Interview Date: October 2002
Interviewer: Steve Nelson
Collection: Hauser Collection
NELSON: Let's get started by talking a little bit about when you were younger what was it that made you interested in going into business?
HEFNER: Well, actually when I was younger I wasn't interested in going into business. I was interested in journalism and law and that was true all through college. When I graduated Brandeis I worked as a journalist, mostly because, I think, I didn't want to go right on to law school, which is what I would have done to pursue a legal career at that point. I really never thought about business until my father first brought it up with me after I'd been out working as a journalist.
NELSON: And where were you a journalist?
HEFNER: In Boston. I worked for the Boston Phoenix and I freelanced. In fact, Janet Maslin was my film editor there and she went on to become the very distinguished film critic for the New York Times and we've remained friends.
NELSON: But you grew up in a household where, I have to say, your father will probably be ranked as one of the outstanding entrepreneurs of the 20th century and still going, but somehow that was not your direction.
HEFNER: Well, my parents divorced when I was very young, so I actually didn't grow up with my father, and my stepfather, who I did grow up with, was an attorney. So I didn't talk about business at night over the dinner table; we actually talked more about politics over the dinner table. My mother was a poll watcher and campaigned avidly for different candidates. I remember campaigning for candidates before I was old enough to vote, going door-to-door. My stepfather ran for some local offices. Plus I went to college in the early '70s at a liberal, liberal arts university, and frankly it was much more of a time when young people were focused on the professions and not business. Business was, in the late '60s/early '70s kind of the establishment, in other words suspect. So during those times, I really hadn't focused at all on business.
HEFNER: Yes, I'd worked for awhile as a journalist, and I thought that I probably would go to law school because I wanted the intellectual discipline that I envisioned the law would offer as well as being interested in a legal career – that could lead me into politics or take me into the judiciary – as a way to make a difference, which was always something that attracted me. At that point, I was out visiting my dad in LA because he had just recently bought the mansion there and I told him that I thought I was going to leave journalism and go to law school, and he surprised me by suggesting that maybe I would find it interesting, to move back to Chicago and come to work for Playboy. I thought he meant for the magazine, so I said that I didn't think I wanted to stay in journalism and he said, "No, no, I mean for the business. Don't you think it would be interesting to learn more about the company?" I said, "Well, I hadn't really thought about it," and he said, "I think you could be helpful to me." He had moved recently to LA from Chicago and I think he felt having me there as kind of a liaison would be of benefit to him. So I moved back from Boston to Chicago really with the thought that I would stay for a couple of years and take advantage of the opportunity to learn and then move on.
NELSON: In what kind of capacity did you enter? I assume you weren't working in the mailroom.
HEFNER: Well, actually, initially I had no job per se. My title was Special Assistant to the President and that allowed me to do project work. I remember my father early on asked me to look into whether or not the company should stay in the movie theater business, so I went around talking to people in the business. I went outside the company talking to people in the business, and I ultimately recommended that we not stay in the business, that it was very hard for an independent company with just a couple theaters to be successful. Meanwhile, I was learning about the company and management by walking around, learning everything from the subscription fulfillment business to finance. I also attended several graduate school seminars in different disciplines of business. Then the company got interested in the idea of opening a retail venture. A couple of distinguished retail execs had come to Playboy with the idea of combining the two areas of merchandise that young people spend the most money on, which are clothes and music, and we had some space in our office building which was right on Michigan Avenue at the time. Nobody knew anything about retailing in the company, since I knew nothing less than the next person, I was put in charge.
NELSON: That made you an expert, right?
HEFNER: That made me, at least within those boundaries, an expert. So I hired a staff, worked with the consultants, developed the business plan and opened the store, and it was a complete disaster. I went back to the consultants and I said, "Well, you said all these things would happen and they're not happening." I realized that if we were going to fix it we had to go beyond those guys, so I found out that there were various trade associations you could join to get comparable statistics, and I started calling other retail execs in Chicago, introducing myself and asking if I could take them to lunch in order to try to figure out things like how much shrinkage is the right amount, what do you do about it, how do you manage the merchandise. And ultimately we did turn the business around. In a funny way, in retrospect, it was a great experience for me because a store like that is really like a mini-business. You have all the issues you deal with when you're running a larger business. You have your personnel issues and marketing issues and operational issues. So I learned from that. I ran marketing through our 25th anniversary. We did a lot of interesting things that year.
NELSON: What year was that?
HEFNER: That was 1979. We brought back the Playboy Jazz Festival, which had been done once as a fundraiser for the Urban League in 1959 in Chicago. We brought it back to the Hollywood Bowl and in spite of the pundits who said you that can't fill the Hollywood Bowl for jazz, only pop music. We actually had a huge success and have been doing it every year since. We launched the Playboy Hugh M. Hefner First Amendment Awards, which are given every year to outstanding individuals who, whether it's in law or journalism or television or government, work to enhance freedom of expression. We toured our art collection and purchased some papers relating to the trial of John Peter Zanger and toured them around the country. We did essay contests for high school students about what does the First Amendment mean today, and a lot of really neat things. We had a roast of my father at Tavern on the Green and launched a journalism scholarship in his name at his alma mater. Next, I published some magazines called the Playboy Guides – the Playboy Guide to Electronic Entertainment, To Fashion and Style and To Wheels.
NELSON: And while you're doing this, what is your position at the company at this point?
HEFNER: Well, I had different positions. I was head of the retail business. I was VP of marketing. I was publisher of the guides. I sort of moved around. At some point at the end of the '70s I went on the board so I got to have a chance to see how decisions were made from that perspective, how capital was allocated, how strategies were set. Then in the early '80s, the company started to face some serious financial difficulties because there was a change of government in England and a number of gaming licenses were cancelled or challenged, Playboy's among them. Playboy was the only American company that had ever been licensed to have casinos in the U.K. and was kind of an easy target. The board and the senior executives decided that rather than fight what they felt would be a losing battle, they would be better off selling the business and getting the benefit of the sale of an ongoing operation. But, the casinos in the U.K. had been the single most profitable business in the company. So, overnight the company went from being highly profitable to being in a money losing position. I felt that the company had to make a number of changes fairly quickly to put itself back in financial health and went to Hef and the board and suggested that I become President, replace the person who had been President, and that we begin a restructuring. I think the board and Hef considered bringing a new person in, maybe having me work with the incumbent President, but ultimately they decided that the best course was to promote me. I formed an Office of the President with the then CFO and we set about turning around the company. The first things we did were the things you do when a company is in trouble. You sell the businesses that aren't successful, you shut down things that you don't think you can turn around, you reduce your overhead, you manage for cash, especially a company like ours which being family controlled could afford to have a low stock price for a period of time while we were concentrating on cash.
NELSON: What were some of the things that you shut down at that point, do you remember?
HEFNER: We sold the resorts, we closed the clubs, we sold the book division, we sold the modeling agency and the limousine company, we sold the record business...
NELSON: So the company's really shrinking, shrinking, shrinking at this point.
HEFNER: Yes, we really shrunk back down to publishing and thought about where were the opportunities to expand from the core business of the magazine. That was really the time in which we made the critical decision to expand not by launching or buying other magazines, which is historically what publishing companies have done, but to take advantage of what was starting to happen with cable television and to extend the brand into television as opposed to leveraging our operating expertise in publishing.
NELSON: Was that something that you had determined was the direction to go? What was it about cable that attracted you at the time? This was early '80s was the time period?
HEFNER: Well, the company had always – under Hef's leadership – been interested in film and television. This was a company that in the late '50s launched a television show– Playboy After Dark and Playboy's Penthouse – which really were the earliest versions of sophisticated variety shows where you would intersperse an interview with Lenny Bruce, or the guy doing the documentary on Woodstock, with Nat King Cole singing, showing a clip and talking about it. Then, in the '70s, the company got involved in actually producing some feature films – Roman Polanski's "Macbeth" was the first. Playboy then distributed the first Monty Python movie in the U.S., and it produced some series and specials for television. So Playboy had a history of being interested in the electronic media that was unusual for a print company. But, in the same way as I'd concluded, it was difficult to be successful as a small movie theater owner I felt. It's always difficult with a small capital base to be a successful film or network television producer because those are hit driven businesses with a high mortality rate and frankly those businesses aren't much enhanced by a brand. I thought, and the company thought, that cable could be different for Playboy because in a multi-channel environment the chance to actually create branded networks that people would go to as destinations seemed to leverage Playboy's opportunity in the electronic medium. And of course, fast-forwarding for a minute, that's exactly what has happened, that cable created not just a new method of delivering television, but for the first time a platform on which true branded networks could be launched and thrive, whether that was Playboy Television or CNN or Court TV or MTV or Nickelodeon, so Playboy, having this brand asset, which we then married with creative and original programming, could create a world of Playboy through television.
NELSON: And what was the reaction? I suppose you went around and started talking to cable operators as people do when they launch networks. What was the reaction from some of the operators you talked to?
HEFNER: Well, we were very fortunate because one particular cable mogul was really convinced that there was room for a quality adult channel, and in fact had launched a channel called Escapade, and that person was Chuck Dolan. Chuck really believed in the idea and thought it would be vastly enhanced through the power of Playboy and Playboy's ability to lend its brand and create content. And so the original Playboy Channel was actually a joint venture between Cablevision/Rainbow and Playboy. So we were hugely helped by having a godfather like Chuck, who not only obviously had distribution through their own systems, particularly in an important market like New York. We obtained great support from that early group of really hugely successful and influential cable entrepreneurs/pioneers; Gene Schneider, Bill Daniels, Fred Veirras, Chuck, all were very early on very supportive of Playboy.
NELSON: I'm assuming there were introductions?
HEFNER: Absolutely, and I spent a lot of time in Denver.
NELSON: As a lot of people did. But were there other operators who kind of looked aghast at the idea of adult entertainment on TV at that time?
HEFNER: Honestly, I think the big challenge that we had in the early days wasn't the lack of support from the operators as much as it was that the analog cable systems only had 35-40 channels and it was already clear that there were going to be more good ideas than that. So we grew, but we grew slowly because there were a lot of services competing for that channel space. What really helped us is when the industry embraced addressability and saw the strong consumer appeal that Playboy had as a key component in getting the consumer to want to buy addressable boxes. What happened in that period was that the big movies and Playboy and a certain amount of sports were really the three compelling reasons to buy pay-per-view. So Playboy then began to grow as a pay-per-view service supported by the cable industry as a way of helping sell in addressability just as frankly in the later '80s, early '90s Playboy benefited from the perception on the part of Direct TV that people would buy dishes to get Playboy 24 hours a day. We started around the same time that the Disney Channel launched as a premium network. In fact, one of my all time favorite marketing creative ideas was the cable company that put up billboards all over town with two images: Mickey Mouse and the Playboy rabbit head and the headline was "Up to your ears in entertainment" because of packaging "buy Disney for the kids and Playboy for the grown-ups".
NELSON: Did you hear from Disney about that?
HEFNER: The Disney people were not happy, I have to say. Michael Eisner and I have a very nice relationship, but he was not amused.
NELSON: Right, but it wasn't your doing, right?
HEFNER: No, no, but I don't remember the billboards lasting a long time.
NELSON: I think it was a demonstration of the recognizability and the power of those two logos, both of which have ears.
HEFNER: Absolutely. That's exactly right. That you didn't even need to say Playboy and Disney.
NELSON: So as your activities in the cable industry started to evolve – on the one hand you had a premium network, on the other hand you were doing pay-per-view – what was the mix of that, without getting into dollars, revenue-wise? Which one was really driving Playboy into the cable home?
HEFNER: Well, interestingly, what we learned is that the appeal of the television network is very similar to the appeal of the magazine in that it has two audiences. It has an audience of really loyal fans who want to subscribe, who want it all the time. And it has an audience appeal on an impulse basis, just like people will go by a Barnes and Noble and see who the Playboy interview is or that Cindy Crawford's in the magazine and wants to buy that issue. Somebody will be home Friday night with their girlfriend and say, "Hey, I want to watch a Playboy movie, or I want to watch Seven Lives Exposed on Playboy TV." So, in truth, if we had our druthers, every cable operator would aggressively promote the channel both on a subscription basis and on a pay-per-view basis. We don't control the world in that regard, so we've tended to have to rely on where the industry is with regard to its own focus on a marketing and technology basis. We started just as a subscription service because that was really the only way pay was marketed, and then the cable industry embraced pay-per-view and they kind of abandoned us as a subscription service and pushed us as a pay-per-view service. Now, in the digital upgrade that's going on, cable companies are looking to the success of Direct TV's which had great success offering Playboy both as a subscription service and on a pay-per-view basis, so, we're starting to work now with the large cable companies to do exactly that. To let your consumers choose. And in effect, what pay-per-view became was the conversion of churn into profits. We all remember churn as a problem that the premium services suffered from, especially in the early days of cable, and what we learned, at least for us, is that as long as you had a mechanism for impulse buying that was profitable as opposed to running the truck back and forth then it was a great business to be in.
NELSON: Now, cable historically hasn't done that well with pay-per-view. It's sort of never – and we won't talk about the digital age yet – but the analog pay-per-view was never that great a business. Yeah, the big title fight or something like that, but on an on-going basis it never quite reached the potential people saw for it, but how about from the Playboy standpoint? Did that work well for you?
HEFNER: Pay-per-view actually has worked very well for us and I think one of the things that Playboy offers the cable industry that's different from the big fight or the Hollywood movie is a consistency of buy because it isn't a question of which movie this month or is there a top fighter this month. It's really a mood buy, so it's quite reliable and quite consistent. Now, unquestionably we know that the ease of ordering in digital versus analog and the better electronic guide makes the home more valuable in digital for the operator and for us than it is in analog, but we actually built a very sizeable business in pay-per-view even pre the more recent digital upgrading.
NELSON: But talk about that, particularly as you saw that coming down the pike because let's say ten years ago that was first talked about, John Malone's famous "500 channels", I think in fact this is the tenth anniversary of that comment – what did you do when you saw that coming along to prepare for that?
HEFNER: I think we were the first channel to actually test the idea of chunks of time. I remember we actually tested something called the Playboy Weekend with a couple of operators where you would pay less than the monthly and you'd get Playboy Friday and Saturday nights, basically, based on our experience over many years with the magazine that people might buy on impulse. And we were right. The consumers voted with their pocketbook that they liked that. So we tried to be kind of an early partner with the cable companies in encouraging Playboy to be on the first tier of offering when they were just rolling out addressability and pay-per-view. I think almost without exception we were launched pretty early, and then we'd also use our own media to promote the offerings. So the magazine which reaches ten million readers a month and catalogs that mail to millions used to support the idea that you could call your local cable company and order Playboy Friday. We also started to create most of our content and probably 80% of what's on Playboy TV is original programming that we create that's exclusive to Playboy TV. So, for example we'd take the Playmate of the month and do a feature around that, trying to create programming that would have good sell-through.
NELSON: But you also acquired a lot of programming, I would assume. You couldn't have produced all of this stuff yourself.
HEFNER: Well, we ramped up as the business grew. I remember doing the first secondary for the company in 1992, which was the first time we had sold stock since the company's IPO, which was in the early '70s, and the road show that I did was all built around our potential in TV. The whole story that we were telling was that this is a company that you think of as a magazine company but in fact it's becoming a television driven company. We had done some strategic planning in that time period (we called it "Playboy 2000" – because everybody called their strategic plans in the early '90s fill-in-the-blank 2000) but in our case there were two very powerful assumptions about what Playboy would be in the year 2000 which was that it would be electronic and it would be international. So we were really committed to transforming the company from a domestically focused print company, which had been its heritage, to an internationally oriented electronic media company. The road show was before the television networks were profitable, because we were investing in original programming and we were making a big bet on that because most other networks had launched by acquiring product that had already been made for another medium, whether it was sports programming or movies that had theatrical release. But we felt that neither the major studio movies that were already available on the HBOs and Showtimes, nor the so-called adult movies, which really weren't of a quality and sophistication that people would expect from Playboy would work on Playboy TV. So the only way to really build the business to a big business was to create a lot more original content. The road show, which was in fact hugely successful, oversubscribed and up-priced, was really sold on the premise of being in front of this many homes with this cost level, but we're growing while our costs will remain relatively constant so when those lines cross we're going to have a terrific business. This year our entertainment division, which is our worldwide television networks and home video, will become the largest revenue business of the company, larger than publishing, and it's a 25% margin business where publishing is a 5% margin business. So that bet that we made, particularly in the commitment to original programming, was really the big bet for the company. Today we produce over 200 hours of original programming every year. We spend 45 million dollars doing it and we have a library of over 2,000 hours of original, unique Playboy movies and programs.
NELSON: And you made a bet that a lot of other cable networks over time made that bet, although most of them didn't commit that early, and that is the whole power of original programming to drive people to cable as opposed to broadcast networks. Of course you had a particular issue around Playboy, your brand, what that represented. Now, you did acquire some additional adult networks. What was the discussion around that because those weren't necessarily of the Playboy sophistication in all cases?
HEFNER: We actually got into the adult movie business on the request of the cable MSOs in about 1996. Time Warner and a couple of the other large MSOs had been experimenting in some of their systems buying adult movies and programming them and had decided that there was definitely a business that was separate from the Playboy Television programming business. Frankly I think they felt that they would rather buy through Playboy than in any other way because we're a company with, I think, a deserved reputation for applying both standards and practices that you would feel good about as a programming partner. So we launched a movie service called Adultvision. The agreement that we reached with the MSOs was that if they give us enough distribution to make the business profitable, we'd be the aggregator of content from the adult movie studios. So we launched Adultvision in '96 as a flanker brand for Playboy at the request of the MSOs. What happened then is that the other company that had more distribution for adult movie services, which was Spice, had acquired that distribution by deep discounting, and consequently found themselves in a position where they were actually losing money. That gave Playboy Enterprises the chance to acquire them, consolidate Spice with Adultvision and eliminate the duplicative costs. So we had a bigger business in terms of more homes for the Spice Networks which we packaged with Playboy. In 2000 we bought the last assets from those businesses so now we have the ability to put an array of movie services plus Playboy together and sell it in to the MSOs. That's actually been important to us because with all the consolidation on the cable side you want to be important enough as a programmer that when you sit down to talk about the carriage agreement you're an important customer. Having Playboy plus the Spice Networks really allows us to do that.
NELSON: Now, with aggregating all this programming, how does that now play into the world of VOD that's upon us?
HEFNER: Well, we definitely have always believed in the next advancement of technology. We talked about the early days of addressability and the role Playboy played in helping really drive pay-per-view. So both VOD and S-VOD are interesting to us because we have brands, libraries and content creating capability. We're working with the cable companies as we sit here in tests around the country because I think the unanswered questions that we all have is what's the right pricing, what's the right way to market, how do you educate the consumer and how do you make it economical for the operator to put the infrastructure in place to deliver this way?
NELSON: And any sense of the mix of VOD, which is much more along the lines of your pay-per-view business, and S-VOD, the subscription service, which again, primarily plays off the premiums?
HEFNER: I really don't have a guess. What I like is the fact that because I control my content I can let the market determine what that optimal mix is and whatever it is the operators will benefit from it.
NELSON: And just to wrap up here, give me your sense of where you're trying to go from here.
HEFNER: Well, one thing I would say that I think is really important in any kind of look backwards at cable, and we've been in the business for 20 years, is that we're also very proud of having made a really important contribution in settling the law as far as the First Amendment rights that cable enjoys. One of the legacies of our partnership with cable over those decades was our willingness to spend millions of dollars to challenge a really bad law, Section 505, up through the Supreme Court. And as a result, for the first time our industry has the Supreme Court of the United States affirming that the standards for pay television are the same as for print and the internet when previously there was question as to whether the standards might be more like broadcast standards, which of course have many more restrictions on what adults can see. So, part of what we've been able to do is put cable on an equal playing field with the internet and with its ability to expand into new entertainment and information offerings for people both here and internationally. For us, we're really excited about the opportunity to grow from the 19 million cable homes that carry Playboy TV today to the 70 million cable homes that are out there because we have carriage agreements with all the MSOs. So in that world of the 500 channel universe, when channel capacity is no longer a constraint, we'll have the chance to offer our content into everybody's home and to do that in partnership with cable around the world, and that's a very exciting opportunity.