adultfriendfinder2.jpgPenthouse is negotiating to buy AdultFriendFinder, a ubiquitous porn and sex dating site, for between $500 million and $1 billion, VentureBeat has learned.

We learned of the talks last Monday, and were trying to confirm, but Techcrunch beat us to it this weekend. Techcrunch has some of the details correct, according to what we’ve heard from a source close to the deal, including that AdultFriendFinder’s parent company, Various, has revenues of some $300 million.

However, while Techcrunch suggests that the price of the purchase is quite low relative to the revenue (a price of about 2 or 3 times the size of revenue is considered low in most industries), which is true, it fails to take into account the profit margins of the business and the future outlook, which explain the lower multiple.

Palo Alto, Calif.’s Various, which is the entity for sale, pays significant amounts of money to buy traffic all over the Web (if you visit some porn sites, you’ll click on pictures, and find yourself whisked way to AdultFriendFinder), not to mention other costs, and so its profit margins aren’t as large as you’d think. Second, the adult industry is not attractive to advertisers as many other sites. AdultFriendFinder is out on the crude side of the industry (it is borders on prostitution, featuring Web cams where you pay for the minute to watch sex acts, and it owns sites like Alt.com, featuring bondage and other more fringe sexual tastes). Finally, the future of the industry is open to question. User generated content, cheaper sex video production, and more interactive technologies all threaten to disrupt the industry. That’s why Penthouse is doing considerable diligence on Various, and that’s why you’re hearing about the large price range ($500million to $1 billion), depending on where Penthouse considers Various’ fortunes to be in say, a year from now. It may also be why Various has has been looking for an investment for at least a year now.

You’re seeing a range of other porn, or semi-porn companies grabbing attention lately, from Zivity on the lighter side (see our later coverage, too), where models get a cut of the site’s revenue, to Playboy’s foray on to college campuses with a new business strategy, Eroshare (a site for for photos), Swing.com and Pornotube (for video). All of these raises question about the health of AdultFriendFinder going forward.