FriendFinder/Penthouse IPO: All You Need to Know About Digital Advertising

Quick, ask the person in the next cubicle to name the digital media brand that has 196 million unique visitors per month and annual revenues of $346 million? Give them this clue: It's a household name. Chances are they won't answer FriendFinder Networks (FFN), owner of Penthouse magazine and various other adult media properties.

FFN refiled for an IPO on March 17. Anyone interested in whether it is possible to build a profitable media company with significant advertising revenues ought to read it. The overwhelming fact that emerges is that yes, you can build a profitable online media brand -- just not from ad revenues.

Here's how FFN breaks down its $346 million in annual sales:

70% - "social networking" (i.e. "adult" dating sites).
22% - "live interactive video" (i.e. pay-per-view porn cams).
3.1% - publishing revenue from Penthouse itself.
3.1% - cable TV/broadcasting revenue.
0.8% - licensing the Penthouse name to strip clubs and other merchandise vendors.

In years gone by, Penthouse would have been a mammoth generator of ad revenue. On these numbers, Penthouse (the magazine and the web site) currently generates just $1 million a year -- barely enough to maintain a handful of staff. That's an astonishing situation, if you think about it: What other media company attracts nearly 200 million users each month and yet gets less than $100,000 in advertising from those eyeballs? (By comparison, The New York Times has just 14 million uniques per month, and many more millions in ad sales, according to Compete.com.)

FFN actually admits that advertising is a non-starter, business-wise:

We have never generated significant revenue from internet advertising. In the future, we may shift some of our websites with lower subscription penetration to an advertising-based revenue model and may seek to provide selected targeted advertising on our subscriber-focused websites.

If the market for internet-based advertising does not continue to develop or develops more slowly than expected, or if social networking websites are deemed to be a poor medium on which to advertise, our plan to use internet advertising revenue as a means of revenue growth may not succeed.

This ought to be sobering information for anyone in the digital media business. Porn is often a bellwether for the ad industry as a whole, and has suffered an extreme version of what the traditional media sector has suffered during the digital holocaust revolution: The disintermediation of its revenues from its content and an audience that is as happy with the free, pirated version as it was the with original pay-version.

The stupidest thing about FFN's business model is its lack of profitability. Despite raking in $346 million it still lost $43.2 million last year. The culprit: Penthouse. FFN is making debt payments of $115 million a year in its struggle to pay off a $500 million acquisition cost in which Penthouse bought FFN. The company's total debt now stands at $511 million.

In other words, not only is Penthouse the least functional portion of FFN, FFN would actually have been better off as a business without the Penthouse purchase.

Regular BNET readers will have noticed a theme emerging among the financial information available for prominent digital media content brands: Whether it's Twitter, Linkedin, Demand Media, Playboy or Pandora, advertising is one of the least effective ways of generating revenue on the web. Subscriptions, by contrast, seem to be the way to go. If FFN can use its cashflows to pay off the Penthouse debt, investors might (eventually) discover a nice little porn/adult-dating business living underneath it.

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