Satellite operators have aggressively devoted pay-per-view channels to XX-rated movies, leading many cable operators to follow suit. These movies show intercourse, oral sex and close-up shots. Triple-X shows are more graphic still. The X-rated "soft" porn featured by Playboy is characterized by nudity, wide- and medium-camera shots, simulated sex and sex between women.
For Playboy, a defining moment came two years ago, when the company passed up the chance to buy what became the Hot Networks. Hot was the raciest of three networks that were part of Spice Entertainment Companies Inc., which Playboy agreed to buy in 1998 for $127 million. Playboy kept the two tamer channels--Spice and Spice 2--but sold Spice Hot to the Vivid principals and retained an option to buy it back.
English said there was no way of knowing at the time how acceptable hard-core programming would become. "We did not misjudge the market," he said.
Playboy is having to pay a steep price to recover lost ground. Monday's deal values Hot and Hot Zone at $28.3 million--nearly three times what Playboy sold them for in 1998.
The television business is the lifeblood of Playboy. The three U.S. channels account for the bulk of the revenue in its entertainment group, which was the only profitable division in the first quarter. The unit, which also includes international television, worldwide home video and movie sales, reported a $5.2-million profit on revenue of $24.7 million in the three months ended March 31.
Of that total, the three U.S. channels took in $19 million, down slightly from $19.1 million in the year-earlier period. The Spice acquisition allowed Playboy to increase revenue even as competitors such as Hot gained market share. The continued expansion on cable and satellite of Playboy's three channels also helped sustain revenue levels.
Although the magazine still ranks among the nation's top 10, its circulation has dropped from a peak of 5 million in the early 1980s to 4.5 million today. Lately, the magazine has suffered from an industrywide advertising and subscription downturn, losing $1 million in the first quarter, compared with a $1.6-million profit a year earlier.
But publishing isn't losing nearly as much money as the company's foray into cyberspace. Though Wall Street considers the Internet a key to Playboy's future, the company's push largely was responsible for a companywide operating loss last year of $16.9 million.
Playboy shares dropped to a low of $8.38 in late December from a high of $29.81 in 1999 in large part because of increasing losses.
The stock bounced back as Playboy sharply cut Internet spending in the first quarter. After a 26% rise this year, shares inched up $1.33 on Monday, to close at 17.50 a share.
Initially, the prospects of Playboy going hard-core troubled some major cable operators. Tele-Communications Inc., the nation's most powerful cable company before its sale two years ago to AT&T Corp., pressured Playboy to tone down the XX-rated Spice channel, hoping to eliminate any regulatory threat or migration to harder-core movies
The cable industry still has a love-hate relationship with adult programming, which one insider calls the "secret hidden asset." Although porn is a touchy subject, no television executive disputes its high profit margins.
Few cable or satellite TV executives are willing to talk publicly about adult programming for fear of inciting criticism from investors, subscribers and politicians who might revoke their licenses.
AT&T came under fire from some shareholders this year for refusing to disclose the profit it earns from porn programming on its cable systems. The shareholders petitioned the Securities and Exchange Commission to order the phone giant to disclose the profit, but the SEC declined.
Adelphia Communications Corp., Southern California's largest cable provider, refuses to carry any adult channels because its founder and chief executive, John Rigas, believes it is immoral.
Most others, however, quietly have carried low-voltage adult programming since the late '80s, when pay-per-view technology made it more secure.
Playboy will remain devoted to softer material, whereas Spice will be more extreme, Christie Hefner said in the Monday conference call. Two of the Vivid channels will be renamed Spice Hot and Spice Zone. The more graphic Vivid TV will be renamed Spice Platinum Live.
English said Playboy will abandon a yearlong effort to launch two hard-core movie channels of its own because of a lack of interest among distributors, which saw them as redundant.
The company will move forward with a new live format that will draw content from the Internet and be hosted by Jenna Jameson, a leading porn star who is under contract with Vivid.
Playboy officials are acutely aware of the success of new hard-core rivals.
"Do we know those numbers? Yes," English said. "Does it indicate that the public's taste and acceptability of [hard-core sex] has changed? Yes. So 'yes' and 'yes' equal 'got to do something.' "