Playboy Goes Xxx

Two days after playboy Enterprises announced it was buying three X-rated cable movie channels--a dramatic departure from the company's soft-core image--Hugh Hefner hosted an Independence Day gathering at his mansion in Los Angeles. Fireworks burst overhead as Playmates sashayed on roller skates across the tennis court, which the magazine's 75-year-old founder had turned into a rink for the occasion. Hef was in his element, and the market's reaction to the week's news gave him one more reason to celebrate: Playboy shares had climbed 30 percent. Lounging in his pajamas the afternoon after his party, he told NEWSWEEK: "We're getting a standing ovation from Wall Street."

It's been a while since Playboy shareholders had any cause for celebration. The company's stock price had lost almost two thirds of its value last year, before it began rebounding slightly in recent weeks. In the first quarter of 2001, Playboy Enterprises reported a loss of almost $12 million. The empire's flagship magazine has seen its circulation fall significantly from its peak in the 1970s. As the tech bubble burst, last year the company postponed a spinoff of its Playboy.com Web site. And the company's profitable entertainment division, which operates Playboy's soft-core movie channels, has been losing market share recently to more explicit pay-per-view offerings. "There are so many alternatives that are down and dirty," says Jack Trout, a Greenwich, Conn.-based marketing strategist. "They should have done this a while ago."

But given its soft-core origins, Playboy has long been reluctant to go all the way. The company essentially started the mainstream adult-entertainment business when Hefner launched the magazine in 1953. The first issue, 44 pages with a nude centerfold of Marilyn Monroe, sold 50,000 copies. Over the next 48 years the company extended the brand--known for its bunny logo, "girl next door" models and playful attitude toward sexuality--into almost every possible incarnation, from casinos to key chains. But it wasn't until Hef's driven daughter, Christie, took over as president in 1982 that the company really got serious. Christie closed Playboy's nightclubs, streamlined the company's staff to cut costs and reorganized Playboy's licensing strategy away from kitschy trinkets and toward classier apparel. In recent years she also led the brand's march into cable TV and cyberspace.

Playboy is optimistic about its Web prospects. Though the company's online division lost $25 million last year, revenues increased by 50 percent and Playboy says it expects the group to turn a profit next year. Playboy's CyberClub subscriptions, which sell for about $7 a month, continue to grow. Earlier this year the company launched Playboy SportsBook, an online gambling site based in Gibraltar and intended for foreign bettors. And it also introduced SpiceTV.com, the companion Web site to what will become Playboy's harder-core cable channels. Playboy's management is hoping the company's latest aggressive moves on TV and the Web are enough to return it to profitability.

Despite the new advanced strategies, until recently the market had been moving away from Playboy. With the introduction of more-advanced satellite cable systems in the 1990s, operators quickly discovered that viewers preferred more explicit programming to Playboy's tamer fare. Last year viewers spent $465 million on adult pay-per-view alone, and Hefner, who says he's never had any problem with hard-core porn, admits that in retrospect he wishes Playboy had branched out into more-risque programming a couple of years ago. He claims Christie was more reluctant to move into hard core. "She's a strong feminist," says Hefner. "Chris-tie came out of a time frame and sensibility that had a strong anti-sexual element."

But eventually, says Hef, "she came around. If you don't update what you're doing to meet the marketplace, you'll be like the dodo bird--a footnote in history." Christie Hefner was on vacation in Colorado and unavailable for comment on the controversial acquisition, but her spokesperson says she "agrees it's the right decision to make."

Of course, Playboy's not so eager for its enduring legacy to be hard-core porn. The new channels will be operated under its Spice Entertainment network, which Playboy bought in 1999, to differentiate the channels from the less-revealing Playboy brand. The move will further bolster the company's entertainment division, already Playboy's most profitable segment. "We're putting our stake in the soil," said Jeff Jenest, the Spice network's general manager. "We want Spice to stand for the most satisfying level of adult entertainment." That certainly would be a satisfying development for Playboy's shareholders.