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Business News (more headlines) 02-15-2014

Branded A "Notorious" Market For The Fourth Year Running, Russia's VKontakte Now Has An Opportunity To Change

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By Frances Moore, Chief Executive, IFPI

The digital music business is advancing across the globe. Countries once dominated by piracy now have licensed streaming and download services which pay artists and reward investment. This is a big, positive change for the music industry, driving revenues, investment and consumer spending.

Unfortunately, it is not a uniformly rosy picture, and one country where good news is definitely in short supply is Russia. The country's music market could easily rank among the world's top 10. Instead, the recorded music business languishes down at number 23, with industry revenues among the smallest of any market in Europe.

Russia should have a thriving, world-beating music business. One of the major reasons why it does not is because of vKontakte, the giant online social network whose unlicensed music service dominates digital music in Russia. Reporting over 240 million users, vKontakte uses unlicensed music to attract viewers, and generates substantial revenues from providing access to copyright-infringing music. This is choking the licensed market and draining the music scene of investment.

Today (12th February) the huge scale and harmful impact of vKontakte's music service has been illuminated by an important report from the US Trade Representative (USTR). The "Notorious Markets" list is a respected barometer of respect for copyright in countries around the world. It complements the USTR's Special 301 Review and influences international trading decisions. The latest report, issued today, is not good news for vKontakte. For the fourth year in a row, the Russian internet giant has been included for its record on copyright infringement. The US government report says: vKontakte's business model "appears to include enabling the unauthorized reproduction and distribution, including streaming, of music and other content through the site and associated software applications."

To those trying to build a licensed music business in Russia, this latest criticism will come as no surprise. vKontakte is providing access to tens of thousands of the most popular songs by local and international artists. Calls for action to stop the infringements have been largely ignored.

The US report is important as it shows that the world - not just the Russian and international music industry - is watching vKontakte closely. That is one good reason why the company should think of changing its behaviour.

This is furthermore an ideal moment for action. vKontakte is undergoing significant management changes at the moment. Its founder and former shareholder, Pavel Durov, has sold his stake and control is shifting over to the majority shareholders led by Alisher Usmanov. Press reports speculate on a change of strategy and eventually an IPO on the stock exchange. It appears that vKontakte is eyeing financial investment outside Russia, with all the scrutiny that that will entail. Any company in that position will need to convince investors it has credible long-term growth potential. Showing a serious respect of copyright and being a licensed partner of the music industry will be an important part of that exercise.

vKontakte should not wait for an IPO to seize this opportunity. It should act now, take steps to stop facilitating piracy and become a licensed participant in the music business. Working with record companies vKontakte could be a powerful player in a fast-growing licensed Russian music sector. This does not need to mean that consumers would be deprived of free music - there are already licensed free streaming services such as Yandex and Trava. What it does mean is stopping unlicensed music, so that artists and record labels have the choice of how their music is distributed and get paid a fair return as a result.

These are interesting times in the Russian music market. New digital services, local and international, have arrived and could be successful if the copyright environment is improved. The Russian government has declared its commitment to improve intellectual property protection in the online world. International record companies are looking to partner and invest in a market that has the potential to be one of the largest in the world.

We look to vKontakte, at this pivotal moment, to take action. A vKontakte that no longer acts as a hub for piracy, and which becomes a licensed partner of the music industry, would be in the interests of everyone - consumers, artists, the record companies, and vKontakte itself.

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