When Context Publisher Lisa Laing visited a Playboy executive to do some benchmarking on printing and mailing costs, she walked into an office that would have been an adolescent boy's dream. The executive had a Playboy calendar on the wall. Years of back copies lined bookshelves. Boxes of the latest issue sat on his floor. When the executive made points about printing quality—saying, for instance, that the hardest thing to print is flesh tones—he instinctively grabbed for a Playboy several times to illustrate. Then he looked at Ms. Laing. He put down the Playboy, picked up Context and made his points without the flesh tones.

As Ms. Laing's visit shows, Playboy's offices—dubbed "the Love Boat" by those who work there—can feel like a different world, far removed from the issues that occupy other offices and other businesses. Playboy, with just $300 million in annual revenue, is also much smaller than the corporate behemoths that define most industries. But the thinking that goes on at Playboy headquarters may well affect how companies in many, many industries use the Internet. Sex-related material has long driven the adoption of new technologies—pay-TV, VCRs, and 900-numbers, for instance—and electronic commerce has been no exception. Playboy has been in the forefront. It launched a major Web site back in 1994 and, since then, has made some bold, successful moves—such as giving away much of its magazine's content as a way of attracting visitors who will view advertising and buy Playboy products.

Along the way, Playboy has learned a lot about what works on the Web and what doesn't. So Context Editor-in-Chief Paul Carroll and Managing Editor Pegeen Hopkins arranged to interview Christie Hefner, Playboy's chief executive, and pick her brain. Ms. Hefner, an articulate spokeswoman for electronic commerce, had interesting insights about how to get visitors to provide information on themselves, about how to develop a brand on-line, about how to take advantage of new on-line technologies, and about what sells. She makes for a good interview.

CONTEXT: Let's start with a look back at what feels like ancient history. You launched your Web site in 1994, as the Internet was just beginning to make its way into the public consciousness. What did you expect from the Web?

CHRISTIE HEFNER: We started with the idea that the possibilities were too intriguing for us not to be involved in the on-line world. We didn't pretend that we knew what the business model was going to be, but we saw a medium with unique properties of interactivity and global reach.

From the beginning, we didn't want to lose control of our destiny, given the healthy respect I've always had for how much is not knowable in the early days of a new medium. That was certainly true in 1994. It's true now, too. So we avoided licensing our content to an on-line service, like CompuServe or AOL, as many publishers did. I wanted control creatively and commercially not because I was confident that we knew exactly what to do, but because I didn't want someone else doing it for us. It would have been like licensing the brand and creative icon of the magazine to Time-Warner and saying, "Create a television network and call it Playboy."

CONTEXT: In retrospect, keeping control was a crucial decision. Of course, you had a very strong brand, so it was easier for you to attract attention than it was for some companies.

HEFNER: Even with the Web site in its simplest form—just re-purposing content from the magazine—we had about 150,000 hits the first week, and every day the number went up. Somewhere around the time it got to be 6 million hits a day, the world stopped keeping track in "hits," and so did we.

Keeping control of our brand was the first very important decision we made. The second was to say that the Web site was not a promotional tool, that it was going to be its own business. That decision meant fighting the conventional wisdom of the time that the way for publishers to attract advertising to their Web sites was to bundle it with print ads and give it away, as added value to print advertisers. I wouldn't let our ad sales people do that. I said we had to understand we were creating something of unique value. If we didn't treat the Web site with respect, no one else would.

We didn't rush headlong onto the Web. High levels of spending only make sense if you're extremely confident you can really build a business. And there was so much we didn't know about what would work. Overspending is where a lot of people have gotten into trouble.

On the other hand, there are those who say, "If you don't know everything about what you're going to do, don't do anything." There's no way to hit a home run that way.

We didn't think we had to spend $40 million a year to create a great site. We thought we could leverage the power of the brand and run the business so that it would be affordable to stay in it for a long time—while still making the bets that could ultimately produce a big business.

For example, we didn't start by building our own ad sales force. We used rep firms in the first few years, until we were able to prove to ourselves that there was a significant advertising market.

We actually ran the business at break-even or at a modest profit for the first few years, which was unheard of. It's only recently that we decided to invest so heavily in the Web business that it will be unprofitable for a while. We did that because we've now proved to ourselves that we can keep building traffic, sell advertising, conduct electronic commerce, and sell content.

CONTEXT: You made a couple of other important decisions, it seems to me. One was to try to set yourselves up as what you called a mall two years ago—what is now generally called a portal. The other was to decide that people buying on-line should be able to buy for less than in the physical world, to reflect your new efficiencies. Were those decisions as important as they look from the outside?

HEFNER: Yes. Our idea was that if we created opportunities for people to come to our site and entertain themselves or get information or communicate, we could then offer shopping opportunities. There was no reason to limit ourselves to a Playboy store that sold just Playboy-branded merchandise. We've been pretty successful with that idea, and we're working on a couple of other interesting deals at the moment.

What I've come to recognize is that we need to do more. In addition to having stores, you need to have opportunities to buy that are imbedded throughout the content of the site. You might be reading a movie review and have a prompt within it that would let you order that movie, and other, related movies, too. We're very much focused on trying to add that capability. In the past, I don't think I really saw around that bend. We were behind the curve in our use of technology for the company as a whole.

This idea of imbedded prompts is one of those great examples of why I've always been smart enough to be very humble and say, "I don't really know the answers." The people who tell you they know all the answers are the people to be most suspicious of—how can anybody know all the answers? We've been living with this medium for such a short time.

CONTEXT: What else has surprised you over the past year or so?

HEFNER: I'm disappointed in the progress of targeted marketing on-line. I still believe that marketing in the future will depend less on blanket advertising and more on matching products with pre-selected or, more likely, self-selected groups of customers who might want to buy them. But not much has been done so far.

I'm also surprised that there isn't better measurement of the effectiveness of ads on-line. Companies and ad agencies want to prove they're getting their money's worth. And here is a medium that has such enormous potential for measurement, yet it's still not used very much in that regard.

CONTEXT: Do you think security has faded as an issue for people buying on-line?

HEFNER: I do. I thought the issue was just a perception problem, because we could offer at least the same level of security that people had when they placed a phone order with a credit card. I think we, as an industry, are now past that problem.

CONTEXT: Will privacy concerns go away, too?

HEFNER: I don't think the industry has addressed privacy adequately, but I think it can. I think we need to follow the model of the Direct Marketing Association. We need to recognize that a small percentage of people don't want to be marketed to at all, so we have to give them a readily available and visible way to opt out of the whole system. We also need to become better at matching appropriate solicitations with appropriate customers and potential customers, so that people receiving them are happy to get them. When people receive their Critics Choice Video catalog in the mail from us, for instance, they're happy. They don't consider the catalog junk mail or spam.

I frankly think people's bigger worries about privacy will concern what the government does, not what commercial companies do. It's what happens to my health records that will worry me, not whether somebody rents my name because I buy a book through Amazon.com. People are worried about things like their health records, their employment records, their tax records.

CONTEXT: Two years ago, when we last met, you talked about possibly giving people incentives in return for information. Have you done that?

HEFNER: It definitely works. For example, Cindy Crawford appeared in the October issue. She did an on-line chat with us while the magazine was on the newsstands. We teased people that the chat was coming by telling them, "Give us your e-mail address if you want us to remind you when the chat starts." About 15,000 people requested e-mail reminders. We're now surveying those 15,000 people, asking them questions that will help us design and market chats better. In exchange for completing the survey, we're offering one free month of Playboy Cyber Club.

We respect people's privacy. No one is required to participate, and we're telling them up front that we're contacting them this one time, and if they choose not to respond, we won't keep bugging them. The lesson here is that you just have to give people something they want; it doesn't have to be a trip to Florida. And you give them control by offering them ways to choose not to participate.

CONTEXT: At Context, we're becoming very interested in "communities of value." By that, I mean communities that companies foster by helping customers talk to each other, and not just to the company. The companies, of course, need to figure out ways to profit from these communities that have them at the center, much as AOL has done by facilitating chat rooms. Is Playboy doing much to create communities of value?

HEFNER: Not enough. Playboy Cyber Club is more of an on-line fan club. That's not a bad thing because although we've spent almost nothing marketing this service, there are almost 30,000 people paying us $60 a year to be members, which is encouraging. But Playboy Cyber Club is mostly about information, photography, newsletters, and chat with the Playmates. It's not yet really about being part of a community.

I believe in the idea of community a lot. I like the idea of a game room that's a multiplayer community. I like the idea of some kind of both male and female destination created around, perhaps, a dating theme. We've actually been talking to other sites that target women, with the notion of trying to build a bridge between their visitors and ours.

I should say, though, that with all the possibilities of the on-line world, it would be easy to get trapped into moving 100 things forward an inch instead of 10 things forward a mile. We're working very hard to make sure we focus on the right priorities. Frankly, it's as hard for me as anybody, because there isn't a good idea that I don't like.

CONTEXT: When we last talked, you said that when it comes to the future of the Internet, if you have 10 people you get 11 opinions. Now, it sounds like you get 11 business plans, or maybe even more.

HEFNER: Definitely.

CONTEXT: With advertising being slower than expected, a lot of publishers are turning to business models based on fees for generating transactions. It sounds like you're headed in that direction.

HEFNER: It's still a three-legged stool for us. We want to aggressively develop opportunities for advertising. We want to sell content, on either a pay-per-view or subscription basis. And we want to develop our electronic commerce revenue.

Two years ago, I would have said advertising would be the largest piece, with selling content second, and electronic commerce third. Now, it appears that electronic commerce will be the biggest revenue stream, followed by content. Advertising will be the smallest, at least for the next couple of years.

I can't be critical of companies that have been slow to advertise on-line. It's still a leap of faith for companies to spend money advertising their products and services on the Web if they're not engaged in direct transactions.

CONTEXT: Although Playboy has been a pioneer, a lot of companies, particularly retailers, hesitate to do much on-line. What can you tell us about what you've observed? What seems to sell well on-line? What doesn't sell so well?

HEFNER: The categories that are strong share two things: There is a vast array of options to choose from, and there is little need for the touchy-feely side of buying. So, books sell well. So do music and videos. Computer hardware is strong. But the classic soft goods of apparel and accessories are tougher. I know you can do neat things on-line—changing the color of a blouse and mixing and matching items instantaneously on your computer screen. But I still think sales of soft goods will move on-line much more slowly than hard goods. I think that even the world of catalogs for soft goods—which is a big business world—exists largely as a promotional vehicle for many stores. Companies send catalogs but still expect people to come into the stores.

Comparative shopping on-line is very intriguing. The percentage of people who do comparative shopping on the Web for high-ticket items like cars is fascinating. But people still mostly go to dealers to negotiate one-on-one to buy the car.

CONTEXT: I'm intrigued by the debate between those who think it's important to be first in a new area like the Internet, and the folks who think it's more important to sit back and wait for the early mistakes to be made by someone else. Do you think Playboy has a sustainable advantage because it was an early mover?

HEFNER: If we had done nothing on the Web, it's not as though somebody else would own what Playboy owns. Playboy is still Playboy. But I thought we had a sensational opportunity, and the earlier we moved the sooner we would, through trial and error, learn enough to move forward.

In some areas, such as search engines, it has been important for companies to move early because so many other people were moving into a new area. It's unclear whether Amazon.com is going to be more, or less, successful than Barnes & Noble. But if Amazon hadn't been an early mover, it wouldn't be a player at all.

I think there is less need to move early with entertainment and information, because a lot of your success depends on your brand. But brand is only permission to play. It's not a guarantee of success. The music cable channel is MTV—not Rolling Stone television. It's ESPN in sports television—not Sports Illustrated. You tell me why the companies that had those incredible brands, Rolling Stone and Sports Illustrated, didn't move successfully from print to television. But they didn't. Companies that have good brands—but that aren't playing on the Web—have no guarantee that they'll ever be able to do anything meaningful on-line.

CONTEXT: Do you see any technological changes that may help or hurt you over the next year or two?

HEFNER: We're still doing a lot of work on basics. We're just putting in place a system that has a series of e-mail prompts to let you know that your Playboy Cyber Club subscription is expiring, to let you migrate easily from monthly, to quarterly, to annual subscriptions, and to keep track of whether you're also a magazine or TV subscriber. That's pretty straightforward and yet we can't do it yet. So, while there is this brave new world out there of fun things, we need to make sure the door fits when we close it in the jamb.

On the brave new world side, we launched something very recently called "Live Pictures," which we think is very cool. It allows the consumer to be his or her own camera person. You give that person an image and, with really incredible resolution, they can zoom in to different elements of the image. There can be prompts for different information depending on where you zoom in on the image. So, let's say it was an image of Playboy's All-America Team. By zooming in on a football player you would trigger lots of data about him.

You could go on a virtual tour of the Playboy mansion that could also be integrated with an art gallery that's in the mansion, which in turn could allow you to order prints of the art. We're doing that now.

We're also trying to make shopping with us more entertaining.

CONTEXT: In the end, how big do you think your on-line business can get?

HEFNER: That's hard, as you well know. Making projections three years out is like throwing darts. In this case, I'm not even sure which wall the dart-board is on.

I'm going to stick with what I've thought for some years now. The on-line business could be bigger than our publishing business. Profit margins could be higher than for our television business, which has margins twice as good as publishing on half the revenues. The on-line business can be a very good business for us.