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MALE SPEAKER: And our first session is a logical
continuation of this talk.
We're going to discuss BRICS.net.
Is it a new billion or a new bubble?
But before we hear their opinions of our experts, let's
look at how people on the street see the role of the
internet for the economy, both of their
own country and worldwide.
[SPEAKING RUSSIAN]
MALE SPEAKER: Well, the opinions are diverse.
And I have the pleasure to introduce Sergei Guriev,
rector of the Russian School of Economics and the moderator
or our first session.
Thank you very much.
Thank you very much.
Good morning.
And I'd like to invite the participants of our first
panel discussion, Mike Walsh, Jacques Bughin, and Leonid
Boguslavsky.
We're going to talk about BRICS.net.
Mike.
SERGEI GURIEV: --CEO of Tomorrow, and the author of
the bestseller, Futuretainment.
Jacques is co-lead of McKinsey Technology Initiative and a
director at McKinsey, also head of High Tech and Telecom
Practice at McKinsey.
And Leonid Boguslavsky probably doesn't need an
introduction to this audience, one of the most successful
Russian venture investors, CEO and owner of
ruNet Limited Holdings.
We are going to talk about the role of the internet in BRICS
and the role of BRICS and other countries like BRICS in
the digital world.
And with that, I will ask Jacques probably to provide
the main findings, the key points, from the recent
McKinsey Global Institute's report on the BRICS.net.
Jacques, please.
JACQUES BUGHIN: So thanks for having me, and thanks for
Google to having this great Big Tent session.
A few things about the question about the billion
versus the bubble.
First of all, I've been at McKinsey for
about 22 years, I think.
And guess what.
The innovation at that stage, when I came first to the
office, was to have a voice mail system.
At that time, there was no mobile at all, and there was
no internet.
it took pretty much--
and at that time, I was in the US-- in '95 to get both mobile
and finally the first internet dial-up connection.
So again, in roughly less than 20 years, the world has
evolved quite dramatically.
And I guess the point I want to make here
is that time flies.
And very quickly, what we call aspiring countries, so BRIC
countries, whether they are at this stage of leapfrogging or
not I don't think is the right question.
We all know it will happen.
That is the first observation.
Second observation, before I go to some of the figures, I
like the way you phrase the topic--
bubbles.
Bubbles are pretty much market bubbles much more than
anything else.
And the fact that there are at least up to 2 billion people
being internet users, it's not a bubble.
It's a fact.
It's a platform.
And from that platform a useful business
model can be created.
And guess what.
Even from a pure historical economic point of view, it's
surprising to see how resilient
companies on the internet--
how resilient they are.
I think the classical example of 1930s, when for first time,
we used rubber to do tires for an emerging industry called
the car industry.
Well, guess what.
There were pretty much 15,000 to 25,000 companies trying to
manufacture tires.
After 10 years, the bubble exploded, and we came to
possibly 10 companies, and today, possibly five companies
worldwide physically selling and manufacturing tires.
Now, if you look at the internet, if you take 10 years
or even 15 years ago, the Yandex of this world, the
Mail.ru of these world, the Vcontact of this world were
existing and still existing.
And in fact, the proportion of companies existing
is still quite big.
So this being said, that means the billion is there.
The bubble is not a bubble.
It's actually a platform.
The question is, how big is it?
Thanks to our cooperation with Google, we try to look at
these numbers and try to get to three facts.
Fact number one is that in economic activity, what's the
money behind that?
And from a pure evaluative perspective, what we're
finding is that today, the economy, again, in value, is
about $400 billion.
No, $400 billion, if you assume half of that is profit,
is $200 billion today.
Now, if you make from that a classical multiple of the
internet economy and be decent about it, let's say a 20
multiple, we call it a $4 trillion market cap evolution
of which pretty much 70% percent is the break.
So it's big potential numbers of profit making.
Now, the question is, who will benefit from that?
In one way, there is the supply chain, i.e.
the Yandex of this world, Google and so on.
On the other side, and it's something that is also quite
staggering, is the people, the companies using
[UNINTELLIGIBLE] technology to benefit the users.
And a staggering fact is that despite the internet being
something we do every day, 70% of the value comes from usage
of the technology.
But pretty much, barely 10% to 20% of the companies are using
extensively the web technology to benefit from those
technologies in terms of new markets entries, new product
development, new time to market, and so on.
And there is no secret, the developed world is not good,
and the developing world is not good either.
I want to finish on these numbers in saying, who will
benefit, again, from this economy?
What we find out is that, in fact, for one job, which is
pretty much reallocated, pretty much three to four jobs
could be created by the internet, simply because the
internet opens new space.
And the spaces where, especially in developing
countries, there were no markets existing.
And that's, again, my last point, which is, whatever
numbers are going to come on the internet, they tend to
understate what the internet impact is on the economy.
And I'm quite sure the panel will basically preach on that.
But the point is that a lot of things happen on the internet
which are not yet measured in marketable numbers, i.e., if
you go, like me, in Africa, and you start seeing people in
Kenya, for instance, where the universe of their life is busy
a 20 kilometer radius, because they can only work 20
kilometers a day, and the only thing of their life will be
defined by 20 kilometers.
And the next day, they got a mobile from which a mobile
data feed could basically give them an SMS to connect for the
next 20 kilometers or possibly the rest of the countries,
obviously, you get fascinating evolution, which does not
translate yet into figures, but obviously will
fundamentally change the market structure, the market
dynamics of these countries.
SERGEI GURIEV: Thank you very much.
I would like to ask Mike about the probable cultural and
societal impact of that evolution that Jacques was
talking about.
Previously, the internet's been growing in Western
countries, which share same cultural heritage.
Now we are talking about BRICS and some other markets, which
are as diverse within as they are distant from Western
Europe or the US.
To what extent do you think that will matter in the
development of the internet economy and
society in those countries.
MIKE WALSH: For the last 10 years or so, we've been really
asking ourselves the question, how will the
web change the world?
But to me, the most interesting question that we
can now think about is actually the reverse, which
is, how will the world change the web?
And if you look at it, there's still a huge bias to look at
Silicon Valley as the kind of center point for the internet
revolution.
But frankly, if you look at the numbers, today, 14% is
what Americans represent on the World Wide Web.
The vast majority of the internet, already in terms of
numbers, is everywhere else.
And what's interesting to me is when you look at those
other markets is not just to look at them in terms of
economics and statistics and say, there's a
billion people in China.
That's a big internet market.
But it's to actually look at what is the potential for
cultural innovation.
If you look at the real history of the internet and
the things that we use every day, they had a lot of their
origins in places you might not expect.
So Facebook did not invent social networking.
It actually came from Korea--
Cyworld.
And it arose out of the very hierarchical structural way
that Koreans look at their relationships with their
families and friends.
Zynga didn't invent social gaming.
It came from, once again, China and Japan.
The first people to do mobile content was not the Swedish.
It was the Japanese, because if you ride a subway in Japan,
it's very crowded.
So you're sitting here.
You can't read a newspaper.
There's just enough room to read on your phone.
Now, arguably, in Russia, your unique situation, which is
immense amounts of piracy and a lack of desire to pay for
things, has led to other forms of innovation.
So really, Russians on websites here, pioneer
freemium models, the use of upgrades to
drive business models.
And you see this, perhaps unfortunately, on websites
that have now been exported globally,
like Badoo and Mamba.
But in a way, they're also forms of innovation in
business models.
But it's interesting, I think, to compare the differences
between some of these BRICS.
So there are some similarities between markets
like China and Russia.
In both China and Russia, you've been
protected to some extent.
So Russia was protected for many
years because of language--
Cyrillic--
and also because maybe a lack of
attention by Western players.
China was protected by its government and the Great Wall
of China that blocked Twitter and Facebook from entering.
But I think going forward, Russia's going to be in an
interesting position, because you don't have those same
protections.
If you're going to survive now in this market, you have to
survive by being fast and innovative, because the big
players are now coming.
But what I think is going to happen is that in all these
markets, the rules of engagement are very different.
This is not just about Brazil, Russia, India and China.
It's also about Indonesia, about Turkey, about Mexico.
And the internet in these markets is completely
different to what it is in the West.
I've spent a bit of time in Indonesia, and I was really
quite shocked, because when I arrived there, I was
introduced to the guy who was apparently the father of the
internet in Indonesia.
And before anyone can look at the web in Indonesia, it all
has to pass through this tiny server room in Jakarta, which
this guy controls.
And what he showed me, he said, I'm going to show you
the most important thing in all of Indonesia.
And bear in mind that Indonesia is like the
second-largest Facebook user market in the world.
He showed me this big group of blue cables, and they all had
little white labels on all of them.
And all the blue cables were marked Facebook, Twitter,
Yahoo, Google, eBay, Amazon.
And he said to me, I'm going to show you
something really cool.
I said, what?
He says, I'm going to take down
Facebook for all of Indonesia.
He said this.
And I was like, you can't do that.
He said, sure I can.
I do it all the time.
He goes, everyone thinks the internet's
really unreliable here.
It's just me pulling out cables.
And it really struck me that the big brands in the world
who think they can just dominate other markets
remotely from a server in California, have got a big
shock coming, because when I look at the future of these
new markets, it's very much about local knowledge, local
understanding.
And more importantly, it's about new
platforms, like mobile.
So the vast majority of people, whether they're in
rural Russia or in Indonesia or in Africa, their first
experience of the internet will be on their
phone, not a PC.
And it's interesting, because when I asked someone in
Indonesia, he said he did a big survey in Indonesia where
he asked people about whether they use the internet or not.
And he said, almost all of them said no.
He said, but when they asked whether or not they used
Facebook, he said they all said yes.
And he said it's because they thought that Facebook was just
a button on their phone.
So this, to me, is the big lesson.
If we look at the web in 10 years' time, it'll look very
different to what we experience today.
We won't go on the internet.
The internet will never leave us.
But the growth will come from these new markets, and it will
be primarily on mobile.
MALE SPEAKER: Thank you very much, Mike.
I would like to move to Leonid.
Leonid is uniquely positioned to talk about entrepreneurship
and companies in those countries.
To what extent do you think that something like Mike was
talking about the protection of local markets, development
of local companies and local knowledge affect the
entrepreneurship and growth of companies in the internet
economy in these countries?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: I'm going to speak Russian, although it's very
difficult to switch to Russian after the first two speakers.
But I'll try to.
Well, actually, we do understand what is going on in
emerging markets.
And I believe the markets, which are really interesting
from the viewpoint of internet business, are not only the
BRIC countries, the traditional four countries,
because very interesting things take place in such
regions as Southeast Asia, and specifically Indonesia, which
is one of the largest countries in the world by
population.
Besides, we see very dynamic development in Turkey.
And if in Nigeria, people wouldn't shoot each other from
time to time, Nigeria could become one of the leading
internet development countries as well.
One difference can be noted, however.
Russia is one of the most advanced countries from the
viewpoint of the following.
We have free competition.
And in all niches, in all services, Russian companies
are leaders.
And global international companies are number two or
number three in almost all niches except Twitter.
The same situation is in China.
But in China, you can really see government protection,
government assistance, which doesn't allow some of the
players in the market, like Google, Facebook, and Twitter,
to become serious players in that country.
In Russia, competition is free, open, unrestricted, and
this is very important.
In Russia, businessmen and companies, which exist
locally, are the local leaders.
Another important point is as follows.
It's important for many emerging markets.
Internet, as an industry, is developing so fast that the
difference between the services and the changing
lifestyle in the emerging markets and in the mature
Western countries.
So the gap is becoming smaller and smaller with
every passing year.
Many traditional industries can lag behind, but internet,
as an industry, is developing so fast that the gap is
insignificant between developed
and developing world.
As I say, I'm talking about services and quality of
service only.
I'm not talking about the size of the market.
I am not talking about the money.
Because if we take Vietnam, for instance, which is an
interesting and promising country, because 90 million
people living there and highly developed mobile services.
But last year, all the advertising market was about
$25 million only--
$30 million.
That's nothing.
It's negligible.
But from the viewpoint of services and the influence of
those services on the everyday life, internet is
accelerating.
The whole thing, it changes the
lifestyle in emerging countries.
Another the interesting point.
On the one hand, large countries with large
populations, with huge markets, well, out of 10
entrepreneurs who want to start their businesses, nine
are going to look for analogues somewhere in the US
or in Europe to clone that template, because by cloning
the previous experience, you could earn a lot of money and
build their own business, because the markets are rather
large, voluminous.
If we look at small countries--
Israel, the Nordic countries--
they don't have such an opportunity.
As a result, 8 or 9 entrepreneurs out of 10 do not
think about cloning, because markets are narrow.
And they think about inventing something totally new,
something we call "innovative." And this is the
difference between young people and their attitude to
new startup businesses.
There is nothing bad in the clones or in
the innovative approach.
Clones give you fast return of investment, fast proliferation
of good business models.
It helps the economy to develop.
It gives you an opportunity to develop.
But from the point of view of innovation, the mentality in
large countries is different from those of small countries.
And the last point, perhaps, I would like to stress, I saw
quite an unusual thing for me.
In all the countries where we work--
we work in 10 countries apart from Russia.
Most of them are emerging markets of
Asia and South Africa.
I was startled by the high level of management--
I mean average level--
that is quite high.
If you meet an entrepreneur, the CEO, the founder of a
certain company in Indonesia, Thailand, India, or Turkey,
then, on average, he's a highly skilled manager.
There is a big trend.
Young people got education in Europe or in the US.
They come back to their native countries and start
businesses.
It's not something rare.
It's a massive influx of highly skilled, highly
educated youngsters who come back to their native countries
with skills, with knowledge, and when you see them, when
you see their teams, you realize that very often, they
are not naive at all.
They realize very well what they have to do, how they're
going to develop their enterprise environment.
They work hard, and I can say that if we take average level
of managerial skills, Russia is lagging behind.
So Russia has excellent entrepreneurs with excellent
ideas working hard, but if we take the average comprehension
of corporate management styles, the right foundation,
right construction of companies,
Russia is lagging behind.
That, generally, is what I wanted to say to begin with.
Thank you very much.
We're ready to start the Q&A session.
You are free to ask questions through Twitter or through the
microphones.
If you have mobile access devices that we mentioned, you
can use them, or you can take the microphone.
Have you got any questions, please?
JACQUES BUGHIN: I want to build on your comments,
because I think they are very important comments in terms of
entrepreneurship and the way that the developing, aspiring
world of the BRIC countries will develop versus the US.
First of all, I think we all know that constraints exist--
access to capital, possibly the establishment of the
infrastructure.
But again, it's one face of the coin.
The exciting face of the coin is the other one, which is
that actually, in markets like new developing countries, the
fact that many industries are actually not existing creates
fascinating opportunity to create new business model
based on the internet.
Take again the infrastructure, and you are in
countries like Africa.
The fixed infrastructure does not exist.
In most of the market today, mobile penetration is starting
to be up to 77%, like in Kenya and so on, but again, that
means that if tomorrow you decide to build a business
model on mobile data, based on an OTT application like
[? WhatsApp, ?]
the cannibalization effects against the classic telecom
incumbent, yes, would exist. But it's likely to be slightly
smaller in magnitude than it is in Europe.
That means that there is more potential for you to deploy
these kind of business models.
Think about the fact that banking doesn't exist. If it
does not exist, then you can create mobile banking like
M-PESA in Africa.
You can basically get a huge fringe of the population,
which was not in the marketplace because of lack of
banking capabilities or relationships, to be bankable.
And all this [UNINTELLIGIBLE]
exists because the market was not existing, and the internet
technology gives this new opportunity.
So the interesting thing is that, yes, as far as the
constraints, there are new, interesting opening gates
coming from the internet, which is unheard of both
because the markets were not existing, and especially
because the old market structure is not fighting back
or trying to retain the gates or close the gate to make sure
they still have the profit pool.
And that's quite important.
In this environment, you come very quickly to two
consequences.
Very first one,
entrepreneurship is what matters.
Find the new business model that will give you the new
market from which you can make money or basically develop
something from the society point of view is going to be
quite. key.
Two, it's likely not going to be the copycat of the Western
world which can fly.
It's likely to be very specific business models that
are pretty much tailored to the type of market structure,
market dynamics that you're facing in these countries that
will be the winner business model.
So I'm actually pretty excited.
And again, the work we've done with Google, we took the wrong
hypothesis of using it as Westerners, of saying, we
believe the way to catch up will take time.
And in fact, we were pretty surprised to find so many
local entrepreneurs with exciting business models that
are likely to revolutionize most of the markets in
aspiring countries.
And the pace at which they develop, the pace at which
they will nurture new markets, it's actually not heard of,
and I also believe it's quite exciting.
MIKE WALSH: The third piece is actually interesting as well,
which is, do those new, market-breaking models develop
for local situations can then break out and influence the
developed world?
SERGEI GURIEV: Let me pick up on that.
And also, both you and Leonid mentioned this.
Leonid said 9 companies out of 10 in the local market will do
local copycats.
But then there is 10% of entrepreneurs.
LEONID BOGUSLAVSKY: I said differently.
I said that nine entrepreneurs are thinking about to take a
good model, and maybe 1 out of 10 dreaming to do something
very different.
SERGEI GURIEV: Exactly.
Something global and new.
And Mike mentioned a number of examples of that coming out of
Korea or Japan but also Russia.
What actually prevents these companies from going global?
Why these ideas actually flourish into the global
companies, not in Korea but in Silicon Valley being copycat
by Silicon Valley entrepreneurs?
Why won't Korean Facebook take over the world?
MIKE WALSH: I believe it's a lot to do with the inability
to change filters easily.
Cyworld made a number of attempts to launch in America,
and they failed.
NTT DoCoMo tried to bring i-mode long before
iTunes to the world.
They failed.
And generally what happens is that you have a lot of success
in your local market, and you just try and replicate that
elsewhere without adapting it.
And you often get smart entrepreneurs, who are
influenced by what they see elsewhere, but they can kind
of customize it to the local context.
And it's a very rare company, I think.
And to some extent, global players like Google and
Facebook have been successful in that.
But sometimes, it's as much luck and art as it is science
and planning.
SERGEI GURIEV: It's also, you can actually reverse Leonid's
arguments saying that maybe if you take a Korean or Japanese
model into the US, then US market size really matters.
And if you adopt US market size, then you create a
company which is so successful that it can easily go global.
MIKE WALSH: It is.
But sometimes, it's accidental.
I mean, Orkut didn't work anywhere except for Brazil.
And apparently, the reason why it took off in Brazil was also
accidental, because when they handed out invitations, they
gave 200 people 50 invitations each.
JP Barlow from the Grateful Dead, as a joke, gave it all
to Brazilians.
It wasn't very funny for Google, though, when it ended
up being kind of the over index point in terms of the
network structure.
SERGEI GURIEV: Yes, Leonid.
You want to say something?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: I'd like to say that we have
some business models.
It doesn't mean that we import everything we can from the US.
We have some business models that came to us from Europe or
were developed locally.
But they are quite few.
It's the flash sale model, which came from France, Skype
from Estonia and the Nordics.
Besides, we have RAP model coming from Sweden.
Then, some Russian models include Badoo, developed by
Mr. Andreev, a model developed here in Russia.
It happens from time to time, but not as
often as we can say.
The models which come from Sweden, Israel, Finland,
Sweden, prove your previous argument that this is a small
market, and we have more people living in
Moscow than in Sweden.
And they try to innovate.
It would be interesting to say about how Badoo and other
companies got success worldwide.
JACQUES BUGHIN: [UNINTELLIGIBLE] of the long
tail versus the head of the distribution.
You talk now about the head of distribution, i.e., do we
guard these companies that are becoming rising stars, and can
they be localized and globalized?
Again, the web tells you that there is a long tail of
companies, and again, Hal Varian, who is the chief
economist of Google, has also a name for these companies
called the micromultinationals, which
actually are doing a lot in the economy.
They are small companies of 10 to 25 people who basically
leverage the web extensively for selling products on the
e-commerce sites and the like.
These companies are creating employment, these companies
are creating exports, and are basically creating wealth for
a lot of those countries.
So again, we should not be biased in saying, we're all
here to find the new golden goose and the new Yandex in
those markets.
That's part of the economy.
But again, in our findings, what we find out is that 25%
percent of the economic activities linked the wealth
creation is driven by the supply side, i.e., the new
Yandex of this world.
But 75% it's actually very small enterprise trying to
use, leverage, these technologies to make a
business model out of it or simply using them to
accelerate the past markets and, obviously, a few big
companies that are trying to use that for multichannels,
for new innovation, and so on.
So that's one aspect that we should not forget.
Then there is another aspect, which is the talent base.
And again, the talent base is quite important to understand.
Why?
Because most of these companies, when they're
becoming big and they go international, what they lack
most of the time is the market insight, the marketing
capabilities.
The scalability exists in the platform but not necessarily
in the business processes.
And the same thing, if you look at the smaller
enterprises and the like, what they lack, most of the time,
is talent to leverage these technologies.
So I think one major theme, as well, that we need to possibly
talk about is small versus large enterprise, but also,
how is talent going to be distributed to benefit from
this innovation?
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Well, talking about talents, we can get a
lot of questions, where can we take managers from?
Why Russian managers are so unskilled?
Why our universities cannot graduate good managers?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: I can answer this question.
It's important what I said--
education.
Education has very little to do with this problem.
We have a good education system in Russia.
We have wise people in this country.
But what we see in reality in the area of management is
investments.
The more investment we have, the more CEOs have to interact
with the people who see a lot of other experiences and ways,
who really understand how the company has to be structured
to attract investments, what the CEO or the founder has to
do in the company for the company to attract
investments, good investments, and potentially go to IPO.
This is a high school of real life that entrepreneurs go
through together with investors.
It's an important issue.
We spend much more time in Russia for interaction with
our partners who launch their startups in order to explain
to them very simple things, because those people didn't
have experience of interaction with other stakeholders,
investors, shareholders, who require transparency, who need
understanding, awareness of certain details.
Many entrepreneurs look at it as, for them, that is
something new.
The more investments we have, the more investors we have,
the faster we shall raise the average level of skills among
our entrepreneurs and managers.
Very often, we see strong managerial
skills in emerging markets.
Why?
Because they worked in the Silicon Valley for some time
or in Europe.
They saw real investors.
They saw how financial reports must be provided.
They know everything about analytics
and corporate structure.
They know that they have to have a powerful CFO or chief
accountant.
They know they have to provide monthly reports and analytics
by certain standards, not only for tax inspection but for
investors as well.
And they need it not only for the sake of investors but for
the sake of their company as well.
And this awareness comes with time, with experience.
Investors are a very good locomotive of this
development.
The more investment, the better is
the managerial skill.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Well, how do you think it's a question of time?
Maybe Russia is still young country, so that people have
not yet had the time to come back.
Or maybe Russia has other possibilities, opportunities
for talented managers, such as CFOs, maybe, in the public
sector rather than in a commercial company or a
startup, or maybe in the raw materials sector where the
revenues are quite high.
Or is it all about closedness--
being closed--
so the society being too proud of what we have and just don't
want to listen to those people who come back from abroad.
Or is it just a matter of time?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: Well, I think it's a matter of time and also a
matter of investment attractiveness of the country
as a whole.
So we are talking, saying that investment effectiveness is
not sufficient, and one has to improve something.
But this is all about institutional issues.
So it doesn't have to do with any particular company.
And why is it happening?
It has nothing to do with what people have been taught to do.
In many ways, it's about the practical and business
experience that they have and that they see around them,
because if they see--
like if the founder is very young, for instance, he or she
is 22 or 25, they started their business, and they just
don't have enough life experience to build a
corporate environment that matches the success they want
to achieve as a company.
But maybe, if there's an environment around them with
other entrepreneurs, other companies that have moved
further down the line, so this particular young
founder could see that.
So if the environment is such, there are a lot of investors
in the market, so he or she would also see that and
perceive that, this experience.
We all know that graduating from university is just a
start, a starting point.
But then you're getting into real life, you start
accumulating life experience, business experience, that will
or will not raise you to a whole different height.
Thank you.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Yeah.
You're welcome.
A question.
Perhaps we need a microphone to make sure that the
interpretation is done.
I'll ask--
well, then, if you speak English, then the translation
to Russian.
[SPEAKING RUSSIAN]
MALE SPEAKER: [SPEAKING RUSSIAN]
TRANSLATOR: It's half-question, half-opinion.
Thing is that Russia, as opposed to many other
countries, you see a lack of mid-size investment capital.
So business angels that provide pennies are there.
Investors like yourself, Leonid, are there.
So these are the people who are looking at companies with
substantial potential.
But in the middle, apart from fast-lane ventures, there's
nothing else.
There's nothing.
So this is the first consideration.
And maybe it's a question out into the air, because people
who have those $10 million to $20 million to play with, they
prefer to buy a house in France and to forget forever
that they've ever lived here.
So this is to the question of investment attractiveness of
the country.
And the second idea, which is more to do with the potential,
is in that the Russian internet
market has one big drawback.
It's very skewed, very biased towards
two very large companies.
And perhaps, it's even more biased than the American one
is toward five large companies, because they have
five big companies that take care of 75% of the revenues.
And we have two large companies that provide 90% of
the revenue.
And we don't have a Paypal to balance it.
Well, I'm not referring to PayPal as a company, but as a
result, impact of Paypal.
So [UNINTELLIGIBLE]
and his colleague who has cached in on the
privatization of Paypal.
So, many thanks to you that you exist. But are you
expecting that your colleagues from Yandex are going to start
actively investing, for instance?
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Well, two very difficult questions, Leonid,
you'll have to answer.
But I mean, $10 million to $20 million would be enough to buy
a small castle in France.
And unless you need two castles, maybe you will find
another $10 million or $20 million that you will be able
to invest in Russia.
But there's also Russian Venture Company, which has
this mandate as well.
Leonid, you're welcome.
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: Well, there are several important aspects.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: You start speaking, and the
sound will come up.
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: So there are several
important aspects here.
Firstly, there are not so many interesting projects in
Russia, to be frank.
Yes, I understand it's a chicken-and-egg problem.
I also agree with the interesting comment to the
effect that the dominating two-- maybe not two, but three
or four companies are, on the one hand, a good thing,
because these companies can potentially become strategists
for startups and young companies.
But on the other hand, indeed, we do see if not a monopoly
but the market is mostly split between large players.
And what we've seen recently, well, interesting projects do
emerge, but there are very few of them.
In terms of money, I don't believe that there's not
enough money in the Russian market for investment.
And today, we have plenty of venture companies that are
actually prepared to enter the projects that they find
interesting at any phases, from the very initial phases
where they can contribute several hundred thousand
dollars, to further stages down the line when they can
provide $20 million to $30 million per transaction.
Yes, I can say that in such countries as Turkey, the
interest on the part of the venture capital is, on the
whole, larger than to Russia.
And what we all know, when we discuss, that is, the image of
Russia, the investment attractiveness of Russia for
Western funds, it's all quite unsatisfactory, I would say.
That is, I talk a lot with American
and European investors.
And a phrase that I always hear, what they say is, with
everything else equal, I'd rather invest in
Brazil than in Russia.
So if there are two interesting projects, and they
have to decide where to invest, they prefer Brazil
rather than Russia.
So the question why?
To the question of why, they usually answer,
quite simply, risks.
They believe that risks in Russia are
larger than in Brazil.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Thank you.
We have some general questions.
SERGEI GURIEV: Pretty much on the same line, one is, can
Russian companies compete globally?
Are we catching up, or are we lagging behind the US?
And will local companies exist and succeed, or global
companies will crowd out the local
companies, local copycats?
So it's a simple answer.
It's yes or no to both questions.
[LAUGHTER]
JACQUES BUGHIN: I think it requires a Ph.D. thesis of
five years to get there.
By the way, I've got a house in France, so if you want to
buy it for $20 million, totally happy with that.
[LAUGHTER]
No, joking apart, again, this question is a bit too broad.
[UNINTELLIGIBLE]
and it relates to the answer to the question of venture
capital and the like.
Ask yourself the question slightly differently.
You go to Africa, I'm just amazed to see the flow of new
business ideas in Africa versus the ones I see in my
work in Russia.
This, despite the fact that if you're in Africa, I will tell
you, the venture funds are pretty much not existing.
And the societal aspects of investing in the web is hugely
complex, i.e., if you're an entrepreneur in Africa, you
are with your family of five, six, seven kids, your wife
does not work, and if you take the plunge to take the risk of
building a new [UNINTELLIGIBLE], you have no
revenue to survive, while at the same time, your average
revenue per capita is actually close to the
threshold of poverty.
So how do you do that?
Well, these guys went there, did develop, because they
develop interesting local business models
that they can scale.
Now, I'm not saying I haven't seen a lot here, but on top of
my head, we could do the same list today with all of us and
brainstorm and crowdsource business ideas.
But look at the resources that you have in this country.
Now, I haven't seen a marketplace or an online
information marketplace for trading [INAUDIBLE]
for instance.
I haven't seen something which is amazingly more efficient in
the way to deliver luxury products like caviar.
I'm quite sure it exists, but yet, I haven't seen the
business model linked to that.
And I think the first question here is to say, it's not a
question, how do you compete globally?
You always compete globally from a competitive advantage
in the first place.
So define to me what the competitive advantage is,
scale it correctly to say whether you can be global in
terms of the global tastes or whatever else.
And then the question is, are you
keeping up with the States?
Are you different with the States is the key question.
MIKE WALSH: I think there is a global dimension, thought,
that has to be faced, which is that for Russian companies,
they've got one of two choices.
They can either create something innovative that's
world class, like Cut the Rope, or they find a way to
target Russians in other markets.
It seems odd, but one of the candidates running for
reelection as mayor of London recently set up an account in
Chinese on Weibo, which is the Chinese Twitter.
And it's not because he's got aspirations for the Beijing
communist party, but it's because he's targeting a very
large community of Chinese people living in London.
So the diaspora populations are actually very significant.
And I know there are some companies in Russia, like
Mail.ru, that have started to look at this opportunity.
But if you think this is what's happening in Latin
America, there are a lot of businesses that might have
started in Argentina that are now having a very big
influence throughout Mexico and Spanish-speaking
countries, because they've managed to use culture as a
rocket to really expand very quickly into new territories.
SERGEI GURIEV: Thank you.
Leonid?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: Well, I'll give a very interesting example.
We have an investment in a company that's called
Tradeshift.
Initially, it was a Danish company.
So developers in Denmark built a service like that.
It's basically a software-as-a-service solution
that allows, in the cloud, to create electronic accounts and
to make orders.
This is a very interesting and dynamically growing company
that's started--
well, they initially shifted their headquarters to London,
because in Denmark, because of what we have been discussing,
in case you want to become global, it's very difficult to
have a headquarters in Denmark.
But more recently, they moved from London to Silicon Valley.
The point is that today, we have a perception--
and this perhaps is something that we'll
have to take for granted--
such that if you want to be a global company in the digital
world, you'd better be an American company if you want
to be global.
It just makes it easier, simpler--
simpler to raise capital, and it's much easier to do a lot
of other things, even though in Silicon Valley, it's not
easy at all to find good people, good employees.
We also have a couple of investments in companies that
were started by Russian guys.
But they moved their headquarters to Silicon Valley
while the R&D teams, in many ways, still exist in Russia.
But the way they're positioning themselves to the
market is as an American company.
More than that, they try to do everything possible--
so they're showing that technology-wise, it's built by
Russians, talented people, because it's recognized all
over the world.
But as sales and marketing, and as far as business
development, as far as investment relations is
concerned, they position themselves
as an American company.
So in answer to the question of whether a Russian company--
and let me add, with a headquarters in Moscow-- can
become a global company, well, that would be very hard.
Well, I'm not saying that it's impossible.
But in our area, it's very difficult.
By the way, it's interesting that Yandex is now making
quite an important experiment.
Yandex has launched Turkish search, and it's very
important and maybe a historic experiment.
I must say that the audience is growing quite well in
Turkey for Yandex.
Yandex launched a very good search there.
They launched Yandex Traffic Jams, which is very important
in Istanbul.
And this is important.
So let's, all of us, support Russian a company that is
making this move towards globalization.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: Thank you.
There was a question there.
MALE SPEAKER: [SPEAKING RUSSIAN]
TRANSLATOR: Well, thank you very much.
[UNINTELLIGIBLE], Interfax.
I have a question to Mike, for the most part.
because we don't have a lot of time left to
the end of the session.
Mike, what do you think about the business model in mass
media, probably mostly about local
media in local languages?
Will they be able to survive in the future?
Will they have to play a role of the second and third option
in advertising budgets?
So they first will award everything to large, global
services such as Facebook, then to local, like pictures
in Mail.ru and only then to these poor newspapers where
the whole staff may be confined to two or three
people, freelancers, in five years.
What are you feeling about that?
MIKE WALSH: It's a tough question, which in many ways
was probably decided five years ago already.
So my view is news reporting is very expensive to do, if
it's quality.
And if it's bad, it's commoditized.
So the challenge is going to be, if your local newspaper
was a blog, would anyone read it?
And if they do read it, would you make any money from it?
I think in the future, big news organizations that are
well-known global brands, will survive.
And they'll thrive on multiple forms of media, because
they'll stop thinking of themselves
as a physical medium.
They'll just see themselves as a brand on multiple mediums.
In the local space, I think news organizations will have
to change significantly.
They will have a lot less staff, whey will be a lot more
nimble, and they'll have to find new ways to make money.
But it will also depend on the category.
In many ways, entertainment and gossip now has been crowd
sourced to consumers.
They can come up with much more interesting things on a
Facebook feed than you can get on E!
News.
And I think in particular, on the Russian internet, just
from my viewing this week, you have a lot of entertainment,
whether it's fake videos of Putin in cages or *** Riot
or whatever it is, you have a lot of very free entertainment
on the internet.
I think it's hard to compete with.
But seriously, I think the changes in media
have already happened.
And now it's just a question of advertisers following
consumer behavior issues.
SERGEI GURIEV: When you say "local," do think it's
national level, city level, [UNINTELLIGIBLE] level,
district, whatever?
MIKE WALSH: In the old days, Warren Buffett said he loved
investing in newspapers, because if he saw that the
population of a local town was increasing, then revenues
would increase from the newspaper.
So I think the biggest victim is going to
be at the city level.
To some extent, national newspaper and media outlets
can survive as global brands.
But really, the smaller the level of localization, the
greater the damage.
SERGEI GURIEV: [SPEAKING RUSSIAN]
TRANSLATOR: And we have some time for another question.
Yes.
You're welcome.
FEMALE SPEAKER: [SPEAKING RUSSIAN]
TRANSLATOR: Well, hello.
Tatiana [UNINTELLIGIBLE], internet
agency of ticket sales.
Talk about the [? simplicity ?]
of the internet market in Russia.
They often say that since someone has first entered the
internet, they will only make their first purchase in three
years from that.
So there's no trust to using bank cards so you have to sign
up, share your data, the relative myths about fraud.
So I'd like to hear a comparison about the situation
in other countries where the internet is growing as fast
and the number of users grow.
How fast will the user go this way, building trust?
Are there any ways to fight those myths and superstitions?
And before you--
SERGEI GURIEV: --question, can you also consider the question
on Twitter, how you would compare Russia to other BRIC
countries in terms of general internet and e-business
proficiency, because it's directly
related to that question.
Yes, please.
JACQUES BUGHIN: Maybe on the first one, in terms of the
statistics, we measure [UNINTELLIGIBLE]
small and medium enterprises.
We compare the Russian companies versus the average
SMB in Europe, in the US.
What we find out in terms of distribution is that
companies, like Russian companies, barely 10% to 15%
of small, medium enterprise can leverage the web
extensively.
And 85% pretty much don't.
And there's even a long tail of 40% that really don't.
If you compare that to the US, it's much more.
30% are really using it extensively and correctly, and
you have a long tail 20% to 30%.
So you see a real shift of an order of
magnitude of one to two.
So that's quite important.
Now, on your question of e-commerce, there are always
pain points, but pain points define business models too.
The good news about e-commerce is that in every market in the
world, 20 years ago or 10 years ago, when e-commerce
started, it took roughly 18 months for somebody coming for
the first time on the internet to start doing a transaction.
In your case, it's possibly three years, so
it's a bit too long.
But at the end of the day, what we find out is that when
people do their first transaction, usually, there's
no way back.
So the question is possibly a timing question much more than
anything else.
Now, infrastructure for trust and the like will develop no
matter what in these countries, like it has in the
other markets.
The reason a brand like eBay or Amazon can stand as they
are is that at the end of the day, they command a price
premium of trust. If you go to Amazon Amazon's value
proposition is, you buy something, you trust that you
will get the goods that you want to get
in the timely fashion.
If you don't like it, you can return back.
And that is a value which basically gives the value of
the prize discount or the prize benefit that you can get
against offline.
Now, that means companies need to build that trust and build,
possibly, part of the infrastructure.
Yes, it will possibly take time, but relax.
I also believe that in every market I've seen--
and again, take the example of Latin America, where
e-commerce was pretty much rampant and, well, to say the
least, even nonexistent.
By a few innovations, by changing a bit of the rules,
i.e., when there is a fraud, the burden of the fraud is not
on the consumer but on the bankers and so on, which has
changed dramatically the process of trust. So I guess a
few things that I'd add could possibly create a marketplace.
So yes, maybe it will take time.
But hang on there.
I'm quite sure it's going to develop.
MIKE WALSH: But if you look at all the BRICS, they all have
problems with e-commerce.
And it's not just about development.
I mean, even Germany, they hate credit cards.
You go to Media Markt, and you can't pay with
a credit card either.
But to me, what's going to happen is one of two things.
You'll either use retail stores, like in China, where
you buy vouchers that you can use in gaming.
Or you do what is happening in Russia, which is being linked
to mobile SMS. And the mobile becomes the trusted platform
for payment.
JACQUES BUGHIN: Exactly.
Good point.
SERGEI GURIEV: Absolutely.
Leonid?
LEONID BOGUSLAVSKY: [SPEAKING RUSSIAN]
TRANSLATOR: Well, briefly, to answer this
question, in Russia--
I'm actually answering this question about the
effectiveness of e-commerce in BRIC countries.
Russia is certainly not number one.
I believe Brazil is number one.
In Brazil, more than 80% of transactions in e-commerce are
happening using plastic cards, whereas in this country, it's
mostly cash on delivery.
And logistics, the logistical infrastructure in Brazil is
much more advanced.
And to your question, I'm answering that recently we've
seen a considerable speeding up, the reduction of the time
to the first purchase on the internet.
And strange [UNINTELLIGIBLE], I think coupon services have
played a role there, because in coupon services, there's no
delivery of both the coupon and cash acceptance in your
home, so people have to pay using some payment service,
either card or [? QE. ?]
And because some attractive propositions have been made,
there are a lot of people who have made their first internet
purchases thanks to coupon sales.
SERGEI GURIEV: [SPEAKING RUSSIAN].
TRANSLATOR: Thank you very much, and I'd like to thank
all the participants and the audience.
Thank you very much.