WWW- Shares of the Chicago-based adult-entertainment company shed 15% Thursday after Playboy projected a “substantial” second-quarter loss and tempered the forecast for all of 2006. In a conference call early Thursday, Chief Executive Christie Hefner told analysts “we will not meet our initial earnings projection of 67 cents to 70 cents per share for the full year.” Playboy, which lost its exclusive programming deal with satellite broadcaster DirecTV last month, blamed its souring outlook, in large part, on declining domestic television revenues.

Making matters worse, Playboy reported weaker-than-expected first-quarter results. Earnings came in at two cents a share, well shy of the Street’s consensus forecast of 13 cents. A year earlier the company lost 39 cents a share including one-time charges. Total revenues slipped to $82.1 million from $83.5 million a year earlier. Playboy shares were down as much as 22% in early trading.

Lucas Binder, an analyst at UBS, wrote Thursday that the company’s shift to a video-on-demand broadcast model hurt performance. “We believe that Playboy must find a way to stem the declines while also lowering the cost of the domestic TV business to grow earnings per share.” Domestic TV revenues fell to $22.3 million in the first quarter from $25.2 million a year ago.

Hefner, who consistently refused to cite specific numbers despite analysts’ persistent questioning during the conference call, also declined to detail the impact of the loss of the exclusive arrangement with DirecTV. In April, the nation’s largest satellite provider announced it would also air hard-core adult content from New Frontiers Media. DirecTV has 15.1 million U.S. subscribers who now have the option of choosing New Frontier’s adult channels over Playboy’s tamer offerings.

Playboy hasn’t signed a new pact with DirecTV, Hefner said, leaving unclear whether it would lose more channel spots to other adult-content providers. Privately owned competitors Hustler Magazine and Penthouse Television are gearing up to enter the video-on-demand cable market, with Penthouse TV slated for a June launch.

“Playboy could lose another channel or two,” says Dennis McAlpine, president of independent research firm McAlpine Associates in Scarsdale, N.Y. “They had five. The good news is that it’s too early to tell – they don’t know how badly it’s hurt them. It’s not just DirecTV. The other stuff is going to hell, too. The magazine is a dreadful performer.”

Lower advertising and newsstand sales for its flagship magazine caused a 13% decline in quarterly publishing revenues to $23.5 million. Playboy expects to report a 16% decline in ad revenues year-over-year for the second quarter.

Sex sells, but who’s buying? Playboy has pinned much of its revenue hopes on the video-on-demand model, but that’s based on single viewings of individual programs. Cable companies are reluctant to promote adult content, making it difficult to increase revenues beyond customers who seek out the programs through their cable and satellite providers.

It’s a revenue model that makes money in small increments. At DirecTV, for example, pay-per-view porn comes in blocks that cost between $5.99 and $14.99, and content providers get between 5% and 15% of viewers’ money, with the rest going to the cable company or satellite provider. In contrast, mainstream movie studios take about half the proceeds from pay-per-view films.

In a survey conducted by Veronis Suhler, a New York boutique investment bank specializing in media companies, video-on-demand spending growth dropped to an estimated 55.6% in 2005, suggesting that a spending trend peaked in 2004, when the growth rate was 123.9%. This year, that growth is expected to ebb further, to 37%. Satellite pay-per-view spending hit $1.2 billion in 2004, and the survey had a 2005 estimate of $1.3 billion and a 2006 estimate of $1.4 billion.

“It’s not something new, but video-on-demand ain’t working,” says McAlpine. There’s no growth in it, from what [Hefner’s] saying.”

Hefner said the ideal model would be subscription video-on-demand, where customers would pay about $15 a month for unlimited on-demand access to its content, which runs the gamut from racy to raunchy. But key aspects of that shift aren’t in Playboy’s hands. She said the company has yet to reach agreement with Time Warner (TWX: 17.50, +0.19, +1.1%), one of its largest cable partners, on its video-on-demand distribution model.

“Looking ahead, it’s obvious we have a challenge,” she told analysts, speaking of her dealings with Time Warner. “They are less than precise, to be candid, on their timing. The driver for domestic television is the rollout of our VOD product, and we aren’t in control of that.”

McAlpine says the balkiness of the Time Warner deal obscures a larger problem.

“The only hope they seem to have is subscription video-on-demand,” he says. “The problem for video-on-demand is that you have to constantly promote it, and the cable operators won’t let them. You’ve got to consciously go to that channel, and they’re saying it isn’t working.”

It’s not a new concern for Matthew Harrigan, an analyst at Denver investment bank Janco Partners. “They have had, over the years, some operations issues and had to cut costs, and are about to do it again,” Harrigan says. “At some point you have to get some more traction on your revenue model. People knew it was going to be really soft. The only thing that seems really robust right now is the licensing.”

It’ll be a while before Playboy’s rabbit ears perk up, and investors need to decide whether they want to stick around for the long haul. Management said the weakness in publishing and domestic TV results will continue. Improvements are expected in advertising sales, the licensing business should continue to be strong, and the opening of the Playboy at the Palms casino in Las Vegas should boost the top line.

“This has become an unusual year with two extremely different halves,” Hefner said.

But the current lack of hard numbers for the second quarter makes a longer-term outlook all the more murky, wrote Binder at UBS. The DirecTV blow hurt, but because of the lag between the loss of exclusivity and the payment from video-on-demand orders, the severity of the impact won’t be clear for a couple of months.

“That was a significant and unanticipated adjustment,” Hefner said. Linda Havard, the company’s chief financial officer, added that when the video-on-demand adult market stabilizes, Playboy’s share will sink to between 40% and 50% of the market due to an influx of competition. Right now Playboy controls about 75% of adult programming.

Then, too, there’s the Internet, which hasn’t provided much of a boon to Playboy. That’s largely because of the huge amount of free adult content available. Online subscriptions and e-commerce brought in just one-sixth of Playboy’s total revenues during the first quarter.