Case Analysis on Playboy Enterprises
Playboy Enterprises was founded in 1953 by Hugh Hefner to manage the publication and distribution of the Playboy magazine. The company has experienced tremendous growth since its inception and currently boasts of three segments:
1). Publishing-which is in charge of the business aspect of the Playboy magazine,
2). Entertainment- which manages the electronic assets of Playboy Enterprises. This includes the open source software, the Spice Network, the playboy website and the production of the adult videos.
3). Licensing- this oversees the licensing of the Playboy name and its logo to third parties.
Playboy Enterprises is one of the major players in the adult entertainment industry and has had good financial performance as compared to the industry average. This trend has however reversed in recent years with the company reporting losses which have led to speculation on its going concern status particularly due to the fact that it is a public listed company. In the 2008 fiscal year, the company reported a net loss of $156.1 million which was a significant drop in profitability as compared to the $4.9 million profit realized in the 2007 financial year (Reuters UK, 2009). As shown in the table below.
Table 1: Hoovers (2009) Playboy Financial Results
Playboy Enterprises Annual Income Statements (2006-2008)
(All amounts are in millions of US Dollars) Financial Year | Revenue | Gross Profit | Operating Income | Total Net Income | Diluted Earnings Per Share – EPS | 2008 | 292.1 | 55.8 | (157.7) | (156.1) | (4.69) | 2007 | 339.8 | 76.0 | 10.0 | 4.9 | 0.15 | 2006 | 331.1 | 68.9 | 9.1 | 2.3 | 0.0 | The current financial performance of Playboy can be evaluated by looking at the internal as well as the external factors. This involves looking at its internal capabilities including its strength and weaknesses and the environmental factors which are the opportunities and threats that the company is exposed to.
Strengths
The Playboy Enterprises draws its greatest strength from its brand name and bunny logo which have made it one of the premier consumer brands in the world. The brand has over the years become synonymous with the adult entertainment industry thus attracting a fanatical following and becoming part of the zeitgeist of the latter part of the twentieth century. Playboy boasts of being one of the few magazines to become a major international consumer brand. The larger than life personality of Hugh Hefner, who represents hedonistic yet luxurious version of the American dream, has also played a huge role in enhancing the image of Playboy Enterprises (James, 2006). Through his Playboy Mansion and the celebrity filled parties he hosts every so often, he has managed to keep himself as well as his company in the limelight.
The company has exploited the influence of its brand to further advance its commercial interests. It has been able to acquire other players in the industry as seen in the acquisition of ClubJenna in 2006. In the same year, the company also entered into a joint venture with Palms Casino Resort leading to the establishment of the Playboy Club casino, Playboy nightclub and a Playboy store. Through its Licensing division, the company has also established the Playboy branded line of licensed fashion and consumer products. These include both men and women fashion clothing and accessories, home furniture and fittings as well as entertainment products. This business segment generates an estimated annual turnover of $1 billion from global retail sales through its international network of retailers.
The diversification of its scale of operations has increased the revenue streams of the company thus providing more working capital to support existing operations and projected expansion initiatives. The company has also developed a new market niche which has increased its customer base. This gives it an upper hand over its competitors who are yet to penetrate such markets.
Playboy has been able to successfully integrate e-business into its operations. This has proved to be successful and now accounts for nearly two thirds of the company’s revenues exceeding the traditional Playboy magazine. Through electronic medium such as the television, internet and DVDs, Playboy has modernized its operations and can now reach a wider audience is an efficient and relatively cheaper way (Carpenter, 2000). This has enabled it to maintain its market share over time and which is increasing coming under the threat of new entrants into the adult entertainment industry.
Weaknesses
Playboy Enterprises just like any other business is exposed to risk in the form of operational, financial and general business risk. These inhibit the ability to maximize on the internal capabilities mentioned above and are thus regarded as weaknesses. In spite of being a pioneer and a power house in the adult entertainment industry, Playboy Enterprises has in recent years recorded a decline in its profitability and revenue. For a company with such a distinguished brand name, the poor performance demands an explanation. While this may be occasioned in part by the declining global economy, internal factors have to be addressed so as to mitigate future revenue losses. The major issues which have been identified are but not limited to: cost minimization, risk management
To begin with, the poor financial performance reported in the last financial year has made it necessary for the management to address the issues regarding the company’s expenditure management considering the declining global economy. While Playboy has been quite liberal in spending the vast resources at its disposal it cannot afford to do so in the current economic environment. This is a culture which has been cultivated over the years by Hefner in a bid to boost the image of the company considering that its core business is entertainment. This has worked in the past where it was the dominant player in the industry. However, the declining market share as a result of increased competition calls for prudence in the management of the company’s revenues. These sentiments are supported by the current C.E.O Jerome Kern who has stated that the main objective of his team is to make the company’s cost structure commensurate with the realities of the existing market (Reuters UK, 2009). This will be the only way to guarantee the prevailing going concern status of the company which is currently threatened by the declining performance.
Part of Playboy’s internal weaknesses is attributed to the nature of its business which can also be termed as operational risk. Playboy, as a distributor of media content is exposed to legal suits on the grounds of defamation, copyright or trademark infringement and invasion of privacy (Carpenter, 2000). This is primarily based on the nature and content of the material distributed. However the company’s use of open source software which permits third party developers to access the company’s IT resources is a major factor when looking at this issue. Although, these developers are usually vetted before being granted access to the company’s software, there is the probability of one or two malicious individuals misusing this privilege. They may upload unauthorized content which may lead to disputes as a result of any or a combination of the issues mentioned above.
Despite the current highly unpredictable environment, there exists opportunities which can still be exploited by players in the industry. This is especially in terms of opportunities resulting from the innovations in information technology. The company can employ these new technologies to increase the accessibility of their products by the consumers. This will additionally lead to the reduction in their overall operating costs. The use of modern concepts such as digitization whereby printed material is converted into electronic form such as web pages can be applied to Playboy publications. This will increase the accessibility of the magazines and act as a tool for management information by analyzing the data collected from the use of the website.
The company can also collaborate with software developers to increase the accessibility of their products through other mediums such as mobile phones. This will enable the customers to view and upload adult videos using their mobile phones. Mobile phones are increasingly becoming the new computers as a result of the enhanced features developed by manufacturers. The company can enter into an agreement with such companies to collaborate in the development of software that will allow easy distribution of media content using mobile phones. Playboy can earn additional revenue by patenting this software such that other players in the industry have to pay for using it. The company is already engaged in talks with companies like YouTube in bid to market and distribute some of their products through their network (Weprin, 2008).
Over the years, new players have entered the adult entertainment market leading to increased competition which is attributed to the decline in Playboy’s market share. This also has affected the company’s advertising revenues as they compete for endorsements and advertising space from big companies. This has proven to be an uphill task considering that the advertising market is diminishing due to the government regulation on advertisements by tobacco and alcohol companies which account for a significant proportion of the advertising revenues for the players in the adult entertainment industry.
Playboy’s main competitors include: Alpha Media Group, Vivid Entertainment Group and FriendFinder Networks Inc. Alpha Media group publishes the Maxim magazine which is focused on men’s lifestyle which puts it in direct competition with Playboy magazine. The Maxim magazine is also available on line through the Maxim website. The company’s main aim is to become the leader in the men’s magazine niche and thus Playboy should brace itself for a major fight. However, with proper planning and research, Playboy can counter such competition.
Vivid Entertainment Group is another major competitor of Playboy Enterprises. It is a leading producer of adult films globally and distributes its products through the retail and rental markets in addition to its online mail-order site. Just as in the case of Playboy, Vivid Entertainment is also available on cable and satellite channels based on member subscription. The company also offers pay-per view access for its internet subscribers.
The FriendFinder Network was formed as after the restructuring of the Penthouse Media Group. The company hosts several networking websites which are offered in 12 languages in 170 countries as compared to Playboy’s 150 countries. The internet therefore forms the core of its operations. It also publishes the adult magazine Penthouse which is a major competitor of Playboy magazine (Hoovers, 2009).
With the threat of heightened competition and a declining global economy, Playboy is compelled to transform its operations in order to survive in the market. This is quite a challenge considering its poor performance in recent years. Like in other related cases and as mentioned earlier, the first step must involve cost cutting. This will include measures like: downsizing on the scale of its operations by reducing the size its work force, cutting down on its advertising and marketing costs and any other expenditure that can be avoided. The company might also be forced to hold back any capital intensive projects that have been planned for in the near future and withdraw from any ventures which are yet to become profitable. Such measures will reduce its operating costs and thus facilitate the reorganization of its operations in the long term. This has already begun with the shutting down of its DVD division and the laying off of part of its workforce.
Even as it embarks on reorganization, the company must allocate more funds to the key areas of its operations. These constitute those business segments which have continued to operate profitably even in the current environment such as the Licensing division. However increased spending in such segments should be based on their viability in the future. This means that more money has to be allocated towards research and development for better and innovative products which are designed based on the consumer needs. This will play a big role in the company’s return to profitability.