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Brea Bennett at Twistys

August 17, 2001 02:12pm
Spain's Private Media Group Plans Euro Listing (WSJ)
Source: ManNet

(BARCELONA, SPAIN) -- A walk around the offices of media group Milcap SA has all the familiar sights: puppy-dog screensavers jostle for attention with thumbtacked cartoons, and proofs of next month's magazine are littered across worktables.

Most of the men and women hunched over their monitors, though, are peering intently at still shots of hardcore pornography. Others are browsing a broadband video site with digital-quality, full-screen videos showing a very active half-dozen naked bodies on a beach. And nobody's looking over their shoulders.

Barcelona is home to Milcap, the flagship company within Nasdaq Stock Market-listed Private Media Group Inc. [http://PRVT.com], one of the world's premier producers of hardcore pornography. With Private already a familiar newsstand name in Europe, chairman Berth Milton Jr. wants to put it on the short-list of European investors as well, with a secondary stock-market listing planned for mid-October in Germany.

Proceeds from the offering, which could total 100 million euros, will fuel Private's aggressive expansion into the highly lucrative U.S. market, an expansion that has enabled the company to transform itself from one homemade magazine title in 1991 to today's multimedia empire comprising four magazines, 35 Web sites, almost 400 movies, shopping sites, a clothing line and broadcast deals on three continents.

"It would give us the money to buy absolutely anything in this business," says the 43-year old Mr. Milton. In his top-floor office he has photos of his three daughters on the side table, a view over the industrial suburbs outside Barcelona and dozens of reports on his desk. What he doesn't have is any of the magazines, posters, or catalogs that blanket the rest of the building, even as the Swedish-born Mr. Milton waxes grandiose about Private's potential in a world where hardcore porn is becoming increasingly mainstream.

So far, Private's recipe has proved to be recession-proof and attractive for investors. For the first half, Private earned $4.8 million (5.3 million euros) on sales of $16.6 million, and the company expects bottom-line profit to exceed $12 million this year. More importantly, the higher-margin new media sales -- digital videodiscs, the Internet and broadcasting -- more than doubled in the first half to $9.2 million, even as magazine sales held steady.

At first glance, the top-line numbers look paltry, especially when compared with Playboy Enterprises Corp.'s [http://PlayboyEnterprises.com] more than $300 million in annual sales. But that is mostly because of Private's traditional accounting procedures, where only royalties are billed as revenue, rather than the entire sale price of its products. As the company signs new contracts, it is slowly changing its procedures to reflect higher top-line growth. As it stands, though, Private's bottom-line margins of 30% put it well ahead of Playboy, which posted a net loss of almost $50 million last year, partly for accounting reasons.

Mr. Milton grabs a sheet with all the sales figures for the company's DVD movies. Topping the list is "Tatiana," the first in a glitzy, high-budget trilogy set in 19th century Europe and produced in 1998. More than 32,000 copies have been sold in the new format, more than twice as many as were sold on video despite coming out a year later on the new format.

"There are virtually no incremental costs there -- that's pure profit," Mr. Milton explains, running his finger down the list of more than 100 titles. Those movies, as well as more than two million still images from about 30 years of magazines, are the bread and butter of Private's business. The profit comes simply from channeling existing material onto a variety of different distribution platforms -- DVD, Internet, pay-per-view television -- at virtually no cost.

Private's got a leg up on the competition in a couple of ways. For starters, its movies garner multiple awards each year at home and in the U.S., and are among the more expensive productions in the adult industry. Shot by top directors, each production averages more than $100,000 to make. Many shot-on-video productions cost less than $20,000 to make, and a big chunk of that often is spent on fancy boxtop art to lure customers rather than on the production itself. This year, Private will produce about 80 new titles.

"They are absolutely synonymous with high-quality productions, one of the very top producers in the world," says Mike Ramone, editor in chief of Los Angeles-based Adult Video News [http://AVN.com], the leading industry trade magazine. AVN sponsors the annual adult video awards [http://AVNawards.com] -- considered the Oscars of adult entertainment -- where Private has taken home plenty of awards for foreign films.

"We also own the world-wide rights to everything we've ever produced, and we've got one of the biggest libraries in the world," boasts Mr. Milton. Many of Private's rivals, including Vivid TV [http://VividTV.com] of the U.S. -- three of whose hardcore cable channels were recently acquired by Playboy -- license their productions to third parties, limiting their ability to leverage their products across all markets and platforms. For Private, that means it can distribute DVDs anywhere in the world (no country codes) and snag a share of royalties from every sale. No surprise, then, that the video masters are treated like treasures: They are stored in a special fireproof vault in the Barcelona headquarters.

And distribute they do. In the basement warehouse, three workers are filling orders constantly, grabbing DVDs, videos and magazines off the shelves and stuffing them in boxes for shipment around the world. Even the massive warehouse -- with row upon row of two-meter high shelving stacked to the gills with everything in Private's catalog -- is now too small to handle the business. Private is building new headquarters across town three times as big, with an expanded warehouse.

But the virtual business is where the money is, with Internet margins averaging 50%. The new broadband video site, PrivateSpeed [http://PrivateSpeed.com], promises to boost margins even further, with customers paying $45 for 360 minutes of access to hardcore videos -- the same material already released on video and DVD. The same logic holds true for broadcasting deals, including one with Playboy TV in the U.S., with British Sky Broadcasting PLC [http://Sky.com] in the U.K., Liberty Media Corp.'s Pramer [http://www.Pramer.com.ar] in Latin America and Wizja TV [http://www.WizjaTV.pl] in Poland.

And investors are buying: Private's stock has risen sevenfold since it was listed early in 1999, and trades at 39 times trailing earnings, or 11.3 times trailing sales. That compares with Playboy's 1.4 times trailing sales, a reflection, Mr. Milton says, not just of Private's higher profitability, but a sign that softcore offerings like Playboy's are being knocked off their perch by Private's more-explicit hardcore productions. In fact, Playboy's acquisition of Vivid's cable assets earlier this year was seen in the industry as a tacit acknowledgment that tamer fare is losing ground.

"Private and Playboy are the inevitable winners in the coming land grab in the adult industry," with the difference that Private's more-explicit offering targets a different and growing demographic, says Rob Routh, a New York-based analyst who previously covered the company for Ladenburg Thalmann [http://www.Ladenburg.com] before a merger closed the broker's media-research department. Currently, no stock analysts follow Private.

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