Translated material
"Results" / BUSINESS
Minus one and a half billion
David Gundler*The fall of the NASDAQ index backfired on RuNet with pessimism
(inset to this article “What is NASDAQ” see here )
Over the past year and a half, a lot of interesting information projects have appeared on the RuNet, a layer of professionals has formed, and e-commerce has begun to develop. Domestic companies and the state would hardly have been able to so dramatically expand the Russian-language sector of the Internet and create such a number of content resources if investment funds with foreign participation had not graced the Russian market with their presence.
Even in the summer, the prospects seemed quite rosy to many. Observers insisted that now money would flow into the Runet like a river. However, the rise of the Russian Internet in 2000 was mainly due to the overheating of the US financial market. The value of shares of high-tech companies on the NASDAQ turned out to be overvalued from two to three to hundreds of times. There were so many people willing to invest money in hi-tech that investment funds splashed out overboard of the American market and reached Russia in waves.
We
Due to Russian specifics, companies declared the same investment volumes, but in reality they turned out to be an order of magnitude less. Nevertheless, the announced figures still give us some guidelines. The first to announce itself in January was a consortium consisting of the investment group "Russian Funds" and the company "Orion Capital Advisors", which received about $30 million as investments. The resources of "Rambler", "Top100" and "iXBT" became its property. Subsequently, the consortium promised to invest $400 thousand in the information resource Lenta.ru. Golden Telecom promised to invest about $50 million in various projects in Russia and the CIS countries. In particular, the search engine Aport.ru, Atrus and Omen, previously owned by the Agama company, were purchased for $25 million, and it was also acquired for $8.3 million Infoart project.
Here are more examples - the company ru-Net Holdings bought a 35.7% stake in Yandex for $5.3 million and invested $1.8 million in the Ozon online store, and the investment group Delta Capital spent $2, 5 million on Port.ru. The NetBridge holding announced $6 million spent on List.ru projects (fomenko.ru, lovers.ru, etc.), and this does not count its own projects (Molotok.ru auction, 24x7.ru electronic store). Many companies have entered the market and are actively working on it without disclosing their costs - these are Media-Most (Memonet, 7 Days), the Effective Policy Fund, Yukos (Sibintek) and others. Their costs can be calculated only approximately (using different methods). According to our estimates, in 2000, various companies and funds invested more than one hundred million dollars in Russian Internet projects.
They have
According to the Internet Group , in the fourth quarter of last year alone, more than two hundred companies in the United States were closed in one way or another related to the Internet (previously, cases of closure were isolated), of which 110 were engaged in Internet commerce, 30 were content providers, the rest worked in the field infrastructure, software and consulting. Investor losses amounted to more than one and a half billion dollars, which, naturally, could not but cause skepticism about the placement of capital in this industry. The vast majority of Internet projects do not pay off, and the prospects for their profitability are very vague. Budget tightening and staff cuts are taking place in almost all world-famous Internet companies. Top managers prefer to return to sectors of the real economy. (The table below shows the lowest and highest stock prices of the leading companies over a 52-week period in 2000. The largest drop occurred at the end of December.)
| Amazon.com | 100.6 | 15.6 |
| Yahoo.com | 250.1 | 25.5 |
| AOL.com | 88 | 35.5 |
| Priceline.com | 104.25 | 104.3 |
| Ebay.com | 127.5 | 26.75 |
| Microsoft | 119.9 | 41.4 |
| Oracle | 46.5 | 21.5 |
| Dell | 59.7 | 16.3 |
| Intel Corp | 59.7 | 16.3 |
| CISCO INC | 82.0 | 35.2 |
| LUCENT | 78.0 | 14.3 |
| AT&T CORP | 36 | 17.125 |
This year, apparently, nothing good can be expected either. Analysts predict a decrease in the income of the main companies that make up the core of NASDAQ. Almost no one believes the optimistic forecasts of consulting companies: the accuracy of their market development forecasts turned out to be even lower than that of the eternal hero of jokes - the weather forecast. Investors lost not only money, but also faith in the Internet. Moreover, they don’t want to hear anything about its Russian part. Statements like: “There will be less Western investment in 2001” sound naive. There won’t be any at all; there’s nothing to invest in here yet on a Western scale. Risks are good against the backdrop of overall stability. And in Russia, even ordinary business, in Western opinion, should be classified as extremely risky.
Mythology of Runet
Last year, the Runet was ruled by myths. They, like mermaids, lured investors and captivated managers with illusory opportunities to get rich “overnight.” The time has come to remember them - and part forever.
The first and main myth : “The time is already close when international Internet giants, such as Yahoo! or AOL, will come to Russia and choose local partners. You need to have a significant market share in order to sell it profitably.” The myth was inflated to lure the “primary” investor, and the “carrot” was the false statement that the investor would be able to resell the project very profitably after some time. Until the market has gained critical weight for development, Western portals will not come. We need to wait another three to five years until the number of users reaches the required tens of millions. And then we should expect guests, who, by the way, will certainly come to our monastery with their charter. Already, yahoo.com is in the top ten most popular sites among Russian users, and after its Russification it will capture at least a third of the market. And he is unlikely to need supports from local brands, which will require a lot of money.
Myth two : “The second wave of portfolio investors will soon come to the Russian Internet.” There has not been and will not be a second wave. Will the largest American investors really invest hundreds of millions of dollars if it is obvious that it is impossible to return these costs at the current level of market development? Unless a miracle happens (in the creation and promotion of new technologies), the market in Russia will be in the stage of “stagnation” for about three years, then it will begin to rise again, and take off no earlier than in six to eight years.
Myth three : “The resource is easy to recoup through advertising; advertising on the Internet is effective.” Indeed, there are several projects that pay for themselves through advertising. But, firstly, they can be counted on one hand, and secondly, will they be able to do this in the future? According to our estimates, the monetary volume of the advertising market in 2000 did not exceed three million dollars, and next year it will amount to no more than 5 million. Investment budgets spent on promoting portals through advertising have been exhausted. And the income line is still empty. None of the electronic stores still pays for themselves. The effectiveness of advertising leaves much to be desired. There are still too few buyers on the Russian Internet to recoup advertisers' expenses. It is no coincidence that in the United States, more than 60 percent of online advertising is branding, that is, image advertising. What domestic brands can be effectively promoted on our Network and how justified will the costs be? So far, most of the image advertising has been in the “offset” category.
Myth four . "The number of users and advertising volumes will increase steadily." There are good reasons to believe that most of those who wanted and had the opportunity to access the Internet have already done so. In order for the permanent audience to double and reach five million users, a major modernization of the Russian telephone network and the solution of extremely capital-intensive telecommunications problems are required. There are a little more than seven million computers in Russia, and a significant part of them are not able to work with modern programs. Two-thirds of the already small number of telephone lines are analog, not digital. Therefore, argumentation along the lines of “the victory of communism is inevitable because it is objective” seems inappropriate in our case.
What year is coming..?
The period for updating the “general face” of Runet is two years. This year the time will come to pay for your debts. As a result, the number of projects will be reduced. In the worst conditions - up to 30% of the current number. Those who cannot justify their commercial appeal will drop out of the game. In accordance with their business plans, most large companies (Rambler, ru-Net Holdings and many others) expected to achieve self-sufficiency in 2001. It remains to wish them success so that they do not sink into oblivion like dozens of other projects. Stability and overall growth benefit everyone.
Most likely, the year in e-commerce will be marked by revenge from offline companies that have finally appreciated the advantages of the Internet. The market will belong to those who own the infrastructure and logistics, and not just the ability to “make websites.”
-----------------------------------------------------------
*David Gandler - CEO of Internet Group