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from www.portfolio.com – On Friday, May 18, 2007 Steve Hirsch, founder of Vivid Entertainment Group, the world’s largest producer of adult videos, was expecting a mysterious visitor.

But Stephen Paul Jones was late. When Jones, an unknown figure in the pornography world, finally arrived in the all-white reception area of Vivid’s Los Angeles offices at 2 p.m., he was apologetic.

His private plane had broken down, he explained, and he was forced to fly commercial. Hirsch, dressed in a T-shirt and jeans, found that excuse a little slick. But he was eager to speak with Jones, so he let it slide and introduced him to two Vivid colleagues. When the four men sat down in the company’s conference room, Jones got right to the point: He wanted Vivid to buy his website, YouPorn.com.

As its name suggests, YouPorn lets users upload and watch a virtually unlimited selection of hardcore sex videos for free. The user-generated clips on YouPorn—like those on YouTube, the site it mimics—range from the grainiest amateur footage to the slickest professional product.

Also, like YouTube, the site has far more traffic than income. Just nine months after going live, in September 2006, YouPorn was on pace to log about 15 million unique visitors in May, Jones told the Vivid executives, and its audience was growing at a rate of 37.5 percent a month.

Today, YouPorn is the No. 1 adult site in the world; Vivid.com, a pay site, is ranked 5,061. According to Alexa, a website-ranking company, YouPorn’s overall rank is higher than CNN.com (84), About.com (114), and Weather.com (195). (Those numbers are averages for the three-month period from mid-June to mid-September.)

Blond, barrel-chested, and wearing a sport coat, Jones oozed Silicon Valley confidence. According to Hirsch, he mentioned his Stanford M.B.A. repeatedly. He offered reams of documents and audience data, emphasizing YouPorn’s global reach. (Only 12 percent of the site’s traffic comes from the U.S., he said.)

Jones told the men that he and one other executive, a young Malaysian man living in Australia, were the owners of YouPorn, and he stressed that with the site’s traffic, its opportunities were manifold: dating, gaming, mobile content, pay-per-view, webcams (“already very popular in China”), and more. He shared his vision of turning YouPorn into a “very cool brand, perhaps the Virgin of adult entertainment.” As Jones rambled on, Hirsch and his executives traded raised eyebrows. Malaysia?

Still, they were intrigued by YouPorn—and more than a little intimidated by its size. In recent years, competition from the internet had cut deep into the porn studio’s revenues.

DVD sales, once Vivid’s financial bedrock, were down almost 50 percent since 2004, and the proliferation of cheap Web-based videos was stealing market share from the company, which specializes in high-end sex films. Vivid and its top rivals—Wicked Pictures, Evil Angel, Digital Playground, Red Light District, Penthouse Media Group, and Hustler, to name a few—had lately been getting an unwanted glimpse of the overnight crisis that the file-sharing revolution brought to the music industry and Craigslist brought to newspaper classified ads.

The meeting lasted an hour. As Hirsch listened to Jones’ pitch, he considered the risks of acquiring YouPorn. Hirsch had been in the adult-entertainment business long enough to be mindful of its legal pitfalls, and that was a chief concern. How do you verify the age of the participants in these thousands of sex videos—or, for that matter, the age of the audience?

For the time being, Hirsch put those questions aside and focused on the business challenge: How, exactly, would you monetize this site? All the features were free, and, as Jones admitted, the advertising revenue was meager—about $120,000 a month. Jones said he wasn’t too interested in figuring that out himself. He planned to grow the audience as large as possible and then “exit” to an established company with the resources and know-how to parlay the traffic into revenue.

Not that he’s expecting the $1.65 billion Google paid for YouTube or even the $580 million Rupert Murdoch coughed up for MySpace. Jones told Hirsch he’d be willing to part with YouPorn for $20 million. Hirsch said he’d be in touch.

“It doesn’t make any sense!” Hirsch tells me a month later. It’s a hazy afternoon in June, and he is sitting behind his oak-slab desk, his eyes flickering between a pair of flat-screen monitors, one tuned to Bloomberg News and the other showing a YouPorn clip featuring a gaggle of naked women and an oxygen mask. “They’re giving porn away. You can’t make money on this.”

A compact, well-exercised man of 46, Hirsch is one of the biggest names in the $12 billion adult-entertainment business. The very picture of a respectable, down-to-earth smut peddler, he lives with his wife and two young children in a gated community in a quiet suburb in California’s San Fernando Valley, the industry’s global capital. He’s proudly sober, eschewing the rollicking parties of the sex business for quiet passions, such as his prehistoric-amber collection.

Hirsch’s life in the industry started early. In 1970s Cleveland, his father left a career as a stockbroker, says Hirsch, to sell stag films for Reuben Sturman, the porn pioneer who eventually went to jail for tax evasion. Hirsch went to work for Sturman during high school, and Sturman nurtured the young man into a sort of porn prodigy. In 1984, when Hirsch was 23, he co-founded Vivid with the then-novel idea of signing actresses to exclusive contracts and marketing them like Old Hollywood stars. He was just in time for the dawn of the VCR, and Vivid grew quickly. It has been the largest producer of adult videos in the world for more than a decade now, in part because Hirsch borrowed heavily from the Hollywood studios he can see from his office window: expensive sets, big names (most famously Jenna Jameson), and slick packaging. By porn-industry standards, his films are expensive.

He says they typically cost $50,000 to $300,000 to produce and $20,000 to market and distribute; they sell for about $25 on DVD. The company makes approximately 60 movies a year and posts roughly $100 million in annual revenue.

But lately, success hasn’t come easily for Vivid and its upmarket rivals. Three years ago, 80 percent of Vivid’s income came from DVD sales. Today, Hirsch puts that number at about 30 percent, with the rest coming from a fragmented range of sources: subscriptions to Vivid.com, pay-per-view TV, internet video-on-demand, merchandising, and mobile-phone deals. Domestic DVD sales are down 35 percent this year alone. His revenue is flat, he says, but that’s mainly because he’s been cutting costs. Within five years, he claims, DVD sales will be close to zero.

Vivid’s situation is grim but not unusual. DVD woes plague the entire Valley, from multimillion-dollar corporate operations to backroom bottom-feeders: Total sales fell 11 percent in 2006, to an estimated $3.8 billion, according to Adult Video News, the industry’s leading trade publication. Hirsch’s company shares the high end of the market with about 20 other studios that each claim more than $20 million in annual revenues. Outside of those are at least 100 small producers who bring in $500,000 to $5 million a year, estimates Paul Fishbein, president of Adult Video News. These companies shoot on shoestring budgets of $10,000 or less (sometimes much less) per film. “Those rinky-dink companies are struggling to get 1,000 to 1,200 DVDs out at $8 to $10 wholesale,” says Fishbein. “That barely pays for the cost of a cheap production.”

And the decline of DVDs will only accelerate. “You’re going to see a precipitous drop now,” Fishbein says. “Hopefully for producers here in the Valley, that will be offset by internet sales. Hopefully.”

……YouPorn—the site Stephen Paul Jones tried to sell to Vivid in May—is a strange and mysterious business. There are no links to founders’ biographies, no contact information, no hint of who is behind this booming Web entity. Its domain is registered using a service designed to mask the registrant’s identity.

Back in July, I sent an email to the lone address on the site. It went unanswered. I asked around and, after a series of dead ends, was told that a Stanford alumnus—an outsider to the industry—had started YouPorn. A porn producer gave me the man’s cell-phone number. I left a voicemail. Jones called back a few hours later.

“It’s a brave new world, man. People are crazy. What can I say?” he said, during a freewheeling two-hour conversation that swung wildly from the subjugation of female porn stars to federal regulations governing obscenity to the existence (or nonexistence) of God. Jones insisted that the site was not intended to make money. “It’s not a profit center; it’s more of an experiment. If you wanted to be philosophical about it, it’s kind of an exploitative industry, and this is sort of the opposite.”

Jones said that “Stephen Paul Jones” was an alias. He said that he was 27 years old and worked at a Newport Beach, California, hedge fund, where he managed billions in assets. He used the alias, he said, because his bosses would fire him if they knew about YouPorn. He said he wasn’t the owner of the site anyway. He said it was founded by “a German” who wrote the underlying software and now runs the site’s day-to-day operations.

Still, Jones seemed proud of YouPorn. “People have been telling me that this site would die and the traffic would go away, and they’ve all been wrong,” he said. “When a new model enters the market and impacts other companies’ business by 15 percent of their revenue in a year, that’s historymaking.

“Porn is recession-proof,” he went on, “so if other companies’ sales are going down, there’s a reason. If the reason is the world saying ‘We like to blast ourselves over the internet,’ and the consumers of the world saying ‘We like the amateur stuff better,’ then that’s significant. You could call it a revolution.” He liked the sound of that. “Sure, why not?”

It turns out there is a Stanford alum named Stephen Paul Jones. But he’s fortyish, not 27, and he lives in South Lake Tahoe, California, not Newport Beach. In the past two decades, this Stephen Paul Jones seems to have had no connection to the adult-entertainment business. Public records show that he was involved in a handful of security companies. According to Stanford alumni records (he earned his M.B.A. last year), he enjoys skydiving, stunt piloting, and snowboarding.

Meanwhile, the man who says he’s 27 and uses Jones as an alias has stopped returning my calls. So I drive north to Lake Tahoe.

I knock on the door of a lodgelike three-story house with an enormous backyard. A blond, barrel-chested man answers, an entourage of children in tow. I tell him my name and ask to speak to Jones. “Wrong house,” he says, as his face goes hard. His wife asks what this is about. I say I am a reporter writing about an internet company. “Oh,” she says and gives him a look.

He hustles his family inside, grabs a pack of cigarettes, and comes back outside to yell at me. And from the minute he starts talking, I recognize his voice and his patterns of speech. This is the man I spoke to on the phone. This is the same Stephen Paul Jones.

Jones confirms this, apparently without meaning to, saying he knew during our phone conversation that I had an agenda because I told him that I didn’t like porn. (I told him no such thing.) He threatens to sue me, saying he has “Google’s lawyers.” Then he asks if we can talk somewhere farther away from his home. He drives his S.U.V. about a mile down the road, with me following. For the next 2½ hours, in a diatribe that is always convoluted and occasionally hostile, he keeps returning to one theme: his amazement at the sheer number of people who visit YouPorn every day. And he repeatedly insists that he is not the site’s owner.

But in his emails to Vivid executives, Jones had described himself as “the decisionmaker at YouPorn” and said that he and his Malaysian partner, Zach Hong, “own 100 percent of the company.” (Hong, when reached at his home in Australia, confirmed his involvement with YouPorn but declined to answer further questions.) In these emails, Jones sounded like a no-nonsense M.B.A. with an articulate, if familiar, vision for growing his Web 2.0 company. Among other things, he said he would follow “the Skype model” and cited a quote he attributed to one of Skype’s founders: “If we have 100 million users, and if just 1 percent of them give us $10 per month, we will have $120 million in revenue.”

Now, though, leaning against my car on a dark country road, Jones refuses to answer the most basic questions about the financial particulars of YouPorn or his plans for its future. As the conversation wears on, he sounds proud of the site one minute and worried about tarnishing his family’s reputation the next. After all, he says, he has five kids. He seems deeply conflicted about being in the sex business, much less a mastermind of the most popular adult site in the world.

Back in the Valley, Vivid’s Hirsch says that while he envies YouPorn’s traffic, he has no plans to buy the site, mainly because of the legal exposure associated with hosting user-generated pornography. But he also says that he can’t figure out how to make money through YouPorn and that it would be inconsistent with his strategy of focusing on high-end feature films. A.E.B.N. was also approached by Jones, says an executive there, and passed on YouPorn too.

According to several industry executives who say they would have heard otherwise, YouPorn hasn’t been sold. After our conversation near his home, Jones continued to deny that he owns the site.