Business & Financial Markets (Moscow) - February 1, 2008

RBC has acquired a controlling stake in the online digital content store Fidel.ru for $8.5m, with the investment commitments factored in. Analysts believe that Fidel.ru will have a hard time standing up to content piracy, though its members could eventually increase their profits as the market moves on to legalization.

Under the deal’s terms, the holding may boost its controlling stake (51 percent) to 75 percent over the course of three years. RBC’s subsidiary, Media Mir, will take up the development of Fidel.ru.

Launched back in 2005, Fidel.ru features music tracks by 75 leading copyright holders, including Sony BMG, Universal Music Group and the Russian companies CD Land, Pervoye Muzykalnoye Izdatelstvo, Misteriya Zvuka and Pravitelstvo Zvuka. The music tracks’ sales have been authorized by the copyright holders and related rights owners, and their .wma format protects them against unsanctioned copying. The store also offers audio books, mobile content and computer games.

According to eMarketer, the entire global online music market swelled 47 percent to $2.8bn during 2007, and it is expected to reach $7.5bn by 2011. Jupiter Research predicts that by 2012, 20 percent of users will be purchasing music online, while a quarter of all music will be in digital format.

Specialists have given cautious estimates of the project’s prospects, however. They tend to believe that the abundance of web portals offering downloadable music for free, as well as torrent networks, obscures the future of such a business. The success of Fidel.ru for RBC will rely largely on whether or not the business development model the new owner of the online store chooses will be flexible enough and adaptable to market changes, said Kira Sokolova, leading consultant of J'son & Partners. “It is vital to take into account the peculiar features of online content distribution, characterized by a high piracy rate, imperfect digital rights management (DRM, a class of technologies limiting unauthorized use of digital content - B&FM), and streamlined e-payment systems,” Sokolova noted.

According to Finam Investment Company analyst Alexei Averkov, commitments to invest in the resource’s development make up at least half of the total price. “Over 90 percent of Internet users are now downloading music for free. Yet the market is steadily moving towards legal buying, which will boost the revenue of its participants. They need additional reserves for promotion and traffic generation, however. This is something RBC has, so the chances that the newly acquired project will develop actively are high,” Averkov reasoned. Most likely, however, the Russian Internet will favor alternative models, with free music downloads offered in exchange for advertising, for instance, and the paid segment is hardly likely to claim more than 30 percent of the market in three to five years to come, he forecasted.