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Playboy Spices Up Its Adult Business

In a stunning move, Playboy Enterprises last week cornered
the adult pay-per-view market by purchasing rival Spice Entertainment Cos. for about $95

Operators, which fear an upheaval of one of the
industry's most lucrative categories, had mixed reactions.

The proposed purchase calls for Playboy to acquire
outstanding Spice shares, along with adult networks Spice, Adam & Eve and Spice Hot.
Spice shareholders will receive $3.60 in cash for each Spice share, as well as 0.1 Playboy
class B shares, at a minimum value of $2.11 per share or a maximum value of $2.69,
depending on what Playboy is trading at.

At press time, Spice was trading at $5.69 per share, up 8
cents from last Thursday's close. Playboy's stock rose 19 cents to $16.31 at
press time.

Spice shareholders, however, will retain ownership of its
digital operations center for video and Internet broadcasts, as well as certain rights to
a library of adult films.

It is unclear what Playboy will do with Spice's three
adult services, which reached a combined 21.5 million households. Playboy and AdultVision
reach a combined 17.9 million households.

Representatives of Playboy would only say that the company
is 'excited' about the deal and that 'everybody will benefit by this
consolidation.' They also declined to comment on what would happen to Spice's 70

J. Roger Faherty, chairman and CEO of Spice, said in a
prepared statement that the company is 'pleased with the opportunity that this
agreement provides our shareholders.'

The deal stunned operators, which enjoyed high buy-rates
and lucrative split returns between Spice's services, Playboy's signature
network and Playboy's AdultVision.

Adult services generated about $253 million last year, up
from $212 million in 1996, despite most operators cutting adult-network hours because of
federal scrambling issues, according to Showtime Event Television figures. Adult still
represents 30 percent to 50 percent of many operators' monthly PPV-revenue take.

Further, Spice and Adam & Eve provided better revenue
splits for operators. Spice and Adam & Eve averaged 70 percent and 80 percent splits
to operators, respectively. While Playboy's all-movie AdultVision service offered 75
percent to 80 percent splits to operators, Playboy itself gives systems only 60 percent of

With the proposed buyout, operators are worried that
Playboy will eliminate the more cable-friendly Spice networks.

'We'll have to wait and see what Playboy
does,' said one top 10 cable operator. 'We've enjoyed pretty attractive
margins, so I'm hoping that Playboy will retain the Spice services and the splits
that we have now.'

'To have the resources of the Playboy organization
behind Spice is good, but the product should not be toyed with,' said Skip Harris,
vice president of marketing for Falcon Cable TV Corp. 'Playboy has its viewers, but
Spice has a different audience, so it shouldn't put the name on it.'

Of greater concern to some operators is Spice's more
explicit Spice Hot service, which launched in October. Playboy was initially opposed to
the launch of the service, which goes well beyond the standards set for traditional
PPV-adult services, and some operators worry that the more conservative Playboy will
eliminate it altogether.

While Spice Hot is in fewer than 500,000 households, the
service has, in some cases, doubled adult buy-rates. In Coaxial Cable's system in
Columbus, Ohio, where Spice Hot is carried part-time, the network is generating $10 per
basic subscriber -- double what the system was doing with two full-time services in 1995.

'Do they [Playboy] really want to take away a service
that's really successful?' asked Gregg Graff, senior vice president of
marketing, programming and advertising for Coaxial. 'It would be very difficult for
us to go back to [traditional PPV services] after offering Spice Hot, so we may have to
look for someone who will provide us with that type of service.'

Other operators also said they would look for
adult-programming alternatives if the deal significantly changes the adult-revenue
infrastructure. One MSO executive went so far as to say that it would offer adult on a
stand-alone basis, rather than losing its adult margins.

'If the financial investment changes, we might have to
re-examine our investment in that product,' said one top 15 MSO PPV executive.

But Pam Burton, director of marketing for Prime Cable,
which carries Spice, AdultVision and Adam & Eve part-time, feels that the merger is a
positive for the industry.

'Whenever you have a consolidation, there are concerns
that a monopoly situation won't provide flexibility,' she said. 'But
Playboy's always been flexible and, with the relationships that they have,
there's no reason why that should change.'

Playboy last week also released its fourth-quarter
earnings. Its revenues were $81.3 million in the fourth quarter of 1997, compared with
$79.8 million in the same period in 1996, but the company still recorded a slight loss due
to a onetime charge related to an accounting change. Revenue from Playboy TV, however, was
up 6 percent, mostly from the direct-to-home market. Predictably, cable revenues were down
due to the effect of Section 505, which forced operators to move adult networks to
'safe-harbor' hours because of insufficient signal-scrambling technology.