Playboy Survives Its Midlife Crisis


By Brian Hindo On New Year's Eve, Playboy magazine plans to celebrate its 50th anniversary in typical style, with a celebrity-laden bash at founder Hugh Hefner's famed Los Angeles mansion. It looks like shareholders in Playboy Enterprises (PLA) may have more to cheer than just a golden anniversary Playmate, however. Investors could be toasting Playboy Enterprises's long-awaited return to profitability.

Hef's media empire has been in the red since 1999, but this year's first quarter finally saw positive net income, and the company's online division posted first-half 2003 operating profits of $424,000. True, the amount isn't great, but profitability was achieved ahead of schedule. Thanks to the turnaround, Playboy stock -- of which Hef still holds about 30% -- has been hovering near a 52-week high, closing at $14.15 on Aug. 19.

RUNNING THE GAMUT. A makeover to appeal to younger readers and a foray into New Media have helped the bunny hop into the black. Under new editor James Kaminsky, Playboy Enterprise's flagship magazine received a much-needed facelift to fight intense competition for readers and relevance in a post-Maxim publishing world. Readers number more than 3 million -- more than either Newsweek, Vanity Fair, or BusinessWeek, for that matter -- but that's less than half the readership Playboy enjoyed during its heyday in the 1970s.

What's driving profits for the middle-aged company now are pay-TV and the Internet. In 2002, Playboy Enterprises derived 55% of its revenue from the entertainment and online divisions, vs. 40% from publishing. (The other 5% will come largely from licensing.) Analysts expect the trend to continue. Harris Nesbitt Gerard analyst Jeffrey Hoskins pegs 2004 revenue streams for the entertainment, online, and publishing segments at 44%, 13%, and 37%, respectively, with licensing at around 6%. Indeed, while patriarch Hugh has spent his time hitting the cocktail circuit with his seven buxom girlfriends, daughter and CEO Christie Hefner has quietly built Playboy Enterprises into one of the few successful examples of media synergy (see BW Online, 5/24/02, "Playboy's Synergizer Bunny?").

Hoskins forecasts net income for Playboy Enterprises this year of just under $500,000, on revenues of $302 million -- a considerable improvement on net losses of $29.3 million in 2001 and $11.3 million in 2002, and a revenue increase of almost 9% over 2002's $277.6 million. Thus, Hoskins has an outperform rating on Playboy stock, with a price target of $16 by the closing months of 2004.

The addition in recent years of a suite of adult-only networks such as Spice and Vivid to Playboy TV allowed the company to sweeten package deals with cable operators. Now, Playboy's television outfits are available in more than 113 million households worldwide. Also, about 160,000 folks subscribe to Playboy's various online offerings, which run the gamut from sexy, sophisticated fare typical of the magazine to hard-core pornography. The average subscriber shells out $100 per year, according to Harris Nesbitt Gerard's Hoskins. To top it off, "the fastest-growing source of new subscribers to the magazine is Playboy Online," says CEO Hefner.

RETRO ICON. The big question: Will synergy have a price? The swing to profitability is certainly a welcome sight for Playboy Enterprises investors, but could the move into hard-core taint the Playboy brand -- one of the company's most important assets? The company has always tried to emphasize its high-living, epicurean associations and its history as a publisher of literary lions like Norman Mailer and Truman Capote. Think sexiness, not sex. Yet the availability of harder-core material from raunchy magazines and the Internet on the one hand and competition for younger readers from "laddie" mags such as Maxim and FHM on the other left Playboy with little choice but to shed some of its inhibitions.

CEO Christie Hefner doesn't believe the company's increasing reliance on racier TV and Web material for revenues endangers Playboy's long-touted image as something more than a sex purveyor. The company has embarked on a brand strategy that marketing experts term "decoupling" -- in other words, keeping the Playboy brand on its more mainstream, tamer fare, while marketing the hard-core content under the Spice brand. "We saw [Spice] as a different, flanker brand," Hefner told BusinessWeek Online in an interview. "It's rather like Viacom (VIA) having Nickelodeon [for children] and Showtime [for adults]."

Besides, the Playboy image seems to have undergone a transformation, especially among young adults. "I think the brand is a little muddled, and a lot retro," says Robert Kozinets, marketing professor at Northwestern's Kellogg School of Management. Since the sexual revolution has come and gone, the brand and the bunny icon seems to hold a kitsch appeal, says Kozinets -- witness a popular Playboy line of clothing featuring the Bunny icon aimed at young women.

In that light, Playboy's brand-management tactic makes sense, says Kozinets, who sees "playful sexuality, rather than [anything] threatening, dangerous, or perverse" in the company's vaunted image. Yet, Hefner & Co. must remain mindful of what happened to former competitor Penthouse, which took a sharp turn toward the lewd in an attempt to boost magazine sales. Instead, the move alienated advertisers and offended vendors, who moved the magazine off the newsstand and behind counters, or worse, stopped selling it altogether. The freefall culminated in the Aug. 12 bankruptcy filing of Penthouse publisher General Media.

TRIED AND TRUE .At 50, Playboy's future still depends on the "brand anchor," Playboy magazine, says Neil Morgan, marketing professor at UNC-Chapel Hill's Kenan-Flagler Business School. Each month the magazine offers a new centerfold, who in turn provides additional content for other divisions in the form of videos and online pictorials, for example. The print product also defines the company's preferred brand message of harmless hedonism. This tried-and-true formula should continue to work, Morgan says, as long as the magazine has enough readers. Notes Morgan: "There has to be some critical mass of readership to continue to send those brand-association messages."

Most marketing experts think Playboy magazine still has a long way to fall before it needs to worry about losing critical mass, however. And under Kaminsky, who joined Playboy from fierce competitor Maxim, the magazine has seen higher newsstand sales. Its September cover also carries a teaser for a decidedly Maxim-esque article on how to pick up women at a funeral. Norman Mailer it ain't, but at 50, there still seems to be some hop in the bunny. Hindo writes about the market for BusinessWeek Online


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