When Paul Heth showed up in Moscow after the Soviet Union disbanded, the former U.S. soldier had nothing more than $600 and a love of movies. Now he’s taking on some of Russia’s wealthiest men in a race for box office riches.
After building a chain of the country’s largest multiplexes with partners including Viacom Inc. (VIAB:US) Vice Chairman Shari Redstone, Heth sold it to billionaire Vladimir Potanin’s Cinema Park for about $170 million in 2011, only to be lured back by the prospects of even greater returns.
In December, Heth, backed by Baring Vostok Capital Partners, UFG Private Equity and the Russian Direct Investment Fund, bought No. 3 chain Karo Film for an undisclosed amount and a pledge to spend $100 million on multiplexes over three years. That same month, billionaire Mikhail Fridman sharpened his cinema push, combining his brands under the Formula Kino name to create the country’s second-biggest chain, trailing Cinema Park.
“My idea is to build the thing into $700 million or $800 million company in the next four to five years,” Heth, 49, said in his office at Karo’s flagship October theater on Moscow’s Novy Arbat, named in honor of the 1917 Bolshevik Revolution. “Sales are now at $200 million. We have a hell of a lot of work to get there.”
The native Californian started shuttling movies back and forth from Los Angeles one reel a time in 1993. Russian ticket sales had plunged to less than $3 million a year, forcing theater owners to convert their properties into stores and car dealerships, Heth said. Two decades later, sales reached $1.2 billion a year, making Russia the world’s No. 8 market, ahead of Australia and behind South Korea, according to the Motion Picture Association of America, a Washington-based trade group.
Heth’s first break came via a friend who knew the producer of the 1992 adaptation of Albert Camus’s “The Plague,” starring William Hurt and Robert Duvall. Legal issues had prevented release in the U.S., so after striking a profit- sharing agreement with the Radisson Slavyanskaya Hotel in central Moscow, Heth showed the world premiere of “The Plague” in a conference hall on a Soviet projector.
After maxing out his credit cards to buy uniforms from Gap Inc., Heth said he convinced Coca-Cola Co., ConAgra Foods Inc. (CAG) and the Moscow Times to provide refreshments, a popcorn machine and advertising on credit, respectively. “I was the usher, the cashier and ran the popcorn stand, as was my partner,” Heth said, referring to fellow American Ray Markovich. “We did everything. And it started.”
Two years later, Heth convinced Eastman Kodak Co. (EKDKQ) to fund the first Dolby Digital cinema in Russia, in the Izvestia newspaper building on Pushkin Square. “The Rock,” starring Sean Connery, was the first picture.
“No one had ever been to a theater with digital sound,” Heth said. “People started cheering and clapping, they couldn’t believe it,” he said. “By the end of the day we raised prices from $3 to $8 and people were scalping our tickets for $100 on the street corner.”
Kodak Kinomir has been the top grossing cinema worldwide, making “millions of dollars” with a single screen, equal to an entire multiplex on London’s Leicester Square, according to Heth. Per-screen revenue in the U.S. was about $250,000 on average last year, MPAA data show.
The next breakthrough came in 2001. By then, Vladimir Putin had replaced the ailing Boris Yeltsin as Russia’s president and the social and commercial chaos of the 1990s had started to subside. With incomes surging, companies including Ikea, the world’s biggest home-furnishings retailer, began preparing longer-term investments to capitalize on the country’s resurgence.
It was then that Heth made the biggest bet of his career.
With Ikea planning what would be the first of 14 Mega Malls as big as 300,000 square meters each in Russia’s largest cities, Heth pledged $60 million to become the cinema tenant in four of them. The only problem was he didn’t have the money.
“I signed $60 million of leases with basically no $60 million to secure those sites,” Heth said.
He needed a partner quickly and convinced Shari Redstone, with whom he had developed luxury cinemas in the U.S., to invest in the project. Heth said he’d met Sumner Redstone, Shari’s father, after an industry conference in Las Vegas by introducing himself as “the leading exhibitor from Russia,” without mentioning he operated just a single theater. He was later invited to meet Shari Redstone and together they built Kinostar, a chain of 10- to 15-screen multiplexes.
Russian box-office revenue jumped 120 percent in 2008-2012 as 3D releases inflated ticket prices and the number of modern screens doubled to more than 3,100, according to Nevafilm Research in St. Petersburg, which tracks the industry. The U.S. and Canada, the largest market, had sales of $10.8 billion last year at 42,800 screens, according to MPAA.
The success of big-budget Hollywood blockbusters such as James Cameron’s “Avatar” in 2010, which grossed a record $119 million in Russia, has alarmed some officials in a country where pioneering movie-makers such as Sergei Eisenstein in the Stalin era served as propagandists for the state.
The share of ticket sales generated by domestic movies fell to 15 percent last year from 26 percent in 2008, when the sequel to the 1975 Soviet classic “The Irony of Fate” pulled in $50 million, the most for a Russian movie, according to Russian Film Business Today magazine.
Some lawmakers are hoping to reverse the trend through regulation. A draft law sponsored by Sergei Zheleznyak of the pro-Putin United Russia party would force theaters to allocate at least 20 percent of their screen time to Russian-made movies.
“The threat is very serious,” said Andrey Von, who oversees the cinema business at Fridman’s A1 investment company. The proposed quotas may hurt the profitability of cinema chains and force them curtail investment, Sergey Kitin, CEO of Potanin’s Cinema Park, said in an interview.
Heth, again, is ahead of the pack. In 2005, he joined with Sony Pictures to start Monumental Pictures to make Russian movies. Their biggest hit, with sales of $28 million, is “Vysotsky,” the 2011 biopic about Vladimir Vysotsky, the singer, songwriter and actor who died at 42 during the 1980 Summer Olympics in Moscow.
“He’s an outstanding person to do business with,” Sony Pictures Chairman Michael Lynton said of Heth in an interview in Los Angeles. “He’s very honest, smart, has great follow- through.”
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