ROVO, Utah — The video-store chain that Larry W.
Peterman owned in this valley of wide streets and ubiquitous
churches carried the kind of rentals found anywhere in the
country — from Disney classics to films about the sexual
adventures of nurses. Mr. Peterman built a thriving business
until he was charged last year with selling obscene material and
faced the prospect of bankruptcy and jail.
Just before the trial, Mr. Peterman's lawyer, Randy Spencer,
came up with an idea while looking out the window of the
courtroom at the Provo Marriott. He sent an investigator to the
hotel to record all the sex films that a guest could obtain
through the hotel's pay-per-view channels. He then obtained
records on how much erotic fare people here were buying from
their cable and satellite television providers.
As it turned out, people in Utah County, a place that often
boasts of being the most conservative area in the nation, were
disproportionately large consumers of the very videos that
prosecutors had labeled obscene and illegal. And far more Utah
County residents were getting their adult movies from the sky or
cable than they were from the stores owned by Larry
Peterman.
Why file criminal charges against a lone video retailer, Mr.
Spencer argued, when some of the biggest corporations in
America, including a hotel chain whose board of directors
includes W. Mitt Romney, president of the Salt Lake City
Olympics organizing committee, and a satellite broadcaster
heavily backed by Rupert Murdoch, chairman of the News
Corporation, were selling the same product?
"I despise this stuff — some of it is really raunchy," said
Mr. Spencer, a public defender who described himself as a devout
Mormon. "But the fact is that an awful lot of people here in
Utah County are paying to look at porn. What that says to me is
that we're normal."
It took only a few minutes for the jury to find Mr. Peterman
not guilty on all charges. His case illustrates what has
happened to an industry that used to be confined to the margins
of commerce, in the seedy parts of most towns, run by people who
never dreamed of taking their companies to Wall Street.
Spurred by changes in technology that make pornography easier
to order into the home than pizza, and court decisions that
offer broad legal protection, the business of selling sexual
desire through images has become a $10 billion annual industry
in the United States, according to Forrester Research of
Cambridge, Mass., and the industry's own Securities and Exchange
Commission filings.
Whatever the phenomenon may say about the nature of American
society, the financial rewards are so great that some of the
biggest distributors of explicit sex on film and online include
the country's most recognizable corporate names.
The General Motors Corporation, the world's largest company,
now sells more graphic sex films every year than does Larry
Flynt, owner of the Hustler empire. The 8.7 million Americans
who subscribe to DirecTV, a General Motors subsidiary, buy
nearly $200 million a year in pay-per-view sex films from
satellite, according to estimates provided by distributors of
the films, estimates the company did not dispute.
EchoStar Communications Corporation, the No. 2 satellite
provider, whose chief financial backers include Mr. Murdoch,
makes more money selling graphic adult films through its
satellite subsidiary than Playboy, the oldest and best-known
company in the sex business, does with its magazine, cable and
Internet businesses combined, according to public and private
revenue accounts by the companies.
AT&T Corporation, the nation's biggest communications
company, offers a hard- core sex channel called the Hot Network
to subscribers to its broadband cable service. It also owns a
company that sells sex videos to nearly a million hotel rooms.
Nearly one in five of AT&T's broadband cable customers pays
an average of $10 a film to see what the distributor calls
"real, live all-American sex — not simulated by actors."
For all the money being made on sex — legally — by mainstream
corporations, the topic remains taboo outside the boardroom. The
major satellite and cable companies do very little marketing of
their X-rated products, and they are not mentioned in annual
reports except in the vaguest of euphemisms.
None of the corporate leaders of AT&T, Time Warner,
General Motors, EchoStar, Liberty Media, Marriott International,
Hilton, On Command, LodgeNet Entertainment or the News
Corporation — all companies that have a big financial stake in
adult films and that are held by millions of shareholders — were
willing to speak publicly about the sex side of their
businesses.
"How can we?" said an official at AT&T. "It's the crazy
aunt in the attic. Everyone knows she's there, but you can't say
anything about it."
For hotels, the sex that can be piped through television
generates far more money than the beer, wine and snacks sold
from the rooms' mini-bars. Just under 1.5 million hotel rooms,
or about 40 percent of all hotel rooms in the nation, are
equipped with television boxes that sell the kind of films that
used to be seen mostly in adults-only theaters, according to the
two leading companies in the business. Based on estimates
provided by the hotel industry, at least half of all guests buy
these adult movies, which means that pay-per-view sex from
television hotel rooms may generate about $190 million a year in
sales.
At home, Americans buy or rent more than $4 billion a year
worth of graphic sex videos from retail outlets and spend an
additional $800 million on less explicit sexual films — all
told, about 32 percent of the business for general-interest
video retailers that carry adult topics, according to
compilations done by two trade organizations that track video
rentals. Chains like Tower Records now stock nearly 500 titles
in their so-called erotic category, far more than films about
history or dinosaurs.
On the Internet, sex is one of the few things that prompts
large numbers of people to disclose their credit card numbers.
According to two Web ratings services, about one in four regular
Internet users, or 21 million Americans, visits one of the more
than 60,000 sex sites on the Web at least once a month — more
people than go to sports or government sites.
Though estimates have been greatly inflated by some
e-commerce sex merchants, analysts from Forrester Research say
that sex sites on the Web generate at least $1 billion a year in
revenue, providing a windfall for credit card companies,
Internet search engines and people who build Web sites, among
others in the commercial food chain.
Some of the most popular Web properties — which feature quick
links to sites labeled "Virgin Sluts" and "See Teens Have Sex" —
are owned by a publicly held company in Boulder, Colo. That
company, New Frontier Media, has stock traded like any other,
and it expects its video network to be in 25 million homes
within a few years. It does business with several major
companies, including EchoStar and In Demand, the nation's
leading pay-per-view distributor, which is owned in part by
AT&T, Time Warner, Advance-Newhouse, Cox Communications and
Comcast.
Another company, LodgeNet, whose chairman is Scott C.
Petersen, does $180 million in annual business selling sex
videos and other forms of room entertainment to hotels. LodgeNet
is a major employer in Sioux Falls, S.D., its home base. It is a
client of the accounting giant Arthur Andersen, and nearly a
fifth of the company's public shares are held by a Park Avenue
investment firm, Red Coat Capital Management of New York.
"We feel good about what we do," said Ann Parker, a
spokeswoman for LodgeNet, which trades on the Nasdaq market.
"We're good corporate citizens. We contribute to local
charities."
The biggest provider of hard-core sex videos and adult Web
content, Vivid Entertainment Group of Van Nuys, Calif., whose
founders and principal owners are Steven Hirsch and David James,
has been making the rounds of investment bankers of late,
preparing for an initial public stock offering next year that
could ultimately lead to the first porn billionaire.
"The adult entertainment business is just exploding," said
Bill Asher, the president of Vivid, whose offices are in a new
granite and glass building that houses investment and venture
capital firms. "Right now there are a lot of people making a lot
of money. Somebody's got to take control of it, and we figure it
might as well be us. We see ourselves as the designated driver
of this business."
To the astonishment of Mr. Flynt, who began in the
pornography business by selling poor-quality pictures of naked
girls as a way to build interest in his strip clubs, his
competitors in the $10 billion annual adult market are
mainstream corporations whose board members are among the
American business elite.
"We're in the small leagues compared to some of those
companies like General Motors or AT&T," Mr. Flynt said. "But
it doesn't surprise me that they got into it. I've always said
that other than the desire for survival, the strongest desire we
have is sex."
The Technology Factor: Look, Ma, No Staples!
Thirty years ago, a federal study put the total retail value
of hard-core pornography in the United States between $5 million
and $10 million — or about the same amount that a single
successful sex-related Web site brings in today. It seemed
likely that the industry would remain where it had always been —
largely out of sight, but profitable, and faced with consistent
legal problems.
What kept the market relatively small, in the view of people
in the industry, were the barriers between consumer and product.
Typically, a person would have to go to a run- down part of
town, among people considered less than savory, to find
hard-core adult films or bookstores. These retail outlets
frequently were raided by law enforcement authorities, further
adding to the risk for a consumer — a risk of shame, or arrest.
In 1975, the Sony Corporation released the videocassette
recorder to the broad market, and within 10 years, about 75
percent of all American households owned a VCR. Once the venue
had moved from theater to the privacy of the home, the adult
entertainment industry was never the same. For example, a single
film, "Deep Throat," generated more than $100 million in sales,
thanks in large part to the popularity of VCR's, Frederick S.
Lane III writes in his book "Obscene Profits: The Entrepreneurs
of Pornography in the Cyber Age" (Routledge, 2000).
But even with most Americans owning VCR's, people still had
to take a trip to the video store, risking some embarrassment.
Pay-per-view television and the Internet removed the final
barriers.
Cable and satellite programmers allow people to buy a variety
of sex-based programming, from Playboy, on the lighter side, to
the Hot Network, owned by Vivid, and the Erotic Television
Network, distributed by New Frontier, on the more explicit end
of the spectrum. Consumers could watch movies of people having
sex without ever leaving home.
What investors and bigger corporations soon discovered was
the vast audience for pornography — once the privacy barrier was
eliminated. Twenty percent of all American households with a VCR
or cable access will pay to watch an explicit adult video — and
10 percent will pay frequently, according to the distributors
New Frontier and Vivid. That interest explains, in part, why the
production of pornographic films has grown tenfold in the last
decade. There are now nearly 10,000 adult movies made every
year, according to an annual survey of the films produced in the
Los Angeles area.
Last year, there were 711 million rentals of hard-core sex
films, according to Adult Video News, an industry magazine that
is to pornographic films what the trade publication Billboard is
to records. It even has its own film awards — modeled after the
Oscars.
But video rentals have reached a plateau over the last two
years. The future is pay- per-view at home — driven by the easy
access and good technical quality of digital television — and
pay-per-view from the Internet, driven by the technological
innovations of new cable and phone lines that carry far more
images, more quickly, to a computer screen.
"Videos changed the way people could view porn because they
were able to watch in the privacy of their homes," said Barry
Parr, an electronic commerce analyst with International Data
Corporation. "Internet pornography takes that a step further —
they can do it with absolute privacy."
The number of people visiting sex sites on the Web doubled
over the last year, outpacing the number of new Internet users.
Some of the more popular sex Web sites attract in excess of 50
million hits, or visits, a month, according to the ratings
services Nielsen/ Net and Media Metrix. About one in a thousand
people who visit a site will subscribe, for fees averaging $20 a
month, according to some of the leading Web pornography
providers and Flying Crocodile Inc., a company based in Seattle
that tracks and services the sexual-content market.
At the same time that technology was making it easier for
people to view pornography, legal obstacles were falling. The
1973 Supreme Court case Miller v. California established a
threshold for defining illegal pornography; a major test was
that it had to be considered obscene to the "average person,
applying contemporary community standards."
Initially, the case helped prosecutors clamp down on
publications and movies. But that proved to be short-lived. If
"Deep Throat" could sell $100 million worth of copies, then what
was the community standard?
"The court may have handed off the determination of obscenity
to the local community, but the standards of local communities
had fundamentally changed," writes Mr. Lane in "Obscene
Profits."
When Mr. Peterman was prosecuted for distributing obscene
material in Utah last year, he became one of the few video
retailers in the nation charged with such a crime in recent
years. In a state long regarded as a bastion of family-values
morality, more than 4,000 people signed petitions supporting his
prosecution.
But Mr. Peterman showed that he had 4,000 regular customers
for sex videos. His lawyer argued that Mr. Peterman was not
violating community standards, because people in Utah County
bought 20,000 adult sex videos from one satellite programmer
alone in the period that Mr. Peterman was said to have broken
the law; it was double the volume in most cities the size of
Provo. And in the Provo Marriott, guests were paying for nearly
3,000 explicit adult videos every year, according to court
testimony. After the Peterman trial, that hotel dropped its
adult movies.
"My client was just a little guy," Mr. Spencer said, "a
mom-and-pop dealer in a very big business."
The Corporate Factor: It's the Demand, Companies
Say
At a time when political campaigns from the presidential
level down to that of the local school board have made an issue
of sexual excess in broadcasting, the corporate entanglements in
the pornography business have blurred the lines of the
debate.
In Missouri this year, Senator John Ashcroft, a Republican,
ran ads denouncing "Hollywood's decaying influence" on society,
singling out his Democratic opponent, Gov. Mel Carnahan, for
accepting donations from Christie Hefner, the Playboy
executive.
Mr. Carnahan, who died last week in a plane crash, had
countered by pointing to donations to Mr. Ashcroft from Charles
W. Ergen, chief executive of EchoStar, which sells adult
pay-per-view through its fast- growing DishNetwork satellite
division.
"If he's going to start that, he's in greater trouble than I
am," Mr. Carnahan had said.
Mr. Ashcroft's supporters had replied that there was still a
distinction between the two companies: EchoStar did not produce
pornography — it merely sold it, while Playboy created its own
videos and pictures, they said.
"We added adult at the request of our customers," said
Judiann Atencio, a spokeswoman for EchoStar. "We have something
for everybody, from Irish hurling to cricket. Adult is there if
you want it."
When AT&T announced that it would start offering the
hard-core Hot Network to its 2.2 million digital cable
subscribers beginning in August, they were castigated by critics
and pressured by religious and civic groups that hold stock in
the company.
A group of mutual-fund investors, which included the Sisters
of Charity of New York, the Evangelical Lutheran Church of
America and the Mennonite Church, told AT&T its members did
not want their three million shares invested in a company that
sold pornography.
"At the heart of our concern is the concept of mainstream
companies getting into hard- core pornography," said Mark
Regier, who manages a mutual fund for 800,000 members of the
Mennonite faith. "For a company with AT&T's tradition and
its charitable work to be involved with pornography at this
level is unbelievable. And I don't think many people understand
what it means to take away the barriers to this kind of
material, such as AT&T is doing."
For AT&T, there are sound business reasons to start
carrying the highly profitable Hot Network. Unlike distributors
of mainstream Hollywood pictures, sex-film distributors
typically offer the programmers a split of 80 percent of the
revenue, compared with 50 percent or less for routine
features.
Impulse buys, in which customers tap a code into a remote and
a movie follows, have also spurred in-home sales of pornographic
films.
"Impulse technology — that's been just incredible," said Mr.
Asher of Vivid Entertainment, which makes hundreds of adult
films and claims that it sells a million copies a month to
cable, satellite, home video and hotel retailers. "You have
about 35 million homes with this kind of technology now," Mr.
Asher said, "and it's growing enormously. It's easy and it's
private — that's the key."
Although the companies that program explicit sex films will
not give out their revenue figures for this category, a report
by the Showtime Event Television company found that adult
pay-per-view took in $367 million last year — a more than
sixfold increase from the $54 million of 1993, easily outpacing
the growth of pay-per-view "events" like boxing and
wrestling.
Time Warner, EchoStar, General Motors and AT&T all say
they are simply responding to a growing American market that
wants pornography in the home. At the same time, the companies
say new technology makes it possible for parents to keep such
programming away from children.
"We call it choice and control," said Tracy Hollingsworth, a
spokeswoman for AT&T Broadband, the company's cable
division. "Basically, you use your remote to block out any
programming you don't want. But if you want it, we offer a wide
range of programming that is available in the market we're
in."
Hotel chains have made similar decisions when, this year,
several groups urged them to get rid of the adult pay-per-view
programs that are in nearly 60 percent of all middle- to
high-end hotels. Only one chain, the relatively small Omni
Hotels, chose to remove the sex films.
"What we noticed was that early on, the content was R-rated,
but then it migrated rather quickly to really raunchy stuff —
just hard-core porn," said Jim Caldwell, the president of Omni.
"I thought: What are we doing? We don't have topless waitresses
in the restaurant."
Mr. Caldwell said more than 50 percent of all guests were
buying the sex films. "The anonymity is the big thing," he said.
Omni's decision to remove pay-per-view sex videos from the
company's 15,000 rooms will cost the company more than $1.8
million a year, Mr. Caldwell said. But he said he had received
phone calls and letters of thanks from 50,000 people — more than
for any other corporate decision.
Much larger hotel chains, like Marriott, which calls itself
the world's largest hotel management firm, with nearly 300,000
rooms in the United States, and Hilton, with 290,000 rooms under
its control, have not made changes.
Some critics said Marriott, run by several prominent members
of the Mormon Church, though not affiliated in any way with the
church itself, should drop its adult movies, given the stand
against explicit sexual materials that Mormons have long taken.
But company officials said they were mostly franchisers, and
could not make unilateral decisions for the hotel owners who
paid to be a part of the Marriott chain.
The two companies that provide hotels with pornographic films
are both traded on Wall Street and have enjoyed big run-ups in
their stock prices over the last few years. The leader, On
Command, based in Denver, is worth more than $400 million, and
its principal owner is Liberty Media, controlled by John C.
Malone, the cable and telecommunications magnate who sits on the
board of AT&T and recently agreed to buy up to 15 percent of
the shares of Mr. Murdoch's News Corporation.
The chairman and chief executive of On Command is Jerome H.
Kern, a former New York corporate lawyer active in civic and
volunteer causes, serving on the board of New York University
and as a director of Volunteers of America in Colorado.
On Command would not discuss how much money it is making on
adult films. But in its annual report, the company said it was
generating $23 a room each month for the 835,000 hotel rooms it
reaches. The company goal is to get into an additional one
million hotel rooms. Analysts say at least half the revenue
comes from adult films. The company recently began offering
all-day erotic television to hotel customers, for a single price
of $15.99.
"Talk about your captive audience," said Mr. Asher of Vivid.
"I've heard that in some hotels, 85 to 90 percent of all profits
from in- room spending comes from adult channels."
The Money Factor: Big Profits Now, Bigger Ones on
Way
While the big companies that deliver sex films to homes and
hotels will not talk about how popular explicit sexual materials
are, the makers and distributors say the volume is enormous. And
court testimony and documents that were made public in the
Peterman case also offered some insight into the profit
potential.
"Despite the fact that this material isn't marketed,
revenue-wise, it's one of our biggest moneymakers," said Peggy
Simons of TCI Cable, in court testimony in Mr. Peterman's case.
TCI, controlled by Mr. Malone, has since been bought by
AT&T.
"When we talk to the companies one-on- one, they tell us
we're great, that we're a huge moneymaker for them," said Mr.
Asher, whose company owns the Hot Network, which is available in
16 million homes. "And by the way, I tell my biggest customers —
don't say you ever met me."
In trying to take public his company, which now does about
$80 million a year in sales, Mr. Asher said, "The biggest
problem I have is the image of the adult business. People think
it's run by the mob, or a bunch of guys with gold chains. I grew
up in Paris, Illinois. I have a master's of business
administration degree."
The Hot Network portrays people having sex in a variety of
methods — what the company calls "widely accepted sexual
activity" — and prohibits scenes of violence, nonconsensual sex,
drug use, forced bondage and sex with minors.
Analysts of electronic commerce and telecommunications say
the mainstream sex market might be leveling off, but new
technology is likely to bring in even more consumers.
"The novelty of it has not worn off yet, and I don't believe
it will wear off," said Sean Calder, a vice president for
e-commerce at Nielsen/Net Ratings, which gauges the popularity
of Web sites. "The numbers point to a huge personal need. We see
lots of people logging on at 3 in the morning."
The $30 billion project to rewire the cable industry with
lines capable of bringing more material, and allowing people to
buy on impulse, will play a big part in the emerging home
pornography market.
"These companies like AT&T, they're thinking ahead to a
time, perhaps in 10 years, when 50 million Americans will have
broadband capability and all their television and Internet will
be interactive through one big box," said Bryn Pryor, technology
editor for Adult Video News, the trade magazine.
"But it's not just technology that made the big boys get into
it," Mr. Pryor said. "This just happens to be a business where
you can't lose money."
