Hollywood Giants Face New Hurdles in Russia Next Year

Jaap Buitendijk
'Fantastic Beasts: Crimes of Grindelwald,' a top grosser in Russia in 2018, was criticized by the country's culture minister.

Authorities have introduced restrictions on studio films, such as the right to move release dates to avoid collision with major local movies and an age rating system that favors homemade titles.

Next year is likely to be a bumpy ride for major U.S. entertainment and technology players in Russia, with a mix of new challenges and opportunities set to affect the business in the country.

The past year was generally good for Hollywood movies in Russia, with the top 10 list of the highest-grossing titles dominated by Hollywood features, led by Avengers: Infinity War, Venom and Fantastic Beasts: The Crimes of Grindelwald as the three top performers. And Venom became the all-time best performer for Sony in the country.

Still, Russia has long been a challenging market to navigate for Hollywood studios, U.S. networks and tech giants. Over the last few years, Russian authorities have introduced restrictions on Hollywood movies, such as the right to move release dates to avoid collision with major local movies and an age rating system that favors homemade titles. 

Elsewhere, U.S. tech giants have faced threats from Russian authorities, as they were unwilling to comply with a controversial local law on data protection.

Heading into 2019, the industry is facing a good news/bad news situation in the country. Here is a closer look at the risks, challenges and opportunities that Hollywood and tech giants are set to encounter in Russia in the new year.

More opportunity for online video revenue

As Russian online video services continue to gain momentum, they have emerged as new potential vehicles for Hollywood content, opening up licensing — and revenue — opportunities for U.S. studios and networks.

Over the last five years, the number of paying subscribers of local online video services grew from 4 million to 25 million, according to the country's communications ministry.

In November, new online video service Videomore premiered HBO's My Brilliant Friend simultaneously with the U.S. and other countries, which was the first such premiere for the service aiming to establish itself as a major source of premium foreign TV and movie content. Videomore was conceived as a joint venture by two major Russian networks, National Media Group (NMG) and CTC Media.

Among Videomore's other U.S. titles is The Witches of Oz, and the company plans to add more in the new year.

Russia's other major online video services that offer Hollywood fare include Amediateka, "the Home of HBO," ivi.ru and Megogo. Online giant Yandex, known as "the Russian Google," recently moved into this field as well, signing an agreement with Warner Bros. International Television Distribution to air TV series online, including Castle Rock.

Meanwhile, as Russian video services increase the amount of Hollywood content they offer, a need for better accountability has arisen in Russia.

Responding to that, as of 2019, Nielsen has said it will count the number of views of movies on Russian online video services, following a push from the local association of producers. The association acted on behalf of local producers and distributors that complained that they didn't trust viewership reports coming directly from online video services.

Over the last few years, revenue of local online video services has been rising by 30 to 40 percent a year, while license payments to rights holders have seen an annual increase of less than 10 percent a year. Rights holders suggested that online video services might have been underreporting the number of views. To obtain reliable data, the producers’ association suggested that an independent company be brought in to count the number of views, and Nielsen was hired to do the job.

A representative for Nielsen in Russia told The Hollywood Reporter that the company will collect viewing data from the country’s online video services and send them to rights holders with a software solution that tracks views and calculates royalties.

New bureaucratic hurdles

As of 2019, digital service providers, including Netflix, Apple and Google's Google Play, will have to go through a more complicated procedure of paying the digital content sales tax that the country slapped on all foreign companies that sell movies, music and other content online as of 2017.

As opposed to the previous system, under which the tax, often referred to as the "Google tax," could be paid by Russian partners, foreign digital content companies will now be required to register with local tax authorities, which will require more work and resources. 

The digital giants have not commented on the situation. However, Frank Schauff, CEO of the Association of European Business, sent a letter to Russian finance minister Anton Siluanov in November, in which he called for keeping the existing procedure, complaining that the new scheme would lead to "substantial hurdles" for foreign companies operating in the country. Russian authorities ignored the letter.

"Control over online distribution is vital for conducting business in a civilized way," Alexander Semenov, publisher and editor of the local trade journal Kinobusiness Today, told THR.

The "Google tax" was launched as an initiative to support local online video services, which had complained that Netflix, Apple and Google have an advantage over them due to their size and global reach.

In 2017, foreign companies paid a total of 9.4 billion rubles ($141 million) in these taxes. As of late November, the 2018 figure was 11 billion rubles ($165 million). No breakdown by company has been available.

New protectionism threat

Meanwhile, a threat of new restrictions on Hollywood movies has emerged late in the year, as state officials and prominent filmmakers brought up the subject again.

"Government protectionism in the area of cinema should be stepped up," culture minister Vladimir Medinsky was quoted as saying by state-run news agency RIA Novosti in early December. "Otherwise, the global Hollywood machine will destroy our film industry."

Medinsky was enraged by the fact that on some days in November Warner’s Fantastic Beasts: The Crimes of Grindelwald accounted for more than 70 percent of all screenings at Russian theaters, while many homemade films were having a hard time getting released.

"I was indignant to see nearly two-thirds of all screenings be given to one movie," he explained. "What is it, other than a monopoly, a total monopoly of Hollywood studios who dictate their conditions to the cinema chains?"

The idea of restricting Hollywood movies at the Russian box office as a step to protect local producers has been discussed in the country for years. The political drive to restrict Hollywood fare became stronger when relations between the United States and Russian soured after the annexation of the Crimea peninsular region from Ukraine in 2014 and the U.S. slapped sanctions on Russia.

However, as the proportion of homemade movies of the total box office gross rose over the last few years, reaching 25 percent in 2017, the government decided not to take any radical steps. Exhibitors have opposed quotas on foreign film releases in the past, saying that would hurt their business. 

Still, some top personalities in the filmmaking community are in favor of the idea of protecting local films at the expense of Hollywood.

Nikita Mikhalkov, an Oscar-winning director and chairman of the Russian filmmakers’ union, recently lashed out against Hollywood. "We give too much money to those who don’t respect us," he was quoted as saying by the TASS news agency. "They introduce sanctions against us, they try to bend us, and we give them money. As a Russian citizen, I am upset to see those which don’t respect us to generate billions from the Russian box office."

Karen Shakhnazarov, a film director and head of Mosfilm studio, has also called for restrictions against Hollywood movies.

Some recent proposals have suggested restricting the total number of screenings of any single release to 35 percent of the total number of screenings in the country and the introduction of a three-percent tax on all foreign releases to protect the local film sector. An earlier idea of minimum quotas for homemade films at the expense of Hollywood is not completely off the agenda either.

But drastic steps, like a complete ban on Hollywood movies, which some politicians called for in the past, are unlikely. "Hollywood majors still bring too much money to the local industry," Semenov concluded. "Homemade releases wouldn't make up for that."