Playboy's Synergizer Bunny?


By Jane Black Media synergy may be out of fashion, as investors punish AOL Time Warner (AOL) and Vivendi Universal (V) for too much promising and too little delivering by management. But try telling that to Christie Hefner, the indefatigable CEO of Playboy Enterprises (PLA). "Media synergy can be achieved if there's a strong relationship between your brand and consumers, and you can use the brand to sell new products to new customers in print, on TV, or on the Internet," she says. "I think that's what we've done."

Those are bold words -- especially coming from a chief exec whose company continues to lose money. In 2001, Playboy reported an operating loss of $12.2 million, or $1.20 a share, on revenues of just $291 million, due to losses in its Internet business. Try as she might, Hefner has so far been unable to make good on vows to turn the $390 million market-cap Playboy Enterprises into a billion-dollar company.

But as the Playboy name revs up to turn 50 years old in 2003, Hefner, who took operational control in 1988 from her legendary father, Hugh, insists she has figured out how to make synergy work.

"ABILITY TO STRETCH." "Playboy is a true brand. And that makes us very different from a company with a group of disparate assets. Time Warner can't say because somebody reads Sports Illustrated, [that reader] automatically would be interested in being an AOL subscriber," she says. "So while we have a sense of modesty about what we do in scale compared to an AOL Time Warner or Disney (DIS), we also have a lot of pride in the strength of the brand and its ability to stretch into consumer products, television, and online."

Sound familiar? It has actually been Playboy's strategy ever since Hef first donned his pajamas and smoking jacket. In the last half-century, Playboy has tried repeatedly to capitalize on its brand. (Remember Playboy Bunny air fresheners?)

Still, some analysts finally see a shift in strategy that could bolster the bottom line. After years of steering clear of sexually explicit material in favor of the frisky but softer content favored by patriarch Hugh Hefner, Playboy has embraced hard-core pay-per-view programming on TV.

INTO THE BLACK? Shares are trading at around $15, down from a 52-week high of $19.75. But some analysts still think this could finally be a breakthrough year. "The numbers tell the story. Playboy is going to further increase market share in men's lifestyle and entertainment, resulting in tremendous profit gains," says Jeffrey Hoskins of Gerard Klauer Mattison. Hoskins expects Playboy to swing into the black, earning profits of $14.5 million in 2002 and $36 million to 2003. His 12-month target share price: $21, which would be a smart 40% gain.

The main driver of Playboy's growth is cable TV. It now owns six cable networks: Playboy TV, Spice, Spice 2, Hot, Hotzone, and Vivid. The additional networks were purchased last July, make Playboy's entertainment division its largest and fastest growing. And the division has fat margins of 26%. Compare that to Playboy's flagship publishing business, which had puny margins of 2% in 2001.

TV is emerging as Playboy's profit bunny for several reasons. With the Spice networks, Playboy now has a range of programming, which, in addition to pay-per-view porn, features naughty news magazine Sexcetera and reality show Sexy Girls Next Door, as well as the more sexually explicit fare found on Hot, HotZone, and Vivid.

FASTER GROWTH. The breadth of programming helped Playboy increase the number of pay-per-view programs it delivers to 122.8 million in the first three months of 2002 from 113 million in the fourth quarter. "The acquisition of the Spice networks means that more adult-entertainment cable channels in pay-per-view homes are owned by Playboy. So whatever people choose to watch, Playboy is the beneficiary," says Hoskins.

Playboy also is expected to buck the cable industry's slowing growth. Though new-user signups for digital-cable will slow from 6.5 million in 2001 to 5.5 million in 2002, adult entertainment remains popular among cable operators, who can charge more for adult movies than standard Hollywood fare. Playboy also is likely to earn a windfall from the troubles plaguing Adelphia Communications (ADLAE), the country's seventh-largest cable provider.

Adelphia, which has 5.7 million subscribers, is the only U.S. cable company that doesn't buy Playboy programming. But financial woes and a Securities & Exchange Commission investigation into Aldephia's accounting has resulted in the Coudersport (Pa.) operator putting some of its most important systems on the block, such as one in Los Angeles with 1.2 million subscribers. Potential buyers include Cox Communications (COX) and Charter Communications (CHTR), both of which buy several channels from Playboy.

LOTS OF COMPANY. The Internet also is expected to boost Playboy's profitability. At a time when many big media companies have pulled back on the Net because profits are elusive, Playboy is moving full steam ahead. At its annual shareholder meeting on May 15, Hefner announced that she had sold an 8% stake in the division for $15 million, valuing its Internet business at an attractive $180 million. Though the division lost $3.6 million before taxation, amortization, and depreciation in the first quarter, Hefner says it will break even in 2002 and turn a profit in 2003.

Making money online isn't easy for anyone, even those hawking sexually explicit content. Here Playboy faces plenty of competition from thousands of porn upstarts, many of which operate out of someone's bedroom and have no overhead and no brand to protect.

And unlike with her TV strategy, Hefner is bucking trends online: She isn't counting on hard-core porn in this venue. Though Playboy runs SpiceTV.com, she's focused on selling Playboy-branded products and subscriptions to its CyberClub, which offers 50,000 uncensored photographs of Playboy Playmates. "Playboy Online doesn't compete with the woman who puts a cam in her bedroom any more than Playboy competed with Hustler magazine," she says.

SHRINKING READERSHIP. She may be on to something. As of Mar. 31, CyberClub had 118,300 subscribers who pay from $4.95 to $9.95 per month. That's up 17% from the fourth quarter and 51% from the same period a year ago. Since outside investors, not Playboy Enterprises, are providing any additional investment in the online division, Hefner says every new subscriber is "gravy."

So far so good. But plenty of challenges remain. The power of the brand, many analysts say, continues to decline. At the end of 2001, Playboy magazine's circulation was 3.1 million, down 1.7% from 2000 and by more than 50% from the height of its popularity in the mid-1970s. Competitor Maxim, in contrast, saw its circulation rise 3.9%, to 2.5 million.

Playboy also has flopped numerous times in its brand-extension efforts. Take the casino business. In 1984, Playboy casinos closed in London and Atlantic City, N.J., following allegations of gambling-law violations in Britain. Granted a license in 1995 to run a casino in Greece, Playboy pulled out a month after the doors opened.

HARD-CORE PAYOFF. "All of their ideas have potential. But sometimes it seems like they're throwing mud at the wall just to see if it sticks," says Denis McAlpine, principal at McAlpine Associates, which follows the company. Playboy Investor Relations Director Martha Lineman counters that the strategy is and remains consistent: To use the brand to promote and build high-margin businesses, such as TV and licensing.

And this time around, Playboy could be on track. Though the famed bunny ears have lost some of their allure, it seems clear that Playboy's willingness to move into the hard-core porn area is paying off. And the brand still seems to have a strong pull on TV. On May 10, 4.8 million men and 4 million women tuned into the Fox reality show Who Wants to Be a Playboy Playmate?. For the sought-after demographic of men age 18 to 34, the show beat out the National Basketball Assn. playoffs. That's just another reason GKM analyst Hoskins is so bullish on Playboy's bunny. Black is a reporter for BusinessWeek Online in New York


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