Supply and demand: CEE’s home-grown Netflix rivals

Russian service Tvigle.ru

The over-the-top video market in Central and Eastern Europe is in a state of growth and it is local players that are defining the market. Andy McDonald reports.

The rise of over-the-top (OTT) video on a global scale is typified by the rapid growth of services like Netflix and Amazon Prime Instant Video. Yet in central and eastern Europe, where these US giants are yet to set their sights, the market is already being defined by a new generation of home-grown players.

Companies like Ivi.ru, Stream.ru, Tvigle.ru, Player.pl, Ipla.tv and Iplex.pl have not only established themselves in recent years, but have also grown their market share, developed their business models and are already focusing on multi-device strategies that are putting them on a full range of connected devices.

Smart TVs, games consoles, tablets and mobiles are all helping to give these VOD services a foothold in a part of the world that was once better known for its rampant online piracy. While these issues still exist, the local OTT players are gaining in confidence, and are now even setting foreign expansion goals of their own in markets that are theirs for the taking.

Business potential

Across eastern Europe as a whole, Informa claims that advertising revenues accounted for a huge 99.7% of OTT revenue market share in 2010. Last year the balance shifted slightly, with ad revenue share dropping to 77.7% and subscription revenues growing to account for 16.9%, while transaction revenues made up the remaining 5.4%. By 2017, this is tipped to become 58.7% ad revenues, 32.9% subscription revenues and 8.4% transaction revenues. As far as money is concerned, Informa predicts that OTT market revenues in eastern Europe will climb dramatically from a total industry of just US$26.75 million (€19.75 million) in 2010 to  US$699.8 million in 2017.

The gradual shift in business model from an almost entirely free and ad-supported approach to a system that embraces both subscription and transactional can already be discerned in the approaches being taken by some of the major players in the space.

Russian VoD site Tvigle originally launched in 2007 and now claims a current user base of 11 million Russian viewers. According to a recent report by Digital TV Research, around 90% of its revenues are from ads. Founder and CEO Egor Yakovlev claims that the firm has tried different business models “a couple of times in the past” but is keen to add in a ‘premium’ layer to the service later this year.

[icitspot id=”194292″ template=”pull-quote”]“In the past with [a] paid model we [were] always in a situation where we’d lose money, but in the timeframe of next autumn we do plan to go out with a new level of subscription and transactional model as well – but we are going to do that only on devices. We are not going to do it on the open internet, on computers. We will do it on smart TVs and we will probably do it on set-top boxes,” says Yakovlev.

Among the premium content that Yakovlev is keen to secure for the site on a subscription basis is US TV series from big studios such as NBC Universal. “Mostly we are going to target TV series because you will be able, from a relatively compact catalogue, to build a long relationship with the customers and to build loyalty in a more durable way than you could do on a single feature movie,” says Yakovlev. He also aims to offer a “freemium or a mixed type of model” for Russian music videos, allowing users to watch on an ad-free basis for a small monthly fee, or for free with ads included.

Russian rival Ivi.ru launched in 2010 and as of last summer had an estimated 3.7 million registered users and 16 million monthly visitors, with founder and CEO Oleg Tumanov claiming it is the biggest legal VoD service in the country. Ivi.ru has deals in place with the six major US studios, along with European studios and all the main Russian content producers, and offers both ad-supported and paid access models.

Tumanov says this mixed-model approach is designed to avoid the service becoming a “niche” home just for premiere content, with the site offering paid programming in short release windows alongside ad-supported movies, TV shows, animation and music videos. “As the market changes, more attention is paid to TVoD and SVoD offerings, as these offer an opportunity to deliver cinema premieres and popular catch-up content,” says Tumanov. “As long as our audience is used to consuming pirate content for free, ad-supported movies are still preferable for most of Ivi’s audience. But today the situation is gradually changing. Subscription is a service that takes a longer time to develop. It is our focus for 2014 to make visible progress with this business model.”

Moving to mobile

Russia’s Stream.ru is slightly different in that it has been paid from the start. However, it is also looking to extend its business in different ways. The VoD service is owned by Russian telco Mobile TeleSystems (MTS) and last year, in collaboration with its parent company, it launched a series of value-added services for phone users, including a music offering. “The first year showed that we can deliver a high-quality product, especially when demand for voice services in telecommunication is shrinking. We gained efficiency and reached stability with this service. Now we have plans to expand our cooperation with different copyright holders in order to attract more subscribers and provide a better variety of music,” explains Stream.ru CEO Artem Zassoursky.

He says that Stream’s experience in working with copyright holders in the cinema business has helped the service to expand into the music field. The firm has a deal in place with Melodia, a major copyright holder of classic music in Russia, and Zassoursky says that he is confident that “by offering our clients the best of the best of Russian and western classical music from Tchaikovsky to Rakhmaninov, recorded by the outstanding Russian and Soviet musicians, we may influence people’s taste, and educate them a little bit.” He also points to Stream’s recently launched mobile ad sales house as another new project, and says “we have an ambitious plan to build from scratch a powerful sales house and creative agency, dealing with a fast growing market for mobile ads.”

Over in Poland, Iplex.pl – a smaller rival to the likes of Cyfrowy Polsat-backed Ipla.tv, TVN-owned Player.pl and online portal Onet-owned VOD.pl – is also looking to mobile to help boost its presence and last autumn launched a special ‘Iplex powered by T-Mobile’ application. Vice-CEO Lukasz Skrzypek says that this allowed T-Mobile customers to not only watch Iplex’s film content on mobile devices, but to add the costs of the application to their monthly T-Mobile bill.

The theory seems sound. According to recent Cisco research, the share of smart devices and connections in central and eastern Europe will rise from 15% in 2013 to 61% in 2018. At the same time, average mobile network connection speeds will grow at a compound annual growth rate of 11%.

Iplex offers a catalogue of more than 1,500 film titles focused on world cinema and art-house movies. The service works on an ad-supported and a subscription model with roughly 1,000 titles available free with ads. The SVoD layer has two levels – Iplex Plus, which gives access to premium films without adverts for PLN9.90 (?2.4o) per month, and Iplex Zero, which turns off the ads before and during free content for PLN19.90 per year. Like many of its rivals, Iplex offers apps for various smart TVs, as well as on local cable TV via Toya 3G. Its Android and iOS apps are only available to T-Mobile customers, though Skrzypek says Iplex is planning a general release soon.

Repositioning of Player.pl 

Polish broadcaster TVN recently relaunched its online VoD service on Sony PlayStation 3 consoles, with a debut on PS4 due to follow, after rebranding it from TVNplayer.pl to Player.pl earlier this year. Maciej Maciejowski, member of the management board in charge of new business development at TVN, says the change in branding came as TVN “enriched the offering with third party providers”, having initially been focused solely on offering TVN’s linear output on the web. “We look at Player.pl as a high quality service – that’s an important distinction between things like YouTube or some other providers,” says Maciejowski. He stresses that TVN’s service is focused on full-length TV shows and, to the extent that it can secure the rights, movie content, and not video clips.

Player.pl

According to stats from Polish measurement body Megapanel, Player.pl has the most engaged audience of all the Polish VoD services, with the average time spent on Player.pl in February this year seven hours and 13 minutes. However, it trails Onet’s VOD.pl portal and Cyfrowy Polsat-owned Ipla.tv in terms of unique users. Currently the service is ad-supported, but Maciejowski says TVN is already trialling a Player+ option, offering “some major Hollywood content and other things that are available only in the paid model.” Maciejowski says that in the future he plans to enrich the offer with paid content and that the trial set out to determine “people’s willingness to pay for any online offering”.

“In Poland this market is a little different than the UK, for instance, because we don’t have Lovefilm/Amazon or Netflix here. The majority, and by majority I mean 99% of the online VoD offering, is advertising-supported. So that’s the reality that has been created here. Right now, to [be] entering with a paid offer, [you] must be very, very well prepared,” he says.

Maciejowski concedes that subscription revenues in Poland are currently “not significant,” but claims that studios holding content back for long periods of time also “opens the playground for pirates”. Since the second half of last year, he says there has been a “huge change” in the attitude of the Hollywood studios: “I think that they realise that there is real money in some [CEE] markets [and] there is real money in advertising-supported models.”

Iplex’s Skrzypek agrees that discussions with even the biggest major studios are now easier than when the firm first started negotiating with the US majors back in 2008 – provided that “cost and technology, especially safety, levels are fulfilled”. He says that it’s “possible to acquire almost any film, but the costs usually block the deal”.

Connected devices 

At Stream.ru, Zassoursky says that the uptake of connected devices is helping the online video industry transition towards paid offerings. Stream is available on various smart TV brands, as well as on iOS and Android tablets and phones and Windows 8 devices – all products that are arguably more commonly associated with offering content in a paid ecosystem than computers browsing the open web.

“Smart TV is the most profitable at the moment but the other platforms are important for business development as well,” says Zassoursky. “As we and other online services develop high-quality applications for different platforms our viewers are more willing to pay for OTT. I should mention that the obvious trend is a decrease in internet viewers and a significant increase in smart TV, iPad and other mobile device viewers. That’s a positive sign for us as followers of a paid model.”

According to ComScore stats from August 2013, Russia had 60 million total unique video viewers, who watched 162.4 videos each during the month. Ivi.ru’s Tumanov says that with this high volume of traffic, revenue for the online video segment in Russia grew by 67% year-on-year in 2013 and Ivi.ru’s own business doubled last year. “In general this became possible mostly due to an impressive expansion of connected devices: tablets, smartphones and smart TVs. Combined with governmental anti-piracy actions and rising interest in online video advertising, OTT video has a chance to preserve its growth dynamic for several years ahead,” says Tumanov.

This growth in connected device penetration is only set to increase as general web connectivity improves in Russia. The Russian government has set a target for broadband to be available to 95% of homes by 2015, while Russia’s Ministry of Communications estimated there were roughly 83.2 million active internet users in Russia by September 2013, up from 71.7 million a year earlier.

At TVN, Maciejowski estimates that 40% of traffic to Player.pl is currently divided equally between connected and mobile devices – even though this is not currently measured by official research. “I see a huge change in favour of smart TVs and connected devices…with strong growth in importance of connected devices year-on-year,” he says, adding that the TV is the “natural screen” for full-length content.

Piracy problems

Though piracy is still a concern in Russia, the country is taking positive steps at addressing the issue. The government passed new anti-piracy measures last summer, which, though criticised by some as a potential tool for strengthening online censorship, have been praised by others as a much-needed means to help protect copyrighted content.

According to a report published in October by East-West Digital News in partnership with comScore, Ernst & Young, Moscow’s Higher School of Economics, and The Next Web, the law has had an immediate effect. The legislation allows a Moscow Court to temporarily block access to any illegal content, as well as hyperlinks to this content, and in the first two months alone 56 complaints were filed and three sites were blocked.

“Piracy is a major concern in Russia, though I must admit that the new anti-piracy law passed in August 2013 is an excellent step forwards. There is less illegal video content today on [leading social networks] VKontakte or Odnoklassniki than there was 10 months ago,” says Stream.ru’s Zassoursky.

At Ivi.ru, Tumanov believes that the recent legislation is a move in the right direction, but says piracy still remains the biggest competition for all legal services in Russia. “When we speak about legal digital distribution in Russia, copyright protection remains the hardest thing to improve. Recent acts by our legislatures are definitely steps in the right direction but the enforcement mechanism is still underdeveloped. Cooperation from major Russian internet companies including the main social networks and Yandex is clearly necessary; otherwise the effect of this law will not be significant,” says Tumanov.

Over at Tvigle, Yakovlev agrees that things have “become better” with the new law, but says piracy is “still a challenge for everybody.” He says that some of the major Russian web portals are “still covering the availability of pirated titles by using the explanation that somebody else uploaded it”, and claims that in Russia pirated domestic movie content can still even be found on YouTube – despite the latter’s Content ID copyright protection system, which has effectively purged pirated western movies and TV content from the site.

“If you are a small or medium-sized production studio, which is shooting one feature film in three years, which is often the case, you probably simply don’t have the resources and expertise to protect your content on YouTube,” says Yakovlev, who claims that only the big production studios in Russia effectively police their content on the site.

In Poland, TVN’s Maciejowski says “we are in the process of lobbying for the new law” to tackle piracy, but claims part of the difficulty is that often the pirate sites are offshore entities, that fall outside of EU legislation. He also says that more can be done to educate web users who have little knowledge of rights issues – “a lot of people who use the pirate websites – the VoD websites – are not aware of the fact that they are pirates. Because the perception of the people is ‘if I pay, it’s legal’.”

“I think that the first step for Europe to fight the pirates is to have good tools to cut off the money to them and to cut off the advertising money, because you might very often find Google Ads on a pirate website. To cut off financing from payment processors like PayPal, that’s the best way to fight piracy,” says Maciejowski.

Expansion plans

While piracy is something that all of the CEE OTT players have had to contend with, it has perhaps also been a deterrent to the likes of Netflix, which has set its sights on a major expansion in Europe this year, but is so far focusing its efforts on western European countries.

The firm currently has launches lined up for Germany, Austria, Switzerland, France, Belgium and Luxembourg for later in 2014 but has not laid out any plans for CEE.

“Russia, in my view, represents a challenging environment for Netflix due to the high level of piracy, language, local content, local competition and the legal system. I wouldn’t see [it] as the next priority for them but can’t comment on [their] plans,” says Ivi’s Tumanov.

In Poland, both TVN’s Maciejowski and Iplex’s Skrzypek believe that a move by Netflix would help to educate the market, promote paid OTT in the country and allow Polish VoD platforms to reach new subscribers. As Maciejowski says, “I hope that Netflix will teach people to pay for content, but one has to remember, the biggest problem with the piracy issue is that most of the content that is desired by the audience is not available.”

Tvigle’s Yakovlev is more damning about Netflix’s potential to cross over into the Russian market. “If you take a look at the current Netflix catalogue – and let’s assume all this catalogue became available in Russian translation – nobody would be interested in 99.5% of this catalogue in Russia. Let’s be honest – it’s relatively old movies, it’s relatively few premium titles, it’s almost zero premieres,” he says. “You have to do really complicated homework to be successful in this market, if you are coming from abroad.”

With no pledges yet made by the major western OTT players about heading into CEE, the domestic players are themselves looking at possible expansion opportunities.

Tvigle previously had plans in place to expand into Ukraine this year and had made its first steps towards doing so, before the political situation in the country, and its knock-on effect on the ad market there, scuppered its plans. Yakovlev says there is still potential for Tvigle to make a move into this market should the situation improves, but says it is now also considering making a move into other former Soviet Union, Russian-language speaking countries – namely Belarus and Kazakhstan.

Stream.ru says it too has plans to expand into other CIS countries this year, but would not elaborate on these, while Iplex said it has plans to move outside of Poland, but did not give further details. TVN’s Maciejowski is equally cagey. “There are some plans to expand, I would say, but I don’t want to reveal them too early. Our plan is to have the best online player on the market – that’s it.” Watch this space.