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Forbes: Playboy Investors Should Pay Heed To Downfall Of Private Media Group

from – Hugh Hefner’s offer to take Playboy private is the best deal investors will ever get–they should take the money and run. Why? Disruptive digital technologies have struck a near-death blow to big players in the porn business. There’s no better example than Barcelona-based Private Media Group, Europe’s biggest adult entertainment brand.

After three consecutive years of operating losses, Private’s stock is in the cellar, trading at around $2 on Nasdaq, down from a high of near $40 a decade ago. Its auditing firm doubts Private’s ability to survive.

“Right now I’m simply trying to make the company cash flow positive,” Private CEO Ilan Bunimovitz told Forbes last week. Apparently he didn’t make it positive enough: Bunimovitz was canned Monday by Private’s board, without explanation. His replacement is Berth Milton, who served two earlier terms as the company’s chief executive.

Private was the first adult entertainment outfit to be listed on Nasdaq. Outside the U.S., where it distributes content in 40 countries, the company is as recognizable a brand as Playboy. But over the last decade, Private’s business was eroded by the proliferation of new players and digital platforms in porn.

Penthouse, too, was upended by web porn, but the brand has stayed alive thanks to private equity titan Marc Bell, who folded Penthouse into his collection of x-rated social media sites, including Bell has also made a bid for Playboy, offering $210 million ($25 million more than Hefner’s offer). Hefner, who controls 70% of the voting shares of Playboy stock, has already indicated he’s opposed to Bell’s offer.

Like Playboy, Private has an uphill battle. Private’s head of investor relations, Hans Christian Anderson (his real name) and its VP of online services, and Andrew Sullivan, explained why at an investor confab in April. They warned that the new cost structures for adult content have wreaked havoc on Private’s legacy businesses–DVDs and magazines.

“The average adult DVD customer spends $80 an order; the average digital customer spends $18,” said Sullivan. At the same time, Google is driving paying customers toward free porn on the web. “That’s a major threat.” The porn biz faces the same challenges the music industry has confronted for a decade–a span when half of all revenues from music CDs disappeared. File-sharers and digital distributors of porn-by-the-clip have sharply undercut players like Private.

While it should have been converting to digital, Private instead dabbled in nutritional supplements, operated an X-rated nightclub in Bucharest, opened an erotic clothing boutique on Los Angeles’ Melrose Avenue and launched the first adult duty-free outlet at the Munich airport. Most of these ventures came to naught.

“Some of these ideas weren’t bad, they were just poorly executed,” said Bunimovitz, before he was axed.

In recent filings Private says the core of its digital strategy will involve a kind of x-rated cloud. Private’s expansive library of 70,000 titles will soon be accessible across five different formats, from Blu-Ray to mobile–buy one movie and watch it on five screens. Some 500 films a week are being encoded for its North American VOD portal alone. That means fewer big-budget flicks like “Virgin Treasures” and “House of Sex and Domination.” Features like these racked up 130 industry awards for Private, but high production costs ate up cash.

Will all this give Private’s stock a lift? Probably not—only better financials will do that. Playboy’s efforts to remake its brand and compete in a digital landscape aren’t nearly as robust as its European counterpart. Which is why Hefner’s offer is a gift Playboy shareholders ought to accept.

He’s bidding $5.50 a share, a 40% premium over what the shares were valued before the offer. The higher bid from Penthouse’s owner may force Hefner to raise his offer–even before the competing bid, Playboy shareholders filed suit last week against Hefner’s plan, labeling it inadequate. But ultimately, investors should be grateful someone wants to buy them out.


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