suppliers

Within the value chain (scripting, casting, production, post-production, marketing/sales), the bargaining power of suppliers is negligible. Mainly standardised products (e.g. cameras, microphones and software etc. for the production process) or services (e.g. hosting of websites) are used so that costs to switch to alternatives are very low for XXX. This low influence of the suppliers is also supported by the opaqueness of the market and the unimportance of the porn-production industry compared to regular „studios“ (Netflix, Miramax, Amazon, etc.) for those suppliers.

Further factors are causing a competitive discount:

Buyers

In contrast to the suppliers, the bargaining power of buyers in the porn production industry is immense. It reduces the attractivity for commercially operating new entrants, because (as said above) of comfortable production conditions. This situation is exacerbated by the dominance of a few free content websites making porn available as a worthless commodity, reducing the switching costs to an attempt of clicking to another (free) website. On the contrary, these websites can create value when producing traffic from redirecting (e.g. through „teasering“ with incomplete scenes) to the website of XXX, generating new customers who are interested in certain porn-performers („stars“). A change from the overall production target „mainstream-porn“ to certain customer-groups relying on a fetish or similar, does not make sense, because otherwise loyal customers could be alienated. However, a wide range of subscription models (daily, weekly, monthly, quarterly, yearly) could be a sufficient way to gain customers when pushing the content (teaser) to social media and other channels (free-porn-website).

New Entrants/ Rivalry

Because producing porn became very easy, the capital requirements are manageable, and the switching costs are meagre (due to subscription models, free porn, etc.) there is a steady flow of new market entrants, regularly producing all kind of porn (mainstream, niche, fetish, gonzo, animation), to address certain customer needs. That is why high price pressure is a challenging feature.  Economies of scale can be realised only by pushing the content massively into all the available channels and massive online-marketing, mainly on competitors websites through „marketing-platforms“ like EroAdvertising or JuciyAds . Due to some marketing restrictions, only a profound market knowledge and creative marketing make a porn-production-business profitable. Regularly existing market players re-enter the market with new offers and brands (e.g. livejasmin.com), creating cannibalisation and huge rivalry. Obviously, there are no substitutes for pornography, besides the art, where viewing can be exercised as a process of sensual pleasure. However, the use of art generally differs from the use of pornographic movies.

Formulation and Actions

To reinvigorate the growth of the company, different aspects need to be taken into account: Based on the outstanding resources (existing videos, existing porn-stars, loyal customer-base) there are some capabilities being considered as productive and promising. Based on a market-perspective, these resource-based-approaches need to be accompanied and strengthened by some market-based activities.

To structure the proposals, reference is made to the Strategy-Diamond by Hambrick/Fredrickson.[7]

Arenas

The XXX is an established producer and should stick to mainstream pornography. High-quality-mainstream porn is the key competence which should not be discarded because the profitability also in the future will be a „stable anchor in an unsafe port“. Brand building with brand-associated porn-stars is key to being a viable business and capturing the maximum value.

The ‚premium content‘ business-model should be maintained. These include HD videos, no-ad and pop-up promises, unlimited downloads, priority access to new content from a favourite ’star‘. The website concept can be extended to live-shows, which now considered as standard. Even in the certainty that content is stolen, it takes months before it leaks out to the free porn sites.

Selectively some niche-movies can be produced to attract undecided customers.

Due to the internationalisation of pornography and worldwide distribution, some market research should figure out the necessity of new narratives. Later specialised country websites, which meet the specific needs of customers, can be set up. 

To participate from the needs of customers, a shop with complementary products, based on an affiliate network, should be introduced.

Furthermore, the launch of a porn magazine should be pursued because existing sets and actors can be sold in a secondary publication step (cross-selling).  

Vehicles

Because the competences and capacity’s of XXX are concentrated in online-distribution, they should focus on pushing these channels hardly, focusing on social media and freeporn-websites where teaser should be placed to redirect customers.

Supporting this „channel-pushing“ a collaboration with specialised „marketing-platforms“ like EroAdvertising or JuciyAds should be focused to acquire customers from highly specialised networks (porn), rather than from morally restricted marketing companies like Facebook.

Furthermore, the existing subscription models should be adapted to market-standards (daily, weekly, monthly, quarterly, yearly).

A Coalition between small porn-producers to create networks to combine premium content with a necessity of diversifying a.) porn-genres, b.) authorship and c.) aesthetic could strengthen the variety of the portfolio of high-quality-porn. Alternatively, licencing only selected, curated content from other producers could be a way to increase the diversity of content.

Finally, a merger with a competitor or acquisition of competitors with a similar strategic attempt should be taken into account, because power would increase.

To strengthen the customer-relation crowd-funding could be a vehicle of reducing financing costs while making future customers being part of the movie before it even exists. This options only make sense when epic or costly movies need to be financed. Compare, for example www.axfcrowdfunding.com (02.04.2020).[8]

Differentiators

The main differentiators are the brand-associated porn-stars. They are crucial to being a viable business. The casting of those perfect performers, the maintenance of these contacts and the crafting of a familiar atmosphere within the company is the competitive advantage that tells XXX apart from other producers.

The image of a high-quality-producer must be accompanied by absolute adherence to the highest quality standards in terms of the beauty of performers, picture-quality (light, setting, sound, etc.). XXX wants to be the high-gloss-magazine within the porn producers.

Staging

Immediately the „channel-pushing“ need to be realised to acquire new customers. The content provided at XXX is sufficient enough to convince high-quality-oriented porn consumers. Keep on producing the best quality.

In a second step, the collaboration and regular campaigning with specialised „marketing-platforms“ like EroAdvertising or JuciyAds should be focused to increase the customer base. Make the „starlets“ to real „stars“ in the branch. 

Finally, diversify content, install a shop with complementary products, etc. to participate from cross-selling-effects.

Economic Logic Due to the high-quality-product offered, a price, depending on the subscription model, is necessary to gain profits. In order to capture the greatest value, a concentration on brand and star-building is crucial. Supported with “content pushing” and the re-direction of potential customers from free-porn-websites, who are interested in not only watching a teaser with a porn star, they are interested in, the economic logic and the strategic approach go hand in hand. In return, customers get access to a variety of high-quality films, immediate access to new releases with numerous premium advantages.

Bibliography

Barney, J. B., & Hesterly, W. S.: VRIO Framework, published in: Strategic Management and Competitive Advantage, New Jersey, Pearson, 2010, p. 68–86.

Hambrick, Donald C.; Fredrickson, James W.: Are you sure you have a strategy?, published in: Academy of Management Executive, 2005, Vol. 19, No. 4, p.51-61.

Maris, Elena; Libert, Timothy; Henrichsen, Jennifer: Tracking sex: The implications of widespread sexual data leakage and tracking on porn websites (arXiv:1907.06520 [cs.CY]).

Mauborgne, Renée; Kim, W. Chan: Blue Ocean Strategy, published in: Harvard Business Review – Article Collection: HBR’s Must-Reads on Strategy, p. 69-80.

Porter, Michael E.: The Five Competitive Forces That Shape Strategy [1979/2009], published in: Harvard Business Review – Article Collection: HBR’s Must-Reads on Strategy, p. 23-41.

Porter, Michael E.: What is Strategy?, published in: Harvard Business Review – Article Collection: HBR’s Must-Reads on Strategy, p. 2-22.

Slayden, David: Debbie Does Dallas Again and Again – Pornography, Technology, and Market Innovation, published in: Attwood, Feona (editor): Porn.com: Making Sense of Online Pornography, p.54-68, New York, 2010.

Tarrant, Shira: What Everyone Needs to Know – THE PORNOGRAPHY INDUSTRY, New York, Oxford University Press, 2016, p.28-48.

Online resources
  1. pornhub.com (02.04.2020).
  2. youporn.com (02.04.2020).
  3. https://www.ft.com/content/7bce6750-1408-11e5-9bc5-00144feabdc0 (31.03.2020)
  4. www.axfcrowdfunding.com (02.04.2020).

[1] Compare the broad range of categories on the main porn sites, eg. pornhub.com, youporn.com, etc.

[2] Compare https://www.ft.com/content/7bce6750-1408-11e5-9bc5-00144feabdc0 (31.03.2020).

[3]Compare: Slayden, David: Debbie Does Dallas Again and Again – Pornography, Technology, and Market Innovation, published in: Attwood, Feona (editor): Porn.com: Making Sense of Online Pornography, p.54-68, New York, 2010.

[4] Compare: Maris, Elena; Libert, Timothy; Henrichsen, Jennifer: Tracking sex: The implications of widespread sexual data leakage and tracking on porn websites (arXiv:1907.06520 [cs.CY]).

[5] Compare: Barney, J. B., & Hesterly, W. S.: VRIO Framework, published in: Strategic Management and Competitive Advantage, New Jersey, Pearson, 2010, p. 68–86.

[6] Compare: Porter, Michael E.: The Five Competitive Forces That Shape Strategy [1979/2009], published in: Harvard Business Review – Article Collection: HBR’s Must-Reads on Strategy, p. 23-41.

[7] Compare : Hambrick, Donald C.; Fredrickson, James W.: Are you sure you have a strategy?, published in: Academy of Management Executive, 2005, Vol. 19, No. 4, p.51-61.

[8] Compare for example www.axfcrowdfunding.com (02.04.2020).

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