From: myfirstmillionpod
The adult entertainment industry has undergone significant transformations due to the evolution of technology and internet culture, particularly with the rise of video-sharing platforms and digital distribution. This shift moved the industry from paid content models to predominantly free, ad-supported models, leading to dramatic changes in business strategies, content creation, and ownership.
Early Internet Era: Directories and Photos
Before 2005, internet porn sites primarily functioned as directories, similar to Yahoo, offering links to other websites, mostly featuring photos rather than videos [02:32:16]. Users would visit sites like “Juggworld.com” which displayed a hundred links to external content [02:39:27].
The YouTube Revolution and its Adult Counterparts
A major milestone occurred in 2005 with the launch of YouTube, which simplified online video hosting by allowing users to upload and share videos easily without needing their own servers [02:57:00]. This innovation, which seemed non-obvious at the time, was detailed in Sequoia Capital’s investment memo for YouTube [03:19:00].
Following YouTube’s success, numerous copycat adult video platforms emerged, such as RedTube and YouPorn [03:36:00]. These sites were often flooded with pirated content, offering free access to material that traditionally required payment [03:44:00].
Advantages of New Digital Platforms
Despite being “sketchy websites,” these new platforms offered significant advantages over traditional models [03:59:00]:
- Privacy: Content could be accessed in private settings [04:04:00].
- Instantaneity: Fulfillment of craving was “one click away” [04:08:00].
- Infinite Variety: Users could continuously search for desired content, leading to the discovery of “infinite niches” and exposing a wide range of preferences [04:12:00].
- Free Content: Most content was free, unlike the prevalent paid models at the time [04:23:00].
Decline of Traditional Studios
The rise of free video platforms severely disrupted traditional adult entertainment studios like Vivid Entertainment, which operated similarly to Hollywood studios, producing content and selling DVDs [04:34:00]. Vivid, once considered the “King of Porn,” saw its revenue plummet by 50% and then 80% with the advent of these disruptive websites [05:02:00].
Similar to how Viacom sued YouTube over pirated content, Vivid Entertainment also began suing the new free platforms [05:20:00].
The Rise of Pornhub
Pornhub emerged from three Canadian college students who met at a competitive foosball tournament around 2005 [06:01:00]. The “Chief Nerd” and best programmer among them, Matthew Kezar, initially built a live-streaming video website for their foosball competitions [06:14:00]. He then realized the same video technology could be applied to adult content [06:31:00].
Initially, these founders created about a hundred directory sites, similar to Juggworld [06:46:00]. Observing YouTube’s model and Vivid’s decline, they decided to create their own video-hosting platform, Pornhub, to retain traffic [07:05:00]. In a controversial move, they also created their own content production company, Brazzers, operating both the platform and the studio from the same office [07:23:00]. This connection was kept secret, with Brazzers publicly denouncing platforms that distributed free content, while secretly owning one of the biggest [07:43:00].
Pornhub experienced explosive growth from 2007-2008, expanding from three friends to 250 employees, all bootstrapped [10:31:00]. They even bought houses next to each other to create a working neighborhood [10:42:00]. Key to their success was Kezar’s expertise in SEO, making Pornhub the number one ranked site for “porn” and “sex” on Google [11:00:00]. Owning Brazzers content also provided them with material that couldn’t be easily taken down due to copyright issues [11:15:00]. They further consolidated power by acquiring other smaller sites, including “Homegrown,” which started as a VHS tape exchange for swingers and was later acquired by a Stanford MBA student [11:24:00].
Challenges and Shifting Ownership
By 2009, making millions and employing 250 people, the founders grew paranoid due to the risks associated with such a high-profile, sensitive business [12:20:00]. The U.S. government seized $9 million from one of their bank accounts [12:34:00], and Matthew Kezar, the SEO savant, quit due to stress [12:47:00].
Fabian Thylmann’s Era
The original founders sold Pornhub for $140 million [13:13:00]. The buyer was Fabian Thylmann, a German programming genius who at 17 created a website tracking internet traffic statistics [13:24:00]. Recognizing the dominance of porn sites in traffic, he developed an affiliate tracking tool for them, which became the most used affiliate code on the internet [13:50:00]. He sold this previous company for hundreds of millions of dollars before acquiring Pornhub [14:18:00].
Thylmann proved to be a skilled operator, doubling profits in three to six months [14:32:00]. He invested $1 million in content licensing rights to mitigate lawsuits [14:44:00], launched PR campaigns around safe sex, and engaged with politicians to legitimize the business [14:50:00]. He also attempted to build a larger media empire by acquiring Celebs.com and trying to create a TMZ-like platform, but nothing matched Pornhub’s growth [14:59:00]. By age 32, with 500 employees, he became the “biggest porn Tycoon on the planet” [15:07:00].
Pornhub’s monetization strategy involved data scientists who identified optimal paywall timing: a video length of 2 minutes and 59 seconds was found to be the most effective point for a free user to impulsively pay for content [16:04:00].
To fund growth, Thylmann secured a 60-100 million [17:26:00].
Bill Ackman’s Crusade and Payment Processor Shutdown
The high-stakes nature of the business continued to manifest. The CEO’s $16 million house was burned down by arsonists [17:46:00]. Furthermore, activist investor Bill Ackman launched a crusade against Pornhub [17:51:00]. Reportedly, he was motivated by a New York Times article about a teenage girl whose nude photos were leaked onto one of these websites and couldn’t be removed [18:00:00].
Unable to directly pressure an offshore, privately owned company, Ackman targeted Pornhub’s financial lifelines [18:37:00]. He contacted the CEO of Visa, accusing the company of enabling such activities [18:56:00]. Within a day, Visa, followed by Mastercard, cut off Pornhub’s payment processing capabilities [19:19:00]. This forced Pornhub to implement stricter policies, including license verification for content creators [19:30:00]. Ackman publicly encouraged victims of Pornhub to pursue compensation [19:35:00].
Further Ownership Changes and Valuations
Due to tax issues and evasion, Fabian Thylmann was forced to sell MindGeek (Pornhub’s parent company) in a fire sale for $77 million [20:21:00]. This surprisingly low price for the sixth most trafficked website in the United States (with two billion monthly visits, an average visit duration of 10 minutes, and 10 pages per visit) was partly attributed to its reported low profitability [20:49:00].
The initial public narrative was that two executives bought the company, but the real financial backing came from a shadowy Austrian businessman named Bernhard Bergmann [25:49:00]. Bergmann, a former Goldman Sachs finance professional, had previously bought RedTube in 2013 and sold it to MindGeek, only to buy the whole company back later [26:14:00]. He structured the company’s financials to obscure true profits, reportedly lending money to the company and taking out $2 million per month in debt payments himself [26:42:00]. Even Bergmann faced personal challenges, with his wife seeking a divorce and wanting him to cut ties with the company [27:00:00].
Most recently, a private equity group named Ethical Capital Partners acquired Pornhub, forming the company solely for this acquisition [27:09:00].
Fate of the Original Founders
The original founders, Stefan Manos, Usam Yousef, and Matthew Kezar, have no mention of Pornhub on their LinkedIn profiles [21:29:00]. Yousef, seeking a reset from the stress of the adult industry, dedicated a year to reading 150 books on investing and became a Warren Buffett disciple [22:02:00].
He co-founded Valsoft, a “Berkshire Hathaway for internet companies,” with Manos [22:15:00]. Valsoft acquires profitable, cash-flowing internet companies, inspired by Constellation Software [22:24:00]. Starting in 2016, they bought a company selling software to small hotels, then three the next year, then eight, and now acquire 20-25 companies annually [24:05:00]. They focus on small businesses, typically 100 million in EBITDA annually and plans to go public [23:33:00]. Yousef believes the private software market is opaque and inefficient, allowing for a high rate of capital deployment similar to historical moguls like Rupert Murdoch [23:25:00].
Broader Implications on Technology and Society
The adult entertainment industry’s journey highlights broader trends in technology and society, such as the normalization and abstraction of work in digital industries. Professionals in tech companies, even those dealing with seemingly trivial or controversial products, can become intensely focused on optimizing metrics like user engagement, virality, and monetization, losing sight of the underlying product’s true nature [30:08:00]. Max Levchin, a co-founder of PayPal, famously stated that “anything can be optimized to infinity,” implying a cautionary note about the projects chosen for such intense optimization [36:02:00]. This can lead to an “existential crisis” for individuals dedicating their creative energy to seemingly inconsequential endeavors [37:08:00].
However, it’s also argued that not every product needs to “change the world.” The “product” of a CEO or owner can be to create jobs, provide a great workplace, or secure a future for their family [37:18:00]. Entertainment, whether a Super Bowl or a silly Vine skit, holds value in itself [37:34:00].
The story also touches upon the curious case of DuckDuckGo, a privacy-focused search engine that has surprisingly become the seventh most visited website in the US, more popular than Yahoo, Wikipedia, and Twitter [39:16:00]. Launched in 2008 by Gabe Weinberg, it offers a less targeted ad experience, appealing to users concerned about online tracking [39:27:00]. Despite being a “significantly less good Google” in terms of search quality, its traffic has grown immensely, and it’s reportedly very profitable, having raised over $100 million in funding that primarily went to early employees selling their stake, indicating no need for company cash [40:39:00].