Bullshit reaches limit - AFF and Iporn scuttlebutt

[gonzo]

If you thought the MC cross sales was the news for this week check it out. rumors flying all over the web!

AFF-

Deep in the Hole: FriendFinder isn’t likely to find any pals on Wall Street; Needs IPO to pay debt

--on the web

[ZD Net]- FriendFinder Networks, the company formerly known as Penthouse Media Group, is filing to go public to pay off almost a half a billion in debt in an equity market that stinks. Simply put, FriendFinder is launching an IPO Hail Mary to stay alive. At least FriendFinder’s initial public offering filing turned up a bunch of interesting nuggets.

FriendFinder is best known for its Adult FriendFinder site, which is a social network for folks looking for services that probably shouldn’t be mentioned on a family friendly site on Christmas Eve. But I’m a sucker for an entertaining regulatory filing as are a few other bloggers (Techmeme).

The IPO, which is underwritten by a firm called Renaissance Capital (we’re not talking Goldman Sachs and Morgan Stanley folks), details a bevy of interesting stats such as churn rates on Adult FriendFinder as well as nuggets on how Penthouse magazine is trying to cover sports and games. FriendFinder also operates sites such as AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com and SeniorFriendFinder.com.

As background, Penthouse bought Various, which is the parent of FriendFinder, a year ago for $400 million. The $460 million in potential IPO proceeds will go to paying off FriendFinder’s almost $450 million in debt. For the nine months ending Sept. 30, FriendFinder had revenue of $243 million, operating income of $17.6 million and a net loss of $32.3 million. Prior year comparables are largely irrelevant since you’re comparing a social network to Penthouse magazine.

Here’s all you really need to know: This IPO is a Hail Mary pass for survival. The company says it all in its prospectus:

Our ability to continue as a going concern is dependent on our ability to raise additional capital, including from this offering. As of September 30, 2008, our balance sheet had approximately $43.3 million in cash and restricted cash and $420.1 million in short-term debt, net of unamortized discount, $411.0 million of which had been reclassified from long-term debt, due to our failure to comply with certain covenants and restrictions in the agreements governing our 2005 Notes and 2006 Notes and our subsidiary’s First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained…If we are unable to cure such defaults and/or obtain waivers, we could trigger the acceleration of payment provisions in such agreements which would require us to immediately repay up to approximately $466.0 million to our noteholders. We do not currently have sufficient cash to repay this indebtedness if our debt is accelerated and if the noteholders instituted foreclosure proceedings against our assets, the proceeds of the assets could be insufficient to repay such indebtedness in full. Under these circumstances, we may be unable to continue operating as a going concern.

Comforting eh?

At least there are some really interesting stats from FriendFinder (since we don’t get much color from private social networks like Facebook). Here’s a look:

* FriendFinder averaged 1 million paying subscribers a month for the first nine months of Sept. 30. That’s good for 77.2 percent of Internet revenue. Net revenue per subscriber was $19.06 a month.
* Paid users, people who pay by usage, averaged 1.7 million minutes a month–good for 19.6 percent of revenue.
* The monthly churn rate is 18 percent for the nine months ending Sept. 30, down from 19.6 percent at the end of 2007.

* Ad revenue of $152,356 a month for the nine months ending Sept. 30 is skimpy. The company is hoping to change that, but acknowledges: “We have never generated significant revenue from internet advertising and may not be able to in the future.”
* A nice history lesson on Various, which operates other social networks beyond Adult FriendFinder

* American Express won’t process credit card transactions for adult material.
* Various neglected to collect taxes in the EU. The company says:

After our acquisition of Various, we became aware that Various and its subsidiaries had not collected VAT from subscribers in the European Union nor had Various remitted VAT to the tax jurisdictions requiring it. We have since registered with the tax authorities of the applicable jurisdictions and have begun collecting VAT from our subscribers in the European Union and remitting it as required. We have initiated discussions with most tax authorities in the European Union jurisdictions to attempt to resolve liabilities related to Various’ past failure to collect and remit VAT, and have now resolved such prior liabilities in several jurisdictions on favorable terms, but there can be no assurance that we will resolve or reach a favorable resolution in every jurisdiction. If we are unable to reach a favorable resolution with a jurisdiction, the terms of such resolution could adversely affect our financial condition or results of operations.

Overall, I’d file this IPO filing in the “you must be kidding” department.

And Iporn
IPORN is done employees were all let go Tuesday.

There is more to the story- I'll tell you in a bit- also getting you the numbers from Mercer Financial who is acquiring AVN- this is the co that was part of adultvest.

[Toby]

2009 is going to be very interesting indeed.

[gonzo]

Ahhhh Santa please dont stop! This gets better by the hour.
Iporn

IPorn has closed its offices in Beverly Hills. And it has also dropped out of the AEE show in January because its main investor has allegedly cut off its financial pipeline.

Francis Koenig owner of AdultVest, which owns a piece of IPorn [on paper Mike Weiss is the CEO of IPorn], allegedly went through something like $3.5 million of investors’ money in a two year period, according to the Grand Vizier who leaked parts of this story earlier.

The Vizier says the IPorn offices were for show anyway to impress investors but nothing really was ever done to develop IPorn.

“Everyone involved in IPorn is very upset and all investors will lose their money,” states The Vizier who says that Koenig, who comes from the investment world in New York, formed IPorn as a self-fulfilling sexual fantasy and that Koenig fancied himself as another Rocco and would often make that comparison.

In fact, Koenig insisted that he was better that Rocco. Not to mention the best videographer and still photographer in the game, according to him, at least.

“His claim to fame was that he had the most beautiful cock you had ever seen,” laughs The Vizier.

Of the 100 or so scenes IPorn shot, Koenig appears in maybe 18 POV scenes. Koenig also created a “fake” site called Cream Pie Surprise and used that as a means to justify cumming in each girl.

“Before a girl can shoot for him, he has to cum inside them,” says The Vizier.

“On one occasion Otto Bauer and Johnny Thrust were supposed to D.P. a girl while Koenig was going to take the other girl into a room for a private. But then he had it in his head he needed both girls, so the shoot was held up till 3 in the morning before he was finished with them.”

“Koenig said he wanted to learn this business inside and out, guess how he did it.”

“And he promised every director in the business work,” adds The Vizier. “IPorn was ridiculous and kind of funny, in a way.”

Koenig would also insist that shoots be held on weekends so that he could personally be there to shoot his own POV content.

“Those who worked on the sets describe how Koenig, a veritable dick machine, would be hyped up on Viagra, insisting that he fuck all the girls that were hired.

“If they didn’t fuck him, they were fired. He’s had all these two week romances with a zillion porn chicks.”

From what the Vizier also knows, Jim Powers and Porno Dan are now trying to salvage the company or what’s left of it through another company called Immoral. They will have a both at AEE.

“It’s a fiasco,” says The Vizier. “Even AVN got dragged into this and was made promises.”

[Koenig was the man behind the proposed deal to buy AVN, a deal Koenig set up in order to get a piece of AVN. But the proposed deal brokered through Mercer Capital is pretty much imperiled as of these latest developments.]

The idea behind AdultVest was the fact that Koenig intended to own parts or all of the porn companies in the industry. IPorn was one of those companies.

“He wanted to have control of agencies, brothels, everything,” says The Vizier. “It was ridiculous. And when the IPorn-thing came along he used that as his personal stomping grounds.”

Koenig, I’m told, would allegedly spend hundreds of thousands of investor dollars to finance shoots which turned into drinking parties, orgies and an ultra lavish lifestyle. Koenig allegedly paid himself a $50,000 a month salary with investor money.

“He was good at getting money out of people,” continues The Vizier who heard that Koenig’s car payment alone was $3500 a month. In one instance, Koening allegedly totaled one very rare BMW and the next day bought another one like it.

“There was a shoot in Florida during Internext in which room bills were something like $8,000 for four days because of all the alcohol which was being consumed. Every shoot was budgeted for at least $1,000 in alcohol and Koenig was known for putting on the big show to impress people. The Florida trip wound up costing at least $60,000, and IPorn didn’t even have a booth at Internext.

During Internext Koenig took his party to a fancy steak house.

“He had a couple of girls dress like the twins from The Shining,” The Vizier relates. “He liked to dress girls in $20 hooker Halloween costumes. And he would make them go to dinner dressed like this. Then he’d make them crawl on the table toward him like cats. At the steak house he made Porno Dan whip out his cock and had one of the girls suck it for entertainment.”

All expenses paid venues included other lush locales and there were trips to Las Vegas and Santa Barbara. And a recent trip to Berlin was apparently another story fraught with drama, peril and naked girls walking on the streets.

“It was lunacy. All the girls were crying,’ says The Vizier.

“And Koenig was bright red on Viagra grabbing all these Czech and Hungarian girls. By the end of the trip they were hiding from him.”

“Koenig put his crew up in a castle in East Germany near the Polish border and basically paid Johnny Thrust $500 a day to be a taxi driver.”

“It got so bad in Berlin, that Porno Dan supposedly had to talk people out of trying to kill Francis,” says the Vizier. “Berlin was one big drunken haze and no one slept.”

“Then there was another shoot where everyone was drunk on Absinthe and knocking hotel room doors in. People would pass out from no food because of the insistence on alcohol."

On a shoot in Los Angeles, Gina Lynn was paid $9,000 but, according to some witnesses, couldn’t even stand after awhile due to whatever reasons you might want to imagine.

“Koenig was the kind of guy who couldn’t walk in a bar without spending $2,000 minimum. He had to have champagne rooms and private rooms to eat in. Koenig would specifically hire people who could keep up with his partying and still be able to function and work.”

“None of the money ever went into building websites or tube sites which were promised,” The Vizier continues. “How could this company go through all this money with nothing to show for it?”

“There should be a book written about this,” The Vizier laughs.

“Here was a guy who was hooked on the idea of being a porn star and living the life. He was a flashy guy.”

[RawAlex]

AFF appears to be playing out as expected - the big sale price that Lars and co were getting for selling out was more "mythical money" than any real amount of coin. The entire concept is sort of a backing into an IPO, by assembling what appears to be two financial boat anchors together and trying to see if they will float.

The numbers also show something pretty interesting: 1 million average subscribers, 27 million average revenue (243/9) means they take in $27 gross per member per month, approximately. At 18% churn rate, they are retaining 5.5 months, or about $150 per member. Their payouts to affiliates are pretty much in the 100 - 150 per month range, so they are typically making on affiliate sales something like $0 - $50 per member over a 6 month period gross. With an operating income of 17.6 million, that number is somewhere around $2 per month per member net income, or about $11 operating income per member total, and a loss of almost $20 per member over their lifetime.

If nothing else, this is the complete proof that paying $100 - $150 per member isn't a valid business model. At $50 per affiliate payout, they would in theory be profitable (if the same about of business came their way).

Almost 100% of the debt outstanding is the "takeover" of Various by Penthouse, and that the cash position of the company may be left over cash from Penthouse, as AFF has leaked a ton of money this year.

The worst part in all of this is that if AFF closed it's affiliate program tomorrow, The churn would pretty much wipe them out just as they manage to cover their losses and return to profitability, with no user base and no source of income.

I cannot picture this IPO gaining much traction, especially if the potential investors get a look at some of the great file sharing, torrent, and software hack sites that are relying on AFF money to pay their bills.

It's classic, I can't wait to see Lars back as an $8 an hour coder to pay the bills.

[Toby]

Originally Posted by RawAlex

...Their payouts to affiliates are pretty much in the 100 - 150 per month range, so they are typically making on affiliate sales something like $0 - $50 per member over a 6 month period gross...

That of course assumes that they're actually paying affiliates for all of their sales.

[RawAlex]

Well, it goes a long way to explaining why they were apparently so far into bed with Zango and their ilk, converting a $100 affiliate payout into a $25 PPC popup scumware sale turns that from a loser into a profitable transaction.

There are some other interesting numbers in there too, like cams losing reveue per minute, and the fact that outside of "adult" social networking, Various has very few real members (only 78k).

Also, they declare somewhat under 1 million paid members, but the front page of their website says "over 20 million members". At what point does this cross over the line to misleading advertising?

25,282,127 Members!
88,883 Online NOW!*
1,670,380 Members in Canada
132,813 New Photos this week!
3,250 chatting now
9,920 using IM now

[Toby]

Here's an article on the IPO from a non-adult source. The last line sums it up pretty well.

http://news.cnet.com/8301-1023_3-101...g=2547-1_3-0-5

[RawAlex]

It's almost the hail mary with the marching band on the field and people getting up out of the stands to do home.

Now that they have revealed the numbers, I would have to say I am not impressed. I would love to see what their new member acquisition costs are. That would probably tell the whole story.

[JFK]

Originally Posted by gonzo

Ahhhh Santa please dont stop! This gets better by the hour.
Iporn

IPorn has closed its offices in Beverly Hills. And it has also dropped out of the AEE show in January because its main investor has allegedly cut off its financial pipeline.

Francis Koenig owner of AdultVest, which owns a piece of IPorn [on paper Mike Weiss is the CEO of IPorn], allegedly went through something like $3.5 million of investors’ money in a two year period, according to the Grand Vizier who leaked parts of this story earlier.

The Vizier says the IPorn offices were for show anyway to impress investors but nothing really was ever done to develop IPorn.

“Everyone involved in IPorn is very upset and all investors will lose their money,” states The Vizier who says that Koenig, who comes from the investment world in New York, formed IPorn as a self-fulfilling sexual fantasy and that Koenig fancied himself as another Rocco and would often make that comparison.

In fact, Koenig insisted that he was better that Rocco. Not to mention the best videographer and still photographer in the game, according to him, at least.

“His claim to fame was that he had the most beautiful cock you had ever seen,” laughs The Vizier.

Of the 100 or so scenes IPorn shot, Koenig appears in maybe 18 POV scenes. Koenig also created a “fake” site called Cream Pie Surprise and used that as a means to justify cumming in each girl.

“Before a girl can shoot for him, he has to cum inside them,” says The Vizier.

“On one occasion Otto Bauer and Johnny Thrust were supposed to D.P. a girl while Koenig was going to take the other girl into a room for a private. But then he had it in his head he needed both girls, so the shoot was held up till 3 in the morning before he was finished with them.”

“Koenig said he wanted to learn this business inside and out, guess how he did it.”

“And he promised every director in the business work,” adds The Vizier. “IPorn was ridiculous and kind of funny, in a way.”

Koenig would also insist that shoots be held on weekends so that he could personally be there to shoot his own POV content.

“Those who worked on the sets describe how Koenig, a veritable dick machine, would be hyped up on Viagra, insisting that he fuck all the girls that were hired.

“If they didn’t fuck him, they were fired. He’s had all these two week romances with a zillion porn chicks.”

From what the Vizier also knows, Jim Powers and Porno Dan are now trying to salvage the company or what’s left of it through another company called Immoral. They will have a both at AEE.

“It’s a fiasco,” says The Vizier. “Even AVN got dragged into this and was made promises.”

[Koenig was the man behind the proposed deal to buy AVN, a deal Koenig set up in order to get a piece of AVN. But the proposed deal brokered through Mercer Capital is pretty much imperiled as of these latest developments.]

The idea behind AdultVest was the fact that Koenig intended to own parts or all of the porn companies in the industry. IPorn was one of those companies.

“He wanted to have control of agencies, brothels, everything,” says The Vizier. “It was ridiculous. And when the IPorn-thing came along he used that as his personal stomping grounds.”

Koenig, I’m told, would allegedly spend hundreds of thousands of investor dollars to finance shoots which turned into drinking parties, orgies and an ultra lavish lifestyle. Koenig allegedly paid himself a $50,000 a month salary with investor money.

“He was good at getting money out of people,” continues The Vizier who heard that Koenig’s car payment alone was $3500 a month. In one instance, Koening allegedly totaled one very rare BMW and the next day bought another one like it.

“There was a shoot in Florida during Internext in which room bills were something like $8,000 for four days because of all the alcohol which was being consumed. Every shoot was budgeted for at least $1,000 in alcohol and Koenig was known for putting on the big show to impress people. The Florida trip wound up costing at least $60,000, and IPorn didn’t even have a booth at Internext.

During Internext Koenig took his party to a fancy steak house.

“He had a couple of girls dress like the twins from The Shining,” The Vizier relates. “He liked to dress girls in $20 hooker Halloween costumes. And he would make them go to dinner dressed like this. Then he’d make them crawl on the table toward him like cats. At the steak house he made Porno Dan whip out his cock and had one of the girls suck it for entertainment.”

All expenses paid venues included other lush locales and there were trips to Las Vegas and Santa Barbara. And a recent trip to Berlin was apparently another story fraught with drama, peril and naked girls walking on the streets.

“It was lunacy. All the girls were crying,’ says The Vizier.

“And Koenig was bright red on Viagra grabbing all these Czech and Hungarian girls. By the end of the trip they were hiding from him.”

“Koenig put his crew up in a castle in East Germany near the Polish border and basically paid Johnny Thrust $500 a day to be a taxi driver.”

“It got so bad in Berlin, that Porno Dan supposedly had to talk people out of trying to kill Francis,” says the Vizier. “Berlin was one big drunken haze and no one slept.”

“Then there was another shoot where everyone was drunk on Absinthe and knocking hotel room doors in. People would pass out from no food because of the insistence on alcohol."

On a shoot in Los Angeles, Gina Lynn was paid $9,000 but, according to some witnesses, couldn’t even stand after awhile due to whatever reasons you might want to imagine.

“Koenig was the kind of guy who couldn’t walk in a bar without spending $2,000 minimum. He had to have champagne rooms and private rooms to eat in. Koenig would specifically hire people who could keep up with his partying and still be able to function and work.”

“None of the money ever went into building websites or tube sites which were promised,” The Vizier continues. “How could this company go through all this money with nothing to show for it?”

“There should be a book written about this,” The Vizier laughs.

“Here was a guy who was hooked on the idea of being a porn star and living the life. He was a flashy guy.”

The "Money Shot"

[JFK]

and a few more

[Fausty]

Back in the early 1990s and fresh out of MBA school, I hired on in the IT department of a company that provided "credit card protection service" to the big card companies. For only $50 a year or so, they would "protect" cardholders if their wallet was stolen - cancelling their cards and indemnifying against any charges accrued after the theft. Yes, such indemnification was already provided by the card companies themselves - but not every cardholder knew that.

Of the $50 yearly fee, about half went back to the card companies as "commission." The signups - via inserts in monthly card statements - were borderline misleading: people read that language and thought they needed this "service" or they'd be on the hook for thousands of dollars if their wallet was stolen. Once they signed up, that card got banged $50 every year like clockwork - after all, it was the card companies themselves who were doing the billing (via a shadow third company). Cancel? Yeah, right. Call in to cancel, and you got a "retention expert" on the phone who was paid only if she convinced you not to shut off the money. Oddly enough, even though we got lots of cancellation calls, every year the billing seemed to go up and up and up. . . and complaints were also piling up for unauthorized charges after people had cancelled.

At its peak the company was bringing in $150 million or so in revenue, and netting - AFTER taxes - about $40 million in pure profit. Everyone agreed that it was a "genuis" business model - so profitable, so easy, so reliable! Being a young punk (and now, of course, a not-so-young punk) I wondered aloud if, you know, the fact that our customers hated us and didn't actually want - or benefit from - the "service" we provided bothered anyone else. I was shouted down by the bigger corporate dogs - what did I know anyway? I ended up leaving after making Vice President, and eventually testified against the management on an insider trading case that landed on the front cover of Businessweek and involved Jeb Bush. But that's another story. . .

All these "great business models" that involve squeezing money out of people for stuff they really don't want or don't want to keep buying are built on sand. Yes, "subscription revenue" is great - my own company is subscription-based and it's a nice way to provide service for customers. BUT - and this is a big "but" - you must EARN that subscription every billing cycle. Sitting back and banging that card, ad infinitum, trusting that the hassle of cancelling is enough to keep most "subscribers" locked in, is lazy and dumb. Our customers ask us to cancel? Done. We even pro-rate a refund for the part of the month they haven't used. No questions asked. It hurts, if we have a network hiccup and a bunch of customers cancel overnight - but it keeps us honest.

I see these genuises who are getting "rich" banging cards for people who are barely convinced they want to buy, and I cringe. Sooner or later, it all comes crashing down. Yes, always. Someone might be quick enough to grab some money and run, in the meantime, but nobody makes REAL wealth that way. Wealth with lots of zeroes, that is.

It's alot more fun - and more interesting - to build a company whose customers really love the service one provides, and are happy to pay a fair price for it. Also a much harder task than just figuring a way to "game the system" long enough to grab some loot, admittedly. But, these little scam "businesses" that only know how to bill aggressively, they are a flash in the pan - not one of them has had any real impact on the world, and they're not even a footnote a few years from now.

The ones who really bust ass to do something genuinely useful for their customers, they get to write the rules for how the future unfolds. Sign me up for that game - the scams aren't worth the hassle, just building fancy sandcastles during an incoming tide.

Regards,

Fausty

ps: That card-protection company (Safecard Services, NYSE-listed) was purchased by CUC for $400 million or so. . . and CUC as we know eventually generated its own multi-billion dollar fraud meltdown and some serious criminal charges. What goes around comes around: scams beget fraud beget scandal beget nothing but heartache for all involved.

[gonzo]

Francis sure was generous with other peoples money I see.

At least he could have bought a better grade of hookers to run around with. God knows Ive been seen with far more attractive women and I didnt have to pay for them to hang out with me.

[tony404]

http://www.nytimes.com/2008/12/25/te...1&ref=business
The company, however, warned that it has a lot of competition and a history of losing money. It posted a net loss of $29.9 million on $48 million in revenue in 2007. For the first nine months of 2008, FriendFinder had operating income of $17.6 million and a net loss of $32.3 million on $244 million in revenue.

By comparison, IAC’s online personals businesses, which include Match.com and Chemistry.com, are significantly more profitable, with operating income of $50.7 million on revenue of $277 million in the first nine months of 2008.

[Fausty]

^^ another interesting thing about this is how, essentially, the value of the Penthouse dead-trees magazine seems to be a non-factor in the business at this point. That's a brand that used to have quite a bit of value - and it's all been squandered. This is yet one more perfect example of the dynamic highlighted in Christenson's The Innovator's Dilemna.

The IAC comparison is further misleading, in that those properties are already well-established. If memory serves, they were not immediately profitable upon founding - many companies must grow through losses to reach profitability. Comparing, ceteris paribus, a younger company in a given market to one with more of a foundation already in place is basically apples to oranges - not to say that Various is or is not on a sustainable growth trajectory.

Personally, it just seems to me like a "concept" website that could be nicely profitable and flexible enough to be relevant across time if it were not saddled with massive corporate overhead. One thinks of the minimalist style of Craigslist administration - versus a project like this with the full phalanx of lawyers, accountants, middle managers, secretaries, memo-writers, PR flacks, etc. etc. Peel that crap away and there's probably a decent business hidden underneath.

Fausty

[Hell Puppy]

Hail Mary indeed.

No one in their right mind tries an IPO in this market unless they have to. I seriously doubt they can get enough for the offering to come anywhere close to that debt.

I haven't looked at the balance sheet, but with that debt hanging over them and with the current return rates, that paper will be worthless.

[RawAlex]

It is especially clear that the debt is nothing more than a payout to the AFF previous owners, not debt incurred to create anything. There is very likely a business model in there, but one that pays maybe $40 a signup or something. You cannot pay $100 plus against 20% churn and only take in $20 a month per member, there is no money in it.

I suspect though at $40 a signup, few people would send traffic because their tube or torrent site wouldn't be profitable anymore.

[RawAlex]

What I find interesting is even the most generous suckup on the zoo is seeming to understand that AFF appears to be in serious trouble.

The basic problem: the purchase of AFF (and probably Danni Cash) was done entirely in debt. It is likely that Andrew and Lars were only going to get the big money when this whole deal went public. What they don't appear to have figured on was the world economy going to crap, the inability of the company to show a path to profitablity, and so on.

The IPO appears on the surface to be massively overpriced, as even a generous web value of twice yearly revenue is barely equal to the stock offering. There is little underlying asset value (except for the software used to the run the site and the database, which I suspect is packed full of dead profiles). Their inability over the past few years to raise non-membership revenues (such as by advertising) is a real problem as well. The vast majority of their users are on the "adult" side of the business, which means they can't even run google adsense on their pages. I find it pretty amazing that they are unable to work their traffic in a manner to raise more income from their users.

I also don't understand the traffic issues: If their signup rate overall is say 1 in 200 (being nice here), and they turn a couple of million users a year (1 million end of period users 20% churn means you turn them all twice a year, thus 2 million signups). That means they are managing at least 200 million direct program clicks a year, plus significant amounts of returning client traffic (say 20 visits per user, that is another 40 million hits a year). So with a quarter of a billion hits, it is shocking that they cannot seem to make any real income off that traffic.

Something isn't right - and it suggests that either traffic is way off, or they truly are not good traffic managers and never had anyone on staff to do it.

[RawAlex]

I love this one:


What Kind Of Car Do Investors Get With The FriendFinder Porn IPO?

Posted at 10:22 AM PT on December 27, 2008

Print Yahoo! Buzz Share Sphere

Anyone who buys into the FriendFinder Networks IPO won’t just be buying a piece of a debt-ridden, money-losing collection of porn sites and social networks. They’ll also be buying a piece of a car the company bought from one of its founders, and now values at $95,000.

http://mediamemo.allthingsd.com/2008...nder-porn-ipo/

I am betting that Lars and Andrew didn't realize that an IPO would pretty much put all the dirty laundry out for everyone to see.

[Fausty]

Originally Posted by RawAlex

What I find interesting is even the most generous suckup on the zoo is seeming to understand that AFF appears to be in serious trouble.

Sorry - had to read that sentence a few times to make sense of it. . . I kept seeing "suckup" and "zoo" and assuming someone was talking about me.

The basic problem: the purchase of AFF (and probably Danni Cash) was done entirely in debt. It is likely that Andrew and Lars were only going to get the big money when this whole deal went public. What they don't appear to have figured on was the world economy going to crap, the inability of the company to show a path to profitablity, and so on.

To be fair, this hardly makes the AFF acquisition unique - or even unusual. Lots of purchases are done with a cash chunk and the balance carried as debt. Often, the full purchase prices is paid out over time, and subject to adjustments on the basis of post-acquisition performance of the combined companies. It's not really "shady" in and of itself - in fact, if you buy a company and cash-up the sellers 100%, they have next to no incentive to ensure the integration works, and the combined company succeeds - after all, they got their cash and they head for the exit.

In contrast, if there's a substantial debt carry, they have incentive to ensure the combined company at least does well enough to pay down that debt. Many IPOs have gone out solely on the basis of a need to deal with this kind of post-acquisition debt and, in general, Wall Street isn't opposed to that kind of deal - if the numbers work and demand is there. Heck, the "classic" model for that is buying a company with borrowed money, taking it out in an IPO, raising cash to pay down the acquisition debt, and being left with a majority equity stake in a debt-free company for essentially $0 invested. The Platonic form of LBO.

The vast majority of their users are on the "adult" side of the business, which means they can't even run google adsense on their pages. I find it pretty amazing that they are unable to work their traffic in a manner to raise more income from their users.

It continues to amaze me that the "adult" side of the net gets redlined off as "no-man's-land" for advertising networks - it's absolutely stunning! Sure, I know some advertisers would piss their pants if their precious brand were tarnished by association with anything as horrific as human (well, let's stick with "mammalian") sexuality - though generally violence and bloodshed are no problem - but is it really true of ALL advertisers?

I mean, even if 20% of brands are too candy-ass to run ads on adult sites that still leaves 80% of the advertising market. Yes, google (and the merchant associations) have allowed themselves to be ruled by "lowest common denominator" moral fundamentalists, but that seems more a business opportunity for someone else than an insurmountable obstacle.

No, AdBrite does NOT count - they can't find their ass with two hands and a proctologist to assist.

Regards,

Fausty

[RawAlex]

Fausty, normally the idea is that the companies "merge" and stock is issued to the winners. It seems this time instead that AFF was sold on notes (which appear by the report to not have been respected / late / in default). If Andrew and Lars are lucky, they didn't finance the notes themselves and rather actually got paid out. I somehow manage to doubt it, but you never know.

So what happens is that instead of the boys having a stake in a relatively debt free (but money losing) company, they hold notes payable only if a public offering for a debt laden and unprofitable company works out. It's pure hail mary, more so because little or none of the public offering money would get turned into operating capital, which means that at least in the short term, their cash position would not improve. Further, because the notes have not been paid in a timely manner, it is unlikely that any debt service has been going on, so retiring that debt (aka, paying off L&A) wouldn't do anything to fix the go forward business.

What I find most interesting is that those in the investment world that chose to comment on the potential IPO all came to the same conclusion really, really quickly. I think the online adult community is still in shock from finding out that the huge cash cow that was AFF in fact is a debt laden, money losing pig in a poke. It is also the best case anyone can every put forward for why you don't pay $100 or more for a member, or at least that you can't unless you are jamming them the deecash way.

[RawAlex]

For those who would like some light reading:

http://www.sec.gov/Archives/edgar/da...390/i10357.htm

plenty of good quality double talk in there, and interesting positioning trying to play AFF like facebook or youtube.

[Fausty]

Originally Posted by RawAlex

Fausty, normally the idea is that the companies "merge" and stock is issued to the winners. It seems this time instead that AFF was sold on notes (which appear by the report to not have been respected / late / in default). If Andrew and Lars are lucky, they didn't finance the notes themselves and rather actually got paid out. I somehow manage to doubt it, but you never know.

Technically, there's not a pre-defined "winner" in a merger and, though it's somewhat different from everyday assumptions, the distinction between a "merger" and an "acquisition" is not as bright-line as it seems. I don't know if this deal was structured as a 368(b) all-stock merger, or an asset acquisition, or what (too lazy to dig deeper, sorry) - there's as many potential deal structures as there are creative minds to design them. Still, the issuing company is almost by definition the "acquirer" and the company (shareholders, actually) receiving that payment (whether it is cash, stock, or debt) is the "acquired entity." Mergers are sort of the middle ground and can go either way - as they say.

Indeed, the "acquiring company" in technical M&A topics is primarily chosen on the basis of tax and jurisdictional variables - it is not uncommon for the "acquiring" company's shareholders to end up with a minority position in the resulting combination. Twenty years ago, there was a sense that deals like that were inherently "shady" - say "reverse merger" to an old-school finance player and the wince. However, the structure itself is now commonplace and this AFF deal is, in a sense, a form of that.

You do bring up a good point - I'd need to look closer at the EDGAR docs to see if they debt carried from the acquisition is held by the sellers or a third party. If it's the latter, then the sellers did in fact "cash out" on close (apart from any equity they may have received - either stock or warrants/options).

I pretty much agree with you that these "go public and pay off debt" deals just seem uninspiring. As you say, there's really no cash left, post-IPO, to invest in the business or help it to grow (though paying down debt can free up extra operational cashflow in the process - depending on whether the notes accrued to a balloon or required regular paydowns). Similar concerns apply to deals where most of the IPO stock is being sold by outside investors - not the company itself - so the proceeds don't end up in the corporate treasury.

Basically, if the market is hot all sort of deals like that go right through. In today's dead market, I can't imagine floating an offering like this - I was involved in a de-leveraging, post-LBO IPO in 2000 that got scuttled at the last minute when the market got jumpy. So much is at the winds of fate, in deals like this.

In any case, raising money via the debt markets to fund acquisitions isn't, ceteris paribus, improper - in fact, given the US tax treatment of corporate debt interest payments, companies "lever up" as part of sound tax management all the time. Much of the volume of the commercial paper markets in recent years has been composed of debt placements to fund purchase activity - the hedge funds placed many billions of such debt in the markets for just such deals, with nobody calling foul. Many buyout funds specialized in doing deals like that, and nothing else.

Basically, I'm trying to say that, if this deal had been done in 2006, it would have looked an awful lot like everything else - with the "adult" side the only difference. You look at some of the private equity IPOs that went out in 05/06 and it's just shocking - these deals were entirely to pour cash into the hedge fund profit column and many of the companies that did them are now defunct as a result. In the nonexistent current IPO market, ANY weakness or symptom of deal weakness is going to bring out the knives - and once that happens it is sort of a self-fulfilling failure.

Q.E.D.

Fausty (MBA, University of Chicago - minor in finance )

ps: some acquisition agreements will specify a "best efforts" requirement to float an IPO after a certain period of time - this AFF deal could, in theory, just be the company going through the motions of that so it doesn't end up in some sort of trouble under a separate agreement - just pointing out something I've seen before, where "hopeless" deals got proposed for that reason alone, and not because anyone really thought the'd price and trade.

[gonzo]

Thanks to Will76 for reminding me of the AFF / Ibill connection - again...who much does Ibill owe you?

2002: Intercept buys ibill for 120 million: " But when Atlanta-based InterCept acquired iBill for $120 million in 2002, it immediately encountered problems. New rules from Visa made it more complicated and costly to process adult website transactions, and "accounts dropped like flies," says Dugas. Meanwhile MasterCard levied $5.85 million in fines against iBill for an unusually high volume of "charge backs" -- consumer-disputed charges -- though InterCept managed to recoup most of the fine from iBill's previous owners.
Porn Billing Leak Exposes Buyers

3/24/2004 Penthouse buys Ibill from intercept for 23.5 million plus assumption of 20 million ibill is obligated to.

Artcile 3/31/2004 says " iBill has no corporate or bank debt outstanding. iBill and Penthouse International's real estate assets are unaffected by the current reorganization of General Media and subsidiaries. "
" On a pro forma basis, had iBill been consolidated with Penthouse for the full fiscal year ended December 31, 2003, Penthouse consolidated revenue would have increased by approximately 197%. "
iBill Attends First Industry Event Since Acquisition by Penthouse. | Company Activities & Management > Company Structures & Ownership from AllBusiness.com

Penthouse buys ibill which has no outstanding debt and to give Penthouse (which is losing tons of money) value.

" iBill processes online website orders. First Data is a billion dollar company that gave notice earlier last year that we would not extend iBill’s merchant agreement. It seems that iBill sought court intervention to require us to continue processing after the expiration of iBill's agreement, in lake September 2004. The court denied iBill's request for a preliminary injunction against First Data. First Data has not processed payments for iBill since that date." New York Daily Times

October 2004: " Care Concepts financed the recent acquisition of General Media by issuing new preferred stock and convertible notes in the amount of roughly $16.4 million, the release stated. " " Care Concepts’ announcement came following a stormy month for the company, which was forced to delay its acquisition of payment processor iBill and had its stock delisted from the American Stock Exchange for a variety of public-interest concerns. " " Under the new purchase agreement, PET Capital Partners Inc., the company that owned General Media’s debt, will retain voting common stock and a majority of the total common stock equity of the company. PET’s Marc H. Bell and Daniel C. Staton will assume the day-to-day operations of the magazine. "

Care Concepts Completes Penthouse Publisher Purchase - XBIZ.com


" With its acquisition of iBill, Penthouse believes that numerous economic synergies will exist between iBill and its media companies, including the ability to offer iBill clients access to the PENTHOUSE brands and, at the same time, generate new sources of recurring revenue for Penthouse."
Penthouse Acquires Internet Billing Company LLC ``iBill'' | Business Wire | Find Articles at BNET

“We are very excited to welcome Various and its employees as a part of the Penthouse family,” said Penthouse Media Group CEO Marc H. Bell. “Various is an attractive addition to our already strong print platform, and one that puts Penthouse in a very robust position in the ever-growing online social networking arena. We like where the business combination puts us and that this transaction will enhance PMGI’s current and future licensing, print and interactive ventures.”
Penthouse Media Group Purchases Adult Friend Finder for $500 Million - XBIZ.com

" Penthouse is continuing its acquisition program as it continues to consolidate the industry into one global brand."
AdultFriendFinder.com finally sold out - $500M Web 2.0 Money: The Money & Business Behind the Web 2.0 Innovations


Segway /Ibill connection. - GFY Webmaster Board (in particular post #40 and a few others) explains where a lot of ex-ibill employees ended up.

[Hell Puppy]

I like the bit about the car as an asset.

Turns out it's not Andrew or Lars company car, it's a company asset originally tagged to be given away.

That amuses me on many levels. How many big giveaways like that have ever actually ended up with the prize in the hands of an affiliate or customer?

I can only think of one, and that was Greenguy getting the CE viper back in the day.

The usual MO is make the contest a year long, quit promoting after a couple of months and let people forget about it.

[JFK]

Originally Posted by Hell Puppy

I like the bit about the car as an asset.

Turns out it's not Andrew or Lars company car, it's a company asset originally tagged to be given away.

That amuses me on many levels. How many big giveaways like that have ever actually ended up with the prize in the hands of an affiliate or customer?

I can only think of one, and that was Greenguy getting the CE viper back in the day.

The usual MO is make the contest a year long, quit promoting after a couple of months and let people forget about it.

from what I recall, at the time the winner chose the cash prize, versus the car.

[Hell Puppy]

Originally Posted by JFK

from what I recall, at the time the winner chose the cash prize, versus the car.

That sounds right, I may be wrong but I think Greenguy couldn't even drive a stick at the time or something like that.

Plus unless you've got extra garage space, a Viper is not exactly a daily driver or something you just park beside the house with a car cover. It's not a happy car in traffic. In fact, it's not a happy car til it hits at least 80 mph.

But at any rate, I know that prize was actually rewarded. I think a lot of people grumbled because Greenguy won it, and he was tight with CE at the time. But when you run a raffle type contest where every signup is a ticket, statistically you would expect huge affiliates to have the best chance at winning.

Now I seem to remember CE following that up with a million dollar give away. Hell, I probably still have a banner for that here somewhere. Dont recall that ever being awarded. And that was circa 98-99.

[Toby]

Greenie still has the Viper. I think it has less than 1000 miles on it.

[Toby]

Need a good laugh. Read this monument to double speak.

http://avn.com/internet/articles/33943.html

A dozen paragraphs that don't really say a fuckin' thing.

[JFK]

Originally Posted by Hell Puppy

That sounds right, I may be wrong but I think Greenguy couldn't even drive a stick at the time or something like that.

Plus unless you've got extra garage space, a Viper is not exactly a daily driver or something you just park beside the house with a car cover. It's not a happy car in traffic. In fact, it's not a happy car til it hits at least 80 mph.

But at any rate, I know that prize was actually rewarded. I think a lot of people grumbled because Greenguy won it, and he was tight with CE at the time. But when you run a raffle type contest where every signup is a ticket, statistically you would expect huge affiliates to have the best chance at winning.

Now I seem to remember CE following that up with a million dollar give away. Hell, I probably still have a banner for that here somewhere. Dont recall that ever being awarded. And that was circa 98-99.

sorry man, 2 different cars

[Hell Puppy]

Originally Posted by JFK

sorry man, 2 different cars

thats a decade ago now.

i do well to remember to put on pants when i leave the house now.

[JFK]

Originally Posted by Hell Puppy

thats a decade ago now.

i do well to remember to put on pants when i leave the house now.

congrats on the progress just remember, a pair of pants today, The World Tomorrow

[Toby]

and the iPorn story continues to grow...

by Gene Ross on AdultFYI
Final: Rob Rotten's Escape from Berlin; Claims Francis Koenig Bragged About AVN Purchase

The last time I had spoken to Rob Rotten, he had suffered a motorcycle crash, was air lifted to the hospital and was discovered to have had a cervical spine fracture in C2, a pelvic fracture, a torn ACL in his right knee, and a concussion. Other than that, he was okay.

I talked to Rob this week and he was vastly amused by The Grand Vizier’s recent report on Francis Koening of IPorn. www.adultfyi.com/read.php?ID=31971

Amused in the sense that Rotten had witnessed a lot of these stories first hand.

“I had a brief experience,” says Rotten. “This was right before the Venus Show.”

According to Rotten, he got a call from Jim Powers about two weeks before the show telling him to pack his bags that he was going to Germany.

“I said, yeah, right. He said, no, ‘this company IPorn wants you to come out there and do scenes.’ Like everything in porn, you believe it when the check cashes and the ticket’s in your hand. So I brushed it off. About a week later I get a call from Porno Dan saying, ‘yeah, dude, we want you to come to Germany, but this guy Francis Koenig is scared of your tattoos so he wants to give it some thought.’

“I said, yeah, let me know because I’m traveling out of the country and need a fresh test before I leave so you guys got to give me at least a couple days fair notice. We were leaving on Saturday so this was the Monday before.”

So, Rotten, who also shoots, was being asked to go to Germany strictly as talent.

“Now it’s Friday and I haven’t heard anything further,” Rotten continues.

“Then my phone rings and he says Rob, get your test we’re leaving tomorrow morning. Your ticket should be in your in-box in a few minutes. So I wait around and finally the ticket finally does show up.”

“I didn’t complain at the time and I usually travel a lot and don’t mind having a lot of stops but this is the worst fucking ticket I’ve ever seen in my life. I had six stops just in the United States and two more in Europe before I got to fucking Berlin.”

In the meantime, Rotten gets his blood drawn, packs his bags and next morning jumps on the airplane.

Even with the stops, Rotten arrived in Germany about three hours before anyone else.

“I never met Francis and he never met me. All of a sudden I see Jim Powers and Porno Dan, and there’s this douchebag who looks like a gay Ben Stiller. I’m introduced to him- it’s Francis. I go thanks for the ticket and he’s bragging that he was able to rent two Mercedes Benz vans. We’re in Germany. That’s like a Chrysler. Big fuckin’ deal. But he’s so proud of these vans.”

Rotten says he was first told that everyone would be put up in a nice hotel then would shoot in a villa in the middle of nowhere.

“But he says there’s a change of plans- we’re not getting the hotel. We’re all going to stay at this villa. We all jump in the van, and I’m in the one with these two Czech Republic girls we met at the airport, Francis and some other douchebags. Francis is running his mouth the whole time about how he has the most beautiful penis in porno.

"We’re driving through Berlin. The guy’s utterly lost, but he can’t stop talking about how beautiful his penis is, and about how he’s the best camera guy in the business.”

Rotten then volunteered a few positive comments about Jim Powers’ efficiency with the camera. To which Koenig allegedly said, “Jim could learn a few things from me. I’ve really got this business down. I’m unstoppable.”

During the course of the ride, Koening then passed an Exotic Museum and made a point to slam on the brakes, according to Rotten.

“He [Koenig] made everyone look at this place then said, 'me and my penis will be in there soon.' He wants everyone to know that a mold of his penis will be in there that’s how beautiful it is.”

Rotten says the drive is continuing close to four hours by now when he looks out the window to see that they’re driving through East Germany.

“It’s straight out of that movie The Lives of Others,” Rotten observes.

“There’s these blown out concrete buildings and graffiti and couches on fire on the side of the road. We were in the Communist bloc of Germany. It was really weird to see. Then there’s this sign that says 6km to Poland. We’re in fuckin’ Poland!”

Arrangements were made for 25 people to stay at the villa, says Rotten.

“There’s no towels, there’s no blankets. There’s no water. Worst of all there’s no beer. There’s nothing. Everyone’s pissed at this point. And I’m saying to myself it is what it is. Me and Jim are laughing a lot about the situation.

"It’s like ten o’clock at night, and Francis is saying we have to shoot and stay on schedule. They get a couple of girls into makeup. First up is going to be Johnny Thrust. So Francis pulls this one girl out of makeup. Jim’s like where’s the girl? Francis took the girls while they were in makeup, brought them up to his room and began cream pie’ing them.”

“Meanwhile he’s screaming why aren’t the girls ready when he keeps taking them away. And you should have seen his face. He looked like a fucking turnip. I’ve never seen Viagra face that bad. He was like a tomato, a turnip. If he had cried, it would have been blood. That’s how red he was.

"He looked like some weird mutant. We were teasing him about it, and he denied that he took any Viagra. But he said, oh, I take Cialis. When he told us how much, I thought he was lucky his heart didn’t explode.”

Rotten said his test results were not yet in and no way he could check because they were without Internet connections.

“I couldn’t do a scene and Francis was all bent out of shape about that,” laughs Rotten.

“Meanwhile he’s still fucking all the girls and nothing gets done. We ended up saying fuck it and we crashed out. There was this side house where Jim and I slept on couches. Johnny sleeps in a bed because no one wants to sleep with him, and Porno Dan got his own little lair upstairs.

"Next morning we have to pick up Otto Bauer and I go, my God, this is my escape. Fuck this. This Francis guy- I’m going to kill him. There’s no way I can last two weeks with this guy. I will seriously kill him.”

Rotten says the drive back to the airport to get Otto was just as weird.

“The whole time Francis is talking about how he’s buying AVN and has all these investors lined up and how he’s buying it pennies on the dollar and how AVN is failing and how he’ll pick it up and make T-shirts, make billions of dollars and make it a public company,” says Rotten.

“He’s on and off the phone with investors while he’s driving. And he’s also bragging to us about how the deal’s going down.”

Once they got to the airport, Rotten said he tried to convince Bauer to jump ship [Otto didn’t], then Rotten booted with his backpack and got on a train to downtown Berlin.

“I stayed at a few hostels then went off to Amsterdam doing tons of drugs and mushrooms and did a whole European trip! Thank God I did because I heard things got a lot worse as the days progressed.”

I ask Rotten if his absence may have been noticed any time during those two weeks.

“I don’t think so,” he laughs. “Obviously Francis was pissed, but I’m sure as soon as he popped a few more Cialis, it went out of his mind. I successfully escaped and felt bad for the rest who weren’t able to.”

Rotten said his concern was that Koenig would cancel the airline ticket once he bailed. But that didn’t happen.

“When I got back, I took the liberty of calling Paul at AVN saying, dude, whatever you do, don’t sell to that douchebag.”