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Has media convergence paid for Playboy?

Playboy is cramped up behind the starting gate in the race to seamlessly deliver interactive entertainment and one-way broadcast programming over high-speed connections to individual PC-TV boxes.

With its steamy cable movies and simmering pool of e-commerce offerings, Playboy Enterprises executives are fond of saying the company is primed to exploit every angle of the PC-TV convergence dream.

But like others in the online industry, Playboy is cramped up behind the starting gate in the race to seamlessly deliver interactive entertainment and one-way broadcast programming over high-speed pipes to individual boxes. And the wait is far from over.

"The convergence stuff hasn't come to play for them yet," said Steve Barlow, a media analyst at investment banking firm Credit Suisse First Boston. "This could change as the technology and broadband comes through a broader pipe into the home."

A cultural icon See special feature: Playboy pins hopes on Net with its treasure chest of sought-after content and branding power to boot, Playboy doesn't have to convince anyone that it has a valuable product. However, the company's chief, Christie Hefner, recognizes Playboy can't ride to the top on the tails of her father's silk robes anymore.

Despite the delay for its convergence strategy to take hold, the younger Hefner often touts the promise of the Net at her many speaking engagements: e-commerce, broadband, and video streaming.

Playboy maintains that when fast access hits, it will be one of the first companies to push rich video content via high-speed Net connections.

"It is definitely in the works--probably in the later half of this year," said Paul Kallis, acting president and chief technology officer of Playboy Online. "I'm encouraged by the growth I'm seeing in both DSL [digital subscriber lines] and cable modems."

Pointing to the meltdown Victoria's Secret had during its free online fashion show, Kallis said he wants to be ready for the masses when Playboy dives into pay-per-view Net video and cross-platform development for TV set-top boxes.

"You have to make sure the customers keep coming back and are satisfied," he said.

But as Playboy kills time while convergence takes hold, other challenges abound.

Although Playboy Online's revenues jumped to $7.1 million in 1998 from $3.9 million in 1997, it also reported an operating loss of $6.5 million for 1998. Moreover, the division's president, Buford Smith, recently stepped down in the middle of its online build-out.

And the company's fee-based Cyber Club, which got off to a strong start when it was rolled out in July 1997, has grown to only 31,000 subscribers, who pay either $6.95 per month or $60 annually for access to exclusive nude pictorials and other content.

"They talk about convergence, but it's not there. Although the Net will certainly be part of its growth, it also has taken some revenues from Playboy's Catalog Division," noted Dennis McAlpine, an analyst with Ryan, Beck and Company. "The growth of its Cyber Club subscribers has been slow, too, because they don't know how to promote it quite yet."

Playboy Online's revenue track record is standard course for Net ventures, analysts agree, and it pulled in 88 million page impressions in March. But the division is striving to double revenues to $15 million for fiscal 1999, which no doubt puts the pressure on to produce even better results.

And Playboy's immediate catalyst for making money on the Net will not be convergence, analysts say.

"There is no question that e-commerce is perceived as a growth engine within Playboy," said David Leibowitz, an analyst with Burnham Securities in New York. "They have made great strides."

Barlow agrees. "E-commerce revenues have been growing faster than its print advertising, and those advertising online are not the same as those taking ads in the magazine," he said.

The company also could try to spin off Playboy Online for an initial public offering, some say, although the coals are cooling for Net IPOs.

Kallis wouldn't comment specifically on whether Playboy is considering an IPO of its New Media division, saying only: "We always look at ways to increase the value of our company."

Despite the shaky landscape when it comes to convergence and the lag in its first online pay-per-view experiment, the Cyber Club, Playboy is beefing up its investment in technology and marketing this year in an effort to make 2000 the year for its online watershed.

"In the fall we'll begin marketing the Cyber Club, which we [overhauled] to handle more growth," Kallis said. "We will be embedding the e-commerce offerings throughout the content and rolling out a whole new marketplace in the coming months. E-commerce for us is a major component of our revenue stream both now and going forward."