ON THE roof, where staff can smoke as well as work, is a big chess set. The names of meeting rooms are in the Cyrillic alphabet. Two sides of the courtyard are a building site of five hollow storeys. You could say that the headquarters of Yandex, Russia’s biggest online-search company, symbolises the country’s whole internet economy: a bit smaller than expected, but growing fast, and unmistakably Russian.
Last year the number of Russians online went up by 14%, to 53m. That made Russia’s online population Europe’s biggest, just ahead of Germany’s, with lots of room left to grow (see chart). GP Bullhound, an investment bank, reckons that only 18% of those people shop online and that online advertising, though rising fast, takes up only 9% of Russian ad budgets. Yandex’s revenues, most of which come from ads, reflect this pretty faithfully. In the first quarter they were 5.9 billion roubles ($200m), 51% more than a year before. Its profits rose at a similar rate.
Russian companies dominate the market. Yandex gets about 60% of online searches, estimates LiveInternet, a research firm. Google attracts about a quarter, though its share has been growing. Mail.ru is by far the biggest portal, e-mail service and online-games platform. It also owns Odnoklassniki, the second-biggest social network, and 40% of VKontakte, the biggest. Facebook lies fourth. Ozon, which sells goods and travel, calls itself both Russia’s Amazon and its Expedia.
The Russian internet market looks more like China’s than either resembles anything in the West. Baidu dominates Chinese search. Tencent plays a similar role to Mail.ru, of which it owns 7.8%. When the Chinese buy online they turn to Dangdang, 360buy or one of Alibaba’s online marketplaces rather than Amazon or eBay. They tap out a cacophony of short posts on Sina Weibo, not Twitter. And so on.
In important ways, Russia is different. It has no equivalent of China’s wildly popular online-video sites (which Chinese people love because censored TV is so dull). It has no Great Firewall. Facebook, Twitter and YouTube are not banned. Foreigners have been much freer to enter Russia, but have struggled all the same. “Closed borders in China let local services develop without competition from the West,” says Dmitry Grishin, Mail.ru’s boss. “That let them succeed in the short term, but will make them weaker in the long term.”
Fritz Demopoulos, an American who co-founded Qunar, a Chinese travel site sold to Baidu last year, and has invested in Ostrovok, a Russian online travel business, says that success in markets with local champions demands local knowledge, technology, access to capital, good management and scale. Except in scale, he says, it is not clear that foreigners enjoy an edge in any of these areas. Since the financial crisis, many people have started to doubt whether “foreign management know-how is all that relevant,” he says.
Russian firms plainly have a head start in Mr Demopoulos’s first area, local knowledge. One reason is language: according to Ilya Segalovich, Yandex’s chief technology officer, Google “totally ignored language understanding” at first, though “they’ve now got quite efficient.” Geography is another. Yandex is especially proud of its maps and traffic data. A mobile-phone app allows Muscovites to order a taxi and then track its progress (or lack of it) through their city’s horrible jams.
But Russia’s online idiosyncrasies, like China’s, go well beyond the script and the map. Because people still expect to be able to buy from a human being, or at least complain to one, Ostrovok, Ozon and others run call centres, publishing the numbers on their home pages. Serge Faguet, one of Ostrovok’s founders, says that his company learned by watching Ctrip, a Chinese online travel company, whose customers make half of their bookings by phone.
Russians like to pay in cash. Sometimes they do this at automatic kiosks made by QIWI, another Russian firm. Mr Faguet says a “meaningful proportion” of Ostrovok’s sales are paid for at these “ATMs in reverse”. Russians also like to be sure that their goods will turn up—and that they like them—before handing over their money. Sometimes they order from several suppliers and buy from the one that gets there first. Four-fifths of stuff bought from Ozon is paid for in cash on delivery. Chinese online shoppers also like to pay this way.
Like its bigger Chinese cousins, Ozon has to make sure that its goods arrive on time, despite being sent across an enormous country where courier services are patchy and the post is not always to be trusted. So, like them (and others: see article), it has set up its own logistics operation to deliver goods to the customer’s door, in Moscow and St Petersburg, or to one of 2,000 pick-up points. (About 10% of orders go by mail.) In a business with huge economies of scale, it makes sense to deliver for third parties too. About 70 have signed up.
As for technology, Russia, like China, can draw from a deep well of mathematical and scientific talent. In the late 1990s, recalls Alexander Turkot, the head of the information-technology division of Skolkovo, a government-owned centre for technology companies, “at least every second engineer wanted to leave”. Standards in universities drooped too. Now the outlook is brighter, graduates’ salaries are good and people are coming back. Three of Ostrovok’s engineers moved to Moscow from abroad. (Mr Faguet and his co-founder, Kirill Makharinsky, are returnees, having left Russia as children.) Still, says Mr Turkot, it is not always easy to explain to young people that they do not have to be in oil, gas or finance to make money.
As in many countries, in Russia financial and other support is easier to find, the bigger you are. Foreign investors have been keener on the place than foreign operators. Yandex raised $1.3 billion when it was floated on America’s NASDAQ stockmarket a year ago; Mail.ru raised more than $900m in London in November 2010. (Yandex’s share price has since gone down a bit; Mail.ru’s shares are up.) Western venture capitalists have bought stakes in the most promising e-commerce companies, including Ostrovok and Ozon. But local angel investors, who put money into the youngest companies, are far rarer than in America, western Europe or China.
Some support is being built for the saplings. At Digital October, in an old chocolate factory on the bank of the Moscow river, young entrepreneurs can attend seminars find a meeting room or simply socialise. And at Skolkovo, the state is trying both to support young Russian firms and to attract big multinationals. Companies may apply to be “residents” of Skolkovo—although the site, outside Moscow, is still being built, so residency is mainly “virtual” for now. Residents are eligible for tax breaks, advice and grants. The government takes no equity, but Mr Turkot hopes that “market money” will follow his “stupid money”.
The bear abroad
Having dominated at home, can Russian internet companies do as well abroad? As investors, some already have, notably in social media. Both Mail.ru and DST Global, an investment firm to which it used to be closely tied, have stakes in Facebook, which is due to float on May 18th. Selling some shares will give them cash to invest elsewhere. Both also have slices of Groupon, a daily-deals site, and Zynga, a social-games company, which made their stockmarket debuts last year.
The big firms, at least, have ambitions as operators too. Yandex made a foray into Turkey last September. Its market share is only about 1%: Google (who else?) rules. Mr Segalovich says it is too soon to tell how things are going. He will take stock at the end of the year. Mail.ru sees games, which it produces in foreign languages already, as a bridge to Germany and elsewhere.
At Skolkovo, Mr Turkot says that he is looking for export potential in the young companies he will take under his wing. He also says he wants no “copycats”, of which there are plenty in the internet world. A search for new export champions is understandable in an economy that relies heavily on natural resources. And the internet is full of ideas that burst across borders. But the market does not always go where officials would like it to, especially in the free-spirited internet. And there will be plenty of demand to meet at home.
Source: www.economist.com