Rabbit Redux : Playboy Enterprises Sees New Success in Media Ventures

The Rabbit had landed. And in a prime spot too.

Last year, Playboy Entertainment Group opened a film and TV production site in Playa del Rey, not far from where DreamWorks SKG later announced it would build a studio.

“When I first went down there to look at the facility, Oliver Stone was shooting some ‘Nixon’ stuff in the warehouse next to us,” said Anthony J. Lynn, president of the Beverly Hills-based subsidiary of Playboy Enterprises, whose bunny logo has become one of the world’s most recognizable corporate icons. “Universal was shooting some last-minute changes to ‘Waterworld’ in the warehouse behind us.”

That Playboy’s new “ministudio,” which produces low-budget erotic thrillers and other peekaboo fare, had sprouted next door to Hollywood heavyweights carried symbolic freight. After years of stagnation and disastrous decisions, the concern that publishes Playboy magazine is turning itself into a credible provider of entertainment for the global market.

Videos scrutinizing the semiprivate parts of “Baywatch” star Pamela Lee (nee Anderson) and others are frequent Billboard top sellers. Pay-per-view romps with nude Playmates are available to more than 10 million U.S. homes. The company shells out about $25 million a year for new programs such as “Night Calls,” a sexy talk show.

And, in a controversial alliance with Rupert Murdoch’s British Sky Broadcasting and another firm, Playboy launched a cable TV channel last year in Britain; a similar venture started around the same time in Japan.

“Playboy is a brand that lends itself to a global network concept,” said Lynn, whose career includes stints as an executive at HBO and MGM before landing at Playboy in 1992. “MTV has become a global brand; CNN is certainly a global brand,” he said. The idea “is to transform the company into something that is more an electronic and new-media company.”

This shift from publishing to entertainment comes just in time for Chicago-based Playboy Enterprises, headed by Chairman and Chief Executive Christie Hefner. The parent company has had past forays into resorts, nightclubs and casinos flop. And its 42-year-old flagship magazine--a glossy, if somewhat stodgy, swirl of fashion, gadgets and sex--has slumped through years of conservative attacks, competition from other magazines and recent rises in postage and paper costs.

Wall Street, as a result, has seldom regarded Playboy as a sexy stock. Prices have lately been parked around $9 a share; Playboy A shares closed Friday at $9.25, up 12.5 cents, on the NYSE.

The financials show why the stock has been a laggard. Because of restructuring and high entertainment expenses, the company lost more than $14 million on total revenue of $218 million for fiscal 1994; the following year saw a mousy profit of just $3 million on revenue of $247 million.

But those bunny ears are perking up. Earnings from the fiscal 1996 second quarter rose 14%, partly on improved pay-per-view revenue.

Steadily increasing sales and brighter cable and video prospects are leading several analysts to warm up to the stock, albeit cautiously.

“People are asking, ‘What’s wrong with this stock?’ ” said Rita L. Zanella, a media analyst at Gruntal Investment Research in New York. “From a fundamental point of view, this company is worth a lot more than $8 a share.”

“Given the opportunities the company possesses, it should not take an awful lot of things going right for [it] to put some good numbers up on the board,” said David Leibowitz, managing director of Burnham Securities in New York.

Entertainment is leading the way. The division currently accounts for about 21% of Playboy’s annual revenue, but is expected to increase that share to 29% by the end of the decade, Playboy says. Publishing’s slice, by comparison, will probably dip to 43% from 51%.

Christie Hefner, the daughter of magazine founder Hugh Hefner, is said to be the primary architect of this strategy. But Lynn has played a key role in pushing Playboy’s entertainment-industry growth, especially overseas.

Lynn, a graduate of Duke University and the S.I. Newhouse School of Communications at Syracuse University, joined the cable industry during its infancy in the mid-1970s. He worked as a film buyer at HBO, putting the contacts he made there to use in later foreign distribution jobs with Columbia Pictures and MGM. Hefner lured Lynn to Playboy four years ago to beef up entertainment programming and distribution, both in the United States and abroad.

Entertainment companies aggressively pursue foreign distribution because it provides many more markets in which to sell products yet with more or less fixed costs.

But the product in this case needed immediate improvement. Playboy Channel, the cable service launched in 1982, was being criticized for running the same Playmate videos ad infinitum, losing two-thirds of its peak 1.5 million subscribers in the process. Executives finally turned the network into a pay-per-view outlet in 1989.

To help defray production costs, Lynn has negotiated agreements with well-heeled partners such as Motion Picture Corp. of America. The companies will split expenses on TV shows and features.

Playboy has also flirted more aggressively with its core audience of upscale young men. Last month, Playboy TV offered its own cheeky Super Bowl pregame show, pitting bikini-clad Playmates against cheerleaders and models. The company now controls an 800-hour library of original programming. (The publishing division manages the magazine’s popular Internet Web site.) Last July, the company launched AdulTVision, a soft-core movie service.

A new Japanese network, partnered with film distributor Tohokushinsha, made its debut last fall, and Playboy is also beaming new programming to Europe, Latin America and elsewhere.

“When I got here, our programming was seen in five or six countries,” Lynn said. “The number is now around 130 countries.”

However, back home many investors have remained skittish about the company’s past under Hugh Hefner, whose string of money-losing resorts, clubs and casinos nearly crippled the company in the early 1980s.

(Hugh Hefner, now 69, controls a majority of the stock and is said to keep up with the magazine, though he evidently has little contact with other operations.)

And the TV and video content, although tame by some standards, can still offend. The Methodist Church of London denounced Playboy’s new British network, dumping roughly $1.2 million worth of British Sky Broadcasting stock in protest.

But if Playboy has learned anything in four decades, it’s that sex is universal--and, boy, does it sell.

Several years ago the company began producing an edited version of “Eden,” a steamy soap opera, for USA network. The program “is now airing on a Middle Eastern satellite network that covers the Islamic countries,” Lynn said with a smile, and is “very popular.”

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Bunny Money

Playboy Enterprises is shifting its business publishing to entertainment. Some analysts regard this is a smart move because the flagship magazine has slumped and other business forays have been unsuccessful.

Top 5 Men’s Magazines

Name / 1994 revenue in millions:

1. Sports Illustrated (Time Warner): $654 million

2. Playboy (Playboy Enterprises): $170 million

3. Rolling Stone (Wenner Media): $125 million

4. Penthouse (General Media): $98 million

5. GQ (Advance Publications): $67 million

Revenue Sources

Playboy Enterprises Revenue Breakdown for 1995:

Publishing: 51%

Catalogs: 25%

Entertainment: 21%

Product marketing: 3%

Key Dates

1953: First issue of Playboy hits stands, selling 50,000 copies.

1959: Syndicated TV show, “Playboy Penthouse,” premieres.

1960: First Playboy Club opens in Chicago.

1971: Parent company begins trading shares to the public.

1982: Christie Hefner is named president.

1986: Last Playboy Club closes.

1994: Magazine creates home page on the Internet.

Sources: Gruntal Investment Research, Playboy company reports.