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Is the Porn Industry Imperiled?
CNBC.com | January 18, 2012 | 05:09 PM EST

The porn industry stands at a precipice as it heads into 2012.

Online piracy continues to nip at the earnings of studios, and new legislation could dramatically impact how companies do business. So it makes sense, in a way, that the industry's annual convention is facing big changes as well.

The Adult Entertainment Expo sets the course of the next year for porn companies. Fans are welcome, but this is where deals get done, major releases are announced and major products \(and talent signings\) are announced. Industry insiders expect at least one major merger to be announced this year.

New Date, Familiar Faces

This year, though, for the first time, the show does not coincide with the Consumer Electronics Show . The new date is a gamble — and one that show organizers are a little nervous about.

Foot traffic from CES has always been substantial at the AEE. Last year, 23,000 people attended the porn show, with a six percent increase in fan attendance and a two percent increase in overall attendance over 2010, according to Adult Video News. Over three-quarters of the visitors were male, which isn't surprising, but 25 percent of the fan attendees were 46 or older.

The number of fans attending this year is expected to shrink, due to the date switch, but over 150 companies are slated to attend, including the biggest companies in porn, such as Vivid Entertainment, Digital Playground and Manwin (owner of the biggest online porn sites). Almost a quarter of the attending companies have gross annual sales of over $1 million.

The porn industry, as a whole, is thought to generate roughly $14 billion in revenue per year, but revenue from films has been shrinking, due to piracy and an abundance of free content on the Internet.

"The nature of the industry is we don’t make nearly as many products as we did once," says Scott Taylor, president and founder of New Sensations.

Sex toy sales, though, remain strong, particularly high-end adult novelties. Designed with medical grade silicon and often looking like something that sprung from the labs of Apple, these products are now offered by mainstream retailers such as Brookstone and featured in publications such as "Women's Health" and "Glamour."

For the second year in a row, AEE will coincide with the AVN Novelty Expo , to present a more complete picture of the industry.

Battles Ahead

While the show will once again be a celebration of porn with plenty of backroom dealing, there are ominous clouds over the industry these days.

On Tuesday, the Los Angeles City Council gave final approval to an ordinance that will require porn actors to wear condoms during film shoots . Companies that do not comply will not be issued the required film permits. (The city's mayor still has to sign the bill and police officials, the city attorney, and others plan to meet to determine how to enforce the rule.)

Studios say the industry's existing policies regarding HIV and other sexually transmitted diseases have been effective, and political grandstanding motivated the legislation. (Performers are regularly tested for HIV and condoms are available on all shoots. It’s generally up to the actors/actresses whether they are used.)

"I think we police ourselves very well," says Taylor. "I don't know that the guy next door has tests every 30 days, but for some reason, we're held to a different standard."

Studios are also concerned about the economic impact that the law could have. Porn, since it's wish fulfillment, sells better when condoms aren't used. And some studios have threatened to move out of California if this legislation begins to affect their bottom line.

Meanwhile, another fight is looming over .xxx Internet domains . Manwin Licensing, owner of the largest online porn sites, and adult filmmaker Digital Playground, are in the process of suing Icann, which oversees Internet addresses, over the introduction of the .xxx suffix.

The companies maintain the decision to create the domains was flawed and could be detrimental to the industry as a whole , should Internet service providers decide to block all domains with that extension. The suffix is expected to go into effect this year.

Of course, the discussion about these issues won't take place on the show floor within earshot of fans. Instead, the stars will sign autographs and pose for pictures, while company executives strike deals to carry them forward into 2012.

AEE, after all, is as much a circus as it is a business event.

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