Innovation Lessons from Adult and Gaming Sites

Tim Valenti and Greg Lindberg are accidental pornographers.

When the two former advertising men started their own Web design company, Cubik Media, in the mid-1990s, one of their first clients was Eidos Entertainment, the company that makes the Tomb Raider video game. Part of the campaign used streaming video, but the new technology was not ready for prime time and almost no one had the high-speed connections necessary to view the content. But Valenti and Lindberg saw potential. On a whim, they started Nakedsword.com, an adult site for gay men, figuring that online video would save a potentially embarrassing trip to the video store. “We built some password-protected areas and threw up some videos, mainly as an experiment,” says Lindberg, Cubik’s CTO. Then something unexpected happened: “People started buying it left and right.” Almost overnight, Nakedsword.com became 90 percent of Cubik’s business. In the years since, Cubik has continued to innovate with online video. It was among the first to use Flash for streaming video, build digital rights management capability into its movies and use peer-to-peer networks for distribution. Most recently, Cubik is integrating a cutting-edge digital fingerprinting system that can spot copyrighted material posted by users on one of its sites, an adult version of YouTube. The system works by turning the sound waves from a movie’s audio track into an image. Every time a user uploads a clip, the system makes a graph of the new audio and compares it to the graphs in its database. If the clip a user is trying to post matches a copyrighted one, Cubik takes it down.

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“It’s pretty amazing,” says Lindberg. “There are lots of companies out there trying to solve this problem, but we actually have something that works.” On the Cutting Edge

Red light sites probably aren’t places CIOs normally would look to find innovative IT. But the sex and gambling industries have always been at the forefront of technological innovation. During World War II, the illegal telephone network that bookies developed was more reliable than the one the War Department used, says Harold Layer, professor emeritus at San Francisco State University. And the pornography industry has helped select technology winners and losers for ages. In the 1980s, for example, demand for adult material gave VCR makers the economies of scale they needed to make their devices affordable, says Jonathan Coopersmith, a professor of technology history at Texas A&M University.

But past innovations pale in comparison to the rate at which the gambling and adult industries are blazing new ground on the Internet. Over and over again, the Web’s red light district has either pioneered or adopted a technology before the mainstream. The first customers of Duocash, a now-defunct anonymous payment system that allowed customers to pay for online services with prepaid phone cards, were gambling sites. A random sampling of 400,000 queries on the early peer-to-peer file sharing network Gnutella in 2003 found that 42 percent were looking for porn (compared to only 38 percent looking for music). And content delivery for mobile devices is now dominated by the adult and casino industries to such an extent that 3G, the high-speed mobile communication network, ought to stand for girls, games and gambling.

Today, adult websites make up 12 percent of the Internet, according to Top Ten Reviews. These sites attract 72 million unique visitors a month (more than 28,000 people are viewing Internet pornography at any given second) and the sex sites’ annual sales approach $5 billion, higher than the combined revenues of the ABC, CBS and NBC television networks. (Coopersmith warns that people should take numbers measuring the size of the adult industry with a grain of salt. “It’s like sex in general,” he says. “People exaggerate.”)

Meanwhile, the online gambling industry has made its sites incredibly sticky. According to Nielsen/NetRatings, visitors to the top gambling sites spend an average of 13 hours at the sites a month. The worldwide average for all sites is just 28 minutes.

Big Names in the Web’s Red Light District

A naive view would be to dismiss the Web’s red light district as composed solely of sleazy people and websites with ridiculous names. But if you scratch the surface, says Frederick Lane, author of Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age, you’ll find some extremely famous, well-known and established enterprises.

Major hotel chains such as Marriott and Holiday Inn profit to the tune of about $190 million a year on the sale of adult movies, according to a report by Citizens for Responsibility and Ethics in Washington (CREW), a government watch-dog group. About 90 percent of this revenue goes straight to the bottom line.

According to CREW, major cable companies such as Comcast and Time Warner also make hundreds of millions a year selling pay-per-view pornography. And telephone companies earn close to $500 million every year from phone sex. In the United Kingdom, $41 billion Vodafone, one of the world’s largest mobile telecom companies, has been frank about its decision to carry and process payments for pornography sent to mobile phones. Even good old General Motors was in the adult movie business (through its Direct TV subsidiary) until it sold that unit in December 2003.

Technology companies in the Internet world are also involved with pornography by helping to maintain the networks and channels by which it’s delivered. Of course, those companies have a good excuse for not calling attention to their role.

“On the Internet,” puns Lane, “all bits are naked.”

There are several reasons why the red light Web embraces innovation. Its target audience—males, 18 to 50—is a demographic that gravitates to new technology. Good technology is also a business necessity. “[Gambling and adult companies] have been forced to be innovative by constant attempts to legislate them away,” say Lawrence Walters, a First Amendment lawyer at the firm Weston, Garrou, DeWitt & Walters. In fact, the U.S. government passed a law late last year that makes it illegal for Americans to spend money at online casinos, a move that devastated the industry. The risk of prosecution has also kept gambling and adult sites from growing into large corporate entities. (See “Red Lights, Big Names,” this page.) “As a result they’ve tended to remain small and entrepreneurial,” Walters says.

Technology is also one of the few ways that sites can differentiate themselves. “We have to compete with free porn,” says James Cybert, director of IT for Hotmovies.com. “What makes us competitive is being virus-free and the consumer experience. If you aren’t able to keep up with the technology you’ll be beat over the head.”

Or as Calvin Ayre, founder of the online gambling site Bodog.com, says, “Technology is our lifeblood.

Red Light Technologies

So what are the latest technologies developed or perfected on the red light Web that will eventually make their way into the mainstream? CIO talked to IT leaders at some leading adult and gambling sites so you don’t have to. These are some of the technologies that they are looking at.

IPTV; MPEG-4; Smart Search

Scott Piper, CIO of New Frontier Media (one of the few publicly traded adult companies), is keeping an eye on IPTV—television delivered over the Internet. Over the next five years, he predicts that the distinction between televisions and computers will disappear. There are three models for how this could happen: set-top boxes that connect to the Internet (with the user experience controlled by a cable company); computer monitors in the living room that run media software (Piper says that Vista may finally make this viable); and appliances that forward computer content to a television, like the new Apple TV.

Of course, IPTV content won’t appear on the Internet by itself. That will put CIOs in the TV business. “IPTV will blur the line between the data center and the broadcast center,” says Piper.

To make your data available to these new IPTV consumers, CIOs will have to digitally encode everything. Most of the major film studios are just beginning that process; New Frontier began digitizing its movies five years ago. One of the technologies New Frontier is using for this is MPEG-4, an emerging compression standard. Videos compressed with MPEG-4 take less space to store and less bandwidth to deliver. MPEG-4 also has built-in digital rights management capability.

But compressing and posting content is the easy part. With every program available at any moment, how will users find programs? Piper believes that search will be the killer app of IPTV. To that end, New Frontier is obsessive about metadata, watching every frame of every video it digitizes and recording as many attributes as it can. Customers can use these metadata tags to refine their searches until they find precisely what they’re looking for. (For example, if you have a thing for blondes on the beach, a search on New Frontier’s adult website Ten.com for “clothing-accessories-sunglasses,” combined with “setting-outdoors-beach,” and “physical-hair-blonde,” returns two 15-minute clips, the fourth scene from Lock, Stock and Two Smoking Bimbos 2 and the first scene from Pick Up Lines 82.)

IPTV will require this kind of search on steroids. “There will be so much choice that the average consumer will be frustrated without concise recommendations,” says Piper. New Frontier is experimenting with a search that combines what people are looking for with information about past preferences. “This will not only be a great up-sell vehicle but also an avenue by which we can broaden people’s tastes,” Piper says.

Innovation from the Web’s Red-Light District

Streaming video. YouTube made it famous; adult movies made it economically viable.

Videoconferencing. Businesspeople increasingly use online chat and embedded video rather than conducting face-to-face meetings. Before that, it was used to communicate with Live! Girls! Now!

Digital rights management.Through their disregard for intellectual property rights, adult sites helped spur the music and film industries to apply DRM to their online content.

E-commerce.The content on adult sites was so compelling (to some), it helped people overcome their fear of using a credit card online, according to Frederick Lane, author of Obscene Profits: The Entrepreneurs of Pornography in the Cyber Age. Mobile Content Delivery

One of the biggest areas of growth in the adult space is delivering content to mobile phones. There are more than three times as many mobile phones in the world as there are computers. Plus, people always have their phones with them. And that’s important. “By its very nature, arousal is impulsive,” says Julia Dimambro, managing director of Barcelona-based Cherrysauce, which delivers adult material to mobile phones. “Mobile brings immediate gratification. With the Internet, you have to wait until you get home.”

Dimambro points out that what works on television and the Internet won’t necessarily work on the phone’s small screen. For starters, the screen dimensions are different, which means existing video form factors, as well as other content, have to be reconfigured to fit or be specifically conceived with the mobile phone in mind.

One type of mobile promotion meeting with some success is “bluecasting.” For example, an advertiser will have a billboard in Heathrow Airport that says that anyone interested in learning about a particular product (say a Range Rover SUV) should turn on their phone’s Bluetooth capability. The billboard then detects the phone and sends it an advertisement or promotion for the product.

One of the services that Cherrysauce is experimenting with is putting plasma screen TVs in pubs. The screen shows a picture of a sexy woman and then prompts viewers to switch on the Bluetooth on their handset. This then allows the “bluejacking” box at the side of the TV screen to send content directly to the handset. Another marketing initiative places advertisements on TV or in print and asks viewers to send a text message to a special short code number, like 12345, if they want to see more. If they do, a link to download the content is returned to their handset via SMS or WAP message, sometimes with a charge attached. This is a process called premium SMS, and it’s a way of giving customers access to the mobile Web without requiring them to type in complicated URLs. Each short code number is registered with the mobile service providers. “If the user sends his text message to an adult short code, he is checked automatically to see if he has age-verified with his network,” such as $41 billion British mobile giant Vodafone, explains Dimambro. “If not, he is sent to the age verification service in order to access the content.”

New Programming Languages

The user experience is central to the success of any site. And so red light sites are trying to find the latest and best programming languages in order to improve the way their sites look and feel.

“Java is really robust,” says Bodog founder Ayre. “But it’s a pretty expensive development platform. We’re starting to see the emergence of a new wave of Web-savvy languages.” The one he likes the best right now is Ruby on Rails, an open-source language that was designed to facilitate the development of Web applications with database back ends. “There’s nothing that Rails lets us do that we can’t do with other tools,” says Ayre, “but Rails holds the promise of doing it faster, and the more productive our product development teams are, the more features we can deliver.”

Bodog is also moving away from Java toward Flash for online games such as poker. Building the games with Flash means that users can play them without having to download anything. “Downloading is an entry barrier that Flash eliminates,” says Ayre. “We know that given a choice, most players will choose a Flash version of a game versus a downloadable one.” And now Flash is robust enough that Bodog can build sophisticated games with it.

Personalization and Customization

There are so many different red light sites competing for dollars and eyeballs that the only way to succeed is to build a relationship with the user, and gambling and adult sites have managed to personalize the user experience to an impressive degree.

“Over the last few years we’ve seen our design team evolve into a user experience department,” says Ayre. This group takes into account everything from color theory to informational hierarchies. For example, one of the first things Bodog learned when it launched the latest version of its site was that people don’t like red poker tables. So the company came up with a tool that lets users choose the color they want their table to be, and traffic picked up.

At Hotmovies.com, IT Director Cybert has built a drag-and-drop tool that lets his customers compile scenes or parts of scenes from their favorite videos. So far, customers have made 4,800 compilation movies consisting of more than 350,000 clips.

And not only does the compilation function allow users to create their own highly personalized experience, it gives Hotmovies data on the kind of videos each user is looking for. “You have to understand your audience and give them what they want,” says Cybert.

There are also ways to customize a site even if the person visiting has never been there before. Cubik Media uses geotargeting, a technique that locates people based on their IP addresses, to tailor the user experience. At its most basic, geocoding allows Cubik to display the site in the user’s native language. But it also presents a chance to localize the site. “Someone from Japan wants to see Asian girls,” says Lindberg. “People want an experience that feels like their culture.”

Red Lights, Best Practices

Historically, gambling and adult sites have been more willing than their mainstream counterparts to work with startup vendors. “They’re much more willing to fund new technology,” says Hassan Kotob, CEO of North Plains Systems, a digital asset management vendor. “At the end of the day, content is all that they have so an innovative technology can go straight to the bottom line.”

“We’re looking for solutions that will allow us to improve by large margins,” says New Frontier CIO Piper. “We won’t buy faster storage arrays if they only give us 10 percent improvements. We’re looking for 50 percent or greater.” Examples of new technologies that New Frontier has invested in are high-speed network storage that allows the company to stop writing to tape because speed went up by a factor of 10, and backup systems that don’t take a storage array offline while the backup is running.

Another red light best practice is to look for vendors that use open source. Since sites are open 24/7 (late-night hours are extremely profitable on the red light Web), “if we ever run into critical issues we need them solved now, not two hours from now,” says Bodog’s Ayre, who has learned that if he wants his people to be able to fix something, they need to have access to the source code.

“We absolutely could not get a couple of our vendors to address an issue that was crippling us,” says Ayre. “Under peak loads, the entire site became nonresponsive. We had no choice but to decompile the systems in question and fix the problem ourselves. This was probably one of the biggest drivers pushing us to adopt open-source solutions for our most critical systems.”

The red light Web has all the hallmarks of a new technology incubator. It has a technology-savvy target audience, and “if someone is conservative, they’re never going to get into this business in the first place,” says Lindberg. In other words, the red light Web is a place where CIOs might be able to learn something. And that may justify an occasional trip . . . you know, for the technology.