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After rough 2013, porn studios look for a better year

2013 couldn't have gone much worse for the porn industry.

The DVD business, once the lifeblood of adult film producers, dwindled even further. Legal challenges over mandatory condom laws continued to dog the industry. And porn companies were forced to shut down production three times after four performers tested positive for HIV.

As the industry prepares for the Adult Entertainment Expo, its annual trade show in Las Vegas, the question on everyone's mind is: What does 2014 have in store?

No one's sure, of course, but some insiders are cautiously optimistic that the worst is over.

Steve Hirsch, Vivid Entertainment
Getty Images
Steve Hirsch, Vivid Entertainment

"My general impression is the industry has bottomed out," says Alec Helmy, founder and publisher of industry trade publication Xbiz. "Companies have figured out how to change their business models to sustain profitability. In terms of the number of players, it's at an all-time low, but those who have survived are obviously the stronger breed."

Globally, porn is a $97 billion industry, according to Kassia Wosick, assistant professor of sociology at New Mexico State University. At present, between $10 billion and $12 billion of that comes from the United States. Revenue from traditional porn films has been shrinking, though, because of piracy and an abundance of free content on the Internet.

"DVD sales are barely alive at this point," says Steven Hirsch, founder of Vivid, one of the industry's largest and best-known studios. "We've seen probably an 80 percent reduction in sales over the past five years—to the point where fairly soon it's not going to make sense to put movies out on DVD. It's not going to happen tomorrow, but we are certainly marching towards that day."

(Read more: HIV brings porn trade group under fire)

Diversification is a fast-growing trend in the industry. Studios who rely solely on DVD sales have generally gone out of business. Some of the survivors have beefed up their video-on-demand offerings to take advantage of the growing online market. Others have branched into physical products, such as sex toys or lubricants.

Few have grown in as many directions as Vivid, though. The studio perhaps best known for its ongoing line of celebrity sex tapes launched a satellite radio channel on Sirius this year, saw its Vivid TV become available in 70 million homes and licensed its name to a series of nightclubs in Charlotte, N.C., Miami, Los Angeles and (later this month) New York City.

While some porn companies may have goodwill, the industry as a whole could use some work. Last year's HIV cases came as adult film producers managed to fight off a state law requiring mandatory condom use in California, but continued their legal battle against a similar ordinance passed last year in Los Angeles County.

Before 2013, it had been three years since the industry saw a positive HIV diagnosis. And while many insiders say the porn industry's internal screening system did what it was supposed to do—catch the diagnosis early and ensure that performers did not infect others—some executives say they're still uneasy.

"When you have three moratoriums in a year and you eat your cache of movies, it has an effect," says Steve Orenstein, president and owner of Wicked Pictures—the only major porn studio that uses condoms in all of its films. "Obviously, there's nothing that has happened in the last year to change our decision to stay with condoms. If anything, it has solidified it."

(Read more: Condoms in Porn? Just another day at Wicked Pictures)

2013 saw more consolidation in the industry, the most notable of which was the merging of RedTube and Manwin—two of the biggest online operators in the industry. The combined company now controls the majority of the porn 'tube' sites, (think Youtube for porn), which stream live content and XXX clips.

Many in the industry blame the tube sites for the industry's woes, noting they are often filled with pirated content, which is offered to consumers for free. Tube sites pick up ad revenue from page views, but the producers of the films earn nothing.

Manwin also saw a leadership change—as founder Fabian Thylmann, once considered the most powerful man in porn, sold his shares in the company roughly 10 months after his December 2012 arrest in Belgium on charges of tax evasion. "Both myself and Manwin are at a stage where I can no longer add significant value to the best of my ability," he said in a letter to employees.

Manwin soon changed the company name to Mind Geek.

Insiders say they expect more buyouts to happen this year—and more companies to go under.

"I think there's more to consolidate and we will see that happen in 2014 and moving forward," says Hirsch.

(Read more: Porn's most popular stars)

Despite the moratoriums, consolidation and ongoing legal uncertainties, both insiders and outside observers say the porn industry actually weathered a tough year fairly well. Owner Scott Taylor says New Sensations did better in 2013 than it has the previous two years. And Hirsch says Vivid's revenues are strong.

"I don't think the industry is any better than it was a year ago," says Wosick. "But they're not any worse than a year ago either. I think [the events of 2013] may have forced it to be a bit more self-reflective. Studios have had to tackle some issues they've had to avoid the past few years and been forced to take stock with how they exist in this present-day economy—and present-day moral atmosphere. ... I think 2014 might be the year the industry comes together."

—By Chris Morris, Special to CNBC.com.

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