Adult Entertainment Firm Grows Old-Fashioned Way.

The Vivid Entertainment Group may be in the kind of business everybody likes to smirk about, so-called adult entertainment, but its path to success is similar to that taken by many other companies.

Much of that success has come as a result of cable TV contracts, higher-than-usual production values, merchandising tie-ins on the Internet and product placement deals. There is even talk of taking the company public to raise cash to improve the quality of its online services.

And certainly, after posting a record $80 million in sales in 2000 and projecting $100 million in 2001, Vivid is one of the most visible, if not most profitable, adult film producers in the country.

Bill Lyon, executive director for the Free Speech Coalition, a trade group formerly called the Adult Video Association, said Vivid's shrewd business moves -- like expanding into DVD and cable television -- have kept it ahead of its competition.

"They've always been on the cutting edge of the business and they've managed to create a strong brand that is recognized," he said.

William Asher, Vivid's president, credits the company's growth to its efforts to expand beyond its traditional video business.

"It's one of those fortunate things for us that we expanded into the TV business and we made it work," Asher said.

The company had traditionally sold its videos through independent video stores (some large chains -- Blockbuster Video, for instance --refuse to stock so-called adult videos). But the limits that video store distribution put on Vivid were suddenly lifted in 1999 when founders and co-chairmen Steven Hirsch and David James purchased the Spice Network, a pay-per-view cable channel, and started running some of Vivid's films, along with those of other producers. Pay-per-view sales brought in about $20 million last year.

"We purchased a network that was small and relatively tame by today's standards, but it was something that distributors wanted," Asher said.

As much as possible, Vivid tapped into a marketing strategy that had worked for it in the past.

"We really went out and said, 'What is selling in the video store?' We weren't trying to completely go over the top (as far as lurid content was concerned), but do what's acceptable with normal distribution channels like cable," Asher said.

Within six months of taking over Spice, cable system operators, including AT&T and AOL-Time Warner, began pressuring Vivid to add a second pay-per-view channel. It now has three. Vivid estimates its channels are now available in 21 million homes around the country.

The move into cable helped push the company's revenue from about $25 million in 1997 to $48 million in 1999. Asher says that, year in and year out, about 25 percent of the company's gross revenue is net profit.

The company has come a long way from its humble beginnings in 1984 when Hirsch and James made their first film for $10,000. It grossed about $100,000.

But while cable has boosted Vivid's revenue, in the last couple of years its core videocassette business has started to level out.

"It's been a slow area for some time, but that's been made up with the growth of DVD, which is in direct competition with video," Asher said.

Other adult video distributors like Valley-based VCA Inc. and Wicked Pictures have been trying to catch up to Vivid, with their own Web sites and online video sales, but Vivid remains at the top of the porn heap, Lyon said.

Mark Kernes, senior editor of the trade magazine Adult Video News, said much of Vivid's success is due to its couples-oriented films and its high production values.

While the average adult film is made for between $15,000 and $20,000, Vivid's cost $60,000 or more, Kernes said -- still a far cry from the millions spent on the average Hollywood film.

After jumping into the Internet just three years ago, Vivid has added to its revenue with a slew of Web sites where it sells videos and DVDs, along with other sex-related merchandise on line. Vivid's main Web site sells subscriptions for $40 per month; access to others is available for additional fees. Asher claims $20 million of Vivid's revenue comes from Web-related businesses, and there is still untapped potential.

"We see the Internet and broadband as the next step for our company. Video on demand is where we're going, and we have a version of that now, but we're still not there yet," Asher said.

Streaming video from Vivid's main Web site, for instance, is jittery, oftentimes blurry and, depending on modem speed, not close to the quality of its videocassette tapes, Asher admitted.

"It's not perfect, but the technology will keep improving and evolving in time," he said.

Asher said the company is actually considering going public to get the cash needed to expand its efforts into broadband with a high-end video-on-demand service.

Vivid's core video production and distribution business still constitutes about 20 percent of its total business. It makes about 75 feature films each year, mostly with a group of performers who work exclusively for the one studio.

"The theory by the company founders was to find stars for the movies and create a buzz around them. They were exclusive with Vivid and when people knew the girls, they were interested in seeing them in whatever film they were in," Asher said.

Vivid also hosts so-called premiere parties at Tower Records on Sunset Boulevard, where actors sign autographs and mingle with fans. A relative handful of performers have crossed over to do bit parts in conventional Hollywood films.

Finally, Vivid has joined its Hollywood counterparts by going the product placement route. Last year it signed an agreement with New Jersey-based. Ecko Unlimited, which manufactures casual wear: oversized jeans and shirts for young people.

Coltrane Curtis, Ecko's marketing director, said the clothing line is featured in Vivid films, and performers make personal appearances like those at Tower Records to both display the gear and tout their new films.

"It opens a new area for us," Curtis said.

Nevertheless, Asher bristles at the suggestion that his company, a leader in the adult film industry, is just another production company.

"We try to market ourselves and our product, but you can't say this business will ever be mainstream," Asher said. "It's adult films and that's what it is."