]A                                                                          INDEPENDENT TECHNOLOGY RESEARCH               ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              INTRODUCTION              Now: Largest Europea...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              Russian Websites Reaching Mass Scale          ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED               Audience Reaching Critical Mass Powering Mone...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                EXHIBIT 6 – RUSSIA, ONLINE ADVERTISING SHARE...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                  E-commerce at an Inflection Point         ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              The key growth drivers for Russian e-commerce ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                DIFFERENCES PREVAIL                Online Ad...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                  expertise, IT platform and organisation re...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED               factors. We envisage that as with generalist ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                            58% of users who consume online ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              CONTINUED MARKET DEVELOPMENT              Grow...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                              Kite Ventures has made foreign...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              Conducive Trade Sale Environment              ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED              Selected Private Placements                   ...
GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED                                                            ...
GP B ULLHOUND R USSIAN I NTERNET – T HE R USSIAN W EB U NTANGLED              THE GP BULLHOUND BANKING TEAM              G...
Russian Internet Update - June 2012
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  1. 1. ]A INDEPENDENT TECHNOLOGY RESEARCH SECTOR UPDATE JUNE 2012 DIGITAL MEDIA2012 Update on Internet in RussiaTHE RUSSIAN WEB UNTANGLEDRelentless Audience GrowthRussia’s Internet audience is now the largest in Europe at 51m monthly users,ahead of Germany which it passed in Q4 2011. Yet with online penetrationbelow 60% outside Moscow and St. Petersburg, we forecast continued stronggrowth in Internet audience in the rest of the country (the “regions”).Online Monetisation Powering AheadNow that Russia has achieved European leadership in online audience, e-commerce and digital advertising are in its sight. While local issues remain,the Russian Internet ecosystem continues to develop, and audiencemonetisation is ramping up.Distinctive Development PathThe vibrant local Internet community, largely centred in Moscow and St.Petersburg, continues to invent Russian-specific ways to define the web, withsocial and logistics as key areas of home-grown innovation. Local championscontinue to dominate the Internet in key categories, and have actuallyimproved their leadership in the past year compared to their internationalpeers.Investment Activity Mirroring Market DevelopmentForeign investments in the Russian Internet space have increased markedlyin the past year, as funds and strategics alike are increasingly keen to positionthemselves in such a fast-growing opportunity. Conversely, the local investors’ecosystem has continued to develop, and several sophisticated specialistfunds have emerged that are now also looking to invest abroad.Conclusions GUILLAUME BONNETON guillaume.bonneton@gpbullhound.comWe foresee continued double-digit growth in key metrics for the remainder of London: +44 207 101 7578this decade. Strong progress has been made in certain sectors such as e- SASHA AFANASIEVAcommerce, by companies who have addressed key local problems. Watch out sasha.afanasieva@gpbullhound.com London: +44 207 101 7569for this trend in other sectors in the next 18 months – our picks include onlinetravel, display advertising and digital content. Important disclosures appear at the back of this report. GP Bullhound LLP is authorised and regulated by the Financial Services Authority
  2. 2. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED INTRODUCTION Now: Largest European Online Audience The Russian Internet audience grew around 14% in 2011 1 to become the largest in Europe, overtaking Germany. Broadband access is still skewed to larger cities – penetration is 37% in Russia while in Moscow and St. Petersburg it is at 91% and 76% respectively. The regions’ broadband penetration is around five years behind and forecast to reach 59% by 2015. Small towns and rural areas benefit from mobile Internet 2 expansion – currently at 22% of the population . EXHIBIT 1 – EUROPEAN ONLINE AUDIENCE AND GROWTH 53m 51m 14% 43m 38m 24m 23m 22m 6% 18m 12m 4% 4% 2% 2% 2% 6m 0% 1% Online audience (Dec 2011) Growth (Sep 2010-11) y-o-y Source: ComScore Media Metrix, 2012; GP Bullhound Continued Double-Digit Growth Last year, 93% of new Internet users were not from Moscow and St. Petersburg, but from the regions – this 3 trend is likely to continue as the gap in Internet penetration is still at around 15% . More established local players are leveraging this trend and are investing to expand their regional operations rapidly: for instance 4 Avito raised $75m in May 2012 to drive audience acquisition , mostly in the regions; Ozon raised $100m in September 2011 to strengthen its logistics and distribution network across the country. Russia’s Internet users are forecast to reach 67.9 million at end 2012, comprising nearly 50% of the country’s 5 population . EXHIBIT 2 – ANNUAL GROWTH IN AUDIENCE PENETRATION BY REGIONS IN RUSSIA 72% 75% +4.0% +4.0% 59% 55% 61% 51% +6.0% +5.0% +8.0% 40% +6.0% 68% 71% +8.0% 53% 50% 53% 45% 32% Moscow St. Towns with Towns with Towns with Towns with Villages Petersburg 1m+ 500k-1m 100k-500k <100k population population population population Source: FOM, 2012; GP Bullhound1 Source: ComScore Media Metrix, September 2010-112 Source: VTB Capital, March 20123 Public Opinion Foundation, spring 20124 GP Bullhound was engaged as an advisor to the company5 Source: eMarketer, 20122 GP Bullhound LLP
  3. 3. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED Russian Websites Reaching Mass Scale Russian websites are steadily reaching the top audience spots in Europe. As of March 2012, out of the top five European web properties by monthly audience, three were Russian: Mail.ru (first place), Yandex (third place) and Vkontakte (fourth place). EXHIBIT 3 – TOP EUROPEAN WEB PROPERTIES BY UNIQUE MONTHLY VISITORS (MARCH 2012) 79.5m 73.8m 71.0m 67.0m 46.7m 43.5m 42.8m 37.3m 37.0m 35.2m Yandex Sites Mail.ru vKontakte Schibsted Orange Sites Sites Springer Deutsche motion BBC Group Telekom MIH Daily- Sites Axel Sites Other European Russian sites sites Source: ComScore, 2012; GP Bullhound In specific categories, Russian properties have growing presence. For instance in just a year the Russian sites within the top 50 largest European classifieds properties have increased their share from 9% to 14% of total European visits in the category, while in apparel retail, the share of top Russian online properties has grown from 3% to 8% (Exhibit 4). EXHIBIT 4 – SHARE OF VISITS AND NUMBER OF RUSSIAN SITES IN THE EUROPE’S TOP 50 FOR SELECTED CATEGORIES Number of % of visits to Russian sites in Russian sites in category top 50 category top 50 News 2% 3% 3 5 Entertainment 4% 6% 5 8 Classifieds 9% 14% 5 6 Travel 2% 3% 2 3 Online services 4% 7% 3 4 Consumer 7% electronics retail 9% 7 6 Books retail 8% 11% 3 4 Apparel retail 3% 8% 2 7 Mar-11 Mar-12 Mar-11 Mar-12 Source: ComScore, 2012; GP Bullhound3 GP Bullhound LLP
  4. 4. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED Audience Reaching Critical Mass Powering Monetisation At nearly 50% monthly reach of the entire Russian population, the Internet is now: 1) A viable marketing channel for national brands, whether global or local; 2) Large enough to justify initial outlay costs for logistics and payments systems. As a result, all forms of monetisation now strongly outperform audience growth (Exhibit 5). EXHIBIT 5 – ANNUAL GROWTH COMPARISON OF CORE ONLINE INDICATORS IN RUSSIA (2010-11) 56% 25% 20% 14% Online E-commerce Digital content Audience advertising revenue Source: AKOR, 2012; J’son & Partners Consulting, 2011; Data Insight, 2012; ComScore, 2012; GP Bullhound Accelerated Online Advertising In 2011, Russia’s online advertising market grew at 56%. For the first time, it overtook printed press, which, interestingly, occurred in the UK in 2010 and in the US is only forecast to take place this year. Television advertising retains a majority share in Russia with its unique ability to reach the mass audience of this vast country, but the situation in more developed Internet markets indicates that this may well change. For instance, Ford’s UK digital advertising spend overtook television for the first time in 2011, with newspaper advertising in third place, but receiving only half of the online budget. “Five years ago”, says Anthony Ireson 6 (marketing director, Ford Britain), “digital would have been a distant fifth in the marketing pantheon .” In addition, as the Internet audience continues to grow, the shift in advertising budgets towards the online channels will gain further momentum. Already in April 2012, Yandex’s daily audience surpassed that of one of 7 Russia’s largest free-to-air TV channels, First Channel (“Perviy Canal”), among inhabitants of large cities . This will accelerate as TV’s global reach weakens. Indeed overall weekly population reach of TV in ten key countries including Russia decreased from 71% in 2009 to 48% in Autumn of 2011, as users prefer the more 8 personalised and flexible channels such as online through PC and mobile devices .6 Source: The Sunday Times, 20 May 20127 Source: East-West Digital News, 29 May 2012; for audience between 12 and 54 years of age8 Source: Accenture survey covering Brazil, China, France, Germany, India, Japan, Russia, South Africa, Sweden andUSA, September 20114 GP Bullhound LLP
  5. 5. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED EXHIBIT 6 – RUSSIA, ONLINE ADVERTISING SHARE OF TOTAL ADVERTISING $17.9bn $15.7bn Other $13.7bn Outdoor $11.8bn Printed $8.7bn press $7.2bn $8.9bn Radio $7.9bn $6.9bn Television $5.9bn $4.3bn $3.6bn Online $2.9bn $3.6bn advertising $1.4bn $1.9bn $2.3bn $0.9bn FY2010A FY2011A FY2012F FY2013F FY2014F FY2015F Source: AKOR, 2012; Zenith Optimedia, 2011; GP Bullhound With online at around 17% of total advertising spend in 2012, Russia is approximately four years behind France and Germany (Exhibit 7). We see a number of factors contributing to the increase of this share to c.20% by 2015 – similar to that of France today: Internet businesses, such as online retail, continue to attract users through online advertising, powered by the growing investment in the sector; Traditional brands switch to digital advertising to reach out to a rapidly growing audience across the whole of the country; Foreign businesses continue to enter the Russian market – Digital River’s survey reports that Russia came out on top of the list of countries where the companies questioned are seeking to expand internationally in the next two years. It was named by 31% of respondents, ahead of Brazil (24%), 9 China (23%), India (22%), Japan (22%), Germany (21%) and the United Kingdom (16%) ; Small and medium sized enterprises use the more targetable digital advertising methods. EXHIBIT 7 – ONLINE ADVERTISING SHARE OF TOTAL ADVERTISING – FRANCE AND RUSSIA COMPARISON France 21% 20% Russia 19% 18% 17% 17% 16% 15% 12% 12% 9% 7% 8% 5% 5% FY2005A FY2006A FY2007A FY2008A FY2009A FY2010A FY2011A FY2012F FY2015F Source: Zenith Optimedia, 2010 for France; AKOR, 2012 and Zenith Optimedia, 2011 for Russia; GP Bullhound9 Source: Digital River Press Release, 15 May 2012; 250 companies were interviewed, drawn from across Asia,Europe and North America, which operate in the software, gaming software and consumer electronics sectors andhave over $250 million in annual revenues5 GP Bullhound LLP
  6. 6. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED E-commerce at an Inflection Point Although the Russian e-commerce sector is still nascent, at 1.5% of the total retail market, this is already higher than Italy. There is room for huge growth, considering that the online share of retail in more developed markets is near the 10% mark. In addition, out of the $10bn online sales in 2011, only c.45% came from regions outside of Moscow and St. Petersburg, inhabited by 85% of the population, and already 70% of the 10 Internet users, implying that a key driver will be regional growth . EXHIBIT 8 – E-COMMERCE SHARE OF TOTAL RETAIL AND INTERNET PENETRATION IN 2011 100% Norway Sweden Denmark 90% 2011 Internet Penetration Switzerland UK Benelux 80% Germany France 70% Italy Spain 60% Russia in 2015 Poland 50% Russia in 2011 40% 0% 2% 4% 6% 8% 10% 12% 14% 2011 E-commerce Share of Total Retail Source: Data Insight, 2012, for Russian e-commerce share of total retail; Centre for Retail Research, 2012, for rest of Europe e-commerce share of total retail; Internet World Stats, 2012, for Internet penetration; GP Bullhound Note: including ticketing and couponing, excluding B2B commerce According to Data Insight research, the Russian e-commerce market has the potential to grow at an annual rate of 16% to reach $18bn in revenues by 2015 – or 3% share of total retail. By 2020, it is estimated that the 11 e-commerce market would have grown to $30bn, at 5% of the overall retail market . EXHIBIT 9 – E-COMMERCE FORECASTS $30bn $18bn $10bn $8bn FY2010A FY2011A FY2015F FY2020F Source: Data Insight, 2012; GP Bullhound Note: including ticketing and couponing, excluding B2B10 Source: Data Insight, 201211 Source: Data Insight, 20126 GP Bullhound LLP
  7. 7. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED The key growth drivers for Russian e-commerce include: More users, especially in the regions outside Moscow and St Petersburg; Internet users becoming accustomed to e-commerce – only 16.3m purchased over a six month 12 period in 2011 out of 54m – 30% of Internet audience, versus 73% in France ; Higher revenue per capita – disposable income per capita is forecast to grow at 24% per year 13 between 2010 and 2014 ; Higher frequency of purchases – as users become more accustomed to shopping online, frequency of purchases should also increase; Increased basket diversity – Russian Internet audience is still dominated by tech-savvy users, who purchase more computers and consumer electronics products (Exhibit 10). As more product categories migrate online, such as furniture and home furnishings (4% in Russia vs. 8% in the US) and auto and parts (5% in Russia vs. 9% in the US), the product range will diversify and average online spend per user will increase. EXHIBIT 10 – E-COMMERCE BREAKDOWN BY PRODUCT CATEGORY FOR US AND RUSSIA (2011) 4% Other 2% 5% 4% 24% Health & personal care 4% 5% Books 5% 5% 2% 11% 4% Office appliances 8% 9% Furniture & home 17% furnishings 2% 4% Auto & parts 19% Groceries 43% Toys & hobby 23% Apparel & accessories Computer & consumer Russia US electronics Source: East-West Digital News, 2012; eMarketer, 2012; GP Bullhound Note: excludes travel and virtual goods12 Source: Data Insight, 2012 for Russia; Médiamétrie — Observatoire des Usages Internet for France estimates,201213 Source: Deutsche Bank, 20117 GP Bullhound LLP
  8. 8. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED DIFFERENCES PREVAIL Online Advertising Skewed to Search “Digital is growing at two-and-a-half times the rate of traditional media and that’s because it’s more flexible and 14 targeted,” according to Jerry Buhlmann, CEO of Aegis . In Russia, where digital advertising only gained significance in the past three years, the market is tilted towards more recent models which are particularly measurable (pay-per-click rather than display) and targeted (profile/social and behaviour/search). Indeed the 15 16 Russian market has leapfrogged traditional display/CPM , and embraced CPC/CPA revenue models, to the extent that these represent nearly two thirds of all digital advertising revenue, versus less than half in the US. This may also reflect the fact that most of the advertisers are so far themselves online players, more used to advertising means with easy-to-track ROI, such as contextual and search. Another reason is due to TV being a dominant channel for visually-focused advertising and will gradual shift to online display. EXHIBIT 11 – SEARCH ADVERTISING SHARE OF TOTAL ONLINE ADVERTISING SPEND IN THE US AND RUSSIA 72% 73% 68% 70% 63% 48% 49% 49% 48% 47% FY2011A FY2012F FY2013F FY2014F FY2015F US Russia Source: Zenith Optimedia for Russia, 2011; eMarketer for US, 2012; GP Bullhound Distribution Logistics Critical to Success in E-commerce The recent explosion of Russian e-commerce (up 25% yoy in 201117), the rapid expansion of online audiences 18 and purchasers in the regions (regional Internet users up 24% between summer 2010 and spring 2011 ) puts enormous pressure on logistics and distribution solutions which are still for the most part inadequate, particularly outside Moscow and St Petersburg. Outsourced solutions do exist, with successful examples including the DZB distribution centre (owned by Arvato, the Bertelsmann subsidiary), which handles over 35 19 million products parcels and mailings a year from its Yaroslav warehouse (250km outside Moscow). Overall though, outsourced solutions are expensive for the etailer, and inadequate for the end customer, as deliveries are during weekdays only and at imprecise times. Traditional logistics players also still lack the14 Source: The Sunday Times, 20 May 201215 CPM stands for cost per impression16 CPC stands for cost per click; CPA stands for cost per acquisition17 Source: Data Insight, 201218 Source: Public Opinion Foundation, spring 201219 Source: Public sources; company information8 GP Bullhound LLP
  9. 9. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED expertise, IT platform and organisation required to deal with e-commerce processes, particularly with extensive SKUs and the need for 99% availability, higher than what is tolerated in bricks and mortar retail. As a result, logistics remains one of the key differentiators for success among etailers in Russia, and larger players increasingly take the issue into their own hands and rely on their own logistic solution. Since our last report, Wikimart has raised money to accelerate implementation of its own order fulfilment solution and Ozon has continued to develop its own local centres. Increasing Hybrid Model Adoption “A logistics infrastructure can also provide a way to circumvent Russians reluctance to pay with credit cards,” Eric Sylvers from Informilo points out. Both pureplay online and traditionally offline businesses are looking at the hybrid approach to address many of the frictions in the Russian e-commerce market – a model that businesses like Amazon have also started to implement in the West. Examples include: Russian Amazon equivalent, Ozon offers 15 different methods of payment and delivery, and has 2,000 sales points where online purchases can be paid for and picked up, for its 1.5 million products catalogue; Mobile phone retailer Svyaznoy Group, which has around a quarter of Russia’s mobile phone market, has launched enter.ru – a hybrid retailer of more than 25 thousand products in multiple verticals including furniture, sporting goods, children’s wares and jewellery. Customers can purchase online, through call centre, and in the retailer’s 25 stores or a network of collection points; The X5 Retail Group, the country’s largest retail group which operates more than 3,000 retail outlets throughout the country, generating more than $15bn in annual sales, launched 5.ru. This website offers a catalogue of 392,000 items that can be picked up at the chain’s offline supermarkets in Moscow and St. Petersburg; Utkonos, the online food retailer that has been in the market for almost ten years, has its own central 20 warehouse, over 100 pick-up points across Moscow, and a home delivery service . Platform Outsourcing Opportunity Players who develop their own full e-commerce platforms across Russia will also be able to offer outsourcing services to third party etailers, ranging from distribution and delivery to the full user-acquisition solution. Indeed the e-commerce sector remains very fragmented in the country with over 25,000 etailers, and the top 50 representing only 16% of total e-commerce, resulting in strong demand for outsourced logistics services. For instance, Wikimart, and enter.ru both plan to offer logistics and transport services to third parties. Similarly, KupiVIP, whose own logistics network includes distribution and call centres, fleet of delivery trucks, generate 25% of the company’s revenues through the white-label service with nine big brands such as Adidas. Undefined Value Chain in Certain Sectors The value chain in some sectors still feels to us and Russia-focused investors to be in early stages of development. This is the case in online travel, for example, where there consumer behaviour patterns are still unclear and several business models are trying to capture the market: packaged tour operators, online travel agents, online hotel booking specialists, private sales etc. The travel space, deemed to become one of the largest e-commerce sectors, is being challenged by both pure-play travel (e.g. Ostrovok, OktoGo, Travelmenu) and non-travel businesses (Mail Group, Ozon), but without a clear leadership and differentiating20 Source: Public sources; company information9 GP Bullhound LLP
  10. 10. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED factors. We envisage that as with generalist e-commerce, this segment will continue to develop and establish the most appropriate business model for the Russian Internet users. Content Driving High Social Engagement As we mentioned in our previous research report, the Russian Internet audience is one of the most socially engaged in the world. The local players, such as vKontakte and Odnoklassniki dominate with 35 million and 28 million unique monthly visitors respectively. Facebook is in fourth place with an audience less than 40% that of the second player (Exhibit 12). In terms of total time spent on site, however, Facebook is dwarfed by vKontakte. One of the main reasons for the length of time users spend on vKontakte is the digital content available through the site, a lot of which is P2P and not cleared for copyright. In fact in May 2012, the company lost its court appeal against an earlier ruling that its feature integrating with file-sharing software breaches copyright. According to ComScore, users 21 spend 29 minutes per month on Facebook, versus 492 minutes on vKontakte . EXHIBIT 12 – TOP SOCIAL NETWORKS IN RUSSIA BY UNIQUE MONTHLY VISITORS AND TOTAL MINUTES SPENT (OCTOBER 2011) 35m 28m 17m 11m 4m 17,220m 9,492m 544m 319m 40m vKontakte Odnoklassniki MoiMir Facebook Twitter Total minutes spent Unique monthly visitors (Oct 2011) Source: ComScore, 2011; GP Bullhound The implication is that continued integration of digital content within social networks and its effective monetisation is key to becoming the leader in this space. For instance, Traveltipz, the online travel reviews aggregator in Russia, has strongly promoted users exchanging reviews through social networks ensuring higher the quality and relevance of reviews. As a result, 45% of reviews are written by users connected to the site through social networks versus less than 10% for a comparable European player. Interestingly, in the Russian e-commerce sector we are seeing similar trends: Ecwid, the Russian based shopping cart software business, is the second most popular solution on Facebook globally. Content Monetisation Still Nascent Currently, Russia’s digital content distribution is severely hampered by well publicised piracy issues. Evidence of this includes: 22 Only 10% of e-books are consumed legally , and only 26% of users have ever paid for video content with the majority having paid for only a single download23;21 Source: ComScore, October 201122 Source: Litres.ru, 201123 Source: J’son & Partners Consulting, 201110 GP Bullhound LLP
  11. 11. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED 58% of users who consume online videos do so via the less vKontakte, versus 30% for the next legitimate content distributor24; The big global players are still outside of Russia due to piracy issues, including iTunes, Spotify. The notable exception is Deezer, who have announced entry to Russia in December 2011 on the back of the global partnership with Orange. Since the last report local players, such as Tvigle and ivi.ru in video content, have continued to try and find ways to bring Russian Internet users to the legal side, including advertising, “freemium” and micropayments models. Monetisation will follow through once the legal content distribution services have reached sufficient scale and recognition. Key drivers include: 1) Russian users are becoming more accustomed to micropayments and “freemium” models online through social gaming – in 2010, casual and social gaming spend per Internet user was $10 in the Russia vs. $8 25 in the US ; 2) Content rights owners view Russia as a lost market due to piracy and are likely to provide content at lower cost to content distributors who offer at least some monetisation; 3) Active anti-piracy policies will gradually reduce availability of free content; 4) New distribution platforms are providing a better user experience and more valuable functions, for instance ebook business, Bookmate (part of Dream Industries), provides social reading and sharing to engage users; 5) Recent studies suggest that 13 million Russian Internet users are willing to pay for content online, but do not always understand whether content is legal or not – as well recognised and trusted players emerge, 26 uses will be more inclined to consume legally distributed content . Subsequently, we anticipate online content monetisation to intensify with revenues forecast to reach $4.5bn by 2012. EXHIBIT 13 – DIGITAL CONTENT REVENUES $4.5bn $3.9bn $3.3bn $2.8bn 2009A 2010A 2011A 2012F Source: J’son & Partners Consulting, 2011; GP Bullhound24 Source: VTB Capital, March 201225 Source: Bank of America Merril Lynch, December 201026 Source: FOM, 201111 GP Bullhound LLP
  12. 12. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED CONTINUED MARKET DEVELOPMENT Growing Foreign Investment Activity In 2011, we have seen continued investment in Russia Internet, both from local and foreign investors. More active foreign funds in the region include: Accel Partners: KupiVIP, Ostrovok, Avito; Balderton Capital: KupiVIP, Elecsnet; Bessemer Venture Partners: KupiVIP, entered into a partnership with the Skolkovo Foundation (a Russian Government-financed technology hub); eVenture Capital Partners: Fast Lane Ventures, Prinme, Heverest, Sapato; General Catalyst: Ostrovok; Index Ventures: Ozon; Investment AB Kinnevik: Avito, Lamoda; Intel Capital: Softkey, AlterGeo, Sapato, Akella; Mangrove Capital Partners: Oktogo, KupiVIP, Drimmi; KupiBonus; HomeMe; Enter Media, Quintura; Northzone Ventures: Avito; Tiger Global Management: Digital Access, Biglion, Anywayanyday, Yandex; Ventech: Oktogo, Pixonic, WomansJournal. For foreign players, Russia is one of the fast-growing opportunities and particularly for European investors, the region happens to be the closest of the BRIC countries both geographically and culturally. Investment focus has been predominantly on already proven business models, in sectors such as e-commerce, gaming and software. From our discussions with investors, other factors that play an important role in the process include: 1) Clear market leadership – Yandex and Mail.ru have shown that it is difficult to displace the incumbent even for players like Google and Facebook; 2) Strong growth of 10%+ per month – businesses view Russian Internet as an emerging market and expect monetisation growth to reflect that, particularly if profitability has yet to be reached; 3) User loyalty – investors’ perception is that it is relatively easy to amass a large audience quickly given the number of new users each month curious to try new online services and offerings. It is essential to demonstrate high user stickiness / return rate; 4) Detailed metrics and KPIs dashboard – given the relative lack of independent analytics data on the Russian Internet sector, investors expect strong internal measurements and analytics; 5) Strong management team – due to the scarcity of top quality Internet management, Russian Internet market is currently experiencing high turnover (similar to Western Europe in the early 90s). Experienced, stable management teams, with effective incentive schemes are considered a huge plus for investors; 6) Bulletproof legal and accounting – transparency of ownership and legal structure and framework are critical. Increasingly Sophisticated Local Investors Russian venture capital funds have started to compete with top tier international VCs for deals abroad and winning, examples include: Almaz Capital has been active in the US software sector, investing in Recovery-as-a-Service solutions provider, nscaled, security software company, Vyatta, mobile video software business, Qik;12 GP Bullhound LLP
  13. 13. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED Kite Ventures has made foreign investments in gaming publishing and payments, including German- based Hitfox, Sponsorpay, and e-commerce properties and services, such as Denmark-based TradeShift, US-based Merchantry and UK-based Made.com; Runa Capital, focused on software businesses, has made several investments including in French app analytics platform, Capptain, US-based SaaS business, Jelastic, UK-based Cloud platform provider, ThinkGrid, US-based time management app, BigTime; Ru-net Holdings has been highly active in Asia, with investments in India, and Germany, investing in Delivery Hero, New Generation Investment announced that it would like to start investing into the start-up scene in France; VTB Capital is now looking to invest in digital media outside of Russia. Others have continued to ramp up operations, such as Fast Lane Ventures, one of the most successful accelerators, who has witnessed its first successful exits (Shopping Live and Sapato), and has launched numerous promising new models, including Heverest, an outdoor clothing and equipment etailer, already showing impressive growth and metrics. EXHIBIT 14 – PRIVATE PLACEMENTS IN RUSSIAN INTERNET BUSINESSES BY QUARTERLY VOLUME AND VALUE Quarterly Private Placement Transactions 15 12 7 7 6 6 6 4 4 3 3 2 2 1 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Quarterly Private Placement Transaction Value $128m $100m $100m $39m $37m $34m $20m $15m $11m $14m $8m $1m $4m $1m Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Source: Capital IQ, GP Bullhound, 201213 GP Bullhound LLP
  14. 14. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED Conducive Trade Sale Environment The flow of exits is increasing as more global strategics perceive Russia as a region they cannot miss out on given the lack of growth in Western Europe and US for international players to reinforce their activities in fast growing regions, such as Russia. In addition, local online businesses are now becoming of scale as a result of continued investment over the last few years and are consolidating within their sectors. Recent exits include: Naspers’s acquisition of Slando, online classifieds website; WPP’s acquisition of Promo Digital, digital marketing services agency; Ozon’s acquisition of Sapato, online shoe retailer; Rambler Holding’s acquisition of Kanobu, online gaming content. Conclusions In past year the Russian Internet market has passed key inflection points, and double-digit growth of key metrics is set to continue for the rest of this decade: Audience – regional penetration still below 60%; Advertising – currently online advertising is still mainly implemented by Internet and technology players, with strong potential growth as traditional brands migrate their budgets online; E-commerce – even by 2015, online share of retail will be lower than Poland today; Digital content – currently dwarfed by piracy issues, but growing extremely fast from a low base. In our view, the Internet ecosystem has had sufficient time to learn and adapt to local challenges and the winners today are not only coping but thriving with specific models: 1) E-commerce - logistics ownership is paramount with the emergence of the hybrid model; 2) User-generated content / reviews – integration with rewards and social networks has proven key in driving growth; 3) E-commerce enablers – effective combination of social and cloud features. We foresee that business models will settle in the other sectors also, namely online travel, digital content distribution and display advertising. Finally the sector has become more attractive to foreign investors with increasing investment activity over the last twelve months. We have also seen noticeably more coverage and great improvements in infrastructure around Internet, for instance logistical platforms, online data measurements and analysis. Now that Russia has firmly entered the mainstream of European Internet, we expect more positive news flow from the sector: Russian companies starting to acquire Internet properties abroad, attracted by lower valuations, technology, and audiences, in particular in other fast-growing economies; More Russian websites joining Yandex Mail and vKontakte among the European top ten; Russian e-commerce companies finally joining their audience – based peers and registering on the European map.14 GP Bullhound LLP
  15. 15. GP B ULLHOUND RUSSIAN I NTERNET – T HE RUSSIAN W EB U NTANGLED Selected Private Placements Transaction Annouc. size Date Com pany Investor ($m ) Com m entary Accel Management; Baring Vostok Capital Partners May-12 Avito $75.0m Online classifieds Northzone Ventures; Investment AB Kinnevik Apr-12 Fast Lane Ventures eVenture Capital; VTB Capital $25.0m Venture Capital incubator Apr-12 MallStreet Company Kima Ventures - Online hypermarket Mar-12 Moe Delo Klever Asset Management $4.0m Online SME bookkeeping service Mar-12 Shoptime KupiVIP $50.0m Online retail clothing store Mar-12 Wikimart Tiger Global Management $30.0m Online marketplace Tiger Global Management; ru- Feb-12 Digital Access $30.0m Online video service under the name ivi.ru Net II Ventech; Mangrove Capital Feb-12 Oktogo Partners; ABRT Venture Fund; $10.0m Online hotel booking service VTB Capital Jan-12 Ostrovok - - Online hotel booking service Online short term vacation and travel rentals across Jan-12 RentHome Fast Lane Ventures - Russia and CIS Dec-11 Biglion Tiger Global Management LLC $25.0m Daily deals site Dec-11 Ecw id Runa Capital $1.5m E-commerce shopping cart softw are for SMEs eVenture Capital Partners; Dec-11 Pinme Direct Group; Fast Lane $1.3m Online photo sharing service Ventures Nov-11 Heverest eVenture Capital Partners $5.7m Online sports clothing and equipment retailer Sep-11 Lamoda Investment AB Kinnevik - Online retailer of shoes Aug-11 VitaPortal Fast Lane Ventures $1.0m Online healthcare media publishing Accel Management; General Jul-11 Ostrovok Catalyst Partners; The $13.6m Online hotel booking service Founders Fund eVenture Capital Partners; Intel Capital; Investment AB Jun-11 Sapato $12.0m Online retailer of shoes Kinnevik; Direct Group; Fast Lane Ventures Almaz Capital Partners; Runa May-11 Travel Menu $1.6m Online travel agency offering packaged tours Capital General Catalyst Partners; Kite Apr-11 Ostrovok $1.0m Online hotel booking service Ventures Holtzbrinck Ventures; Investment AB Kinnevik; Apr-11 Lamoda - Online retailer of shoes Tengelmann Warenhandelsgesellschaft Apr-11 Metabar Runa Capital $1.0m Application for brow sers Accel Management; Bessemer Venture Partners; Mangrove Apr-11 KupiVIP Capital Partners; Russia $55.0m Online fashion private sales retailer Partners Management; Balderton Capital Ventech; Mangrove Capital Apr-11 Oktogo $5.0m Online hotel booking service Partners; ABRT Venture Fund Alpha Associates; Baring Apr-11 Ozon Vostok Capital Partners; Index $100.0m Online hypermarket Ventures; Rakuten; ruNet Mar-11 Biglion ru-Net II - Daily deals site Online city library that helps people to find the best Mar-11 Tulp - $3.0m places to eat, shop, drink Mar-11 Wikimart Tiger Global Management $7.0m Online marketplace Source: Capital IQ; GP Bullhound, 201215 GP Bullhound LLP
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