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Russian Web Giants’ Expansion Plans Threatened by Google

When Apple Inc. (AAPL) released new maps for Russia in September, customers wondered why their iPhones showed Moscow streets named after Soviet-era leaders two decades after they had been rechristened.

While Google was the beneficiary of a similar mapping mishap in the U.S., in Russia Moscow-based Yandex NV (YNDX) came out the biggest winner. In the following month, downloads by Apple users of Yandex’s map application more than doubled.

A home-market head start and expertise in coping with idiosyncrasies of the Russian language have given Yandex and peers such as VKontakte and Mail.ru Group Ltd. (MAIL) an advantage over Facebook Inc. (FB) and Google Inc. (GOOG) in the the country.

Now, as the Russians look to expand abroad in the face of slowing growth at home, analysts say their strengths may not transfer much beyond the borders of the old Soviet Union.

International expansion “is fine in theory, while in practice it’s tough to compete with such a skilled rival as Google,” said David Ferguson, an analyst at Renaissance Capital in Moscow. “You need to invest a lot of money with no guarantee that it will prove successful.”

Yandex, which has 60 percent of Russia’s Web-search market, accounts for twice as many searches as Google. Social network VKontakte, which built a strong foothold before Facebook entered the market in 2008, has a larger audience in the country than Facebook. And Mail.ru, controlled by billionaire Alisher Usmanov, has seven times as many subscribers to its mail service in Russia as Google’s Gmail does and more social network users than Facebook.

Photographer: Andrey Rudakov/Bloomberg

Employees work at their desks in the Yandex NV company headquarters in Moscow Close

Employees work at their desks in the Yandex NV company headquarters in Moscow

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Photographer: Andrey Rudakov/Bloomberg

Employees work at their desks in the Yandex NV company headquarters in Moscow

Israel, Germany

Yandex says it can succeed in Turkey. VKontakte expects to find profit in countries with large numbers of Russian speakers, such as Israel, the U.S. and Germany. Mail.ru is betting it can prosper selling online games in Asia.

“Our services are used by more than 90 percent of the Russian Internet audience,” said Dmitry Grishin, chief executive officer of Mail.ru, based in Moscow. “We don’t plan to stop here,” he said in October, announcing plans to expand globally under the my.com brand.

Russia surpassed Germany more than a year ago as Europe’s largest Internet market by number of users, according to researcher ComScore Inc. (SCOR) After almost tripling from 2006 to 61 million last fall, Russia’s monthly Web audience is set to grow more slowly, according to the Public Opinion Foundation, a researcher in Moscow.

Yandex increased sales 60 percent in 2011 but is expected to expand a more modest 33 percent this year, and Mail.ru, which grew 64 percent in 2010, could slow to 26 percent this year, according to data gathered by Bloomberg.

Russian Grammar

Among Mail.ru’s first steps has been offering online games in China, Japan and South Korea. Yandex says it chose Turkey because of its population of 80 million, increasing online audience -- the country is now the No. 6 Web search market --and an abundance of local-language content. Yandex says that gives it an edge in indexing pages using algorithms, developed for Russian, that help it better search the many grammatical variations of words in the language.

Yandex, which honed its skills in the 1990s by creating a searchable Russian-language bible that it sold on compact discs, has created a website for searching the Koran to build a following in the country. It has also developed technology for its street-view maps that blurs the face of Mustafa Kemal Ataturk on statues and portraits to comply with a ban on photographing images of the country’s founder. Google, by contrast, doesn’t offer street-view in Turkey.

Beating Bing

Yandex says it can raise its market share in Turkey to 35 percent in five years from 1.4 percent today (Google has 93.7 percent, according to ComScore). That would help it benefit from an online ad market worth $403 million in 2011, according to researcher IAB Europe.

“The target looks ambitious,” said Alexander Vengranovich, an analyst at Otkritie Capital in Moscow. He notes that it took Google about five years to reach 26 percent in Russia, with most of its gains coming from Yandex.

One sign of Yandex’s strength in Turkey: In November, it became the default search on handsets running Windows Phone operating system in Turkey, even though Microsoft Corp (MSFT).’s Bing search engine is available in the country.

So far, the Russians have had their greatest success in what many in the country call “the near-abroad,” or the former Soviet Union, home to 20 million of the 160 million native speakers of Russian. Even there, the Russians aren’t dominant: In Ukraine Google has 58 percent of searches, versus 30 percent for Yandex, and in Belarus Google has 43 percent to Yandex’s 41 percent, according to researcher LiveInternet.

Hollywood Hits

“Expansion to the Russian diaspora in other countries is natural and doesn’t demand large investments,” said Anna Lepetukhina, an analyst at Sberbank Investment Research in Moscow. “In truly foreign markets, the Russian companies may find it hard to compete against global rivals, which came there first and are much more powerful financially.”

Yandex is worth $7.7 billion, versus Google’s $245 billion, and its shares have fallen about 9 percent since its May 2011 initial public offering in New York. Mail.ru, which in November 2010 listed its shares in London, has since risen 21 percent and is worth about $7 billion. VKontakte, based in St. Petersburg, considered an IPO last year but shelved the plan when Facebook’s shares plunged.

Language isn’t the only advantage the Russian companies may lose when expanding abroad. VKontakte users in Russia spend an average of 8.5 hours a month watching video, according to ComScore. That’s because they can find almost any Hollywood movie for free, according to Maxim Kulish, head of Internet Copyright Management LLC, a Moscow company that works to protect the interests of filmmakers.

Illegal Downloads

While the site lets filmmakers delete files that violate copyright, removing content for good is difficult because users add new copies of illegal content every day, he said. VKontakte declined to comment on the matter.

“VKontakte is overtaking Facebook due to its video and audio content, of which probably 90 percent is illegal,” Kulish said. “In Europe or the U.S., such violations would have been controlled more closely and prosecuted.”

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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