Russian Search Engine Wars – Part Deux

Yandex logoYandex, which owns Russia’s dominant search engine, reported healthy Q1-2014 earnings last week. Earnings per share in Rubles were 22% ahead of Q1-2013, and the company’s market share in search rose to 61.9% in Q1-2014 (the balance of the search market is primarily held by Google, with around a 27% share).

It was also a notable week for the Russian search engine market on another couple of fronts.

None other than President Putin mentioned Yandex’s capitulation to foreign influence and also made reference to the Internet itself being a “CIA project.” In fact, it was a DARPA project but that’s not the point of this post. Actually, I take that back. It is partially the point. An open Internet makes fact checking such as this too easy.

Creeping state control over the Internet in Russia has been bubbling in the background for some time, starting with selective bans on YouTube videos and pressure on VK to block accounts operated by the political opposition.

I was asked a couple of years ago by a large US  investment bank whether I thought there was an underlying ideological (anti-foreign) reason for Google’s travails in Russia and dismissed it at the time, arguing that, despite these worrying signs, Russia’s rulers valued the country’s integration into the world’s trading system as well as its perception abroad as a modernizing, progressive and confident society, and would fear a backlash from its citizens should they decide to curtail Internet freedoms like in China. In retrospect, I was wrong to minimize the risks to foreign Internet companies. It’s not so much that this fear has dissipated, but rather that the current internal conditions in Russia make the restricting of their own citizens’ liberties laughably easy. Indeed, many Russians are supportive of these moves.

Sputnik logoBack to the fact-checking, Russia has announced progress in developing “Sputnik.ru” a new search engine sponsored by state-controlled Rostelecom which was originally announced in October 2013. Plans are to make Sputnik mandatory in the state sector, which covers an increasingly large swathe of the Russian economy. It’s not hard to fathom the Russian government taking discriminatory actions against Google, Facebook, Twitter and other US-based companies, particularly as the economic sanctions against Russia as a result of the Crimean invasion and annexation, and the regime’s further agitation in eastern Ukraine appear set to escalate. It’s the perfect excuse for Russia to solidify state control over freedom of information access over the Internet. In order to “punish” the west, Russia will restrict their own citizens’ freedoms.

Google Russia logoThe importance of Russia to these global companies is limited. Looking at Google, the company has been a perennial also-ran in its competition for market share with Yandex. Back-of-the-envelope calculations would place Google’s Russian revenues at about US$500 million, less than 1% of the company’s 2013 revenues of US$57.86 billion. Moreover, profitability in the Russian market is certain to be lower than in the company’s core markets due to the requirement to support the Cyrillic language, as well as the significant bureaucratic and compliance overheads imposed by the Russian state (which are not specifically targeted towards Google, other than the censorship monitoring costs). Google’s shareholders may actually applaud the company’s withdrawal from Russia!

So, where do these actions leave Yandex and Mail.ru – Russia’s two most prominent, publicly-listed Internet companies?

Yandex has lost about 20% of its value in the wake of Putin’s comments last week:

Comparative performance of YNDX and GOOG in the last 5 days

Comparative performance of YNDX and GOOG in the last 5 days

While it’s not difficult for Yandex to restrict search results to comply with the state’s dicta, the more important impact is the signal being sent about the prospects for private Russian business (including e-business).

Yandex’s earnings are driven not only by the general Russian economy, but by the recent euphoria of new entrants in the burgeoning Russian e-commerce sector. Cross-border e-commerce retailers such as ASOS and eBay have been aggressively advertising on Yandex in the last 12 months. Moreover, the major locally-based online retailers have also been generous contributors to Yandex’s revenue growth, as a big share of their fundraising from international venture capitalists has been channeled into Yandex advertising in order to spur customer acquisition. The current geopolitical situation would merit at least a pause in the enthusiasm of foreign investors. The Russian online retailers are also likely to pull back, in turn, as international sanctions accelerate an already-weakening Russian economy and their prospects for follow-on venture funding dry up.

Mail.ru is safely in state-friendly hands and VK’s founder, Pavel Durov, has publicly stated that he’s left Russia for good and is shopping for a new host country (although he has been based abroad for quite some time already, ever since the controversy with his objections against state influence in VK started to become more public). De facto or even de jure state control looks to be Yandex’s ultimate fate as well. 

More on the Russian search engine market:

Yandex Reports Market Share Slippage

Battle of the Russian Search Engines: Yandex vs. Google

About Leighton Peter Prabhu

I am a partner in Interstice Consulting LLP and head of the Russian office. My practice focuses on e-commerce business and marketing consulting, especially for foreign e-commerce brands entering the Russian market. I also serve as a consultant to some of the largest international portfolio investors in Russian equities (both public and private). You can find out more about my background and business interests on LinkedIn. You can also connect with me on Twitter and on Google+.

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