The X-ray luminosity and variability of many AGN are sufficiently extreme that any hard γ-rays produced in the source will collide with the X-rays and create electron-positron pairs, rather than escape. A small region where vast amounts of energy are produced, such as an AGN, is an ideal place to accelerate particles to relativistic energies and so produce γ-rays by Compton scattering. The observed X-ray spectra of AGN are hard and indicate that most of the luminosity is at the highest energies so that absorption of the γ-rays represents a large fraction of the energy flux, which can then be re-radiated at lower energies. Pairs can thus effectively reprocess much of the radiant power in an AGN.