Kommersant (Moscow) - February 1, 2008

The company buys online music store for $8.5m

The media holding RBC has announced its purchase of 51% of shares in the online store fidel.ru for $8.5m. The website is the first Russian Internet content store that has been able to attract a major investor. Prior to this acquisition, it was a common belief that the purchase of such assets is unprofitable due to the high level of online piracy. RBC attributes its acquisition to the adoption of the fourth part of the Civil Code of the Russian Federation, pointing out that the new legislation will strengthen the market positions of online vendors of legal music content.

RBC purchased 51% of the Moscow company Fidel Solutions' share capital, as well as an option to increase its stake by another 24% within the next three years. RBC's subsidiary Media Mir, responsible for the development of the holding's online entertainment resources, will be in charge of the new asset's management. According to Mikhail Gurevich, General Director of Media Mir, the acquisition of Fidel can be attributed to the transparency of schemes used by the store to pay fees to rights holders, adding that "Unlike many other digital content resources, Fidel does not employ the services of agencies for collective copyright management, but rather directly enters into agreements with sound producing companies." Gurevich also indicated that Fidel had already secured agreements with a number of leading music record companies, such as Sony BMG, Universal Music, and others.

Fidel Solutions has been selling digital content since 2005. The company has several owners, including General Director Boris Golikov. Fidel sells music, computer games, audio books, and applications for mobile phones, with a catalogue listing about 7,750 different items. According to Finam Investment Company, Fidel is the most visited online store that sells legal music on the Russian Internet, with a daily audience of 40,000 users. Furthermore, Finam estimates Fidel's revenue for 2007 at $5-$7m.

RBC's acquisition of Fidel is an unprecedented deal for the Russian media market. Up until now, investors preferred to stay away from the sellers of digital content on the Russian Internet. Moreover, the purchase of the mp3line.ru and mp3fond.ru websites by the audiofind.ru company was the largest transaction in this sphere. According to Finam, the amount of the deal, which was struck in late 2006, did not exceed $500,000. "The Russian media market's volume is currently estimated at roughly $2bn per year," Oleg Yashin, executive secretary of the Moscow City Government's Business Council Information Market Security Commission, stated. "Legal sales of digital content account for a mere 3-5% of this sum. With this in mind, investors are scared off by the enormous competition with online pirates."

Media Mir's General Director Mikhail Gurevich believes that Fidel will be able to compete with pirated websites thanks to the recent changes in Russian legislation. "Once the fourth part of the Civil Code comes into effect in the beginning of this year, the situation on the market will change," he said. "The pirates will no longer be able to use agreements with agencies for collective copyright management, such as the Russian Society for Multimedia and Digital Networks and NP Fair (Rightholders Federation for Collective Copyright Management of Works Used Interactively). They will have to either legalize their content by signing direct agreements with the rights holders, or leave the market altogether."

Analysts and competitors of RBC and Fidel have differing attitudes regarding the potential of RBC's new project. Zvuki.ru portal manager and General Director of Soundkey Sonya Sokolova believes that RBC's move to acquire Fidel is quite logical: "RBC is starting to use a portal structure similar to that of mail.ru and Yandex. It purchases and creates social networks, automobile portals and other similar portals, striving to offer a maximum amount of services to the users. Therefore, an inclusion of a music portal into this structure seems to be completely logical."

Managing partner of iKS-Consulting Tatyana Tolmacheva reiterated that even before the adoption of the fourth part of the Civil Code of the Russian Federation, a number of anti-piracy laws were implemented in Russia, though they still failed to prevent the pirates from taking up leading positions on the music online market. "It is rather hard to predict how the new legislation will affect the competition between pirates and legal vendors, as in practice it may take the companies years to adjust to the new laws."

In general, experts point out that RBC is entering a very dynamic market. According to J`Son & Partners, Russia's digital content market stood at $1.7bn in 2006 and it is expected to reach $5bn as early as 2010. At the same time, analysts say that about 70% of all software and music will be sold over the Internet in Russia by that time.