New Frontier To Buy Adult E-Commerce Company In $27 Million Deal

One of the most popular, and evidently profitable, aspects of e-commerce is subscription-based adult content — a far cry from the well-publicized business of mainstream online stores like Amazon.com and Dell, but nonetheless a growing segment of the online shopping market. These days, the shadowy adult content industry is emerging into the spotlight, boosted by reports of exploding revenues derived from Internet consumers.

This week, New Frontier Media, Inc. (Nasdaq: NOOF), the parent company of TeN, an adult entertainment pay-per-view and subscription cable/satellite service, announced that it has signed a letter of intent to acquire Interactive Gallery, Inc. (IGI), an e-commerce and technology company that is one of the largest distributors of adult Internet content. IGI revenues are projected to exceed $21 million (US$) for the 12 months ending March 31, 1999.

Privately held IGI sells memberships to consumers who access content from IGI’s numerous adult Web sites, and also reportedly sells and distributes content to thousands of adult Web sites.

According to the company, this acquisition signifies New Frontier Media, Inc.’s commitment to developing and marketing broadband Internet content. The closing of the transaction is subject to, among other things, the approval of New Frontier Media’s board of directors and shareholders, and the receipt of all requisite regulatory approvals.

The Deal

The terms of the acquisition call for the issuance of six million shares of NOOF common stock, of which one million shares are to be held in escrow, subject to IGI earning $6 million before income tax and depreciation expenses, for the 12 months ending December 31, 1999. Based on NOOF’s March 23, 1999 closing price, the acquisition is valued at approximately $27 million.

“This acquisition marks the beginning of our aggressive campaign to consolidate the estimated $1 billion adult Internet industry,” said Mark H. Kreloff, New Frontier Media’s chairman and CEO. “Many of IGI’s affiliated web sites are interested in both our consolidation strategy, and in owning equity in one dominant player’s stock.”

Scott Schalin, chief operating officer, considers the two companies’ synergy ideal. “New Frontier Media’s strengths in adult content distribution to cable and satellite companies, as well as its significant content library, is consistent with our desire to move from being a dominant dial-up Internet content player to being the dominant broadband Internet content player.”

Gregory Dumas, president of IGI, added that, “Broadband Internet service providers have likely recognized the upside potential of the adult content category since it represents approximately one-third of all Internet search destinations. Revenue sharing partnerships with IGI will allow these service providers to capture some of the wealth by delivering proprietary, high-quality editorial, live, and recorded content to their adult content subscribers.”

The Players

Based in Los Angeles, California, IGI is a privately held e-commerce, technology and content distribution company. Among their many innovations, IGI pioneered live, in-browser video-conferencing. The company reports that its marketing and traffic generation programs drive more than 15 million unique visitors each month to its in-house Web sites alone. The company also reports that IGI’s sites consistently achieve high conversion and member retention rates, due in part to their low fraud transaction processing.

Boulder, Colorado-based New Frontier Media, Inc. is a diversified entertainment company primarily engaged in the electronic distribution of adult entertainment via subscription and Pay-Per-View cable/satellite television, and the Internet.

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