Are There Lessons to Be Learned from Internet Porn Sites?

For anyone shy about being seen in the adult section at the local video rental store, the Internet is a dream come true: Completely private access to vast archives of pornographic material.

Porn has long been seen as the big money maker on the Internet while most mainstream sites are years away from breaking into the black. At first glance, it seems easy to understand why struggling Yahoo, the mainstream portal used by millions, moved late last year to improve access to its adult offerings.

But the move backfired earlier this month after it appeared in the Los Angeles Times and sparked a public protest. Yahoo quickly cut its losses, announcing, as one newspaper headline put it, that it would take the “XXX out of its WWW.”

Why would an Internet portal known for its family-friendly style have entered the adult business in the first place? Just how significant is adult material on the web? And does this business have anything to teach mainstream sites?

While Yahoo is one of the big hitters on the Internet, it is reaching for ways to shore up revenues and maintain profits in order to avoid a further erosion of its stock, now trading around $18 after peaking at $216 at the end of 1999.

Yet the company says adult material is an “infinitesimal” revenue source. The company gave users access to adult materials on its shopping area two years ago, merely because Yahoo tries to offer “breadth and depth” to a wide range of users, says spokesman Jackson Holtz. Yahoo did not provide any of the material itself but offered links to outside suppliers.

Many Internet portals wrestle with the issue of what to offer and what to deny their users, and they are generally reluctant to play censor, says Wharton marketing professor David J. Reibstein. “They are trying to be a very comprehensive system that reaches as pervasive a world as they can,” he notes, adding that blocking access to one type of material can put a portal on a slippery slope, encouraging interest groups to demand other limitations. Earlier, Yahoo had been pressured in Europe to block auctions of materials some groups viewed as Nazi memorabilia.

In its shopping sites, Yahoo makes money from ads and from fees for giving products prominent display, and it receives a slice of the payment when customers buy products, Holtz says. The company does not break down the shopping-site portion of revenue, though some analysts say it is but a fraction of total revenues. Adult materials would be a tiny slice of that fraction.

Holtz says the only significant recent change to the adult offerings came at the start of the 2000 holiday season when all those materials were aggregated into one area. The purpose, he adds, was to keep minors away from adult material by requiring a credit card number from users wishing to enter.

After the Los Angeles Times story, “we heard from many of our users, and based on the feedback from our audience, we decided to remove adult related products from our shopping, auction and classified sites,” he says.

This explanation rings true to Wharton marketing professor David Schmittlein. “It was an easy decision for them,” he points out, noting that the risk of offending mainstream users far outweighed any profits to be gained from the adult market.

The common wisdom is that pornographic material is the dirty secret of the Internet, accounting for vast amounts of traffic and enormous revenues. Jupiter Media Metrix, a company which tracks Internet usage, found that 30 million different users visited adult sites in March, accounting for 33.8% of all people who used the world wide web, according to media development coordinator Kumar Rao.

Outsiders have long envied adult sites’ ability to get users to pay monthly subscriptions or other fees. With a few notable exceptions, such as the Wall Street Journal’s online site, mainstream sites have been unable to make subscriptions stick. TheStreet.com and Slate.msn.com, for instance, had to abandon subscription charges for lack of takers.

The Internet was established as a free resource, and it is generally believed that the young people who were the first to use it widely – the “early adopters” – reinforced the Internet-is-free culture.

Reibstein says that in the rush to stake out Internet turf, site providers felt compelled to keep services free to gain traffic. The proliferation of free sites made it difficult for anyone to begin charging. Why, then, will users pay for porn? Certainly, the privacy afforded by the Internet adds value. Reibstein says it also is likely these users are accustomed to pay for adult videos and magazines. Users who follow mainstream news on the Internet, in contrast, are used to getting the service free or at very low daily cost from television and newspapers.

Of all the types of commerce conducted on the Internet, electronic content has a money-making edge because the product can be delivered online, says Reibstein. Once an image is posted, the cost of supplying it to each user falls to nearly nothing. In contrast, a site selling books must carry its product in inventory and support a distribution system.

Schmittlein notes that users of adult material have often provided the first rush of revenue in new media. “It was true in video cassettes and it’s true online.”

If Internet porn users do indeed have unique characteristics, mainstream sites struggling to build revenue may not find many valuable lessons in the adult-site model. Moreover, some experts think adult sites are not the gold mines many believe them to be. In a 1999 report, Jupiter analyst David Card concluded that “proclamations of a huge online porn business are preposterous… Most for-pay adult sites have a few hundred monthly subscribers.” He argued it thus was mathematically impossible for online porn to be the enormous money maker many thought it was. It might be the largest single segment of the subscription-based online market, but this market was estimated to be a relatively small $440 million in sales in 1999.

“Online porn subscribers are extreme early adopters and are highly tolerant of poor quality, not to mention a generally unpleasant online experience,” he said. Mainstream users wouldn’t be so tolerant, he added, noting that when videotapes went mainstream, adult movies became a smaller slice of the pie.

Under public, political and legal pressures, many adult sites now require credit card numbers to verify that users are adults. But many nonetheless provide vast amounts of material for free. Some free sites rely on advertising, some serve as feeders to paid sites run by the same company or by other companies who pay fees when customers click through and sign up.

An April 23 story in Interactive Week, a 250,000-subscriber weekly newspaper that covers the Internet and interactive technology, said the adult sites are facing hard times. Headlined “Trouble in Porn Land,” the story describes one company that operates 10,000 sites which now finds that only one of every 400 people who visit pay sites for the first time go on to buy memberships, down from one in 100 in earlier days. The economic downturn is affecting users, the story said. But in addition, the subscription sites have a tough time competing with the vast number of free sites.

If adult sites find it harder to make money on subscriptions, after having been able to in the early days of the Internet, does that mean mainstream sites have even less chance of making fees stick?

Subscriptions are a high hurdle, but not necessarily an insurmountable one. With few Internet companies making money, many are falling by the wayside, reducing the pressure to offer everything for free, Reibstein says. Indeed, many sites have begun charging for some services. Yahoo, for instance, has a $4.95-per-month service allowing users to receive and pay bills online.

“The only thing that is going to allow you to sustain a price is a kind of oligopoly,” says Schmittlein. While low prices attract users, he adds, Internet shoppers have in fact shown a willingness to pay for good service and convenience, generally through higher prices. Amazon can thus attract hordes of book buyers with its brand name and good service, even though other sites sell books for less.

As the demographics of Internet users change to more closely mirror consumers in general, there will be more people who are willing to pay for what they get online,” says Wharton marketing professor Peter Fader. “I think subscriptions could work today,” he said. “But people feel so burned by what happened a few years ago that nobody has the guts to try.”

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