Yandex, Russia

From The Sunday Times

August 24, 2008

Russians dent Google’s world domination

How a bunch of young upstarts humbled the search-engine giant

Mark Franchetti in Moscow

THE Russian mathematician was 24 years old when he first saw a personal computer, one of only a dozen in the whole Soviet Union. That was in 1984.

A little over two decades later, Arkady Volozh is the chief executive and one of the founders of Yandex, Russia’s most popular internet search engine, a company now valued at £2.5 billion. Widely described as Russia’s answer to Google, Yandex was launched only eight years ago but is now visited by 8m people a day. More impressive still, Yandex and Volozh are credited with humbling Google, by denting its global domination.

Russia is one of only four countries where the American search giant fares considerably worse than local services – alongside China, where the internet is controlled by the government, South Korea and the Czech Republic. To “Google it” may be the common way of searching in much of the world but in Russia Yandex holds 55% of the market compared with Google’s 21%.

It is an advantage Google can ill afford to ignore. As Russia’s economy prospers and its middle class grows, the country is expected to become Europe’s largest internet-user market in the next five years – 60m people by 2013.

Thirteen years ago, when the Russian internet first took off, its entire traffic was small enough to fit on an ordinary flash memory card. Today, by contrast, 33m Russians, as many people as in Britain and already more than in France, use the web.

As a result Yandex is booming. In 2000, when the company was valued at only £7m, its yearly revenue was about £200,000. In 2007 it reached £85m, and industry analysts believe that this figure will probably double this year.

This autumn Yandex is planning to float on the Nasdaq exchange. A group of western investment funds that in 2000 gave the company some £2.5m is expected to sell about £700m worth of shares.

“These are very exciting times,” said Volozh as he prepared to move the company, which employs 1,200 people, to a vast new office in central Moscow. “Russia has the potential to become the largest internet-user market in Europe. It’s a huge market with fantastic growth. Every day more and more people in Russia are discovering the internet.

“We have better technology and understanding of the market. I take the competition seriously and every day check the latest figures to see where it is, but I think we will stay far ahead. What was enough for Google to conquer other markets isn’t enough in Russia.

“In two years since Google opened an office in Russia we haven’t lost a single specialist to our competitors because Yandex is one of the best companies to work for in Russia.”

Broadband penetration in Russia, currently at 10%, is forecast to triple in the next two years. Google, which in an attempt to fight back last month bought Begun, a contextual advertising company for £70m, expects the market for search-relat-ed ads in Russia to rise from £100m last year to £500m by 2010.

Yandex, the world’s second most popular nonEnglish search engine after China’s Baidu, is to open an office in Silicon Valley, headed by one of Yahoo’s former senior vice-presidents. Its New York flotation promises to be the largest yet in Russian technology.

Volozh, 44, who has a degree in applied mathematics, worked as a specialist at a Soviet state pipeline institute when the so-called “kooperativ” (small private businesses) were legalised in 1987. Destined to work for the state for the rest of his life, the young mathematician was unexpectedly ordered to start dabbling in business.

“Ironically, my first business experience was thanks to the Communist party,” said Volozh. “When the law about kooperativ was passed, our boss at the institute came to us and said: you guys are mathematicians, you start a business. We began trading computers and I was made technical director. I was only 24. [We were paid in hardware instead of cash and] I earned two personal computers in one year, a huge sum in those days – enough to buy my first flat, a two-bedroom Moscow apartment.”

By 1990 Volozh had co-founded a company that became one of the largest distributors of computer technology in Russia. At a time when most insiders believed the future of the industry to be mainly in selling hardware, Volozh had great faith in the talent and know-how of Russian specialists. With a group of five computer programmers working out of a cramped flat, he helped set up a search engine for patents.

The experiment led to Yandex (short for yet another indexer), an engine aimed at improving Russian-language searching, which is complicated because of its grammar.

Initial scepticism soon gave way to a giddy rise. Two years after its launch, Yandex took over Rambler, then Russia’s most popular search engine, and broke even a year later. It organised its own free wi-fi network with hotspots all over Russia long before Google got into that game in America and, far from being only a search engine, developed a series of special features.

Its mail service, said Volozh, is protected by unique antispam technology created by its software engineers; it has its own blog search, homegrown electronic-payment system, a social-networking site for business people as well as a real-time traffic-monitoring system, a feature Volozh proudly demonstrated on his mobile phone.

“Our technology is better suited for the Russian market,” he said. “We have brilliant mathematicians and programmers. We are very strong on data analysis and have developed better technology, which is cutting-edge in Russia. We are constantly inventing new programs to stay ahead.”

Yandex’s management style is also very unusual for a Russian company – 120 key specialists have stock options in the business, a first in Russia. Employees, who walk around the office in T-shirts, determine their own timetable, have access to a free canteen and are allowed to play pool and table tennis at work.

In a country where the rich typically flaunt their money, live in lavish mansions, travel by private jet and are shadowed by bodyguards, Volozh – who industry analysts say could soon become a dollar billionaire – is an unlikely business tycoon. He owns neither a yacht nor a plane, drives a Volvo and insists that money has not changed his life.

Even more remarkable for Russia, where business and politics are often intermingled and where connections can be more important than know-how, Volozh never cultivated friends in high places.

Some say that may have to change now that Yandex has been valued at £2.5 billion and has become one of Russia’s best-known brands.

Interest in the company is growing. Alisher Usmanov, the metals bil-lionaire and Arsenal football club shareholder who has invested heavily of late in the Russian internet, was recently reported to be keen on buying a quarter of the company. For now at least, Volozh does not seem to be considering a sale.

“I’m very proud of the fact that we have created something so successful out of nothing, but above all a great brand that sends a positive signal about Russia and that says something about the great talent there is here,” he said.

“People abroad don’t realise that there are many positive things happening in Russia. Yandex is one of them. It’s the country’s best high-tech company. As for what the future holds – more growth, in Russia and abroad. There are huge opportunities for us in former Soviet countries and beyond.”