Russia is seeking to shed its image as a hub for pirated movies and become the next hot market for legal online video, a boon for local services trying to lure users before competitors such as Netflix Inc. enter the country.
Starting today, a law signed by President Vladimir Putin makes it harder for Russian websites to host illegal copies of movies or TV shows. The national communications regulator will start adding sites with such content onto a list of addresses that Internet-service providers must block.
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While Netflix and Hulu LLC operate in a Web-video market worth billions of dollars in the U.S., the market in Russia, with a population topping 140 million, is just emerging. Movie services such as Ivi.ru are betting on a change in the behavior of Russian consumers used to watching pirated content on social networking sites or through so-called torrent services.
"It should curb piracy and boost the civilized online- video market in Russia," said Oleg Tumanov, Ivi.ru's founder.
Ivi and local peers conquering the market would be the latest example of U.S. technology giants losing out to Russian clones in the country. Even as Google Inc., Facebook Inc. and Amazon.com Inc. are leaders in the U.S. and much of Western Europe, in Russia it's online-search provider Yandex NV, social network VKontakte and e-commerce company Ozon.ru that dominate.
Ivi.ru, based in Moscow, is the early leader in Russia's fledgling online-video market, saying it has more than 17 million users on different platforms -- desktop, mobile devices and smart TV -- after doubling its customer base in 2012.
About 90 percent of its content is free and has ads, as the wide availability of free pirated movies and TV shows has made it difficult to charge for content, Tumanov said. Though Ivi.ru also offers a subscription package similar to Netflix, so far Russian consumers prefer the free, ad-supported model.
Ad revenue tied to online video will be about $75 million in Russia this year, according to video-site operator Gazprom- Media Digital. That compares with more than $4.1 billion for the U.S., according to EMarketer Inc. The difference between U.S. and Russia shouldn't be more than 10 times, given income and consumer trends, Tumanov said.
"This shows we have a room to grow," said Tumanov, who used to be a banker at billionaire Mikhail Fridman's Alfa Bank and also worked for billionaire Len Blavatnik's Access Industries before setting up his own business in 2007.
Tumanov owns Ivi.ru with investors including Tiger Global Management LLC, the hedge fund founded by Chase Coleman, and Baring Vostok Capital Partners, an early backer of Yandex.
Netflix has said it wants to be a global provider, though it hasn't disclosed plans for Russia. The world's biggest subscription-video service recently announced service in the Netherlands after starting in the U.K. and the Nordic region.
Chief Executive Officer Reed Hastings has said Netflix will look for countries with high broadband penetration, stable payments platforms and decent rights opportunities.
Russia's Internet audience expanded 15 percent last year to 61.3 million users and was the largest in Europe, surpassing Germany and France and outpacing them in growth, according to comScore Inc. Mobile Internet and smart-TV usage also increased.
"We haven't announced any plans for Russia," Joris Evers, a Netflix spokesman, said in an email, declining to comment further on Russia. Netflix, based in Los Gatos, California, has 30 million users in the U.S. and 8 million elsewhere, and the company is on track for annual revenue topping $4 billion.
Sweden's Modern Times Group AB, which has TV operations in Russia, expanded its Viaplay video-subscription service into the country last year. It hasn't provided subscriber numbers.
The new law aims to do away with Russia's decades-old disregard for copyrights, with illegal DVD copies having been replaced by websites providing pirated movies from around the world. The Motion Picture Association of America regards Russia as a "notorious market" where people download 31 million copies of U.S. movies a year using torrent services. At the same time, there wasn't a single Internet piracy criminal case begun in Russia in 2012, according to the International Intellectual Property Alliance, or IIPA.
Measured by desktop users, Ivi.ru's 8.3 million visitors lags far behind sites that critics contend include illegal content -- social network VKontakte with 34 million video users and file-sharing site RuTracker.org with 12.4 million, according to research firm TNS.
VKontakte, part-owned by billionaire Alisher Usmanov's Mail.ru Group Ltd., "has become a hotbed of online piracy for movie, television and music files," Hollywood lobby MPAA said last year. The site allows searching and uploading movies for free, helping to make it Russia's second most-popular website.
VKontakte fully complies with the Digital Millennium Copyright Act, Georgy Lobushkin, a company spokesman, said by e- mail June 26, declining to comment further. The DMCA is a framework for global copyright regulation on the Internet.
RuTracker.org works with copyright owners to delete material they don't want to be freely distributed online, Alexander Volkov, a spokesman for the site, said by email. RuTracker.org's position on the new law is "sharply negative" as it can result in the manipulation of the Internet, he said.
Past attempts to curb illegal sites have been unsuccessful and it remains to be seen whether the new law will be effective, said Svetlana Gorokhova, CEO of Zoomby.ru, a legal movie service.
There's also the problem that authorities have to identify the Web pages to be blacklisted, and they are likely to be swamped by the sheer volume of blocking requests from studios and other copyright owners, said Maxim Kulish, head of Internet Copyright Management LLC, a Moscow company that works to protect the interests of filmmakers.
Olga Sorokina, a 27-year-old child psychologist in the Moscow region, said she downloads comedies and Bruce Willis movies for free from file-sharing websites such as Fast- torrent.ru and torrentino.com.
"I am not ready to pay for them," she said. "Sometimes you see a warning saying that access to this particular movie is 'denied on request of copyrights owner.' But it's no problem -- you can always go to another website to download it."