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Russian online platforms compete with Amazon, Facebook & co.
17 January 2024

How Russian online platforms compete with global giants

US online platforms have become the most important providers of many services in our globalised world. Billions of people from many different countries use their search engines, booking tools or online e-commerce infrastructures every day. But this begs the question: what does it take for national online platforms to emerge and develop successfully outside the US? In this article, Alina Kontareva summarises her and her co-author’s research on Russia. It is one of the few countries that has managed to build a population of domestic online platforms that are still successfully holding their own against the US giants. In the following, she analyses the cultural, social and geographical factors that have made this possible. What can other countries learn from the Russian case?

How online platforms compete

Why are there only a few online platforms for billions of users? A part of the answer lies – among others – in how they compete and exploit network effects. Over the last few decades, this behaviour has led to a few giants such as Google, Amazon and Meta Platform establishing a global monopoly. They attract the most users with their dominant marketplaces and buy up or suffocate competition. Many EU citizens, for example, also use the services of American providers. As a result, the platforms emerging elsewhere often have great difficulty in becoming competitive, generating large user numbers and becoming a domestic alternative for people.

In contrast to other internal markets, Russia has developed a population of domestically competitive services that deliver functionality similar to that of global platform providers (Table 1). But how did that happen? 

 

YandexVKontakteOdnoklassnikiOzon
ServiceInternet searchSocial mediaSocial mediaOnline sales
US modelWebCrawler / Lycos/ AltaVistaFacebookClassmatesAmazon
Key foreign competitorGoogleYouTube / InstagramYouTube / InstagramAliExpress
Date established1997200620061998
Table 1. Basic information on key Russian internet companies

 

Russia as a “chaotic” national environment

The national environment creates vital conditions for companies’ growth. One of the reasons why Russian online platforms have attracted users was because foreign platforms were late entrants. When the internet was developing globally, Russia was transitioning from socialism to capitalism after the collapse of the Soviet Union in 1991. During this time, Western entrepreneurs described Russia as “hostile” and “chaotic.” A financial crisis in 1998, followed by the dramatic drop in GDP to 1991 levels, high unemployment rates and low population purchasing power discouraged foreign entry into this small national market where users did not speak English. Most importantly, Russia was poorly connected to the internet, which meant it offered a small user base for Western services. 

Despite this, and quite surprisingly, Russia saw the rise of domestic internet entrepreneurship, a development that was boosted by the engineering and maths skills the country inherited from its Soviet past. In 2000, the national environment began to improve: Russia experienced an economic recovery and improvement in government institutions. The number of internet users increased dramatically from 3 million in 2000 to over 59 million by 2010. The rapid growth of the Russian market finally attracted Western investors to invest more than $100 million in Russian internet companies in the early years. 

This sheltered national environment together with rising demand for Russian-language services created room for domestic platforms. In the following, I will focus on three market segments – search, social media and e-commerce – and demonstrate how Russian companies established competitive advantage with local network effects.

1. Search engines: Yandex’s rise from Cyrillic pioneer to national online platform empire

With the growing volume of content, users needed a tool to navigate the internet. Except for AltaVista, Western services did not process texts in the Cyrillic alphabet. Yandex was one of the few Russian search engines to index the Russian-language web content and thus attracted early adopters by the late 1990s. Having had access to the growing volume of user queries, Yandex learned from these data and improved its search algorithms. When Google introduced its Russian-language interface in 2001, the quality of results was poor compared to Yandex’s search engine.

Access to user queries gave Yandex an understanding of what services were relevant for Russian users. For example, as the number of queries about goods grew, the Yandex team noticed demand forming for an online marketplace. Over the years, Yandex extended its offering to create a portfolio of other local services such as online maps, ride-hailing as well as grocery and food delivery. By 2021, these services generated more revenue than advertising. 

2. E-commerce: Knowing local circumstances to enable nationwide logistics

The e-commerce segment was perhaps the most difficult to develop because of its reliance upon material infrastructure. Several obstacles conditioned its development in Russia in the 1990s: the lack of credit card use, an unreliable postal delivery infrastructure and minimal trust in online shopping. Because Russian users were only willing to pay for merchandise upon delivery, sellers were chronically short on capital and had a negative float. As a result, foreign firms remained hesitant to enter the market. But domestic startups struggled to generate growth as well.

One of the Russian marketplaces that emerged was Ozon, founded in 1998, which sold books. It attracted Russians by improving delivery, storage and user trust, and gradually extending the assortment of goods to become a universal marketplace. One particularly important strategic move was the development of a network of sales pickup locations in 2002. This reduced the warehouse storage time and allowed customers to pay upon pickup. As a result, the delivery and logistics infrastructure improved, and the demand for online shopping had been established. 

At this point, a few other domestic marketplaces – Wildberries, Citilink and Lamoda – sprung up in the e-commerce landscape and achieved significant growth. This was possible because they entered the relatively matured market with a working delivery and logistic infrastructure and a demand for online shopping.

Amazon was a late entrant, too, when it opened a Russian website in 2013 but shut it down shortly afterwards. The global behemoth simply could not compete against native players and was not ready to invest into building a nationwide infrastructure by itself. Whereas Amazon was no competitor to Russian platforms, AliExpress, a Chinese online retailer owned by Alibaba, steadily generated growth. They attracted users by offering cheap products and by partnering up with the Russian social media platform VKontakte. 

Thus, domestic marketplaces had seized the advantage due to their national presence and delivery infrastructure. But because no firm, including Ozon, was able to dominate the market early on, the e-commerce market in Russia remains fragmented and openly competitive. 

3. Social Media: Personal networks and user lock-in

Globally, social media platforms emerged later than search or e-commerce. Facebook was developed in 2004, but  it had no Russian version and was difficult to navigate. So,it did not generate interest among Russian users. Two Russia-born social media platforms, VKontakte and Odnoklassniki, appeared in 2006 and were immediately adopted. 

In social media, functionality in creating connections and personal networks is of great importance. Compared to Facebook at that time, Russian platforms, particularly VKontakte, were technologically superior and had an advanced people search system. Moreover, both Russian platforms attracted audiences by giving access to music and video content repositories, which had incidentally been uploaded illegally, thus benefiting from extremely lax regulation. When a Russian version of Facebook was released, Russian users had already been connected via VKontakte or Odnoklassniki. Local network effects created powerful lock-in dynamics that proved difficult for foreign companies to overcome. 

4. State protection: Consequences in different sectors

After around 2008, the Russian government embarked on a mission to gain more control over the internet. This included the takeover of VKontakte’s ownership by the government-affiliated business structures in 2014. These regulations, however, had little effect on the competition between Russian and Western platforms. The majority of users stayed connected through the domestic social media platforms despite clearly evident state control as a means of surveillance. The exception came when Russian users adopted Twitter and Facebook during the wave of protests in 2010–2012 against the Russian parliamentary elections. Eventually, users returned to the native platforms and the personal networks established before the unrest. This example shows how Russian domestic platforms created a strong user lock-in that prevented their users’ migration to foreign platforms. 

But in a time of rapid-paced technological innovation, local platforms constantly face competition. A good example is the case of Yandex. Despite its leading position in Russia, Google remained a serious competitor with more than 40% of the Russian market. The release of the Android OS with Google services pre-installed leveraged a dramatic advantage for Google. Yandex’s market share began to erode. The company attempted to mount competition by developing its mobile operating system Yandex.Kit, which was designed to be installed on smartphones sold in Russia. But, by the time it appeared, Google had already made exclusive contractual agreements with vendors that prohibited them from installing third-party software. In 2014, Yandex filed an antitrust lawsuit against Google, and Russia’s Antimonopoly Service rallied behind  the national champion. Google was forced to open the Android settings to allow device manufacturers to pre-install Yandex on Android devices.

The example of Yandex illustrates how a local online platform was able to leverage local knowledge and access to local data to create a niche. But it also shows limited capacities of a local platform to protect its core product in cases when a global leader controls a major technology transition. Without government involvement, it seems native technology systems are at a critical disadvantage in terms of economies of scale.

Conclusion: What can we learn from the Russian case?

Russia’s internet experience offers valuable insights into how online platforms can be fostered in a highly competitive environment. Although some conditions may not be easily replicated due to the existing convergence of national markets with US online platforms, there are key lessons that European countries, India, Brazil and other nations aspiring to enhance the competitiveness of their digital economies can consider.

First, the local component plays a significant role in providing a competitive advantage for online platforms. Native companies can navigate local obstacles better because of their embeddedness. 

Factors such as language, access to local data and physical proximity can offer distinct advantages for local platform providers. However, platforms that capitalise on national network effects find themselves naturally restricted to their domestic markets and must overcome this limitation.

Second, local online platforms may require state protection. Over the years, the Russian government selectively protected national champions. Some policies, in the social media segment for example, had little effect on competition. Instead it was openness to foreign entry that contributed to fast-paced innovation among Russian platforms. Those platforms, however, also profited from a first-mover advantage in a shielded market environment. The state intervened when platforms generated positive network dynamics and demonstrated stable growth. 

Today, local online platforms can develop alternative solutions that reduce reliance on global platforms. One example is creating industry-level data sharing infrastructure that lessens market-entry barriers for smaller innovators and gives them growth potential. These themes are the focal points in the INCA research project.

This post represents the view of the author and does not necessarily represent the view of the institute itself. For more information about the topics of these articles and associated research projects, please contact info@hiig.de.

Alina Kontareva, Dr.

Senior Researcher & Project Lead: Innovation, Entrepreneurship & Society

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