Creeping ivi in Russian homes

By bne IntelliNews June 13, 2013

Ben Aris in Moscow -

It has been called the Netflix of Russia. Since its launch in 2009, (known as Ivy in Russia) has become the nation's premier site for watching movies. With revenues doubling every year, the company is due to go into profit and is one of a growing number of candidates for a billion-dollar IPO in the foreseeable future.

"We are positioned in the movie business and closer to Netflix than [US online TV broadcaster] Hulu, but we also have some TV shows, music and a kids' portal. But movies is our main thing," says Oleg Tumanov, CEO and chairman of

Netflix and ivi-ru would be identical except for one thing - piracy. In the US, strong intellectual property rights mean the leading movie sites charge their punters on a pay-per-view basis and pocket the cash directly. In Russia, video piracy is so rampant that it is impossible to ask a Russian consumer to pay to watch a movie. They will simply go and download it from one of the multiple peer-to-peer file sharing sites chock full of illegal copies of the movie. Thus, the only way to make money out of online movies is through advertising. "It is a monumental challenge to get people to pay for content," says Tumanov. "You can ask, but the user will not answer enthusiastically," he adds wryly.

Coming to a TV near you

But the market is changing very fast. Only a few years ago, Russia was awash with illegal CD, DVD or video copies of the latest Hollywood blockbuster, available in every kiosk on every corner. But in recent years these movie stalls have mostly disappeared as the business migrated to the internet. More than half of Russia's 143m-strong population is now online and last year Russia became a larger internet market than Germany. "The market is moving very fast in Russia," says Tumanov. "Videos have moved from the web and now increasingly to mobile and smart TVs."

In Russia, sales of smart TVs, which are internet enabled, are soaring and 99% of those sold in Russia now come with a application pre-installed. "Sales of smart TVs is exploding and is already in the millions. We have 7m applications installed on mobile and smart TVs," says Tumanov, "which together account for two-thirds of the views of our service."

Tumanov says that despite the widespread access to pirated copy, the company's strategy is to create a great user experience. A catalogue of over 65,000 TV shows and 10,000 movies also helps thanks to the ease of finding something worth watching. Most of the TV catalogue is Russian shows. Thanks to the rapid rise in TV advertising spending, local production companies have been rolling out an increasing number of home-based soaps and shows tailored to local tastes, so there is plenty to choose from.

Movies are different, as Russia's legendary Soviet-era film-making industry is still struggling to find itself; only 10-15% of movies in the county's theatres are currently Russian-made, with the bulk still produced in the US. This mix is reflected in's catalogue.

This also causes a problem for new releases, which are obviously the most attractive part of the movie industry, and it is the one place where does charge per view. However, often has new Hollywood movies on its service shortly after the DVD is released by the studio and before it is available to similar services in Western Europe.

The difference between America and Russia is the cable companies. In the US, the cable companies generate about $4bn of revenues a year for the studios, so they have a lot of power and want to delay releases to online services until they have had a chance to air a new movie," says Tumanov. "In Russia, cable has barely developed and only generated about $50m last year, so the cable companies don't have any power and we can release the movies earlier.

Because of its reach and the fact it pays studios a share of the advertising revenue, has found the western distributors keen to hand over the rights to show their movies. The way it works is an advertiser will pay per 1,000 views and this money is pooled with, who agrees to pay the owner of the copyright a share of the revenue depending on the number of views of the adverts, which appear at the start, in the middle and at the end of a movie. "We hope the business will develop, as for most copyright owners it is one of the few ways they can earn real money from their intellectual property rights in Russia," says Tumanov.

Intelligence and experience has some competition, but it is already the largest player in the segment. The company was founded by Tumanov while he was still working for Russian tycoon Leonid Blavatnik and his Access conglomerate, where he was the CEO. He bought the company from Blavatnik and group of other shareholders with the help of Russia's answer to Bill Gates, Leonid Boguslavsky's company ru-Net. Dmitriy Alimov, Russia's up and coming internet star and the man who made a fool of investment guru Jim Rogers, is also a partner in the venture and was a managing director at ru-Net at the time of the deal, but now holds his shares through his newly launched Frontier Investments fund.

They brought in oligarch Vladimir Potanin's media holding ProfMedia as a financial investor in 2010 and raised more money in 2011 from the international technology investment fund Tiger Group. In the last round of financing, the firm raised $40m from a broader group of investors that includes Russia's premier private equity fund, Baring Vostok Capital Partners. "None of the shareholders has a majority stake," says Tumanov. "This structure works best, as it is not about power, but intelligence and experience."

However, all his investors are financial ones, who will want an exit at some point. Tumanov says that he is prepared to sell to a strategic investor or carry out an IPO, but that is still several years down the road. "I am not ruling out an IPO, but not before three years, as we need to reach critical size," says Tumanov. "We should be an attractive asset to a strategic buyer, one of the international media companies that is looking to enter the Russian market. Or to a telco that needs content or perhaps to a tech platform like Google or Yandex."

Currently, the site has 3m registered viewers and 18m-19m unique views per month to all its services. Using the Facebook IPO rule of thumb of $35/user as a guide, that would value the company at between $280m and $665m at the moment, but Tumanov says it would be "nice" to get to a billion dollars before they start to think about selling.

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