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How Hugh Hefner Will Destroy Playboy Before He Saves It

Playboy (PLA) has a new marketing director, Lorna M. Donohoe. While turning the bunny-brand around is, on paper, a dream job, she will probably be thwarted by owner Hugh Hefner's suicidal strategy for his company.

It's old news that Playboy loses money, or that its magazine circulation is in freefall, or that nobody pays to see pornography anymore. Clearly, Playboy is in need of a complete restructuring if it is to survive. Its future -- if it were in the hands of someone who knew what they were doing -- is probably as a much smaller, profitable brand with a vibrant licensing arm, nestled inside a portfolio of other adult media businesses with which it can cross-pollinate.

It's not clear that Hefner can see that, however, which is why Hefner has got to go. Unfortunately, he doesn't want to. Instead, Hef has come up with a plan that -- if history is any guide -- will hasten the death of his once-great brand.

Let's review the current status of the Playboy empire, according to its most recent quarterly earnings report. Playboy's revenues are shrinking along with its subscriber base. Its administrative expenses are steady or increasing. It has laid off dozens of employees in the last year. (It's not clear whether the layoff numbers given are cumulative or overlapping; if the former, then 227 workers have gone in the last few months.) And Playboy is being sued by DirectTV for an alleged violation of its most-favored-nation status. (Yes, even though pay-per-view porn is possibly the easiest business in which to make a profit, Hefner is somehow screwing it up.)

Playboy's new media offerings are a desperate scattershot of headscratching ideas. There's an iPad app with no nudity (yes, Playboy is expecting you to just read it for the articles). And a video game called Poisonville, about a fictional U.S. city "where crime and corruption rule the streets":

Players must complete a series of missions in order to counteract corruption, regain respect, and rebuild their reputations. The one slight difference here, according to Playboy, is that players will be encounter "beautiful, Playboy-caliber women."
It gets worse. Playboy has also launched what it seriously claims is a safe-for-work site, titled TheSmokingJacket.com. It is not safe for work. A sample offering includes "Boner Jams," a video of bikini-wearing women interspersed with stuff exploding. It's hard to insult the intelligence of a porn consumer, but this site manages it.

At least The Smoking Jacket has a coherent mission. Playboy.com, which ought to be the center of the Playboy brand, is currently a mish-mash of unrelated stuff. Sure, there's nude pics of Kim Kardashian. But then there's a Q&A with George Clooney. And a golf section. And a massively detailed page dedicated to Hef's reviews of classic movies such as The African Queen and Key Largo. Who is this targeted at?

Luckily for the company and its shareholders, a white knight has emerged. FriendFinder Networks has offered to pay $6.25 a share for Playboy's outstanding stock (currently trading at $5.11 up from $4-ish before the offer). Unlike Playboy, FFN is has a vibrant online business in "adult" dating. It also owns Penthouse, which is valuable not for its magazine but for its chain of strip clubs. In other words, FFN has done everything that Playboy has not to survive in the 21st Century. FFN has also generously offered to let Hefner retain editorial control of the Playboy magazine -- currently one of the least interesting parts of Playboy -- and the Playboy Mansion. It's a perfect exit opportunity for Hef.

But Hefner owns 69.5 percent of Playboy's Class A common stock and 27.7 percent of its Class B stock. So he doesn't have to take FFN's offer if he doesn't want to. Instead, Hefner has proposed buying all the stock he doesn't own for $5.50 per share, and taking it private again. He's already told the board that he intends to ignore FFN, even though the offer would make him (and his minority shareholders) rich. It's an astonishing triumph of raw ego over common sense (see page 16):

Mr. Hefner advises the Board that out of his concerns for, amongst other matters, the Company's brand, the editorial direction of Playboy magazine and the Company's legacy, he is not interested in any sale or merger of the Company, selling his shares to any third party ...
This is business suicide. There is no way Hefner is qualified to turn Playboy around in an era when mobile and digital content will be king. He's had more than a decade to adjust to new media, and he hasn't. Here's what he told New York magazine about how he sees the future of the media business:
I hope that books and magazines and newspapers will continue in some form. I think younger generations maybe don't read as much, and I think we're the poorer for it. And young people don't have as much of a sense of history -- and if you don't have a sense of who you were, then you're not going to have a good sense of who you are.
It's no wonder he's being sued by his own shareholders, and that other companies that have looked at Playboy as an acquisition have walked away.

Hefner is old. He could die any day. Assuming he survives the transaction he's proposed, his obituary will describe him as the man who founded -- and then destroyed -- Playboy. So here's the worst part: If Hef dies before the transaction, that would actually be the best outcome for the company, because it would allow his heirs and creditors to do what Hefner refuses to.

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Image of Hefner by Wikimedia, CC. Image of bunny logo by Flickr user Mark Wallace, CC. Image of 1985 Playboy by Flickr user Matt Hurst, CC.