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August 01, 2003 12:45am
AdultShop Expects $7.2 Million Hit
Source: The West Australian
by: John Phaceas

Online porn broker AdultShop.com is back in the sin bin, warning it will take another $7.2 million hit on its online pornography division and revealing its entanglement in a fresh legal battle with a former internet traffic provider.

The company reported yesterday net cash flow had halved in the June quarter to just $1.07 million, dragging the group's cash flows $3.2 million into the red for the year.

AdultShop said continuing problems with third party credit card processing and the imposition of tougher charge-back and refund thresholds by Visa and MasterCard threatened the future profitability of its Today's Success online erotica business.

Though the business was currently cash flow positive and profitable, AdultShop said it had decided to write off the remaining $7.2 million in goodwill attributed to the division.

At the same time, it said it was suing former traffic provider Pageseeker.com for more than $US747,000 ($1.12 million) in a counterclaim to a demand from Pageseeker for $US69,000.

Pageseeker, a subsidiary of listed Queensland group Dark Blue Sea, claims the money is owed for traffic directed to Today's Success according to its then contract with the AdultShop offshoot.

But AdultShop, which paid $12 million in cash and shares for Today's Success in July 2001, said it was in turn seeking to recover "overpayments" made to Pageseeker, arguing invoices sent to Today's Success did not reflect a discount which had been agreed to by both parties.

The Pageseeker action comes as AdultShop prepares to defend a $US2.8 million claim from a former credit card processor in the US, a demand it has previously described as an ambit claim.

Managing director Malcolm Day was travelling interstate and could not be reached for comment yesterday.

However, chairman Kim Heitman said the headaches associated with credit card processing, which had made it difficult for AdultShop to recover all money owed for accessing its sites, remained an ongoing hurdle to the success of its online porn business.

In particular, the changes proposed by Visa and MasterCard, including substantial fines for non-compliance, threatened to change fundamentally the way the sector operated.

"We anticipate those . . . are going to make significant changes to the industry as it is and certainly we are in the situation of re-evaluting our business model," Mr Heitman said.

"Put simply, to keep under a one per cent charge-back threshold (set by Visa and MasterCard) will require a degree of discipline the industry hasn't yet been able to display."

Charge-backs refer to the number of credit card transactions which are disputed and cancelled by customers. They are particularly high for porn- related transactions and a set proportion of revenue collected by the credit card processor is usually held back to cover any subsequent claims.

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