Why Russia doesn’t have eBay? January 2009

Russia is the single market in the entire world that still doesn’t have a major online marketplace ?

Different people give different reasons for that… Myth 1: There is no suitable payment systems Myth 2: The logistics in Russia is very rudimentary and challenging to build Myth 3: The internet penetration is too low for a marketplace to take off Myth 4: The trust among online users is too low Myth 5: Russians simply lack necessary mentality to adopt that kind of service

Myth 1: There is no suitable payment systems

Myth 2: The logistics in Russia is very rudimentary and challenging to build

Myth 3: The internet penetration is too low for a marketplace to take off

Myth 4: The trust among online users is too low

Myth 5: Russians simply lack necessary mentality to adopt that kind of service

Payment: there are plenty of online services but to start a marketplace one doesn’t really need them We have counted over 50 online payment systems in Russia. They serve less than 10% of online transactions. Once a dominant marketplace emerges this share will gradually grow. Credit cards are responsible for another 10% of transactions. The number of credit card users is also growing but… Like the majority of developing countries Russia remains cash-driven and cash-dominant economy. More than 80% of online customers prefer to pay cash. One can build a marketplace around cash-paying customers. It has been done multiple times over the last 8 years…

We have counted over 50 online payment systems in Russia. They serve less than 10% of online transactions. Once a dominant marketplace emerges this share will gradually grow.

Credit cards are responsible for another 10% of transactions. The number of credit card users is also growing but…

Like the majority of developing countries Russia remains cash-driven and cash-dominant economy. More than 80% of online customers prefer to pay cash. One can build a marketplace around cash-paying customers. It has been done multiple times over the last 8 years…

As in other markets, cash-paid online transactions will work perfectly in Russia There are three ways of accepting cash for ecommerce: Cash on delivery – already being practiced by Ozone in Moscow Instant terminals – currently being used for a limited number of services (such as internet, cell phones, etc.) but are expected to evolve in a major payment tool Banking transfers/direct deposits without opening a bank account – works perfectly in Latin America and already exists in Russia

There are three ways of accepting cash for ecommerce:

Cash on delivery – already being practiced by Ozone in Moscow

Instant terminals – currently being used for a limited number of services (such as internet, cell phones, etc.) but are expected to evolve in a major payment tool

Banking transfers/direct deposits without opening a bank account – works perfectly in Latin America and already exists in Russia

Logistics: already developed and not that challenging Overwhelming majority of online transactions in any developing country takes place within large cities Similarly, there are strong reasons to believe that same-city transactions will constitute up to 90% of Russian online transactions Thus, to build an online marketplace one needs local carriers in large cities Today every large city in Russia has at least a dozen of carriers that provide delivery services for local businesses and online shops/restaurants There are also many national-wise service providers: EPS, Pony Express and others Combining this already existing infrastructure with cash-on-delivery approach with solve all logistical problems altogether. The company named Estafeta provides a very compelling case for such a solution in Mexico.

Overwhelming majority of online transactions in any developing country takes place within large cities

Similarly, there are strong reasons to believe that same-city transactions will constitute up to 90% of Russian online transactions

Thus, to build an online marketplace one needs local carriers in large cities

Today every large city in Russia has at least a dozen of carriers that provide delivery services for local businesses and online shops/restaurants

There are also many national-wise service providers: EPS, Pony Express and others

Combining this already existing infrastructure with cash-on-delivery approach with solve all logistical problems altogether. The company named Estafeta provides a very compelling case for such a solution in Mexico.

Internet penetration increases by 3-4 % annually which makes Russia one of the fastest growing markets for e-commerce Drivers of growth: 2000-2008 Rapidly growing computer penetration in households, workplaces, classrooms and Internet cafes; Exponentially increasing availability and decreasing prices of broadband Internet; Significantly increased Internet security protection, including telecommunications networks and systems; Availability of advanced electronic or other payment systems, including credit card, instant terminals and online banking systems ;

Drivers of growth: 2000-2008

Rapidly growing computer penetration in households, workplaces, classrooms and Internet cafes;

Exponentially increasing availability and decreasing prices of broadband Internet;

Significantly increased Internet security protection, including telecommunications networks and systems;

Availability of advanced electronic or other payment systems, including credit card, instant terminals and online banking systems ;

Trust: how much trust does one need to spend $100 online? Answer 1: Depending on one’s disposable income. Then it becomes not an issue of trust but an issue of growing disposable income of the Russian customer. Answer 2: Depending on where one is shopping. Why on earth 16M Russian internet users that were buying online in 2008 should trust an online marketplace less than they trusted unknown online shops?! Answer 3: Probably similar to that in other supposedly low-trust economies (such us Panama, India) where the issue of trust doesn’t prevent people from massively engaging in online transactions.

Answer 1: Depending on one’s disposable income. Then it becomes not an issue of trust but an issue of growing disposable income of the Russian customer.

Answer 2: Depending on where one is shopping. Why on earth 16M Russian internet users that were buying online in 2008 should trust an online marketplace less than they trusted unknown online shops?!

Answer 3: Probably similar to that in other supposedly low-trust economies (such us Panama, India) where the issue of trust doesn’t prevent people from massively engaging in online transactions.

Mentality: is it true that Russians are that different from the rest of the world?... Argentina Mexico India Panama Poland Japan Brazil China Australia New Zeeland UK South Africa South Korea Germany France US Holland Hungry Belgium Uruguay Malaysia Switzerland Chili Denmark Philippines Turkey Singapore Czech Republic Italy Taiwan Ireland Canada Austria Countries where a marketplace became a major means of online shopping:

Argentina

Mexico

India

Panama

Poland

Japan

Brazil

China

Australia

New Zeeland

UK

South Africa

South Korea

Germany

France

US

Holland

Hungry

Belgium

Uruguay

Malaysia

Switzerland

Chili

Denmark

Philippines

Turkey

Singapore

Czech Republic

Italy

Taiwan

Ireland

Canada

Austria

Rapid economic and infrastructure development created necessary conditions for an online marketplace to take-off 36% Internet penetration Russia becomes the second largest Internet country in Europe Russia becomes the largest Internet country in Europe 43% Internet penetration Russian becomes the fifth largest Internet language in the world 46% Internet penetration Russian GDP per capita, current USD Broadband Internet penetration in Moscow, % of Internet households Russian Internet population, mln. people ??? Russian “Google” Russian “Yahoo” Russian “eBay” Valuation ~$2-5bn Valuation ~$1-2bn Valuation ???

The real answer: nobody has really tried Argument 1: Building a marketplace requires a long-term commitment and a lot of capital. There have been very few well-funded and long-term oriented startups in Russia so far. Argument 2: Building an online marketplace is hard. With that much capital and commitment Russia provides plenty of less demanding lucrative opportunities. Argument 3: Online marketplace is more about business processes and relentless marketing efforts than it is about technology. The example of Molotok.ru illustrates this very well (as opposed to identical Allegro in Poland)

Argument 1: Building a marketplace requires a long-term commitment and a lot of capital. There have been very few well-funded and long-term oriented startups in Russia so far.

Argument 2: Building an online marketplace is hard. With that much capital and commitment Russia provides plenty of less demanding lucrative opportunities.

Argument 3: Online marketplace is more about business processes and relentless marketing efforts than it is about technology. The example of Molotok.ru illustrates this very well (as opposed to identical Allegro in Poland)

The last opportunity to build a large-scale proven business model in Russia…