REUTERS SUMMIT-'Russian Hulu' squares up to online TV pirates

Thu Sep 26, 2013 12:32pm EDT

(For other news from Reuters Russia and East Europe Investment Summit click here)

* Russia's internet audience largest in Europe

* Online advertising revenue seen rising 65 pct to $3 bln in 3 yrs

* Piracy accounts for 75 pct of online viewing

By Alessandra Prentice

MOSCOW, Sept 26 (Reuters) - Luring Russia's 72 million web users away from online pirates is a top priority for leading Russian internet TV portal Tvigle, the firm's head told Reuters, forecasting revenues will double in the next two years.

Tvigle, an online streaming service similar to U.S. firms Hulu and Netflix, already has 10 million unique monthly views. It aims to wean consumers off illegal content, which accounts for around three-quarters of online viewing in Russia.

Tvigle (www.tvigle.ru) offers a suite of channels including drama "webisodes" and children's cartoons. It also carries programming targeted at male and female audiences, with another channel aimed at moviegoers.

"Our biggest competitor is piracy. Ninety percent of the market is open and it's our biggest opportunity ... We are going to convert this media space to the legal side," Tvigle founder and CEO Egor Yakovlev told the Reuters Russia Investment Summit.

Russia's commodities-based economy is slowing down with traditional industries such as steelmaking suffering steep slumps. By contrast, business is booming at internet-focused firms like Tvigle, whose revenue tripled in 2012.

"No one expected such growth in one year. People for the first time have a freedom to choose and are never going back to linear TV," Yakovlev said.

Tvigle is capitalising on an accelerating consumer shift away from traditional television toward more flexible on-demand viewing on computers, tablets and internet-connected televisions.

However, endemic piracy - only 5 percent of downloads in Russia are legal - challenges Tvigle and other providers.

Yakovlev, a former computer programmer for nuclear power plants, said Tvigle's free higher-quality content would entice more and more Russians away from pirated videos.

What's more, Tvigle generates most of its revenue from advertising rather than subscriptions, which Yakovlev reckons will encourage Russian viewers, accustomed to free content, to shift away from illegal content.

The company forecasts the market for online digital advertising rising over 65 percent to $3 billion in three years.

REAL CAPITALISM

Russia's business environment is often criticised for lacking transparency and its intrusive regulation, but these issues are not apparent to the new wave of online firms, according to core shareholder representative Maxim Melnikov.

"With the metal and gas companies there is a risk of the government getting involved, but when it comes to the internet - this is real capitalism," Melnikov, whose investment firm Media3 is the largest shareholder in Tvigle, told the Summit.

One issue which Tvigle does struggle with is Russia's sometimes labyrinthine bureaucracy.

"We are 100 percent legal and pay 100 percent of our taxes and that's kind of challenging in Russia. There's still the situation that you have to spend lots of resources on paperwork and not on your actual business," Yakovlev said.

The tougher operating environment, language barrier and licensing issues have so far deterred global providers such as Hulu, Netflix or Amazon.com Inc's Prime Instant Video service from launching a Russian service.

But foreign companies are unlikely to want to steer clear of Europe's largest internet audience for long, Melnikov said.

"(Amazon's) representative has been here a few times looking for M&A opportunities and I don't believe that there won't be an Amazon or Netflix in Russia in 3-5 years. The point is how big we are at that time," he said.

Tvigle raised initial funding in 2007 from Allianz-Rosno Asset Management, part of German insurance group Allianz , and a further round in 2011 from PromSvyazCapital, the investment arm of bankers Dmitry and Alexey Ananiev.

Around a quarter of the company is now owned by Allianz and a third by Media3 - a holding structure of PromSvyazCapital. Founder Yakovlev owns a quarter with the rest distributed among management and staff. (Additional reporting by Megan Davies; Editing by Douglas Busvine/Mark Heinrich)

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