The on-line erotica industry is hot--in more ways than one. It may be the best model yet for commerce on the Internet

Trend watchers have been telling us for some time that the information superhighway is going to be the supermarket of the future, but when it comes to plunking down plastic, mainstream consumers still seem to prefer a trip to the mall over a spin through the Internet. You can build a Web site, and "they" may come, but that doesn't translate into brisk sales and a robust customer base. For all the hype over the commercial prospects of the on-line marketplace, most business sectors have well-established alternatives to computer shopping that seem more closely attuned to the comfort zone of their core customers.

That's why it may make sense to look with something more than prurient interest at the booming on-line erotica industry. Indeed, the virtual combat zone could prove to be the most viable model for businesses trying to tap the Net's commercial potential. The facts don't lie: adult material is the first fully developed sector in Internet commerce, the first market with large numbers of buyers and sellers. In April 1996, ActivMedia, a market-research firm, found 780 Web stores (up from 60 in April 1995) selling erotic goods, interactive services, or files. And the search engine Yahoo! lists dozens more erotica sites opening for business each week.

Volume of business aside, the ways in which the erotica trade is adapting and developing its high-tech resources indicate how the large on-line marketplaces eventually will look and work. Erotica entrepreneurs are pushing the envelope in all major categories of multimedia information commerce: database access (graphic, audio, and video files), interactive services (keyboard chats, Internet telephony, videoconferencing), and real-time data feeds (continuous video broadcasts from the floor or stage of a nightclub). True, some aspects of this form of commerce are not, shall we say, readily fungible. Even so, the strategies that the on-line erotica industry is devising to cope with rapid technological change, increased customer sophistication, and intense competitive pressure almost surely hold valuable lessons for anyone who hopes to merchandise profitably on the Net.

The good news is that attracting raw traffic--the Internet equivalent of tire kickers and window-shoppers--doesn't seem to require deep pockets. In the real-time marketplace, new vendors in most sectors have to launch themselves with costly advertising and publicity campaigns. New vendors on-line usually don't need a strong promotional push in the traditional media to increase traffic at their site. When millions of potential customers are a couple of mouse clicks away, browsing takes on a whole new meaning, and even quite modest levels of promotion--a dozen one-time search-engine listings, for example, or an occasional news-group posting--can draw sizable traffic. "Not long ago I was developing an erotica site," says a worker at Web-site designer Digital Extreme, "and I put it on-line just to test it. I didn't advertise. I didn't list it with any of the search engines. But within a day I started to get file requests. They built up so fast, we couldn't get access to the site ourselves. Finally we had to take the site down and test it in-house."

Web sites often carry counters that show the number of "hits" on their home pages; those on erotica sites typically post in the tens and even hundreds of thousands. With access to those numbers of potential customers, many erotica sites restrict their promotion efforts to monitoring and maintaining their search-engine listings. Some also post sample images--visual promotions tagged with their corporate brand--to appropriate news groups. That low-budget marketing technique may eventually become standard practice for many on-line business sectors: tourist services, for example, often use the same approach, posting pictures and logos to their own news groups and mailing lists. It's true that a larger proportion of the current user base is in the market for erotica than for, say, a newsletter on mutual funds or a rare auto-parts catalog. But as the on-line population grows to hundreds of millions, even narrow niches (used seaplanes or antique agricultural machinery, for example) should attract a reasonable flow of drop-ins.

The real challenge is converting browsers into customers. On-line vendors in every sector report very low conversion rates, lower even than the average rate of direct-mail campaigns (about 2%). That holds true for the erotica trade as well. One vendor, Danny Johnson of Erotic Archives (a purveyor of live and archived entertainment on-line), reports that his research suggests a conversion rate in the range of 0.01%. In the opinion of many erotica vendors, that low rate can be traced to a phenomenon new to commerce: mass consumers with elite expectations. Because the on-line consumer can comparison shop far more quickly and conveniently than a shopper on the street or a customer with a stack of mail-order catalogs, that consumer can learn as much about product lines and pricing as a full-time buyer's agent in traditional commerce. And the wired consumer tends to demand faster service, speedier responses to questions, and a higher level of sophistication and innovation than the shopper of yesteryear.

Most on-line sectors have too few competing sites or are too new to have experienced the full effect of the shift in the balance of power between vendor and customer. Here again, however, the erotica industry is ahead of the curve. "It's a tough business," says the Web master of New World Erotica, a supplier of data images. "Naturally you have to keep building up your archives, but that's only one factor. All people want something they can't get anywhere else, so fresh product is a must. If you don't redesign the site regularly, people assume you don't have anything new. Speed is also a must. If you're slow or your server is overwhelmed, you get mass cancellations. Complaints or even suggestions have to be answered right away. If one person gets mad and slams you in the news groups, millions are going to read about it and be afraid of doing business with you."

According to the company's Web master, the New World Erotica site attracts between 200,000 and 300,000 hits a month. Handling the site is a full-time job for two people. Current expenses can be covered by 20 subscriptions a day to the site (about $15 each), but the biggest problem is finding economical ways of responding to the relentless pressure to increase the scale and complexity of the site. Recently, for example, because of customer demand, New World Erotica had to translate all 30,000 of its files into a new graphical format--a project that took the Web master about 24 hours to complete.

All of this suggests that the belief that the Internet is going to empower small business by lowering promotion and advertising costs is only partly right. It may not take a large initial investment to get a business up and running on-line, but the human and technical resources needed to serve a savvy and demanding customer base can easily eat up the savings gained on the marketing side of the ledger. To be fair, the energies and intelligence of a well-informed clientele can work to the advantage of an enterprise. Lee Noga, of Z Master Productions, a company that publishes CD-ROMs, agrees that on-line consumers are more critical than street buyers but says that their suggestions are more useful. She claims she's developed entire productions from E-mail input. And Karen Fritsche of the Stockroom (which sells sex aids and toys) says that customers have voluntarily posted the company's catalog on bulletin boards and have distributed links to its catalog archives.

Many conventional information vendors worry that the tremendous volume of free information on the Net could make it impossible to charge for information products and services. That may be true in some cases, yet erotica vendors exist by the hundreds even though the Net is awash in free erotic imagery. Vendors evidently succeed less through unique content than through innovative organization and the effective management of information. Erotica vendors were among the first to offer periodic E-mail delivery, now a routine way of packaging products (search-engine updates, for one). They were also quick to start carrying their archives in a variety of formats. (One format might allow shorter download times, for example; another, higher-resolution graphics.) And they blazed trails developing thumbnail graphics (miniature pictures that serve as graphical file names) to help users scan large image archives.

Actually, much of the free erotica content on-line is provided by the vendors themselves. Most offer unlimited access to peripheral libraries, short periods of free access to their main archives, and lists of links to sites offering free erotica. The freebies are used to demonstrate the effectiveness of their site design--its accessibility, its organizational clarity, its straightforward navigating cues, and its downloading speed. The tactic could work just as well for conventional businesses, like newspapers and magazines. The Boston Globe, for example, already gives away each day's news but sells access to the full text of the articles in its archives.

Another intriguing feature of the on-line erotica market is its resistance to the classic business-text precept that specialization is the best response to stepped-up competition. An informal survey of site developers reveals that nearly all of them are planning to add new categories of business rather than target narrower niches. Some of those sites function like small Internets, branching off more and more services behind the same set of interface tools. In addition to its image databases, for example, New World Erotica runs classified advertising and operates on-line movie theaters, chat rooms, videoconferences, and a "mall" that sells videos, CDs, and other physical goods.

All these developments reflect an emphasis on technology-driven consumer convenience. If the erotica sector can teach one overarching lesson to fledgling on-line businesses, it's that selling information, products, and services amid a flood of competing content means keeping up with the demand for ever-friendlier user interfaces and the latest generation of multimedia technology. Until recently, for example, videoconferencing over the slow connections used by home computers was a high art, requiring special software and direct connections (usually over 800 numbers) to the videoconferencing service's own computers. Expenses were high because the service used real people and advanced communications. This year, advances in videoconferencing software--all you need is a dial-up connection to the Net--have lowered the cost of videoconferencing services, opening up competition. The erotica sector was the first to commercialize videoconferencing over ordinary phone lines, a service that brings the industry the largest share of its revenues.

Erotica vendors were probably also the first to make marketable products out of on-line animation delivery, downloadable video clips, virtual-reality environments, interactive videos, real-time video feeds, and streaming video (video that runs while it's being downloaded). According to Paul Feith, technical manager of the new media department at Playboy Enterprises, the paid Playboy site that is expected to open this fall is a technological extravaganza, with virtual-reality tours of the Playboy mansion and live chats with Playmates. Film promoters, video artists, and animators are already using similar technologies, and other mainstream businesses (travel agencies, for example) are likely to follow close behind.

The downside of technological development is that the headlong pace of change combined with breakneck competition makes for a highly volatile business climate. George Izumi of A6, a CD-ROM publisher of interactive Asian erotica, observes that erotica sites tend to be short-lived; as the competition increases, revenues fall and the pressures intensify, leading many businesses--particularly small-scale, one- or two-person outfits--to burn out rapidly. And even among the survivors, the longevity of a sector's pricing structures is an ongoing concern. Francis Sharrak of Live Centerfold Girls and More estimates that a properly run erotic videoconferencing business (which usually bills at a rate of $5.99 a minute) should be able to gross $25,000 a week or more. However, he concedes that with the addition of several new listings for competing services every week, that lucrative return probably won't last the year.

In the near term many site developers are going to try to entrench themselves by using the micropayment plans (developed by companies like DigiCash and CyberCash) that are beginning to appear in the market. Unlike on-line credit-payment systems, micropayment plans use the digital equivalent of cash. It's like getting money from an ATM: buyers withdraw "E-cash" from their checking or savings accounts for per-item purchases. Converting to this kind of payment scheme may prompt extensive design changes for existing businesses. Whereas most current erotica sites attract subscribers through services like mass downloading, a site built around micropayment technology, which could allow not only per-image but even per-second pricing, would encourage impulse purchasing and could open up the market to people who don't want to use credit systems on the Net or who aren't interested in buying subscriptions.

Other challenges are in store as well: possible changes in copyright law; the introduction of digital watermarking and other copyright-protection technology; significant increases in bandwidth; the development of high-end applications like 3-D video, touch feedback, and large-scale interactive simulations; and the prospect of stiffer government regulation.

Today's on-line erotica industry may not foretell the age of fully developed on-line commerce in every respect. For example, not every market sector will be as beholden to technological innovation or subject to so volatile a competitive climate. Still, the very scale of the industry's on-line presence offers a preview of what businesses might expect on the new playing field. It seems safe to predict that when the world's banking and investment sectors, say, reach a comparable threshold of Internet representation, they will have to contend with many of the pressures and contingencies that currently affect the erotica market. There's a lot more to those racy pictures than meets the eye.

Fred Hapgood is a freelance writer based in Boston.

Adult Education

Seven Lessons from On-Line Erotica

  • Redesign your site regularly. If you don't, people assume you have nothing new to offer.
  • Continually upgrade to ever-friendlier user interfaces and the latest generation of multimedia technology.
  • Be your own access provider so that you can provide faster service. Speed is crucial.
  • Promote yourself in news groups that cater to your industry.
  • Distribute come-ons and giveaways to demonstrate the range of your retail services.
  • Be innovative. Unique content matters less than innovative site organization and good information management. Consider, for example, periodic E-mail delivery to advertise search-engine updates.
  • Design your site for the international market. Sites around the world are targeting your customers; you should be targeting theirs.