Monday, Apr. 19, 1999

Taking Stock In Smut

By Karl Taro Greenfeld/Seattle

Sex has always sold--in any medium and in every era. Yet the Internet has been virtual Viagra for the adult industry, with 1998 online earnings topping $1 billion, according to Forrester Research, up about 30% from 1997. Lately, the only things selling better than sex on the Net are Net companies' initial public offerings. Entrepreneurs are seeking to combine the trends by taking their online porn companies public.

As CEO of the Internet Entertainment Group, a smutty company infamous for revealing Pamela Anderson and Tommy Lee's most intimate moments and, last month, rocker Keith Richards in the saggy buff, Seattle's Seth Warshavsky, 26, has made millions from his cybermall of adult websites. His members-only Clublove site boasts 115,000 subscribers, who pony up $24.95 a month for a variety of salacious fare. But he has also found gold in a bizarre array of pay-per-view Web events. Care to watch brain surgery live online? Or a sex-change operation? Warshavsky's live-just-about-anything imagination has made IEG a dynamic growth company of somewhat dubious repute. "The Net is the natural medium for adult content," says Warshavsky, a geek who has found his killer app. "We're in the right place at the right time." This year IEG, which he co-owns with 4 Star Financial Services, an investment company, is on track to generate $100 million in revenue and $35 million in profit. "It'll be exciting to see what happens with an IPO," Warshavsky says.

IEG, with 150 employees and real revenue, has a good chance of launching a successful offering. Adult companies have gone public before--Playboy Enterprises in 1993 and New Frontier Media last year--but none of them, served up amid a frenzied IPO market, have been pure Internet plays. (One other, much less endowed company, efox.net Inc., has registered with the Securities and Exchange Commission for an IPO.) And remember, many recent Internet IPO stars were companies with no earnings--think Marketwatch, theglobe.com and Geocities. IEG is already hugely profitable. If it were comparably valued, it would be worth hundreds of millions. "So far as whether it would be successful," says Gail Bronson, senior analyst at IPO Monitor, "you betcha. We're talking real revenue, real earnings, real product."

A bit too real. The stigma of adult content has been enough to frighten away top-tier underwriters like DLJ and Goldman Sachs. But for second-tier underwriters, the seamy associations might be worth the bottom-line bump. Craig Gould, vice president of National Securities, a firm that says it is likely to be in on the deal, believes the company can be floated, pointing out that BearStearns found a way to take Playboy public: "History has shown that Wall Street has raised money for adult companies," he says. Fidelity and Warburg Pincus hold blocks of Playboy stock, while BearStearns and T. Rowe Price own positions in Spice Entertainment, another adult-media company.

Warshavsky isn't exactly a Northwest Hugh Hefner, although he has accumulated some nice toys. He lives in an expensive condo decorated with Asian antiquities, across the street from his expansive downtown-Seattle office suite. "I don't live like the average 26-year-old," he admits. His latest purchase: a Porsche 911 Cabriolet to go along with his Jaguar and speed boat. He grew up in Seattle, and entertained neighborhood kids with magic tricks, including one in which an audience member put a coin in a varnished box. Warshavsky then made the coin disappear.

It's a business model working well in electronic form, with PCs replacing the box. Offers and suggestions pour in to this Internet freak show. "We are always working on ways of getting controversial material," says Warshavsky, who weeds out legitimate offers--relatively speaking, of course--from the cranks and seeks his next lucrative magic trick.

Just in case the smut repels prospective investors, Warshavsky is diversifying into myriad online properties, including a gambling site, a psychic site and a site prescribing Viagra. He has often repeated his mantra of aspiring to be the Sumner Redstone of New Media (referring to the chairman of giant Viacom), but as it stands, he remains closer to being the Internet's Larry Flynt.