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Porn on the Precipice

Adult Entertainment Expo in Las Vegas, Nevada.
Robyn Beck | AFP | Getty Images
Adult Entertainment Expo in Las Vegas, Nevada.

Last year wasn't the best year for the porn industry.

Piracy continued to ravage the already suffering video business. And scandal rocked the industry more than once. The industry suffered a setback in November when voters in Los Angeles County passed a resolution that made condom use in adult films shot in the area mandatory – and, depending on how the issue is enforced, could mean a lot more than that.

Despite that, industry insiders are upbeat about 2013. The industry, estimated to make roughly $14 billion per year in revenues, is in the midst of transition. Thanks in part to the incredible success of "Fifty Shades of Grey," mainstream America is more curious and open to the industry. New stars are rising to the forefront. And new revenue streams are starting to fill in the gaps created by the downturn in traditional video.

(Read more: The Dirty Dozen: Porn's Most Popular Stars)

The mainstreaming of the industry seems to be one of the themes of this year's Adult Entertainment Expo, which starts this week. The AVN Awards (the so-called "Oscars of porn"), for example, will feature entertainment by normally family-friendly Cirque du Soleil.

For an industry that's striving for some mainstream acceptance, though, porn's problems are growing – and the AEE is a good indicator of that. Attendance at the industry's annual trade show was down 8 percent last year – and floor space for exhibitors was reduced by almost 40 percent.

Part of the reason for that is the ongoing consolidation among porn companies – which limits the number of companies who might have a presence at the show. Manwin, owner of several so-called 'tube' sites that stream porn clips for free (think YouTube – only with hardcore pornography rather than "Gangnam Style"), continues to buy up studios. And while it seemed as if that spree would go unchallenged, Larry Flynt recently started flexing his company's muscle to offer some competition.

"I think the stronger companies will continue to survive and grow," said Michael Klein, President of LFP, Inc. "The business is stil growing - knock wood. It's improving and revenue is still there. … We think a healthy business is one that has lots of competitors."

LFP stepped to the spotlight in October, when it purchased New Frontier Media, a broadcaster that oversees nine adult-themed pay-per-view networks, including XTSY, TEN and Penthouse TV. Manwin and an investment holding company were considered the front runners for the company, so many in the industry were surprised when LFP emerged from the background to take the company.

Klein says that while LFP/Hustler hasn't been as active on the acquisition front, that has been a deliberate decision.

(Read more: Porn's Most Powerful Players)

"We've been offered a number of the companies sold in the past year, but we just didn't feel the value was there," he said. "If someone wants to pay too much for a company, we'll let them do that."

Manwin, meanwhile, has problems of its own. Managing partner Fabian Thylmann was arrested in Brussels in December and extradited to Germany on suspicion of tax evasion. He was released on bond right before Christmas, but the arrest of the company's frontman has put Manwin on the defensive.

"Manwin's managing partner is currently the subject of an investigation by the German tax authorities and accordingly, no conclusion was reached in this matter — as of the date of this release," the company said in its only statement about the matter. "Manwin's global operations remain unaffected and, as is customary with our company, we will not comment on pending legal matters."

The passage of a law requiring condom use in all porn films is another shadow hanging over the industry. The industry maintains that its testing requirements are sufficient – but was forced to shut down last year for weeks following a syphilis outbreak that occurred when a prominent male performer hid his diagnosis from producers. It was the third shutdown in three years due to infectious disease.

While the Free Speech Coalition, an industry trade group, is appealing the Constitutional merits of the law and determination on how it will be enforced is being determined by county officials, porn companies are trying to plan for the industry's worst case scenario.

While several have threatened to move out of California, that's unlikely – but filming of the movies may move elsewhere. Among the whispered locations are Florida, Nevada, Mexico and Europe.

This all comes as more and more women become curious about the industry's products, a side benefit of the "50 Shades of Grey" phenomenon. Just as eBook sales of erotic fiction have spiked in the past year, porn companies have seen an explosion in the success of their films tailored for a female audience.

(Read more: Porn's New Market: Women)

"It's been picking up -- mostly on the DVD side," said Allison Vivas, president of Pink Visual. "It's been picking up since Wicked picked up on this and started making productions that were more female friendly. … On the digital side, what we're looking at is the tablet market. We don't imagine a woman enjoying this sort of thing sitting in front of her computer screen in her home office."

Meanwhile, the adult novelty business is exploding. A push by major corporations, including Church & Dwight , in the field has led to increased sales and their appearance in stores that wouldn't have considered stocking them a short while ago.

"Toys are where the growth is in this industry – and where it seems to continue to be," said Scott Taylor, president and founder of New Sensations. "In this time of recession, to still see growth in that field says something."

Because AEE is one of the industry's tent pole events, though, most of the conversations about the challenges the industry faces this year – and the problems of 2012 – will remain in the back rooms, well out of the earshot of fans that come to rub elbows with their favorite stars.

The show, as always, must go on.

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Featured

Porn Convention 2012

  • While there are a few adult entertainment companies that are publicly traded, most are firmly closed to civilians, the industry’s term for outsiders. But one company, Pleasure Dynasty, is opening the filmmaking process.

  • As the porn industry gathers for its annual convention, there's a lot at stake. Online piracy continues to nip at the earnings of studios, and new legislation could dramatically impact how companies do business.

  • The L.A. City Council voted to make condom use mandatory in adult films. And adult studios are already planning how to minimize the effects of that law.