Thomas White Global Investing
Russia
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January 13, 2011
A Postcard from Europe
Russia: Booking the Future Face of the Internet

Image showing social media

Digital Sky Technologies also has a stake in Zynga, an Internet games producer, and Groupon, the Internet coupon company.

It’s no secret that Russian President Dmitry Medvedev is passionate about technological revolution. Just last year in June, we wrote how Medvedev is keen to develop a Silicon Valley in Russia. The knowledge economy, he had stressed, was the key to furthering Russia’s economic growth.

When Facebook generated a buzz last week with what appears to be a $50 billion valuation from Goldman Sachs, it was revealed that the Palo Alto-headquartered company also had a rather unexpected investor- Russia’s Digital Sky Technologies. This company plans to pump $50 million into the social media giant. And the Russian influence grows deeper with the Mail.Ru Group owning 2.4% of Facebook. Is Medvedev’s vision coming true?

Recently, Mark Zuckerberg, the founder of Facebook paid a visit to China, where the social network is censored, triggering expectations of a deal with Chinese social media companies. But while China’s Internet populace is the biggest, Facebook is a non-entity there. China has a virtual Facebook clone in Renren, which means everybody, and is currently the largest social network in China. Another leading social network, Qzone, is well entrenched in the Middle Kingdom.

China is a distant goal, but Russia appears a more achievable target for Zuckerberg. What may attract Zuckerberg’s open interest in Russia is this small yet vitally important statistic – Russian netizens spend more time on social networks than any other country. But there are hurdles to overcome. Breaking through in China has been difficult, but Russia is no piece of cake either.

Even Internet behemoth Google has struggled in Russia, with the Russian search engine, Yandex, being number one there and rapidly gaining Internet market share worldwide. The Russian language is a major barrier. Facebook has tried to work around that obstacle by offering Russian translations for many of its unique features, including the ‘like’ and ‘poke’ buttons, so its users are able to capture the nuances of the site better. Competition is stiff. Russian social networks have thrived – sites like Odnoklassniki.ru, VKontakte and Moi Mir all command a loyal following. Still, Facebook’s hold has been expanding – it now has 4.5 Russian million users ever since the social media sensation launched operations in Russia in April last year. That is but a small share of the mammoth 500 million plus members that Facebook has. Clearly, this number can grow. And how. Zuckerberg himself has been quoted as saying that if Facebook can succeed in the Russian market, then it might serve as a blueprint for conquering the Chinese Internet playground.

For now, in Facebook’s all-conquering path, Russia remains a stubborn challenge – just like Brazil and China are, both countries where the social media giant has yet to make significant inroads. That might just begin to change though. What is interesting is that Mail.Ru has a 100% stake in Odnoklassniki and a considerable stake in VKontakte, the Russian social media giants mentioned earlier. And the Mail.Ru Group now has a stake in Facebook. Facebook itself is desperately keen to capture the large Russian Internet market. Is it a win-win situation or a case of Russian roulette? Only time and Russia’s netizens will tell in this riveting age of social media and Internet dynamics.

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