Chicago Tribune, 10/16/05 - At age 79, Hugh Hefner is in the spotlight again, and he loves it. He's making TV
appearances, his girlfriends have a television reality show on E!, and a Playboy-themed
casino opens in Las Vegas early next year.
Not long ago, Playboy looked like it might fade away. The guru of self-indulgent bachelorhood himself had remarried and settled down to raise his two little boys. Losses were mounting at Playboy Enterprises, the public company run by Christie Hefner, the daughter from his first marriage. Television, the Internet and practically every other popular medium had become saturated with sex, so who needed Playboy?
But lately the company has been staging an unlikely financial comeback. With little fanfare, the iconic tastemaker whose magazine always drew the line well short of explicit sex has become the leading purveyor of hard-core programming on cable and satellite television. And by embracing its inner pornographer, Playboy has moved solidly into the black.
There is still "soft-core" fare on the Playboy Channel, though "soft core" can be pretty graphic these days: Cameras zoom in for close-ups of female genitalia and couples entwining in the nude. But on its Spice movie channels, Playboy turns up the heat, showing porn performers copulating in gynecologist-meets-urologist detail. The company used to outsource this sort of programming, but recently started producing its own in high definition at its state-of-the-art studio in Los Angeles. Its Web sites, once big money losers, now make a profit in part by peddling harder stuff.
Hugh Hefner says he encouraged his daughter to offer hard-core porn--what she refers to as her company's "less-edited services." X-rated content already was a dirty little secret at premier media companies, such as Comcast and DirecTV, which distribute it to their customers at a huge markup. Now that Playboy has joined the parade, its founder couldn't be more thrilled.
"This on many levels is the best time for the company," he says in an interview at the mansion. "To have Playboy hot again with a whole new generation is unbelievable."
Hef intends to keep the empire going as a family concern far into the future, a plan likely to dismay some investors who are betting on the sale of Playboy to a sharper operator after his demise. His commanding 70-percent stake in Playboy's voting stock will go to his teenage sons through a trust arrangement. His two adult children--Christie and a son unconnected to the business--won't get those shares, he says, because that would jeopardize his plan for "continuity."
Under terms of the trust, the Hefner stake could be sold, but will it? "I've seen to it that it won't," he says.
Making money will be a secondary concern, he adds. "I have never been in the business for the business."
The No. 1 goal?
"Changing the world."
DRESSED IN HER USUAL buttoned-down business attire and speaking in a confident voice, Christie Hefner is explaining that if you want to make a difference in a needy spot like Rwanda, you have to use your money wisely.
The 52-year-old Hefner has assembled a group of corporate donors in her headquarters at 680 N. Lake Shore Dr. to hear Chicago physician Mardge Cohen plead for help fighting AIDS in the African nation torn by genocide.
Through its foundation, Playboy gives away $600,000 a year, mostly to support free speech, civil liberties and sexual health care. Hefner is urging her fellow donors to lend the Rwandans a hand. "We really do live on the same small planet," she says earnestly.
Hefner does a lot of public speaking, and she's good at it--articulate, poised, fast on her feet. She turns down many more invitations than she accepts, saying she doesn't want fame and celebrity like her dad. But like him, she's a sought-after personality, though for a different reason: She's a rare woman among the overwhelmingly male, turnover-prone ranks of public-company CEOs. She has held the top post at Playboy since 1988, and Forbes recently named her one of the world's 100 most powerful women, putting her at No. 90--one notch below Chicagoan Penny Pritzker, another child of fortune who belongs to all the right civic groups.
Like her father, Christie Hefner says she is more interested in making a difference in the world than making money. But unlike her father, who focuses on the content of the magazine--stories, cartoons and centerfolds--Christie is all business. She goes on important sales calls. She deals with investment bankers and Wall Street analysts. She hires and fires the company's hands-on managers.
Hef is frustrated that, after all these years, with one of the world's most recognized brands, Playboy is not a billion-dollar business. In visibility and influence, it's big. But in the world of public media companies, at $330 million in revenues last year, it's a pipsqueak.
Time Warner has 85,000 employees, Playboy 660. Viacom's sales for 2004 were almost 70 times greater. The Walt Disney Corp. earned more in two days than Playboy managed all last year, and that was Playboy's best performance since 1997.
The comparisons might seem absurd, except that Playboy always has pictured itself in the big leagues. In its government filings, the company counts those media giants among its official "peer group" to benchmark its relative performance. When the dot-com boom briefly sent the company's stock soaring, Christie Hefner pledged that Playboy's market value would exceed $1 billion by 2003. At a meeting with employees, she handed out sweatshirts imprinted with the billion-dollar goal. It wasn't out of greed, her father explains. "The numbers are only a symbol for her. They're important because she wants the company to look good, and she wants to look good."
By 2003, though, the company looked bad. Losses on Playboy's Internet operation exceeded $70 million, and it had spent $200 million to buy out an upstart competitor in the adult TV business. Since 1982, when Christie Hefner took over as president and began directing its operations, Playboy posted net losses of $256 million in its 10 bad years, far outweighing the net earnings of $104 million in its 13 good ones.
True, she inherited a mess in the early '80s, and her overall cash flow has been positive even if her bottom line has not. Nonetheless, Playboy lost on average $6.5 million a year between 1982 and 2004, including $7 million a year over the last decade, and a startling $19 million annually in the last five years.
What held the bunny back? Playboy didn't have much capital, and it failed to break out of its soft-core niche. It bore the commercial stigma of adult entertainment without the higher profits of hard-core porn. Repeatedly targeted by government, feminists and the religious right, Playboy responded cautiously to business opportunities. "They've been ultra-conservative," gripes money manager Mark Boyar, a longtime shareholder who wants the company sold. "She's a mediocre manager at best."
Christie Hefner rejects the criticism. "Who else has taken one magazine and created a half-billion-dollar company?" she asks. Her "two big bets," on TV and the Internet, were right on the money, she says. If they weren't, "I wouldn't have this job."
And in case anybody wonders, she feels fine about her dad saying she owes that job to blood ties. She's fine with her dad's teenage sons getting all his shares when he dies. She's fine with being left off the board of the trust that will control those shares. "The trust is there to support me as long as I want to run the company," she says. "That's all that is important to me."
And, as she has said over and over, she's fine about running a company routinely accused of exploiting women. She devotes time and money to women's causes and sees no conflict between her company's product and her feminist convictions. Those who do, she maintains, don't understand that Playboy empowers women, from the centerfold playmates to the executive suite-and, yes, even through its latest foray into hard-core pornography. "It's not something I have trouble representing," she says. "I led us into it because the market was ready for it."
Some people think the market is ready for a lot more than Playboy is offering. Seated in his wheelchair at his Beverly Hills office tower, behind an ornate desk piled high with his company's skin books like "Barely Legal" and "Wet Dreams," Larry Flynt says Playboy is still way too tame.
"If you're going to be in this business, you can't be ashamed," says Flynt, who claims his privately held Hustler empire exceeds Playboy's in size and scope. "Guys like sex. They like it raw. For every customer you would lose by becoming more edgy, you would make more on the other side."
Nonsense, Hefner says. "If you get too far out in front of the market, you're going to have problems. Playboy never saw its mission as pushing the envelope."
In 1987, Playboy's revenues bottomed out at a paltry $160 million, but because of its austerity measures, it was making a profit. It had more than $30 million in cash and virtually no debt. Hef says he appreciates Christie's work during those painful years: "She was there for me," he says. Instead of merely cleaning up his mess, however, she seized on what she considered Playboy's next big opportunity: pay TV.
At first, Playboy magazine translated into boredom on the tube. TV executives came and went, experimenting with knockoffs of "Candid Camera" and the evening news. They trotted out tired comedians. And Playboy TV advertised its "choice" not to program X-rated content.
Choice was not really the word for it. In 1983, an Ohio prosecutor brought criminal obscenity charges against a cable operator who carried Playboy. It didn't matter that the charges were dropped. The fears aroused among cable operators would haunt Playboy for more than a decade. Then the market abruptly turned, and porn went from pay-TV pariah to profit mainstay.
Wearing topsiders without socks, casual slacks and an open collar, Bill Asher looks every inch the Ivy League preppy with an MBA. He's a pornographer, too, and a good one.
He and his partners have built Vivid Entertainment into a leading provider of video sex. He has his standards: No barnyard animals. No violence. No drug use. No adults pretending to be minors. As hard-core porn goes, Vivid's movies are "mainstream," Asher explains. "Pretty people having hot sex." Demand for his product is growing "double-digit," he says, and Playboy, his former employer, is among his best customers.
Yet Vivid and Playboy have the same business dilemma. Pornography in America is a multibillion-dollar industry, but most of the profits flow to middlemen who distribute the stuff. Asher, Hefner and Flynt take in a fraction compared to media barons such as Rupert Murdoch of News Corp. or Brian Roberts of Comcast, who control the cables and satellites. Lower-profile middlemen--execs at pay-TV providers--have made their bonuses in lean years by pushing porn on a receptive public. Even nice hotels have come to rely on the profits from adult movies in their rooms.
As the market for adult TV turned more intense in the 1990s, Playboy lagged behind. An aggressive competitor known as Spice provided the racier stuff, nabbing the pay-TV audience Playboy had cultivated for years. "We were allowing ourselves to get beat at our own game," says Asher, a Dartmouth alum who joined Playboy in 1994. "We didn't get aggressive soon enough because that wasn't where Playboy wanted to be."
Even when the company bought out Spice for $127 million in 1999, it took only two channels. The third, known as Spice Hot, had the most graphic sexual content then available, including vaginal and oral penetration shown at a distance. Most cable operators wouldn't touch it, and they advised Christie Hefner to stay away. She tallied the risks and took a pass.
But Asher sensed opportunity. For little more than a promissory note and a cut of future royalties, he and his partners at Vivid took Spice Hot off Playboy's hands.
In its annual report, Playboy assured shareholders that the two new channels it did acquire from Spice contained no explicit sex and maintained "the level of taste and quality established by Playboy magazine." Playboy also retained an option to buy back Spice Hot if the market changed.
Did it ever. Within months, Playboy won a Supreme Court victory striking down a 1996 law aimed at limiting the distribution of all adult programming to overnight hours. Even more important, satellite and digital cable delivery came on strong, providing a new level of privacy and security that customers enthusiastically embraced.
Suddenly, lots of operators wanted Spice Hot. MediaOne offered it, then DirecTV did. Vivid launched new "Hot" networks, challenging Playboy with a lower-cost, sexier product, just as the original Spice programs had done.
Playboy exercised its option to buy back Spice Hot in 2001, paying Vivid a stunning $82 million for the expanded programming portfolio, including the explicit channel it had passed up two years earlier. "It was probably the worst business deal ever done," says Kenneth Boenish, president of New Frontier Media Inc., a rival pay-TV pornographer. "And you wonder why they haven't made money."
Playboy executives defend the deal, saying they paid fair market value. The trouble was, Playboy didn't have that kind of money readily at hand. By 2001, the company had developed an acute case of dot-com fever.
Christie Hefner had spotted the Internet early. She launched the company's Web site in 1994, ahead of many competitors. She spoke glowingly about the future of media in an interactive world. She hired a big staff and laid the plans for a blockbuster initial public offering of Playboy.com.
At first, Playboy tried to translate the magazine to the Web, counting on advertising to support its site. But even its mild adult content scared away big-time marketers like automakers and tech companies. Playboy launched online subscription services and e-commerce, too, but as in TV, it was a lot tamer than the competition's.
Even then, porn on the Internet was uninhibited and often free. Apart from dedicated Playboy fans, not enough customers would pay for the mellow fare on Playboy.com, recalled Liz Wald, who served as an Internet consultant to the company. "They definitely didn't want to be hard core, and on the Internet, the-harder-the-better is what makes money."
But the Internet bust and TV acquisitions left Playboy under financial pressure. Bankers were leery of lending to it and private investors were demanding big equity stakes for tiny cash infusions. Hugh Hefner made a $27.2 million personal loan to keep Playboy.com afloat. In March 2003, with no better alternatives, the company issued $115 million in junk bonds at a punishing 11 percent interest rate. Before it paid off the last of the bonds two years later, Playboy would hand over $22 million in interest and $25 million in prepayment penalties and fees.
On the plus side, the Spice channels gave Playboy an overwhelming share of the adult pay-TV market. Costly as it was, the deal to buy back Spice Hot from Asher contributed to earnings from the start. Once they were scaled down, the Internet operations limped toward profitability. And the corporation's growing reliance on porn didn't affect the Playboy brand's marketability. The company still commanded the attention of big-time investors. Wall Street beckoned.
So, Christie Hefner set out last year in search of investor money to shore up her balance sheet. She took along Linda Havard, her chief financial officer, whom she had hired away from oil giant ARCO in 1997, and investor relations veteran Martha Lindeman.
It was a grueling "road show." The Playboy team made the same sales pitch over and over to the investment world's mostly male audiences for seven days, seven or eight times a day. In Boston on day four, cars whisked them from Fidelity to BlackRock to Putnam. Then it was on to Minneapolis and Kansas City on day five. Against the odds, the sales blitz worked. In April 2004, Playboy sold 4.4 million additional shares, raising $52 million, helping it get out from under its most onerous debt. Hefner, Havard and Lindeman had put Playboy's finances back on track.
Now it was up to the likes of raunchy sex star Ann Marie to keep them there.
On an oversized purple bed in Playboy's high-tech California studios, Ann Marie is egging on a fan during her Spice Clips TV program. It's a live call-in show, shot in high definition, and the hostess, clad only in a sheer black halter top, is spreading her private parts while asking Jake from Missouri if he likes what he sees. "Oh, yeah," Jake replies, but when he fails to utter enough "oohs" and "aahs," she ditches him for a more vocal caller, Jason from Ohio.
So it goes in the hard-core heart of Playboy's California-based entertainment division. It faces competition from New Frontier and others, but at the moment it dominates the market, offering those so inclined what division chief Jim Griffiths describes as "a robust adult experience." The TV and Internet businesses under Griffiths provide the bulk of the company's operating profits.
In recent years, Playboy's three divisions have moved in very different directions. Its TV and Internet arm has dialed up the heat, targeting an audience in their 20s who have grown blase about less-provocative entertainment. The magazine flirted with a youth movement but still aims for a slightly older yuppie male. The licensing business, once known for automobile air fresheners, now targets upscale European and Asian women with high-end apparel.
As it has for a couple of decades now, a profit-hungry Wall Street wants Playboy to get cracking: Get into video on demand. Get deeper into international markets. Get into the booming business of adult entertainment delivered over the ubiquitous cell phone.
At Jefferies & Co., analyst Robert Routh advises splitting off the fast-growing entertainment division from the publishing and licensing arms. He also wants Playboy to partner with the hard-core Private Media, run by a second-generation Swedish pornographer, to boost an already substantial overseas presence. The company declines to comment on those suggestions.
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