Google Yandex M&A

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Presentation Contemplating The Acquisition of Yandex By Google.

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Google Yandex M&A

  1. 1. November 2013 Time to End the Cold War: Why Google Should Acquire Yandex By Charles Worthman
  2. 2. Executive Summary
  3. 3. 2 CONFIDENTIAL Executive Summary – Google Should Acquire Yandex Google, which essentially invented modern online advertising, still earns almost all of the company’s revenue from advertising making Google as much an advertising company as an innovative tech company Search is the main driver of Google’s advertising revenues and thus its cash flows According to the company’s core philosophy the main competency of Google is search. Google states: “With one of the world’s largest research groups focused exclusively on solving search problems, we know what we do well, and how we could do it better. Through continued iteration on difficult problems, we’ve been able to solve complex issues and provide continuous improvements to a service that already makes finding information a fast and seamless experience for millions of people. Our dedication to improving search helps usapply what we’ve learned to new products, like Gmail and Google Maps. Our hope is to bring the power of search to previously unexplored areas, and to help people access and use even more of the ever-expanding information in their lives.” In almost all markets around the world users have voted and Google is clearly the best search company in the world with a market share of over between 65% and 88% worldwide depending on the source Yet in a few major internet markets in the world Google is not the dominant search engine: China where Baidu has over 60% of the market, South Korea where Naver is used by about 70% of users and Russia where Yandex, the “Google of Russia” has a market share of 62% - 64% depending on the source China is not a market Google can enter in a big way due to well publicized censor concerns, leaving only South Korea and Russia as markets where Google has not managed to achieve dominance despite best efforts Google should acquire Yandex to obtain dominance in the Russian market Based in the Netherland’s Yandex adheres to relatively strict requirements for accounting and other procedures vs. other Russian based companies
  4. 4. 3 CONFIDENTIAL Executive Summary – Google Should Acquire Yandex “There are very few companies in the world that can compete with Google, and Yandex is one of them and the only one in Europe.” Konstantin Belov, an analyst at UralSib Financial Corp. “Yandex's algorithm accounts for the intricacies of Russian grammar, where the same word can have dozens of different endings depending on its place in a sentence.” – BusinessWeek “Yandex is geared to structural growth in internet advertising as the Russian market sees higher internet penetration and higher share of ad budgets moving away from traditional media to new media. We expect rapid growth of the internet advertising sector and Yandex to stay in the lead in paid search.” – Bank of America Merrill Lynch“It’s remarkable that there are fewer countries with their own search engines today than those with their own space program.” Dmitry Grishin, Co-Founder and CEO of Mail.Ru Group “Russia is a key market, with more internet users than any other country in Europe. But participants clearly must be ready to play by a whole other set of rules and against especially well-entrenched competitors.” – Wired Magazine “In some directions, Yandex is even ahead of Google, for example, the Yandex real-time traffic monitoring service launched 4 years before Google could offer a similar service to its Russian users.” - Sergey Kuznetsov HSE‘s School of Applied Mathematics and Information Science “Of course, Yandex’s leadership might not be eternal. Google could significantly reduce the gap with a strong team and sufficient investment on the Russian market. But it is difficult to imagine Google seriously threatening Yandex positions in the next 5 to 7 years.” - Andrey Zotov, East- West Digital News co-founder: “In the medium or long term, Google has its chance, especially if Google will make some special deal with leading telecoms. It won’t be easy, however, since Yandex is a well structured company and it will be almost impossible for anyone to win the search competition with Yandex. The best Cyrillic search results will keep users around Yandex for a long time to come.” - Alexander Galitsky, co-founder and managing partner at Almaz Capital Partners
  5. 5. 4 CONFIDENTIAL Experienced Management  Yandex is run by a very experienced team of computer scientists  Yandex has been around as long as Google and has a team that is much more experienced in Russian, the second most popular web language Patent Portfolio & Search Knowledge Helpful to Google  Yandex has a large patent and IP portfolio from its years in the internet business  Having been in the search business as long as Google, Yandex’s knowledge and team would be an asset to Google Russian Mobile Is A Big Opportunity  Despite having the highest wireless penetration rate in Europe, Russia’s Smartphone penetration is low  For key areas like social, video and apps Russia is one of the most active countries  Unlike the U.S., Android has a higher tablet market share than iOS in Russia Gives Google Immediate Dominance in Russia  Yandex is the search leader in Russia with 62% market share in the country  Has 54 million unique visitors a month in Russia alone  Has 241K advertisers and over 50% of online ad market share Significant Initial Synergies Make Acquisition Cheap For Google  A large number of overlapping product focuses leads to significant synergies  The transaction is accretive on both a GAAP and a cash basis without including significant additional revenue opportunities in Russia from being a combined firm Russia Is An Attractive Market  Russia is the top internet market in Europe by number of users and 6th in the world  With only about 50% penetration there is still plenty of room for growth  With ecommerce penetration of 1.9% Russia is set for advertising growth despite already being a top digital advertiser Highlights – Why Google Should Acquire Yandex
  6. 6. 5 CONFIDENTIAL Russia Is One Of The Few Markets Where Google Is Not Dominant Russia is one of the only top ten internet markets where Google is not a dominant search engine (a) Google has been able to compete in Russia but has not but has not managed to overtake Yandex Russian is a complex language and Yandex has a big head start in building brand equity and search results in Russia Only 5% of people in Russia speak English fluently especially outside of the major cities Yandex’s lead has held in Russia despite huge advertising resources dedicated to Russia by Google as well as the very successful introductions of Chrome and Android in Russia Google Market Share In Top 10 Internet MarketsDominant Search Engines Around The World (a) In Japan Yahoo has a partnership with Google to utilize Google’s search results. As such, actual Google market share is higher than stated. 98% 97% 96% 95% 95% 92% 67% 40% 22% 3.05% 0% 20% 40% 60% 80% 100% 120% India Brazil Indonesia Germany France United Kingdom United States Japan Russia China Sources:Bloomberg LP & Searchengineland
  7. 7. 6 CONFIDENTIAL 64% 22% 8% 3% Yandex Google Mail.Ru Rambler Yandex is a Clear Leader in the Russian Internet Sector Yandex is the clear leader in Russian search and a strong player worldwide despite only being active on the Russian speaking internet and now in Turkey Yandex powers the paid search feature on Mail.ru so the site is not an actual competitor to Yandex Yandex’s share on mobile is over 50% on Android and 40% on iOS. The iOS share is expected to surge after Yandex’s partnership with Apple In 2012, Yandex’s audience exceeded the viewership of Russia’s most popular TV station Russia Search Engine Market Share (Q2 2013) 17.7 18.7 21.6 23.5 31.3 37 39.3 42.2 50.9 50.9 0 10 20 30 40 50 60 Avito.ru ucoz.ru Facebook Wikipedia Youtube Odnoklassniki.ru Google Vk.Com Yandex.Ru Mail.ru Nov 2012 Unique Visitors (MM) Sources :comScore 66.90% 18.10% 11.10% 2.60% 1.30% Google Sites Microsoft Sites Yahoo! Sites Ask Network AOL, Inc. U.S. Search Market Share (Oct 2013)
  8. 8. 7 CONFIDENTIAL Yandex Firing On All Cylinders • In Q3 2013, Yandex grew 2.2% YOY in share of search on all platforms and 25% YOY growth in number of search result pages mostly from increased search intensity per user • Yandex’s share of the search market in Russia stands at 62% a growth of 1.5% YOY • Advertising clients have grown 24% YOY to 261,000 while ARPU grew 15% YOY • Paid clicks are growing at a rate of 50% YOY as of Q3 2013 • Revenue is growing at a rate of 35% to 38% according to Yandex, with Q3 2013 showing over 40% YOY growth Yandex is Growing Quickly • Yandex recently signed partnerships with very important partners like Mail.ru, Twitter, Apple, Cooliris, Rambler and Skrill, among others; The Mail.ru partnership has great terms with Yandex only paying through TAC costs • Mail.ru the hugely popular Russian portal recently announced that they would stop utilizing Google to power its own search engine further hurting Google’s position in Russia by using Yandex for paid search • These partnerships, especially with Google competitors like Apple and Twitter could be transformative for Yandex and certainly cement Yandex’sposition while the Mail.ru partnership cements Yandex’s #1 search position • By acquiring Yandex, Google nips these partnerships in the bud or takes them on, both of which would nullify any negative problems from the partnerships Yandex Partnerships Strengthen Company • Having launched Yandex Browser only a year ago Yandex now has about 6% total browser share in Russia • Even in Google’s own Chrome Yandex is dominant with 54.6% market share despite Google being the default browser in Chrome (meaning users have to consciously shift) • Yandex is progressing well in mobile with 15% of search traffic coming from mobile and 11% of search revenues • Yandex now has over 60% market share in Android (from 47% just a quarter ago) and 40% in iOS (from 30%) Yandex Doing Well In Areas Google Should Dominate • Yandex is trying to launch key unique products outside of search • Yandex recently announced a new cost per action model for Yandex.Market where Yandex will charge merchants 1% from every transaction made through the market (compared to 8-10% at eBay and others). Yandex will offer enhanced conversion of visitors into buyers through increased user experiences and enhanced credit card safety by having users store their credit card information in Yandex (which will also have obvious benefits for Yandex too) • Already 100 sites have already signed up and another 1,000 have expressed interest Yandex Is Introducing New Products
  9. 9. 8 CONFIDENTIAL Russia is an important language market for Google • Russia’s online ad market is growing at about 30% YOY with the contextual market growing even quicker at 38% YOY; Many individual platforms are growing at even quicker rates • Russia is the largest TV advertising market in EMEA and will shortly be fifth largest in the world • Russia is one of the most dynamic markets in the world for mobile ad requests • Compared to the US Russia’s advertising market is in its infancy. Online advertising spending per user in the US is 15x the current amount spend in Russia • In the key mobile segment , spending is expected to grow 50% per year and is currently at 9% less than the US as a percent of total advertising spending • The Russian audience is the most active in Europe for video consumption which should lead to higher video ads Russia Is A Very Attractive Advertising Market • By 2020 Europe is expected to be Europe’s largest consumer market and the world’s fourth biggest overall; Demand for key consumer sectors is growing at 10-15% per year • The consumer already accounts for 2/3 of GDP and 80% of economic growth since 2004 • The middle class accounts for 55% of the population higher than China (21%), Brazil (30%) or India (11%); The number of people considered upper class (15%) is 3x that of Brazil • Russian users place an order on eBay every three seconds and total spending on eBay alone is $400 million a 54% growth rate YOY • Russia’s e-commerce market is highly fragmented with the top 10 retailers making up only 20% of the market. This is a good sign for advertising platforms like Yandex Huge Consumer Market • Eastern Europe is still the second lowest ad spender of any world region behind only the Middle East and Africa • Russia media spending is growing at 15% and will continue growing at double digit rates for a couple of years according to eMarketer; Total ad spending was up 13% YOY in 2012 • Russia is currently the 11th ranked country for advertising spending and is expected to reach 7th place by 2015 overtaking South Korea, Australia and France • With over 75 million internet users, Russia still has almost half its population not online. This compared to just 20% in the US not online and similar numbers in Europe where Russia is already the largest internet country • Large international online players like eBay, ASOS and Amazon have entered the Russian market recently which should help to drive advertising as these players spend to take share from established local players • The Russian-speaking audience includes about 85 million users today (in and out of Russia) and growing quickly Russia Still Has Plenty of Growth Left
  10. 10. 9 CONFIDENTIAL Russia is An Important Country to Google 2012 Distribution of Visitors to Google.com2013 Percent of Visitors to Google Sites 31.50% 9.90% 3.30% 3.20% 2.80% 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% United States India Russia Brazil Indonesia Source: Alexa 30.1 9.0 3.3 3.2 3.1 3.0 3.0 2.8 2.7 2.4 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 United States India Japan Brazil Russia United Kingdom China Germany Iran Italy Number of monthly active Google+ users 2Q 2012 (MM) 107 43 20 20 14 14 13 12 10 9 0 20 40 60 80 100 120 China India Brazil Indonesia Unted States Russia Mexico Vietnam Turkey Argentina Sources: Digital Media Ramblings and Company Filings
  11. 11. 10 CONFIDENTIAL Recent Developments Have Only Added to Yandex’s Dominance A number of recent development could further enhance Yandex’s competitive position in the Russian Market Apple Inc.’s iOS 7 mobile operating system is expected to include Yandex as a default search engine option within Safari. This should be no surprise considering Apple’s rivalry with Google and that Yandex has been supplying local data for Apple Maps since September 2012 Mail.ru the hugely popular Russian portal recently announced that they would stop utilizing Google to power their own search engine further hurting Google’s position in Russia Mail.ru is testing Yandex.Direct, a contextual advertising service for its web sites. The partnership could potentially boost Yandex revenue by as much 10 percent according to Otkritie Capital Like Google Yandex recently launched its own browser to enhance search and display revenue Yandex recently signed a licensing deal with the browser Opera to share Yandex’s technology and utilize Opera browser capabilities Yandex’s browser now has around 8 million users in Russia or a 5.9% share On July 02, 2013 Yandex announced that it will carry Twitter data in all search results in a deal that is similar to a deal Google used to have with Twitter to carry twitter results in search feeds The deal gives Yandex a leg up on Google up in key social networking related results Yandex recently launched a dedicated mobile browser featuring a single box for URLs and searches as well as voice recognition and other features.  An app store similar to Google Play called Yandex.Store was recently launched in July 2013
  12. 12. 11 CONFIDENTIAL Factor Advantage Notes Local Understanding Yandex •Having been involved in Russian search since 1989, Yandex has a clear language and cultural understanding vs. Google •Yandex has also developed applications specifically for local population Non-Search Services Yandex •Like Google, Yandex offers a lot of non-search services like Maps, Shopping, News, Mail and Payments •Yandex offered Mail, News and Payments before Google did and certainly before they offered a Russian version •In certain areas like Yandex.traffic and payments Yandex is ahead of Google in terms of quality •Yandex's services consistently rank above Google's in Russia except in areas where Google is clearly dominant such as Video Partnerships Yandex •Yandex has partnered with most of the more attractive partners including Mail.ru, Apple, Opera, Cooliris, Windows Phone, Skrill, Twitter, Rambler and many others giving Yandex control of not just Yandex but all the top players •These partnership also testify to the Yandex’s dominance in Russia and quality of the Company’s search results •Partners like Mail.ru and Twitter were formally Google partners Video Google •Google has almost twice as many video users in Russia as Yandex •YouTube is the clear leader worldwide in the rapidly growing video market including in Russia Mobile Google •Andriod is the leading operating system worldwide and in Russia; With Google controlling Android it has an inherent advantage on mobile •Google is one of the largest and most innovative mobile companies in the world and with mobile moving at a rapid pace Google will shortly be too far ahead of Yandex for Yandex to catch up •Yandex has been holding its own in mobile with innovative mobile applications and partnerships with Android competitors like Apple and Microsoft Browser Yandex •Crome is a strong competitor worldwide in both mobile and desktop •Yandex's recent browser as the partnership with Russia browser leader Opera puts in a strong position to compete against Android in Russia Yandex Vs. Google In Russia
  13. 13. 12 CONFIDENTIAL Yandex Has Important Key Partnerships Yandex’s list of partners and advertisers is a who’s who of the Russian internet market Many of these partnerships such as Apple, Mail.ru, Twitter, Skrill and Cooliris greatly enhance the Yandex product and in the case of Apple and Twitter hurt Google’s Through partnerships with Mail.ru and Rambler, Yandex not only operates its own sites but assists in operating the other popular portals in Russia Partnerships and Advertising Partnerships Source: Yandex
  14. 14. 13 CONFIDENTIAL Local Knowledge Is Important, Most Popular Sites Are Local Top E-Commerce Sites The vast majority of the largest companies in key categories (excluding searches and portals) are all Russian companies. This testifies to the importance of local knowledge in the Russian market 56% of consumers say that the ability to obtain information in their own language is more important than price Top Social Networks Top News Sites Top Offline Retailers & Daily Deal Sites Source: Yandex
  15. 15. 14 CONFIDENTIAL Yandex Has The Leading Advertising Network In Russia Yandex offers advertisers a sophisticated service for placing ads on both search pages and millions of pages in its advertising network; Yandex’s ad network shows ads to over 37 million people daily Yandex’s advertiser count is growing quickly (24% YOY) having added 12,000 new advertisers in Q3 2013 Members of Yandex’s ad network include the top sites in Russia such as Mail.ru, Rambler, Odnoklassniki, livejournal.ru and many others Yandex believes there are over 1 million SME’s that could be serviced by Yandex’s advertising network Advertising experts are said to view Yandex’s traffic monetization platform as more efficient than Google’s platform due to the higher CPCs experienced by Yandex Yandex Number of Advertisers (Thousands) Sources: AKAR, Company Data & BofA Merrill Lynch Russia Online Advertising Market Shares 37% 39% 50% 52% 45% 47% 50% 15% 14% 14% 13% 63% 61% 50% 33% 40% 39% 37% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2006 2007 2008 2009 2010 2011 2012 Yandex Mail.ru Other 144 159 174 179 193 202 213 226 239 261 41% 48% 43% 40% 34% 27% 22% 26% 24% 24% -40% -30% -20% -10% 0% 10% 20% 30% 40% 50% 0 50 100 150 200 250 300 350 400 450 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Advertisers YOY Growth, %
  16. 16. 15 CONFIDENTIAL 17,695 15,092 10,971 10,848 7,197 57% 15% 81% 20% 25% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 20,000 Yandex Weather Yandex News Map Makers Sites Mail.ru Ria.ru Total Unique Visitors % Growth 15,284 7,439 6,404 5,314 4,90018% 2% 27% 46% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Yandex Market Ozon.Ru Sites Svyaznoy Sites M.Video Wildberries.Ru Total Unique Visitors % Growth Top News/Weather Sites in RussiaTop Market Sites in Russia Yandex Is A Top Destination in Russia Source: Comscore Top Online Banking Sites in Russia 6,686 1,353 1,103 820 691 37% 21% 29% 0% 10% 20% 30% 40% 50% 60% 70% 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 Sberbank.Ru Tscbank.ru Vtb24.ru Rsb.ru Rencredit.ru Total Unique Visitors % Growth Yandex is the most important site in key categories such as banking, market sites and news/weather sites In key News and Weather categories Yandex has the top two places in Russia Yandex market has almost double the visitors of the largest competitor Sberbank is a partner and majority owner of Yandex.Money
  17. 17. 16 CONFIDENTIAL Browser Share in Russia – Even In Chrome Yandex’s Share Grows Context Market Growth Vs. Yandex Context Revenue SERP and Paid Clicks GrowthEstimated Click-through Rate for Yandex Display Market Growth vs. Yandex Display Revenue Source: AKAR, Company Data and BofA Merrill Lynch
  18. 18. 17 CONFIDENTIAL Russia is a Very Attractive Market Russia has the world’s eighth largest economy and seventh largest internet population Russia’s GDP per capita is estimated at $14,037 higher than Brazil ($11,339), China ($6,091) or India ($1,489) By 2016 GDP per capita is expected to reach $18,709, a growth of about 25% Having grown 60% YOY, Russia ranked second in Europe in terms of job creation (to the UK) in 2012 through FDI It is largely expected that Russia joining the WTO will have a positive effect on the Russian economy and FDI Already the largest in Europe, Russia’s internet audience is growing at one of the fastest rates of any large country in terms of both audience metrics and advertising metrics Contributors to Global Ad Growth 2012 – 2015 ($MM)Countries by GDP (USD $B) 15,685 8,227 5,960 3,400 2,613 2,435 2,253 2,015 2,013 1,842 - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 US China Japan Germany France UK Brazil Russia Italy India $21,191 $13,039 $4,802 $4,157 $3,284 $3,263 $2,442 $2,179 $1,923 $1,874 $0 $5,000 $10,000 $15,000 $20,000 $25,000 USA China Argentina Indonesia Russia Japan Brazil South Korea UK India Source: ZenithOptimediaSource: WorldBank
  19. 19. 18 CONFIDENTIAL Russia By The Numbers
  20. 20. 19 CONFIDENTIAL Already An Attractive Market Russia is Poised For Breakout Growth Russia Mobile Internet Users 91.8 Million & Growing At Over About 20% a year Internet Market Growth 26% Per Year Till 2015 and 15% till 2016 Online Brand Advertising 63% Of Marketers Project An Increase in Amount For Online Ads Mobile Video Audience 39X Increase In Mobile Video In Past 3 Years Internet Audience 76.5 Million Internet Users; 50% Penetration Russia Ecommerce Market 44% CAGR For Ecommerce Until 2015 ($36B 4.5% of Retail)
  21. 21. 20 CONFIDENTIAL English, 55% Russian, 6% German, 6% Japanese, 5% Spanish, 4% Chinese,4% French,4% English Russian German Japanese Spanish Chinese French Russia Is An Important Language Market For Google The Russian language is one of the most prevalent languages in the world especially on the world wide web Next to English, with about 85 million users, Russian is the most popular language on the world wide web and is so popular the Russian language internet was even given its own moniker of the “Runet” It is estimated that there are as many as 30 million Russians living outside Russia The .ru domain is the most popular country-code top level domain on the internet Russian is used on 89.8% of .ru sites and is used on 75% of sites in the former soviet union countries Yandex is the clear leader in Russian language searches for Russian language speakers 1,917 406 335 260 223 202 193 162 122 84 0 500 1,000 1,500 2,000 2,500 First Language Speakers by Language (MM)Internet Most Popular Languages Source: W3Techs.com
  22. 22. 21 CONFIDENTIAL 22 26 35 38 41 61 62 68 77 86 95 103 112 121 15% 18% 25% 27% 29% 43% 43% 47% 54% 60% 67% 73% 79% 86% -30% -10% 10% 30% 50% 70% -10 10 30 50 70 90 110 130 150 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Number of Internet Users (MM) Penetration Russia’s Internet Population is Large and Growing Percentage of Individuals Using the Internet In Select Markets (%) 27 30 14 43 30 14 2 3 4 2 1 87 84 83 81 79 72 53 50 45 42 13 10% 9% 16% 5% 8% 15% 32% 27% 23% 30% 30% -40% -30% -20% -10% 0% 10% 20% 30% 40% 0 50 100 150 200 United Kingdom Germany France United States Japan Spain Russia Brazil Turkey China India 2000 2012 CAGR Russian Market By Number of Users 2005 - 2016(MM) Sources: eMarketer, RIA Novosti, Bloomberg LP, ITU, comScore, J’son & Partners and Ovum
  23. 23. 22 CONFIDENTIAL Russia Is The Top Internet Market In Europe and 6th Largest Overall Top 10 Worldwide Internet Markets By Number of Users (MM) 2012 European Top Internet Markets By Number of Users (MM) 68 67.5 52.7 36.5 35.8 31.6 24.9 15.5 15.3 0 10 20 30 40 50 60 70 80 Russia France UnitedKingdom Turkey Italy Spain Poland Netherlands Ukraine 538 245 137 101 88 68 67 55 53 52 0 100 200 300 400 500 600 China * UnitedStates India Japan Brazil Russia Germany Indonesia UnitedKingdom France Source: Comscore; Note internet users differ widely depending on the source due to differences in estimation
  24. 24. 23 CONFIDENTIAL 1,347 1,237 314 244 194 183 169 152 143 128 110 0.48% 1.27% 0.72% 0.66% 0.82% 2.02% 2.83% 1.27% 0.13% -0.28% 0.73% -15.00% -10.00% -5.00% 0.00% 5.00% 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 China India United States of America Indonesia Brazil Pakistan Nigeria Bangladesh Russia Japan Mexico Population Growth Rate Russia’s Population Gives It Room To Grow Top Countries By Population (MM) Sources: Capital IQ One of the reasons Russia is able to enter into the top markets for numerous categories while still maintaining room to grow is the size of the population is one of the world’s largest Few other countries have the population base of Russia to rely on and many of these such as Pakistan, Nigeria and Bangladesh do not currently have the infrastructure or GDP per capita needed to rank highly in various internet categories Despite having over 75 million internet users that still leaves almost half the population not online Many other countries such as China, India, US and Brazil also rank highly in important internet categories
  25. 25. 24 CONFIDENTIAL Russia Is An Important Search Market Russian users are some of the most active in the world in terms of how often they search on computers Smartphones have yet to catch up to this with Russia being only moderately active in search as compared to other countries Russia is fifth in the world in terms of the total aggregate number of internet searches By 2017 Russia is expected to be 8th in the world in terms of total search advertising spending, a CAGR of 15% Frequency of Search on Mobile In Select CountriesFrequency of Search on Computer In Select Countries Source Google; Includes Smartphone Owners 90 83 85 69 84 92 79 76 9 15 12 27 12 7 18 20 0 20 40 60 80 100 120 Brazil China France Germany India Russia UK USA Daily Weekly Monthly Less than monthly 58 60 51 38 73 54 54 62 27 34 28 38 20 30 32 25 10 5 13 16 5 10 8 9 0 20 40 60 80 100 120 Brazil China France Germany India Russia UK USA Daily Weekly Monthly Less than monthly Top 5 Activities for Mobile Browsing 30% 31% 39% 40% 56% 30% 32% 37% 42% 51% 0% 10% 20% 30% 40% 50% 60% Entertainment News Weather News Social Networking Search Dec-11 Dec-12
  26. 26. 25 CONFIDENTIAL Russia Is A Leader in Search Global Monthly Internet Searches (MM) 30,335 10,431 10,177 7,724 6,910 6,378 5,506 5,029 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 United States Brazil Japan United Kingdom Russian Federation Germany France Turkey Source: Comscore Russia Has a Substantial Share of Rising Google Search Terms In The Past 12 Months (MM) 500% 350% 140% 120% 90% 90% 70% 60% 60% 60% 0% 100% 200% 300% 400% 500% 600% Source: Google
  27. 27. 26 CONFIDENTIAL Russia Is A World Search Leader May 2010 Monthly Internet Searches (MM) May 2013 Monthly Internet Searches (MM) 30,335 10,177 7,724 5,506 6,378 10,431 6,910 4,358 5,029 8% 2% 4% -2% -1% 27% 17% 5% 12% -40% -30% -20% -10% 0% 10% 20% 30% 40% -5,000 5,000 15,000 25,000 35,000 45,000 55,000 65,000 75,000 United States Japan United Kingdom France Germany Brazil RU Canada Turkey 16% 5% 4% 3% 3% 6% 4% 2% 3% Monthly Internet Searches CAGR % Total 24,415 9,595 6,841 5,930 6,651 5,035 4,295 3,800 3,591 -1,000 4,000 9,000 14,000 19,000 24,000 29,000 United States Japan United Kingdom France Germany Brazil RU Canada Turkey 17% 7% 5% 4% 5% 3% 3% 3% 2%% Total Source: Comscore
  28. 28. 27 CONFIDENTIAL Russia’s Advertising Market is Increasingly Moving Toward Online Ads Total Russian Advertising Market ($MM) $7,771 $5,656 $6,777 $8,165 $9,235 $10,417 $11,719 $13,148 $14,620 $16,111 $17,593 $19,036 $20,406-27% 20% 20% 13% 13% 12% 12% 11% 10% 9% 8% 7% -90% -70% -50% -30% -10% 10% 30% $0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Advertising Market (net) Growth Russian Advertising Market Compared to Other Countries (Online % of Total Advertising Spend) Sources: Magna Global, Zenith Optimedia,eMarketer, AKAR BofA Merrill Lynch and JP Morgan 37% 18% 20% 19% 21% 21% 19% 15% 4% 5% 45% 32% 30% 28% 25% 25% 23% 19% 9% 7% 0% 10% 20% 30% 40% 50% UK China Russia US France Germany Spain Italy India Brazil 2012 2015
  29. 29. 28 CONFIDENTIAL TV Advertising Russian Advertising Market Per Capita $71 $41 $51 $63 $67 $74 $83 $93 $104 $114 $125 $135 $145 $0 $20 $40 $60 $80 $100 $120 $140 $160 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Advertising Spending Per Capita $3,649 $2,987 $3,435 $4,061 $4,439 $4,883 $5,371 $5,909 $6,499 $7,149 $7,793 $8,416 $9,005 47% 53% 51% 50% 48% 47% 46% 45% 44% 44% 44% 44% 44% -80% -60% -40% -20% 0% 20% 40% 60% $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TV Advertising % of total ad market Russian Advertising Market Sources: AKAR & BofA Merrill Lynch
  30. 30. 29 CONFIDENTIAL Russia Advertising Market Traditional Vs. Online Russia Digital Advertising Market $462 $502 $831 $1,296 $1,745 $2,290 $2,935 $3,645 $4,454 $5,353 $6,327 $7,351 $8,394 $0 $2,000 $4,000 $6,000 $8,000 $10,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Display Advertising Context Advertising $7,771 $5,656 $4,517 $8,165 $9,235 $10,417 $11,719 $13,148 $14,620 $16,111 $17,593 $19,036 $20,406 $0 $5,000 $10,000 $15,000 $20,000 $25,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 TV Advertising Display Advertising Context Advertising Other Media Russian Advertising Market Sources: AKAR & BofA Merrill Lynch
  31. 31. 30 CONFIDENTIAL Russia Internet And Mobile Have Plenty of Room For Growth Rank Country Population (MM) GDP ($MM) Online Ad Spending ($MM) Mobile Ad Spending ($MM) Total Ad Spending ($MM) Mobile as % of Online Spending Mobile as % of Total Spending Online Ad Spending Per Capita Total Ad Spending Per Capita Online Ad Spending % of GDP Total Ad Spending % of GDP 1 United Kingdom 62 $2,418,671 $8,008 $803 $20,626 10.0% 3.9% $129 $332 0.33% 0.85% 2 Sweden 10 $535,557 $1,150 $46 $3,777 4.0% 1.2% $120 $395 0.21% 0.71% 3 Germany 82 $3,433,506 6449.607 $71 25256.45 1.1% 0.3% $79 $308 0.19% 0.74% 4 Japan 127 $5,050,523 9135.617 $2,074 51254.12 22.7% 4.0% $72 $403 0.18% 1.01% 5 United States 314 $15,984,100 $22,480 $7,290 $177,075 32.4% 4.1% $72 $563 0.14% 1.11% 6 France 64 $2,688,240 3367.414 $109 14360.57 3.2% 0.8% $53 $225 0.13% 0.53% 7 Spain 47 $1,308,640 $1,542 $61 $7,660 4.0% 0.8% $33 $162 0.12% 0.59% 8 Czech Republic 11 $177,089 $257 $3 $1,361 1.1% 0.2% $24 $130 0.14% 0.77% 9 Poland 39 $463,506 $851 $10 $3,102 1.2% 0.3% $22 $81 0.18% 0.67% 10 Hungary 10 $108,521 $205 $8 $773 4.1% 1.1% $21 $78 0.19% 0.71% 11 Brazil 194 $2,194,506 $2,819 $10 $22,644 0.4% 0.0% $15 $117 0.13% 1.03% 12 Russia 143 $1,930,883 $2,002 $34 $10,954 1.7% 0.3% $14 $77 0.10% 0.57% 14 China 1,360 $8,745,025 13611.61 $1,177 41630.52 8.6% 2.8% $10 $31 0.16% 0.48% 15 Turkey 76 $790,053 $399 $33 $3,319 8.3% 1.0% $5 $44 0.05% 0.42% 16 Ukraine 45 $188,223 $121 $6 $1,396 5.3% 0.5% $3 $31 0.06% 0.74% Online ad spending per capita for BRIC countries is well below levels in developed economies Mobile ad spending in Russia is below levels in more developed mobile smartphone markets like the U.S. and U.K. Russia accounts for about 43% of total Eastern Europe media ad spending and is expected to account for half of all spending in Eastern Europe by 2016 Yandex gets 15% of search traffic from mobile vs. 20% for Google and 30% - 40% for Baidu Source: Informa, KPCB, Bloomberg LP, Capital IQ& Zenith Optimedia
  32. 32. 31 CONFIDENTIAL Russia has historically been a cash economy with about 89% of payments being cash payments  Part of this is cultural and part of it has to with infrastructure with ATM/POS penetration standing at 1/5 of the penetration achieved in the US Utilizing mobile and online payment methods has grown in popularity in Russia and is expected to continue growing at a very high rate in the years to come According to a survey by J’son & Partners Consulting, 44% of smartphone users and 60% of tablet users paid for goods or services the previous month before the survey using mobile methods With credit card penetration at less than 20% in Russia, services like Yandex.Money and others have a greater chance of adoption due to the higher value proposition against methods of payment (cash or bank based methods) Most Russians do have payment cards like debit cards but 50% of cards are only used for salary withdrawal and cash withdrawals on payday account for 85% of ATM transactions Unlike in developed economies, many services such as mobile operator payments are pre-pay rather than post- pay which accounts for high volumes of mobile payments, about $285 million in 2012 Mobile banking is also growing quickly, having grown 39% to 243 million. By 2017 mobile banking is expected to grow to $870 million a CAGR of 29% However, due to the low penetration of smartphones much of the current payment market is done through SMS with 43.4 million people using SMS-banking for about $630 million in total payments Russian Mobile and Online Money/Payment Market Source:eMarketer
  33. 33. 32 CONFIDENTIAL Russia Is One Of The Top Video Markets In The World With nearly 60 million monthly viewers Russia is second in the world only to the US in terms of unique video viewers. Russia is first in Europe in terms of total audience having grown at 30% CAGR over the past three years Considering that Russia is also a huge market for illegal content the number of users is also actually underreported Only 5% of content downloaded in Russia is from legal sources and four out of five users pirate content New legislation to enforce IP rights should decrease these numbers and help the legal video market The number of video viewers is growing at 18% annually while the number of videos is growing at 16% annually Each user in Russia watches on average 156 videos per month at about eight minutes per video Thus far, the paid model for content has not been very successful in Russia. Only a limited number of viewers are ready to pay for content, while large amounts of content are available for free on ad-funded sites or via resources with pirated content, something expected to change with new legislation targeted such content Domestic content accounts for up to 45% of the available titles on average in Russia The funding market for online video is fluid in Russia with funding sources such as founders, VC and PE funds, and strategic investors having invested about $200 million in the Russian online video market since 2007 The online video advertising market is expected to grow at a CAGR of 34% to $143million by 2017 and some estimates have growth occurring at over 90% CAGR through 2015 Many major players are expected to enter Russia shortly such as Amazon (which applied to register the trademark “Amazon Instant Video”), Hulu and Netflix having recently visited Russia, a first step to possibly entering the country
  34. 34. 33 CONFIDENTIAL Russia Video Timeline
  35. 35. 34 CONFIDENTIAL Russia Is One Of The Top Video Markets In The World Split Of Available Video Content in Russia By Origin Russia, 45% UK, 5% USA, 40% Europe,10% Total Unique Viewers (MM) 195 59 46 40 38 28 22 0 50 100 150 200 250 USA Russia Germany France UK Italy Spain Number of videos per user and per month 349 324 228 195 187 182 157 0 50 100 150 200 250 300 350 400 USA UK Spain France Germany Italy Russia Source: comScore 3 20 55 98 20% 55% 73% 90% 5% 15% 25% 35% 45% 55% 65% 75% 85% 95% 0 20 40 60 80 100 120 140 160 2011 2012 2013 2014 Mobile Video Viewers (MM) % Mobile Internet Users Mobile Video Viewers
  36. 36. 35 CONFIDENTIAL Russian Video Market Russian In-Stream Ad and Paid Content Market Broadband Penetration in Russia Will Drive VideoNb of video views per year (in billions) 10.22 15.33 25.92 33.91 44.05 61.83 83.78 110.85 143.11 0 20 40 60 80 100 120 140 160 2009 2010 2011 2012 2013 2014 2015 2016 2017 Russia Online Video Ad Spend($MM) $59 $96 $152 $233 $6 $20 $68 $112 $0 $50 $100 $150 $200 $250 $300 $350 $400 2012 2013 2014 2015 In-stream Ads Paid Content 41% 48% 54% 60% 64% 0% 10% 20% 30% 40% 50% 60% 70% 2011 2012 2013 2014 2015 106 118 144 174 209 248 292 0 50 100 150 200 250 300 350 2012 2013 2014 2015 2016 2017 2018 Source J’son partners, EWDN, comScore, Bloomberg LP & Tvigle
  37. 37. 36 CONFIDENTIAL Still Plenty Of Room To Grow For Russian Video Market Compared to the U.S. Russia still has plenty of room for growth in online video At about 59 million viewers, Russia has an online penetration of about 76.6% of internet users and 41% of the total population vs. 85% of total internet users and 59% of the population in the U.S. At parity with the U.S., Russia would have another 6.45 million video users on a percent of internet user basis and another 25.37 million on a percent of total population basis Connected devices like smartphones and smart TVs are growing rapidly and already account for up to 50% of video views for many market players Ad spending in Russia also lags far behind the U.S. in terms of the total amount spent on online video spending. Even adjusted for the lower investment amount spent on TV ads in general this fact could still lead to a large increase in video ad spending According to Maxim Melnikov CEO of Media 3, “Five billion dollars previously devoted to TV advertising has already started to move toward online video advertising in line with increased internet video viewing” In addition, RTB for video to monetize inventory is set to emerge in Russia which should help kickstart video advertising in Russia Increased broadband and 3G/LTE coverage should significantly increase viewership opportunities in coming years
  38. 38. 37 CONFIDENTIAL Still Plenty Of Room To Grow For Russian Market Russia Vs. U.S. Online Video (2012)Emergence of Video Ads In Russia $205.0 $6.0 $16.0 $150.0 $32.0 $0.6 $1.1 $27.0 6x 11x 15x 15x -10x -5x 0x 5x 10x 15x $0.0 $50.0 $100.0 $150.0 $200.0 $250.0 TV Ad Spending Per Capita Online Video Ad Spending Per 1,000 Video Online Video Ad Spending Per Viewer Online Ad Spending Per Internet User USA Russia Gap 10.0% 0.6% 20.0% 2.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Online Video/Display Ad Market Online Video/Total Ad Market Russia USA Sources: EWDN, Global Insight, eMarketer, AKAR, ZenithOptimedia , J’son & Partners, AEGIS, Google, GPMD, IMHO, Mail.ru, Tvigle Russia Vs. U.S. Comparison (2012) (MM)Display Video Ad Spending Forecast ($MM) $576 $718 $859 $1,001 $43 $86 $137 $190 -$300 $200 $700 $1,200 $1,700 $2,200 2012 2013 2014 2015 Display Video Ads Mobile Display Video Ads 179 73 50 20 0 20 40 60 80 100 120 140 160 180 200 Online Video Viewers Mobile Video Viewers USA Russia
  39. 39. 38 CONFIDENTIAL Smart TVs Expected To Drive Online Video Demand Russia is number three in the world in terms of smart TV sales with 800,000 TVs sold in 2012 or 30% of TV sales In 2018 this number is expected to reach 5 million devices a 40% annual growth rate for a total of 32 million total smart TVs in Russia or 31% of the total TV ownership in Russia This forecast is supported by the fact that compared to advanced markets Smart TV penetration is still negligible in Russia compared to more advanced markets at about 5% vs. 20% to 40% in advanced markets To support this growth in smart TV devices all major online video players have developed apps for smart TV viewership. In total there are 640 applications for smart TVs in 1H 2013 a 50% growth rate from the year before Still, only one in three owners of Smart TV devices use all the features of Smart TVs Online Video Consumption By Channel Web, 67% Mobile, 15% Smart TVs, 18% Smart TV Penetration (% of Total TV Devices 2012) 44% 18% 17% 14% 11% 11% 8% 5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% China South Korea India Brazil USA UK Germany Russia Source J’son partners, EWDN & Tvigle
  40. 40. 39 CONFIDENTIAL Smart TVs Expected To Drive Online Video Demand Total TV Market In Russia 91 93 96 98 100 101 102 103 63% 65% 67% 69% 70% 71% 72% 73% 40% 45% 50% 55% 60% 65% 70% 75% 0 20 40 60 80 100 120 140 160 2011 2012 2013 2014 2015 2016 2017 2018 Total nb of TV in Russia (MMs) Penetration Smart TV Market In Russia 1.1 2.4 4.2 6.6 9.9 17.2 24.6 32.1 1% 3% 4% 7% 10% 17% 24% 31% -20% -10% 0% 10% 20% 30% 0 5 10 15 20 25 30 35 40 45 50 2011 2012 2013 2014 2015 2016 2017 2018 Smart TVs (MMs) Penetration Source J’son partners, EWDN & Tvigle
  41. 41. 40 CONFIDENTIAL Russian Video Market Smartphone User Video Engagement 35.4 27.1 36.7 24.7 37.6 28.1 25.5 24.4 17.7 16.9 13.2 11.5 11.4 8.1 6.7 5 0 5 10 15 20 25 30 35 40 Russia India China Brazil USA UK France Germany Watched videos on a video sharing website Watched full episodes of TV programme online Usage of Video Platforms on Smartphone 89 80 78 73 64 76 79 44 37 35 60 14 40 5255 0 20 40 60 80 100 Brazil France Germany India Russia UK USA Google Sites Facebook Vkontakte.ru Comfort with mobile and online video is on par with the U.S. and ahead of major BRICs like Brazil and India Unlike in other countries where Google has a huge lead one other competitors, in Russia, Google is only slightly ahead of social network VKontakte which also has a significant video section, though much of it is pirated content Still, Russia is one of the top five traffic generating countries to YouTube Usage of Video Platforms on Computer 100.3 82.3 83.1 82.9 80.2 78 82.4 49.7 41.3 38.3 60.5 24.7 40.4 52.4 70.8 0 20 40 60 80 100 120 Brazil France Germany India Russia UK USA Google Sites Facebook Vkontakte.ru Source: Google
  42. 42. 41 CONFIDENTIAL Mobile In Russia The mobile internet will be used by 92 million Russians at the end of 2013 a penetration of 65% The number of mobile visitors in Russia grew 51% in 2012 Better 3G and LTE coverage as well as the proliferation of cheaper smartphones and tablets are expected to drive further growth Unlike other markets where feature phones went the way of the dinosaur, in Russia 40.5 million people connect to the internet through feature phones, significantly more than smartphones or tablets Russia still has a lot of prepaid subs that do not have advanced services Feature phones represent about half the market in total and 35% of web access devices Even many smartphones in Russia are lower priced phones including lower priced Android models. These lower priced models are not used as much for internet as higher priced Android phones or iPhones This year more than three out of five of Russia’s web users are expected to go online via mobile this year. Among smartphone users mobile internet services are growing at 88% a year Russia has one of the highest percentages of mobile page views in Europe, only the UK has a higher share By 2017, more than nine out of ten web users will access the internet on mobile in Russia Many web users in Russia are leapfrogging PCs and going from no internet straight to mobile internet The number of users with one or more internet access points is expected to go from 49% in 2011 to 62% by the end of 2013 while those with only one access point are expected to decline from 49% to 38%
  43. 43. 42 CONFIDENTIAL Russia is a Top Mobile Country Mobile Internet Penetration 2012 23% 85% 85% 83% 81% 77% 75% 65% 64% 55% 35% 19% 16% 6% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% World Japan Spain Italy USA UK South Korea Germany France Russia Brazil Indonesia China India Monthly Mobile Internet Users Mobile Internet Use By Device (Monthly Basis) (MM) Smartphone, 22.5 Tablet,2.5 Feature Phones,40.5 60.5 77.4 91.8 103.9 114.6 43% 55% 65% 73% 81% 5% 15% 25% 35% 45% 55% 65% 75% 85% 0 20 40 60 80 100 120 140 160 2011 2012 2013 2014 2015 Monthly Mobile Internet Users (MM) Penetration Sources: Informa, ITU, & J’Son & Partners
  44. 44. 43 CONFIDENTIAL Russia is a Top Mobile Country Device Share of Page Views Across European Countries 68% 92% 90% 90% 75% 91% 24% 5% 6% 7% 22% 6% 7% 3% 3% 4% 3% 2% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% UK France Germany Italy Russia Spain Tablet Mobile PC Prepaid As % Of Total Subscribers Across Countries Mobile Internet Use By Device (Monthly Basis) (MM) Smartphone, 22.5 Tablet,2.5 Feature Phones,40.5 74 67 65 46 23 17 13 1 7 32 23 28 75 76 78 91 17 0 10 24 2 6 5 7 0 20 40 60 80 100 Russia India Brazil China Germany UK USA France Prepaid: you pay in advance andtopup yourcredit whenused up Postpaid: contractwith a monthly bill Hybrid: a fixed monthlyfee withoptionto topup whenmonthly limit is reached Sources: comScore, Google & J'son & Partners
  45. 45. 44 CONFIDENTIAL Tablets In Russia Tablet sales in Russia in the first half of 2013 increased by almost 239% to 2.6 million units for total revenue from tablet sales of about a billion dollars This compares to a decline in PC shipments of 37% for PCs and 45.3 for notebooks Unlike in most markets where Apple’s iPad is extremely strong, in Russia, Android holds the largest share at 65% vs. 49% in the worldwide market. Samsung holds largest share (25%) of the tablet market in Russia Much of this is due to the proliferation of low cost tablets priced at $100 or less Tablet penetration is expected to reach 12 million units by 2015 Tablets now account for 15% of total mobile internet devices in Russia Russia Tablet Market ShareTablet Sales In Russia (MM Of Units) IOS, 29% Andriod,65% Other,6% Sources: IDC & J’son Partners 1.3 3.5 8.2 12.7 16.1 0 2 4 6 8 10 12 14 16 18 2011 2012 2013 2014 2015
  46. 46. 45 CONFIDENTIAL Smartphone Penetration is Well Below Expected Levels At 12% smartphone subscribers as a % of total subscribers, 36.2% total penetration and 27% of 2012 mobile smartphone sales, Russia is well below other markets. However, these factors are expected to grow significantly Data has been slow to catch up in Russia to other parts of the world. For instance, 4G penetration is only estimated at .3% and LTE subscribers just passed the 1 million user mark Wireless penetration in Russia is well above other markets leading to a reasonable expectation that smartphones subscribers will increase significantly, in line with income growth and the dropping prices of smartphones In 2013, 36% of all phones sold in Russia will be smartphones with an average cost of $285 vs. $350 today By 2015 smartphones are expected to more than double to 63 million units while LTE penetration is expected to be 10% in the same time period Sources: Google, J’son Partners & ITU Smartphone Penetration % Of Total Penetration Wireless Penetration 162 141 138 132 124 114 114 90 78 0 20 40 60 80 100 120 140 160 180 Russia Ukraine Germany Brazil United Kingdom France North America Turkey India 12.8 26.3 36.2 39.8 42.3 46.9 56.4 62.2 0 10 20 30 40 50 60 70 India Brazil Russia Germany France China USA UK
  47. 47. 46 CONFIDENTIAL Smartphone Penetration is Well Below Expected Levels But Increasing Rank Country 2013E Smartphone Subs Total Subs Smartphone as % of Total Subs Smartphone Sub YOY Growth 1 China 354 1,221 29 31 2 USA 219 378 58 28 3 Japan 94 124 76 15 4 Brazil 70 304 23 28 5 India 67 1,117 6 52 6 UK 43 81 53 22 7 South Korea 38 57 67 18 8 Indonesia 36 327 11 34 9 France 33 72 46 27 10 Germany 32 110 29 29 11 Russia 30 250 12 38 12 Mexico 21 111 19 43 13 Saudi Arabia 21 55 38 36 14 Italy 21 91 23 25 15 Australia 20 33 60 27 Russia Mobile Purchase Prices Russian Smartphone Vs. Mobile Subscribers 30MM Smartphone Subscribers 250MM Mobile Subscribers 0 50 100 150 200 250 300 Smartphone Mobile Phone 1,493 1,532 2,107 2,879 2,568 2,507 3,483 4,337 3,498 8,599 8,786 11,442 11,934 9,431 9,262 11,778 11,697 8,639 $137 $125 $124 $136 $139 $136 $141 $164 $171 $336 $324 $321 $318 $314 $320 $317 $330 $328 $0 $50 $100 $150 $200 $250 $300 $350 $400 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 PricePerUnit UnitSales(000s) Smartphone Market Mobile Handset Market Price of Mobile Phone Price of Smartphone Russia Mobile Handset Sales By Quarter Source: MTS 37.40% 33.00% 16.60% 12.90% $45-$150 $150-$150 $300-$300 Above $450
  48. 48. 47 CONFIDENTIAL Share of Smartphone Sales in Various MarketsPercent Of People Who Own Multiple Mobile Devices Smartphone Behavior Sources: J'son & Partners & Strategy Analytics Source: IDC Attitude Toward Mobile Marketing 51% 48% 36% 17% 16% 16% 11% 0% 10% 20% 30% 40% 50% 60% Russia Brazil China US South Korea UK India Mobile Purchase From Smartphone (Ever) 39.3 38.8 45.8 34 36 38 40 42 44 46 48 Russia UK USA 21 49 38 39 0 10 20 30 40 50 60 Used a mobile coupon to purchase a product in store Open to receiving mobile ads if freebies included Russia USA 12% 9% 7% 6% 6% 5% 17% 12% 10% 9% 8% 8% 12% 15% 15% 16% 16% 17% 59% 65% 68% 69% 70% 70% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2012 2013 2014 2015 2016 2017 Desktop PC Portable PC Tablet Smartphone
  49. 49. 48 CONFIDENTIAL Russia is a Top Mobile Country Actions Taken after Noticing Ads By Smartphone Owners 23.9 16.7 22 4.6 5.8 7.9 6.1 13.4 4.3 18.2 6 8.9 44.5 19.3 13.2 14.3 4.6 5.5 7.3 6.5 8.3 5.3 15.5 7.3 6 62.2 0 10 20 30 40 50 60 70 Clicked on the ad Looked for more information (m) Looked for more information on (PC/T) Called the advertiser Called the advertiser Later Made a purchase in - store Made a purchase online (M) Made a purchase online (PC) Made a purchase online (TB) Visited website Went to the store Located the advertiser on a map None of these Russia USA Frequency of Mobile Purchase via Smartphone 4 12.1 42.2 41.6 3.6 14.8 41.9 39.7 9 10.7 40.4 39.9 0 5 10 15 20 25 30 35 40 45 Multiple times per day Once a day Few times a week Once a week Russia UK USA Source: Google
  50. 50. 49 CONFIDENTIAL Russia is a Top Mobile Country Relevance Smartphone in Comparison to other Media Barriers to Mobile Purchase via Smartphone 52.1 16.4 84.5 69.2 50.6 78.2 35.6 24.9 82.9 69 54.8 70.2 0 10 20 30 40 50 60 70 80 90 Would rather give up TV than smartphone. Would rather give up desktop/ tablet PC than smartphone Don't leave the house without smartphone Smartphone provides me with relevant information Access information on smartphone, follow-up on other device Websites as easy to use as on other media Russia USA 24.3 29.3 27.8 30.1 22.8 11.8 25.4 16.4 5.1 22.8 9.1 27.2 22.1 39.6 39.6 24.7 9.2 21 11.3 9.5 8.8 13.2 0 5 10 15 20 25 30 35 40 45 Cannot see detailed product/service information Hard to compare prices and options Cannot trust credit card security on mobile device Screen size is too small Hard to type Information is not rich enough Takes too much time to open the web site page Mobile online access tend to be interrupted Battery life is short Not used to smartphone interface Other Russia USA Source: Google
  51. 51. 50 CONFIDENTIAL Russia is a Top Mobile Country Usage of Smartphone in Purchase Journey Actions taken after Local Search 45.4 20.4 8.9 4.4 8.9 32.1 29.2 22.3 6.4 3.7 12.5 42.1 0 5 10 15 20 25 30 35 40 45 50 At beginning of shopping, looking for inspiration, ideas In the middle of my shopping, evaluating the products At end of my shopping / purchase After shopping process, writing reviews Throughout whole shopping Do not use my smartphone in these situations Russia USA 40.5 17 14.7 20.8 23.7 40.1 48.6 14.3 51.9 0 11.8 47.6 16.8 13.4 28.5 24.4 51.1 46.8 11 46.6 0.1 16.3 0 10 20 30 40 50 60 Called the business or service Read or wrote a review about a business or service Recommended a business or service to someone else Made a purchase from a business in- store Made a purchase from a business online Visited a business Visited the website of a business or service Marked or added a business or service to my favorites list Looked up business or service on a map or got directions Other Not taken any action Russia USA Source: Google
  52. 52. 51 CONFIDENTIAL Russia is a Top Mobile Country Frequency of action after attention of advertising Frequency of Local Search on Smartphone 30.8 34.1 16.7 11.1 7.3 24.5 32.4 24.2 13.1 5.9 0 5 10 15 20 25 30 35 40 Daily Weekly Monthly Less than monthly Never Russia USA 13 21.2 22.1 15.1 28.7 6.3 15.2 17.7 16.3 44.6 0 5 10 15 20 25 30 35 40 45 50 Daily Weekly Monthly Less than monthly Never Russia USA 28.3 27 21.8 13.5 9.4 18.2 21.2 27.7 22.2 10.7 0 5 10 15 20 25 30 Daily Weekly Monthly Less than monthly Never Russia USA 12.5 17.7 18.1 16.5 35.2 9.2 14.8 20.6 15.3 40 0 5 10 15 20 25 30 35 40 45 Daily Weekly Monthly Less than monthly Never Russia USA Frequency of Noticing Ads on Smartphone Frequency of action after attention of TV advertising Source: Google
  53. 53. 52 CONFIDENTIAL Share of Smartphone Sales in Various MarketsSmartphone Sales Forecast For Select Economies Smartphones Gaining Ground But Still Room For Growth 66% 69% 59% 56% 6% 29% 0% 10% 20% 30% 40% 50% 60% 70% 80% Great Britain Germany USA China India Russia Share of Smartphones in Total Mobile Sales Smartphones, 12.6MM Laptops, 7.0MM PC, 4.8MM Smartphones Laptops PC Sources: J'son & Partners & Strategy Analytics 239.8 125 26.5 18.8 17.2 15.7 28.7% 14.9% 3.2% 2.3% 2.1% 1.9% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 0 50 100 150 200 250 300 350 400 450 500 China U.S. India Russia Brazil Indonesia 2013 Shipments 2013 Market Share Sales of Various Devices in Russia 2012Russia is expected to be one of the largest markets for smartphone purchases in 2013  Smartphone sales far outpaced PC or laptop unit sales in 2012 and this trend is expected to continue Many Russians are purchasing a smartphone as a first and primary internet device Despite the growth in smartphones, Russia still has plenty of room to grow before it reaches the same percentage of total mobile sales as other markets
  54. 54. 53 CONFIDENTIAL Smartphone Shipments To RussiaRussia Mobile Operating Systems Market Share Android has been quickly taking share from iOS phones in Russia where Apple is considered a luxury item Android now takes over 70% of new shipments (almost double last year) in Russia mostly in lower priced phones Unlike in the US, Nokia phones like the Windows phone are popular in Russia with Windows phone shipments equaling those of the iPhone in 1Q 2013 Major carriers in Russia recently stopped carrying the iPhone due, in part, to the required subsidization of the iPhone that Apple typically requests from carriers In a recent survey, just over 50% of respondents said that they prefer Android over other mobile operating systems. Another 25.3% voted for Windows Phone, 16.8% for iOS, and 7.4% for other options Android Operating System Is Strong In Russia 18.90% 36.50% 22.80% 21.80% IOS Andriod (& Linux) Nokia Other Sources: WapStart and Openstat
  55. 55. 54 CONFIDENTIAL Russia is the 4th country by app downloads from Google Play and 5th For Apple app downloads Russia is the only country except the U.S. to be in the Top 5 for both iOS and Android apps Russia is the fastest growing of the top countries having jumped 6 spots in the rankings year over year Russia went from #9 to #4 on Android and #11 to # 5 on iOS since Q2 2012 Russia should experience even larger growth in Google Play downloads in future years due to the large increases in market share by Android vs. iOS Russia’s major operators have now stopped carrying the iPhone which should dent iOS app downloads Competitor app stores like the Yandex store could take downloads away from Google Play though Russia Is One Of The Top Countries In The World for Apps
  56. 56. 55 CONFIDENTIAL Retail Market Estimates ($B)2012 Top Ten Luxury Goods Markets ($B) Russia’s retail market is currently valued at about $660-$670B in total sales (depending on the source) Russia is now Europe’s second largest retail market and is predicted to shortly become the largest By 2020, the number of households in Russia with annual disposable income above $100K is expected to triple Russia is 8th in the world in luxury spending and Russian tourists are fifth in spending worldwide (up 32% YOY) Russian tourists are second in the world in “shopping expenditures” accounting for 16% of all tax receipts submitted globally Russia contains 101 billionaires third only the U.S. and China both of which have much larger economies Moscow has the most billionaires in the world with a total of 79 and a collective net worth of $367B twice that of Hong Kong, 3x that of Sao Paulo and 4x that of Mumbai Russian Retail Market Overview $77 $32 $21 $19 $18 $14 $12 $10 $7 $6 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 USA Japan Italy France China UK Germany Russia Spain S. Korea $2,311 $3,390 $846 $659 $500 $4,208 $3,961 $1,877 $932 $768 $8,346 $4,470 $3,823 $1,482 $1,155 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 China U.S. India Russia Brazil 2012 2016 2022Sources: Bloomberg LP, Economist Intelligence Unit
  57. 57. 56 CONFIDENTIAL Ecommerce Penetration (% of Total Retail Sales) 1.90% 4.80% 5.30% 5.70% 10.10% 10.20% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% Russia Germany France China US UK Russia’s ecommerce sector is expected to grow at 35% per year until 2015, reaching $36B or4.5% of total retail sales in 2015 with an additional increase to $72B by 2020 (one of the largest ecommerce markets in Europe) or 7% of retail sales. In the long term Russia could be a $150 billion ecommerce market In 2012 ecommerce sales were $12B or about 1.9% of Russia’s $670B total retail market Today at 1.5% ecommerce penetration Russia is well below other countries such as the U.S. and the UK at about 10% and even China and Brazil at about 5%. Both the U.S. and the U.K. reached 2% penetration in 2003 and 2005 respectively The number of Russian consumers reporting recent online purchased increased 93% between 2011 and 2012 Russian Ecommerce Market Set to Explode Ecommerce Estimates Sources: Euromonitor & Morgan Stanley
  58. 58. 57 CONFIDENTIAL Russian ecommerce companies have an estimated market share of about 90% in the Russian market showing the significant barriers to entry in the Russian language market About 22 million Russians made 80 million orders of physical goods (220,000 per day) in 2012 However, many Russians spend a significant amount abroad both in trips and online Between 2011 and 2012 Russians received over 30 million packages from abroad, 70% from foreign e-stores valued at total spending of $2.5 billion Russians spent $43 billion on outbound tourism in 2012 and over $52 billion in spending while abroad Russian Ecommerce Shoppers Prefer Local Sites Top European Retail Sites (MM Unique Visitors) 123,524 54,057 33,068 28,293 26,939 21,634 18,951 18,899 17,922 17,572 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 1% 1% 1% 2% 2% 2% 3% 3% 3% 5% 6% 8% 25% 0% 5% 10% 15% 20% 25% 30% Slando.ru Wikimart.ru E5.ru Amazon.com Sapato.ru Molotok.ru Yandexmarket.ru KupiVIP.ru MVideo.ru Bigilon.ru Avito.ru ebay.com Ozon.ru Shoppers Favorite Places To Buy Online (%) Sources: AlphaWise, comScore & Morgan Stanley Research
  59. 59. 58 CONFIDENTIAL Russians are new to ecommerce with 48% having their first ecommerce transaction in the last two years (vs. 10% in the U.S.) and only 16% having bought products online for over six years (vs. 62% in the U.S. Only 63% buy physical goods online at all vs. 85% in the U.S. The average number of online purchases is 10 times per year for consumers vs. 15 for the U.S. Many factors have held back growth in ecommerce. For instance, cash on delivery represents about 60% of online transactions because of the low penetration of credit cards compared to other markets Delivery is also laden with problems which is why only 19% of Russians cite it as a benefit of online shopping Yandex is a huge beneficiary of any growth in ecommerce with 87% of consumers using search engines to research purchases and 81% using search to compare prices About 40% of commercial searches started at Yandex.Market Russia’s ecommerce market is highly fragmented with the top 10 retailers making up only 20% of the market. This is a good sign for advertising platforms like Yandex Total Past 12 Months (Online Shoppers) Regular (1 Month) Google 38% 38% 36% Yandex 56% 59% 61% Other 6% 4% 35 Yandex % of eCommerce Search 58 49 32 23 12 11 0 20 40 60 80 Cash of Delivery Web Money Bank Card Bank Transfer SMS Payment Terminal Online Method of Payment Russian Ecommerce Market Set to Explode – Yandex Well Positioned Sources: PWC, AlphaWise & Morgan Stanley Research
  60. 60. 59 CONFIDENTIAL According, to a survey by Thinktank L2 and New York Times, most major brands in its Digital IQ index still do not have a proper local presence online in Russia Only 25% of companies have pages in Russian while only 21% have local Facebook pages Only 50% of the top 10 most searched brands on Google have translated local sites Only 5% have Russian language mobile sites for mobile customers 34% of brands do not support local in Russia with even those sites mostly lacking in local content, product, and pricing info that is localized In a survey, 72% of consumers said they would be more likely to buy a product with information in their own language. As such, it is predictable that most dominant companies selling to the Russian market are local Russians search for local brands 24% more than non-translated sites Only about 20% of searches in Russia are in English yet less than 45% of brands fail to reach the top three search results on Google or Yandex for Russian brand keywords due to low investment in local SEO Global brand sites in Russia have an average load time of over 10.5 seconds almost 3x load time in the U.S. and 1.22x locally hosted sites Only 20% of brands offer Yandex.Money or Cash On Delivery methods of payment despite the popularity of COD in Russia and the low penetration of credit cards in Russia Local Is Important – Foreign Brands Have A Way To Go In Russia
  61. 61. 60 CONFIDENTIAL Local Is Important – Foreign Brands Have A Way To Go In Russia More than a third of the brands in L2’s survey never sent a marketing email to any of the BRI country consumer accounts. Less than 20% of welcome emails and only 10% of marketing emails received were in Russian Only 52% of brands offer a Russian language web form for customer service while only 30% offer a Toll Free Number with Russian language support and only one site offers live chat in Russian With many Russians buying things from abroad due to infrastructure concerns and fear of counterfeits (estimated to be almost 30% in major retail sectors) it is vital for international companies to provide local support features These sites will eventually catch up and offer key local support in key markets such as Russia. Once this occurs it will drive online commerce growth and could also give Google an edge as these international brands are already major advertisers with Google Russian Sites Offering Select Features 25% 69% 24% 27% 75% 35% 35% 31% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% Local Language Russian Language Store Locator Prices In Local Currency Local Customer Service Lists Location Info Links From Product Page Geolocation Provides Directions Live Chat in Local Language Source: L2 Think Tank
  62. 62. 61 CONFIDENTIAL Local Is Important – Foreign Brands Have A Way To Go In Russia Average Number of Searches in Brazil and Russia % of BRI Facing Sites Offering Ecommerce Russian Mobile Site Optimization % of BRI Facing Sites With Translated Content 34% 66% With Without 27% 73% With Without 51% 27% 21% US/Global Site Only No Mobile Site Russian Mobile Site Source: L2 Think Tank
  63. 63. 62 CONFIDENTIAL Site In Top 3, 56% Site Not In Top 3, 44% Local Is Important – Foreign Brands Have A Way To Go In Russia Mobile App Investments By Top Brands Mobile Optimized Sites 14% 14% 38% 0% 5% 10% 15% 20% 25% 30% 35% 40% iOS Android Symbian 43% 32% 25% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% No Mobile Site Mobile Site - Information Only Mobile Site with Commerce Yandex Brands With Russian URLs SEO PerformanceGoogle Brands With Russian URLs SEO Performance Source: L2 Think Tank & J'son & Partners Site In Top 3, 57% Site Not In Top 3, 43%
  64. 64. 63 CONFIDENTIAL 2014E Social Networking Users (MM)Percent of People Who Use Social Networking Sites Russia ranks third on the top 10 list of countries where social media use is most prevalent Other surveys have put total percent of people using social networks at as high as 73% Perception of social networks has significantly increased in the past few years. In 2010, only 52% of Russians responded positively to questions about their use of social networks. Today, that number is over 82% Despite having the 7th most popular social networking site worldwide (VK.com), Russia still ranks as the 6th most important country for Google + Russians spend 12.8 hours a month on social networks or over twice the next country in terms of average hours per visitor spent on social networking 52 50 50 49 49 40 40 39 38 35 33 29 9 30 30 17 9 36 24 8 15 21 42 22 21 42 51 25 38 56 0 20 40 60 80 100 120 Britain U.S. Russia Czech Republic Spain Poland Brazil France Italy Turkey Yes No No Internet 525 283 184 110 75 56 39 37 0 100 200 300 400 500 600 China India United States Brazil Russia Japan Germany United Kingdom Source: Pew Research Center Source: eMarketer Russia Is An Important Country For Social Networking
  65. 65. 64 CONFIDENTIAL Countries Who Accessed A Social Network On Mobile 59.9 57.8 53.8 49.5 42.2 40.4 36.8 36.7 0 10 20 30 40 50 60 70 Russia USA UK China Germany France India Brazil Source: Socialbakers Source: Google Russia Is An Important Country For Social Networking Facebook CPCs Across Countries $0.73 $0.75 $0.78 $0.78 $0.81 $0.82 $1.05 $1.08 $1.25 $1.26 $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40 American Samoa New Zealand Nigeria Switzerland United Kingdom Norway United States Australia Japan Russia Top 5 Russian Social Networks By Unique VisitorsHours Per Month By Typical Internet User 49.218 37.78 17.67 7.768 5.259 6.9 30.2 20.5 368.4 306.7 0 20 40 60 80 Vk.com Odn Mail.RU - My World Facebook.com Twitter Average Minutes Per Visitor6.6 6.3 5.6 4.6 4.3 0 1 2 3 4 5 6 7 Russia Brazil Canada UK US
  66. 66. 65 CONFIDENTIAL Russia is a huge gaming market In 2012, Russian-speaking Internet users across the CIS (excluding Ukraine) spent a whopping 40.8 billion rubles ($1.3 billion) on online games, a growth of 22% YOY The mobile game market in Russia will grow from $392 million in 2012 to an estimated $707 million in 201 a CAGR of 13% The number of mobile game players is also expected to increase from 38.6 million at the end of 2012 to 65.1 million in 2016 a CAGR of 11% Russia is the number 2 gaming market in the world behind the U.S. Active video game players and payersOnline game spending in Russia and Neighboring Countries in 2012 $318MM $195MM $87MM $12MM $246MM $366MM Social Games PC Games Mobile Games Casual Games Console Games MMORPG Source: Mail.ru & Newzoo 145.0 38.0 36.0 35.0 31.0 24.0 16.0 15.0 8.0 4.0 63.0 20.0 24.0 17.0 16.0 10.0 9.0 6.0 3.0 2.0 0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 Active Players Active Payers
  67. 67. 66 CONFIDENTIAL Does Acquisition Meet Google’s Criteria Criteria Meets Criteria? Notes Toothbrush Test People use Yandex multiple times a day Solving a User Problem Yandex solves the same user problem as Google does, arguably better, in the Russian language (at least according to users) Important to One of Main Product Areas Search is a main product area of Google. Buying Yandex will increase search share especially in Russia. Technology and partnerships could also be complementary to Google Strong Management Team The employees at Yandex were first movers in search and have successfully competed against Google despite having a lot less resources and manpower Management Team That Will Stay With Google Yandex has been a strong competitor of Google’s in Russia. It is unknown if the team at Yandex would want to work for Google The Yandex acquisition meets most of Google’s acquisition criteria (as described in public documents). The big question mark is if the team at Yandex would move over to Google. This could be addressed in a term sheet though
  68. 68. Merger Overview
  69. 69. 68 CONFIDENTIAL Combined Strengths And Values Highly Regarded Leadership Industry Search Technology Intense User Focus Focus and Strength In Mobile Innovative and Entrepreneurial Spirit Global Focus With Local Knowledge
  70. 70. 69 CONFIDENTIAL Transaction Rationale • Transaction immediately gives Google an unassailable leadership position in a key internet, advertising and commerce market • In the critical mobile area, the combined company will have the ability to enhance the value proposition of mobile through Google’s market leading developments while also having the ability to monetize mobile, something few companies do as well as Google • There are significant cross selling opportunities for Google in Russia. For instance, Russia is one of the few places where Facebook is not dominant which presents an opportunity for Google+ especially considering what a strong social country Russia is Strategic • Highly complementary integration of assets between the two firms including customers, products and technologies • Significant distribution and cost synergies between the two firms Operational • Compelling PF financial profile that is immediately accretive to Google with few synergies required • Including synergies and the growth potential of Russia, Google could be getting Yandex for a decent price while also acquiring the future possible successes (free options) that go above and beyond forecasted financial results Financial • Customers benefit from the combination of Yandex’s local market expertise and Google’s industry leading and quickly advancing products • Yandex has the largest advertising network in Russia, a significant asset for Google in Russia and beyond Customers • Yandex’s team rivals Google in terms of time within the search industry • Google acquires a significant stable of technology talent and IP that will be useful in worldwide while also increasing the attraction to future talent in Eastern Europe Talent and IP • Yandex has partnership deals with the most important companies in Russia, as well as major competitors to Google such as Apple. Taking advantage of these partnerships or neutralizing them is important for Google Partnerships
  71. 71. 70 CONFIDENTIAL Pro Forma Financials Revenues $47,353 $1,242 $48,595 LTM 2013 Google Yandex Combined 2.56% % Combined Gross Profit $34,439 $923 $35,362 2.61% EBITDA $21,145 $561 $21,706 2.58% EBIT $17,092 $433 $17,525 2.47% Net Income $14,857 $378 $15,235 2.48% Cash Flow $10,743 $289 $11,032 2.62% Total Assets $105,068 $1,487 $106,555 1.40%
  72. 72. 71 CONFIDENTIAL Transaction Transaction Structure Expected Sources Of Funding  Google acquires 100% Of Yandex for equity consideration of $17 billion  Premium of 35% to prior day closing price of $37.79  Purchase price of $17.044 billion, subject to working capital and other adjustments  Consideration of 75% Cash and 25% Equity  Theoretical Exchange ratio of .049x with 4.261 million Google shares issued  Transaction expected to be financed with cash on hand from GOOG and YNDX as well as common shares of GOOG PF Financials  With synergies Google can expect cash ongoing EBITDA of $22,018 million and revenue of $48.781 million Expected Timing  Expected to close by the end of the fourth quarter of 2013 Transaction Structure Synergies  Numerous opportunities for pre-tax synergies of about $311 million Conditions to Closing  Subject to due diligence, shareholder approval and regulatory approvals in the US and Russia Management & Employee Teams  Google will attempt to retain key members of Yandex management and key employee teams
  73. 73. 72 CONFIDENTIAL Expected run- rate benefitsLevers Drivers of efficiencies • With the combination Yandex and Google will offer an even more compelling platform for advertisers and partners in Russia and beyond • There will be numerous cross selling opportunities as well as the ability for Yandex advertisers to utilize other Google services or enter into other markets with Google Revenue Enhancements $186.3 million or 15% of Yandex Revenue Product Development Total Pre-Tax Synergies Synergies expected to be accretive to both margins and Adjusted EPS $310.9 million Synergies Summary General and Administrative Costs & COGS • While Google will clearly need to keep the core development capabilities at Yandex to support local products there will be numerous areas of overlap and inefficiencies which can be eliminated through a merger • Efficiencies from pooling of resources and infrastructure (production, support, general support, middle management, facilities, IT, etc.) • COGS will see lower synergy levels due to increased efficiencies from scale $53.8 million or 30% of Yandex R&D Spending $70.8 million or 30% of Yandex G&A and 15% of COGS
  74. 74. 73 CONFIDENTIAL Merger Summary (1) (1) Does not include foregone interest income Transaction Assumptions Sources Amount Current share price $37.79 Cash For Expenses $25.6 Offer price premium 35.0% Cash Purchase Price 75.0% $12,783.0 Offer price per share $51.02 Stock issued 25.0% $4,261.0 YNDX diluted shares outstanding $334.1 Total Sources $17,069.5 Offer Value $17,044.0 + Debt $0.0 Uses‡ Amount + Preferred $0.0 Purchase of equity $17,044.0 + Noncontrolling interest $0.0 Transaction expenses 0.1% 5 $25.6 - Cash & equivalents ($368.4) Total Uses $17,069.5 Transaction Value† $16,675.6 ‡ Assuming no financing fees. Simplifying training assumption. Purchase Price Allocation Transaction Multiples LTM Offer Value $17,044.0 Transaction Value / PF 2013 Sales 11.68x Less: Net identifiable assets of target ($1,105.9) Transaction Value / PF 2013 EBITDA 19.1x Excess purchase price for allocation $15,938.1 Offer Value PEG 0.8x Less: Fixed asset write-up ($1,593.8) Less: Indefinite life intangibles write-up ($2,390.7) Exchange Ratio Calculation Less: Definite life intangibles write-up ($1,912.6) Offer price per share $51.02 Plus: Deferred tax liability $1,179.4 Google Inc. share price $1,036.24 Goodwill Created $11,220.4 Exchange ratio§ 0.049x § Theoretical assuming 100% stock † Balance sheet data converted to USD at a rate of 0.0309 USD / RUB as of the filing date 30-Sep-13.
  75. 75. 74 CONFIDENTIAL 2013E Pro-Forma GAAP Income Statement (1) Pro Forma Google Yandex Increase Decrease Combined Net Revenues $47,352.6 $1,242.0 $186.3 $48,780.9 Cost Of Goods Sold 12,914.1 319.0 (16.0) 13,217.2 Gross Profit 34,438.5 923.0 186.3 16.0 35,563.8 Selling General & Admin Exp. 10,175.3 191.8 (57.5) 10,309.5 R & D Exp. 6,365.9 179.3 (53.8) 6,491.4 Total Operating Expenses 16,541.2 371.0 (111.3) 16,800.9 Ongoing EBITDA $17,897.3 $552.0 $18,762.9 D&A 4,053.5 149.0 286.9 0.0 4,489.4 EBIT 13,843.8 403.0 14,273.5 Other Income (Expense) 657.6 85.0 742.6 Pre-Tax Income 14,501.4 488.0 15,016.1 Income Tax Expense 2,386.0 113.0 62.7 (57.4) 2,504.3 Discontinued Operations 711.0 711.0 Net Income $12,826.4 $375.0 $13,222.7 Diluted EPS $37.85 $1.11 $38.55 Weighted Avg. Diluted Shares Out. 338.9 339.0 4.1 343.0 2013E Adjustments (1) Does not include foregone interest income
  76. 76. 75 CONFIDENTIAL 2013E Pro-Forma Cash Income Statement (1) Pro Forma Google Yandex Increase Decrease Combined Net Revenues $47,352.6 $1,242.0 $186.3 $48,780.9 Cost Of Goods Sold 12,914.1 319.0 (16.0) 13,217.2 Gross Profit 34,438.5 923.0 186.3 16.0 35,563.8 Selling General & Admin Exp. 6,926.7 182.8 (54.8) 7,054.6 R & D Exp. 6,365.9 179.3 (53.8) 6,491.4 Total Operating Expenses 13,292.6 362.0 (108.6) 13,546.0 Ongoing EBITDA $21,145.9 $561.0 $22,017.8 D&A 4,053.5 128.0 4,181.5 EBIT 17,092.4 433.0 17,836.3 Other Income (Expense) 740.6 49.0 789.6 Pre-Tax Income 17,833.0 482.0 18,625.9 Income Tax Expense 2,976.5 104.0 62.2 3,142.7 Net Income $14,856.5 $378.0 $15,483.2 Diluted EPS $43.84 $1.12 $45.14 Weighted Avg. Diluted Shares Out. 338.9 339.0 4.1 343.0 2013E Adjustments (1) Does not include foregone interest income
  77. 77. 76 CONFIDENTIAL 2013E Pro-Forma GAAP Balance Statement Acquirer Target Adjustment Pro Forma GOOG YNDX (Decrease) Increase Combined Cash $54,432 $370 ($12,809) $41,993 Other current assets $12,429 $185 $12,614 PP&E $12,912 $247 $1,594 $14,752 Goodwill $11,396 $23 ($23) $11,220 $22,616 Other intangibles $6,558 $10 $4,303 $10,871 Other long-term assets $3,455 $516 $3,971 Total Assets $101,182 $1,349 $106,817 Current liabilities $9,118 $204 $9,322 Debt $8,200 $0 $0 $8,200 Other liabilities $5,012 $17 $1,179 $6,208 Preferred stock $0 $0 $0 Noncontrolling interest $0 $0 $0 Common equity to parent $78,852 $1,129 ($1,154) $4,261 $83,087 Total Liabilities & Equity $101,182 $1,349 $106,817
  78. 78. 77 CONFIDENTIAL Net Income Merger Build Up (1) Cash Net Income Build Up GAAP Net Income Build Up $378 $627 $186 $16 $109 $62 $0 $100 $200 $300 $400 $500 $600 $700 $800 Standalone 2013E Revenue Synergies COGS Synergies Expense Synergies Tax PF 2013E (1) Does not include foregone interest income $375 $396 $186 $16 $111 $5 $287 $0 $100 $200 $300 $400 $500 $600 $700 $800 Standalone 2013E Revenue Synergies COGS Synergies Expense Synergies Tax Amortization PF 2013E
  79. 79. 78 CONFIDENTIAL Net Income Merger Build Up (1) Cash EPS Accretion Dilution ($) GAAP EPS Accretion Dilution ($) (1) Includes foregone interest income. $0.94 $0.91 $0.87 $0.83 $0.79 $0.76 $0.72 $1.08 $1.06 $1.04 $1.02 $1.00 $0.98 $0.95 $1.26 $1.24 $1.22 $1.19 $1.17 $1.15 $1.12 ($0.10) $0.10 $0.30 $0.50 $0.70 $0.90 $1.10 $1.30 $1.50 20% 25% 30% 35% 40% 45% 50% Offer Premium 2013 2014 2015 $0.41 $0.35 $0.29 $0.23 $0.17 $0.11 $0.05 $0.64 $0.58 $0.51 $0.45 $0.39 $0.33 $0.26 $0.82 $0.76 $0.69 $0.63 $0.56 $0.49 $0.43 $0.00 $0.10 $0.20 $0.30 $0.40 $0.50 $0.60 $0.70 $0.80 $0.90 $1.00 20% 25% 30% 35% 40% 45% 50% Offer Premium 2013 2014 2015
  80. 80. 79 CONFIDENTIAL Market Cap ($MM) Revenue ($MM) EBITDA($MM) 97% 3% Google Yandex 97% 3% Google Yandex Free Cash Flow($MM) Net Income ($MM) Total Assets ($MM) 95% 5% Google Yandex Contribution Analysis 97% 3% Google Yandex 98% 2% Google Yandex 99% 1% Google Yandex
  81. 81. 80 CONFIDENTIAL Summary Yandex Competitor Multiple Valuation LTM EBITDA Margin 2013 PEG 12% 28% 25% 45% 33% 31% 44% 31% 43% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% LNKD SOHU YHOO BIDU A035420 GOOG MAIL Median YNDX 2.8x 6.4x 1.6x 1.5x 1.8x 1.4x 0.8x 1.6x 1.0x 0.8x 0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x LNKD SOHU YHOO BIDU A035420 GOOG MAIL Median YNDX YNDX - PF Sources: Capital IQ & Company Filings STOCK PERFORMANCE 2013E VALUATION MULTIPLES 2014E VALUATION MULTIPLES LTM OTHER Last Close % of 52 Market Revenue Company Name Price Week High Cap TEV TEV/REV P/E PEG TEV/REV P/E PEG Growth Margin COMPS LinkedIn Corporation $247.14 96.0% $29,034 $28,161 18.6x NM 2.8x 13.1x NM 2.0x 65.6% 12.1% Sohu.com Inc. $67.89 77.8% $2,599 $2,088 1.5x NM 6.4x 1.3x 22.7x 1.1x 29.6% 28.1% Yahoo! Inc. $33.17 94.6% $33,843 $32,186 7.2x 22.6x 1.6x 7.1x 19.8x 1.4x (4.1%) 24.9% Baidu, Inc. $10.55 6.3% $55,758 $52,340 10.3x 31.8x 1.5x 7.8x 25.4x 1.2x 40.7% 45.0% Naver Corporation $593.24 91.7% $17,689 $16,559 7.0x 40.5x 1.8x 5.5x 30.0x 1.4x 16.3% 32.7% Google Inc. $1,036.24 99.6% $346,195 $298,596 5.1x 23.4x 1.4x 4.3x 19.9x 1.2x 23.8% 30.7% Mail.ru Group $37.63 93.8% $7,849 $7,636 9.0x 20.1x 0.8x 7.5x 21.1x 0.8x 32.2% 44.3% Mean 8.4x 27.7x 2.3x 6.6x 23.2x 1.3x 29.2% 31.1% Median 7.2x 23.4x 1.6x 7.1x 21.9x 1.2x 29.6% 30.7% Yandex N.V. $37.79 90.0% $12,314 $11,946 9.6x 32.0x 1.0x 7.6x 26.1x 0.8x 37.3% 43.0% Yandex N.V. - PF GAAP $51.02 121.4% $16,996 $16,627 11.6x 44.1x 1.3x 9.4x 34.4x 1.0x 37.3% 43.0% Yandex N.V. - Cash $51.02 121.4% $16,996 $16,627 11.6x 27.6x 0.8x 9.4x 23.9x 0.7x 37.3% 43.0% EBITDA
  82. 82. 81 CONFIDENTIAL DCF - WACC 8 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 0 2 4 6 8 10 12 14 Assumptions Bottom-Up Beta Calculation Levered Total Mkt. Val. Debt/ Unlevered Peer Group Tax Rate (for Bottom-Up Beta) 21.0% Ticker Name Beta Debt Equity Equity Beta(2) Risk-Free Rate of Return (Rf)(1) 1.32% LNKD LinkedIn Corporation 1.575 $0.0 $28,581.8 0.0% 1.575 Market Return (Rm) 7.6% SOHU Sohu.com Inc. 1.112 $323.0 $3,121.7 10.3% 1.028 Country Premium 2.3% YHOO Yahoo! Inc. 0.865 $49.0 $33,752.2 0.1% 0.864 YNDX Tax Rate 20.0% BIDU Baidu, Inc. 1.627 $1,921.2 $56,432.6 3.4% 1.585 MAIL Mail.ru Group 1.251 $0.0 $8,210.2 0.0% 1.251 WACC GOOG Google Inc. 0.875 $8,200.0 $342,694.7 2.4% 0.859 A035420 Naver Corporation 0.467 $271.2 $17,341.5 1.6% 0.461 Market Risk Premium (Rm - Rf) 6.2% Multiplied by: YNDX Bottom-Up Beta 1.089 Average 1.110 1.089 Adjusted Market Risk Premium 6.8% Add: Risk-Free Rate of Return (Rf)(1) 1.3% WACC Sensitivity Analysis Add: Country Premium 2.3% Cost of Equity 10.4% YNDX Cost of Equity Multiplied by: YNDX E/(D+P+E) 100.0% E/(D+P+E) # 8.50% 9.25% 10.00% 10.75% 11.50% 12.25% 13.00% Cost of Equity Portion 10.4% 100.00% # 8.5% # 9.3% # 10.0% # 10.8% # 11.5% # 12.3% # 13.0% YNDX Cost of Debt (Rd) 15.0% 95.00% # 8.7% # 9.4% # 10.1% # 10.8% # 11.5% # 12.2% # 13.0% YNDX Tax Rate 20.0% 90.00% # 8.9% # 9.5% # 10.2% # 10.9% # 11.6% # 12.2% # 12.9% After-Tax Cost of Debt 12.0% 85.00% # 9.0% # 9.7% # 10.3% # 10.9% # 11.6% # 12.2% # 12.9% Multiplied by: YNDX D/(D+P+E) 0.0% 80.00% # 9.2% # 9.8% # 10.4% # 11.0% # 11.6% # 12.2% # 12.8% Cost of Debt Portion 0.0% 75.00% # 9.4% # 9.9% # 10.5% # 11.1% # 11.6% # 12.2% # 12.8% WACC 10.4% 70.00% # 9.6% # 10.1% # 10.6% # 11.1% # 11.7% # 12.2% # 12.7% Sources: Capital IQ & Company Filings
  83. 83. 82 CONFIDENTIAL DCF - Valuation 8 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 0 2 4 6 8 10 12 14 (1) Assumes 43 days remain in 2013; Mid-Period Convention for annual cash flows; Terminal value cash flow occurs at December 31, 2017. Terminal value equals present value of 2017 EBITDA of $1,203.0 * 13.0x Terminal Forward EBITDA Multiple. (2) Implied Perpetual Growth Rate of FCF = [(Terminal EBITDA)*(Terminal EBITDA Multiple)*(WACC) - (Terminal Year FCF)] / [(Terminal EBITDA)*(Terminal EBITDA Multiple) + (Terminal Year FCF)] Fiscal Year Ending December CAGR 2008 2009 2010 2011 2012 | 2013E 2014E 2015E 2016E 2017E 2013-2017 Total Revenue 259.0 289.8 409.5 624.1 941.9 | 1,242.0 1,552.0 1,905.0 2,320.0 2,798.0 22.5% Annual Growth 11.9% 41.3% 52.4% 50.9% | 31.9% 25.0% 22.7% 21.8% 23.0% EBITDA 124.8 117.8 196.7 277.5 406.2 | 561.0 685.0 846.0 1,025.0 1,203.0 21.0% Annual Growth (5.5%) 66.9% 41.1% 46.4% | 38.1% 22.1% 23.5% 21.2% 26.0% Margin 48.2% 40.7% 48.0% 44.5% 43.1% | 45.2% 44.1% 44.4% 44.2% 47.0% EBIT 104.4 87.6 158.0 219.1 309.6 | 433.0 534.0 666.0 809.0 988.0 22.9% Margin 40.3% 30.2% 38.6% 35.1% 32.9% | 34.9% 34.4% 35.0% 34.9% 35.3% Less: Income Taxes 20.0% (20.9) (17.5) (31.6) (43.8) (61.9) | (104.0) (106.8) (133.2) (161.8) (197.6) Unlevered Net Income 83.6 70.1 126.4 175.3 247.6 | 329.0 427.2 532.8 647.2 790.4 24.5% Plus: Depreciation and Amortization 20.3 30.3 38.7 58.4 96.6 | 128.0 151.0 180.0 216.0 215.0 Less: Capital Expenditure (45.3) (32.8) (70.5) (172.3) (130.4) | (155.3) (192.3) (218.9) (233.8) (335.8) 21.3% Less: Increase in Working Capital 8.1 1.0 17.2 (6.1) 1.1 | 1.4 1.8 2.2 2.7 3.2 22.5% Unlevered Free Cash Flow 66.7 68.5 111.8 55.3 214.9 | 303.2 387.7 496.1 632.0 672.8 22.1% Present Value of Equity DCF Assumptions % of TEV % of MVE PV of 2013 Free Cash Flow Stub(1) 35.5 0.3% 0.3% Weighted Average Cost of Capital 10.35% PV of 2014-2017 Free Cash Flows(1) 1,747.2 14.3% 13.9% PV of Terminal Value(1) 10,423.3 85.4% 82.7% Terminal EBITDA Multiple 13.0x Enterprise Value 12,206.0 100.0% 96.8% Less: Implied Perp. Growth Rate of Unlevered Free Cash Flow(2) 5.8% Total Debt 0.0 0.0% Preferred Stock 0.0 0.0% Tax Rate 20.0% Minority Interest 0.0 0.0% Plus: Cash and Equivalents 397.2 3.2% Equity Value 12,603.2 100.0% (USD in millions, except per share data)
  84. 84. 83 CONFIDENTIAL DCF - Sensativity 8 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 0 2 4 6 8 10 12 14 Discounted Present Value of Terminal Value Present Value of Enterprise Value YNDX CF EBITDA Exit Multiple EBITDA Exit Multiple WACC 2013-2017 11.0x 12.0x 13.0x 14.0x 15.0x 11.0x 12.0x 13.0x 14.0x 15.0x 8.35% 1,855.8 9,509.6 10,374.1 11,238.7 12,103.2 12,967.7 11,365.4 12,229.9 13,094.4 13,958.9 14,823.5 9.35% 1,818.6 9,156.6 9,989.0 10,821.4 11,653.9 12,486.3 10,975.2 11,807.7 12,640.1 13,472.5 14,304.9 10.35% 1,782.7 + 8,819.7 9,621.5 10,423.3 11,225.1 12,026.9 = 10,602.5 11,404.2 12,206.0 13,007.8 13,809.6 11.35% 1,748.0 8,498.1 9,270.7 10,043.2 10,815.8 11,588.3 10,246.1 11,018.7 11,791.3 12,563.8 13,336.4 12.35% 1,714.5 8,191.0 8,935.6 9,680.2 10,424.9 11,169.5 9,905.4 10,650.1 11,394.7 12,139.3 12,884.0 Net Debt(1) Present Value of Equity Equity Value per Share YNDX at EBITDA Exit Multiple EBITDA Exit Multiple WACC 12/31/12 11.0x 12.0x 13.0x 14.0x 15.0x 11.0x 12.0x 13.0x 14.0x 15.0x 8.35% (397.2) 11,762.6 12,627.1 13,491.6 14,356.1 15,220.6 Divided 35.33 37.92 40.52 43.12 45.71 9.35% (397.2) 11,372.4 12,204.8 13,037.2 13,869.7 14,702.1 By 34.16 36.66 39.16 41.66 44.16 10.35% - (397.2) = 10,999.6 11,801.4 12,603.2 13,405.0 14,206.8 333.0 33.04 35.44 37.85 40.26 42.67 11.35% (397.2) 10,643.3 11,415.9 12,188.4 12,961.0 13,733.5 Shrs 31.97 34.29 36.61 38.93 41.25 12.35% (397.2) 10,302.6 11,047.2 11,791.9 12,536.5 13,281.1 = 30.94 33.18 35.42 37.65 39.89 Implied Perpetual Growth Rate of FCF Premium/(Discount) to Current Price per Share YNDX EBITDA Exit Multiple EBITDA Exit Multiple WACC 11.0x 12.0x 13.0x 14.0x 15.0x 11.0x 12.0x 13.0x 14.0x 15.0x 8.35% 3.1% 3.5% 3.9% 4.2% 4.5% (13.4%) (7.0%) (0.7%) 5.7% 12.1% 9.35% 4.1% 4.5% 4.8% 5.2% 5.4% (16.3%) (10.1%) (4.0%) 2.1% 8.3% 10.35% => 5.0% 5.4% 5.8% 6.1% 6.4% (19.0%) (13.1%) (7.2%) (1.3%) 4.6% 11.35% 6.0% 6.4% 6.8% 7.1% 7.4% (21.6%) (15.9%) (10.3%) (4.6%) 1.1% 12.35% 6.9% 7.4% 7.7% 8.0% 8.3% (24.1%) (18.7%) (13.2%) (7.7%) (2.2%) (1) Equals Total Debt plus Preferred plus Minority Interest Less Cash and Equivalents. (USD in millions, except per share data)
  85. 85. 84 CONFIDENTIAL Yandex Ownership Concentration Name % O/S Position Position Chg Position Chg % Volozh, Arkady 9.97 32,546,735 (25,655,386) (44.08)% OppenheimerFunds, Inc. 6.50 21,223,122 2,131,762 11.17 % Thornburg Investment Management, Inc. 5.90 19,250,139 765,014 4.14 % Morgan Stanley Investment Management Inc. 5.26 17,173,867 95,450 0.56 % Ivanov, Vladimir 3.44 11,218,884 (13,318,884) (54.28)% Comgest S.A. 2.58 8,433,126 (619,000) (6.84)% Capital Research and Management Company 2.50 8,165,000 248,567 3.14 % BlackRock, Inc. 2.19 7,138,412 4,483,797 168.91 % Fidelity Investments 2.12 6,918,167 (2,756,875) (28.49)% Capital Group International Inc. 1.58 5,168,600 (4,060,920) (44.00)% Eton Park Capital Management, L.P. 1.38 4,500,000 2,500,000 125.00 % Lazard Asset Management LLC 1.38 4,491,985 (305,202) (6.36)% Wellington Management Company, LLP 1.38 4,489,488 (1,988,562) (30.70)% UFG Private Equity 1.08 3,515,186 (2,000,000) (36.26)% William Blair Investment Management 0.97 3,181,481 1,563,343 96.61 % Institutional Ownership By Style 62% 33% 4% 1% GARP Growth Blend Value 52.52 65.55 71.16 73.99 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% Top 20 Top 50 Top 100 All Source: Capital IQ
  86. 86. 85 CONFIDENTIAL Yandex Stock Chart Source: Factset Research Services Inc. Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Source: FactSet Prices Yandex NV Class A (YNDX) Price (USD) Volume (Thousands) Volume Yandex NV Class A
  87. 87. 86 CONFIDENTIAL Yandex and Peer Stock Chart Source: Factset Research Services Inc. Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 80 100 120 140 160 180 200 220 240 Source: FactSet Prices Yandex NV Class A vs. Peers Indexed Price Performance Price (Indexed to 100) Yandex NV Class A Google Inc. Class A Yahoo! Inc. Mail.ru Group Ltd. Sponsored GDR RegS Baidu, Inc. Sponsored ADR Class A NAVER Corp.
  88. 88. Yandex Needs Google
  89. 89. 88 CONFIDENTIAL As Much As Google Needs Yandex, Yandex Needs Google More I think it’s always a mistake to assume that technology will be static. So, I think certainly over the long term, we’re going to have new kinds of devices and ways of interacting with computing and the Internet. We’re obviously excited about Google Glass and new ways of interacting with hardware and new types of hardware. With any technological change you probably overestimate the short-term and underestimate the long-term. We’re really excited about making those investments and making sure we’re positioned to the future. – Larry Page CEO of Google While Yandex is innovating in core search areas, they are not innovating at nearly the pace that Google is In key difficult areas like mobile (both hardware and android), wearables and big data Google is innovating at a much faster pace than rivals and gobbling up share as a result The pace of innovation has accelerated at a blistering pace in the past few years and shows no sign of slowing in the coming years Yandex is not even in areas of possible huge innovations such as wearables and phone hardware Google is creating an unstoppable ecosystem with key incentives in wearables, hardware, driverless cars and big data, among other initiatives that will be extremely difficult to replicate if Google obtains a large lead (like Apple with the iPhone) With Google spending almost $9 billion per year on R&D and acquisitions, it is hard to see how Yandex will be able to compete in 10 or 20 years if Google is successful with any of its world changing products (like Glass) or incrementally improves core products in a way that others would have a lot of trouble replicating
  90. 90. 89 CONFIDENTIAL Things Are Changing At An Accelerating Pace On August 5, 2013 Jeff Bezos announced the acquisition of the Washington Post for $250 million The Washington Post is one of the most iconic publications of the past 100 years Yet due to the digital innovation related to news consumption the company that broke the Watergate scandal went for only $250 million For reference two other companies, Tumblr and Instagram were sold for over $1 billion despite being in existence for only a short term before being acquired This shows the increasing pace at which new technologies are displacing existing market leaders
  91. 91. 90 CONFIDENTIAL Companies Not Around In 2000 Have Created Major Industry Disruptions The below companies are disrupting business models at a blistering never before seen pace: The below one-time dominant companies failed to get in front of future trends and paid the price:
  92. 92. 91 CONFIDENTIAL Yandex Is Hoping The Future Will Be Like The Past: Not Likely With this information would you stake your companies future on tomorrow being like today? Yandex Is Compared to Google, Yandex has not been innovating at nearly the same pace as its search competitor. Yandex is assuming that the world in which it came of age in will continue By staying a smaller company while not pursuing innovation at nearly the same pace as Google Yandex is making the implicit bet that the future will be much like the past a bet that may seem unwise in hindsight If any of Google’s major innovations, for which it spends over $9 billion a year (in R&D and acquisitions), are a major success it will greatly enhance Google’s position at the expense of major competitors like Yandex Already, major successes like Android, YouTube, Google+ and Chrome have greatly enhanced Google’s competitive position, especially in key mobile markets Products like Glass, Google Now, self driving cars, Moto X, Google’s version of cookies and others have the potential to create major disruptions in Google’s favor. This would put Google far enough ahead of competitors to present a major problem to those competitors By not taking on major but riskier innovations Yandex is implicitly betting that the landscape will not change too much a tricky assumption for anyone who watched once dominant companies fall to innovative forces
  93. 93. 92 CONFIDENTIAL Why Yandex Needs Google Ecosystem Online & Mobile Video Glass Mobile Phone Hardware Social Network (Google+) Smart watch Driverless Cars Chrome Hardware AdID Google Cloud
  94. 94. 93 CONFIDENTIAL 2 20 80 200 250 350 600 700 18 160 250 400 425 500 650 800 0 200 400 600 800 1000 March 2009 December 2009 August 2010 May 2011 July2011 October 2011 June 2012 January 2013 Android iOS Mobile is Exploding Sources: StatCounter Global Stats, Apple, Google, Flurry, Cisco, News Reports and Kleiner Perkins Caufield & Byers Global Mobile Traffic As % of Total Internet Traffic Installed Base of Computing Products Source: Credit Suisse and Company Data Available Apps (000s)Mobile Consumer Internet Traffic (PB Per Month) 684 1,239 2,223 3,774 6,026 9,131 0 2,000 4,000 6,000 8,000 10,000 2012 2013 2014 2015 2016 2017
  95. 95. 94 CONFIDENTIAL Mobile Summary Source: Google and Nielsen
  96. 96. 95 CONFIDENTIAL Mobile Is Growing Rapidly Mobile A Larger Part of World Traffic 1/7 Of Global Internet Traffic & Growing Quickly Mobile A Larger Part of World Traffic 217 New Users Every Minute Smartphones Are Now Indispensable 67% of Users Access The Internet Every Day From a Smartphone App Revenue Is Exploding $25 Billion In Revenue From Mobile Apps Larger Share of Digital Consumption 1 of Every 3 Minutes Spent on Digital Media Mobile Visits Trouncing Desktop 10x Growth In Visits For Mobile Vs. Desktop From 2012 to 2013
  97. 97. 96 CONFIDENTIAL Increasingly e-Commerce is Mobile U.S. Retail Mcommerce Sales By Device 2011 - 2016 Sources: eMarketer & Baymard $5 $14 $24 $34 $46 $61 $8 $10 $13 $17 $20 $24 $14 $25 $38 $52 $68 $87 $0 $20 $40 $60 $80 $100 2011 2012 2013 2014 2015 2016 Tablet Smartphone Other Total Mobile Spending Amount Distribution $1-20, 38% $21-100, 30% $101-$250, 15% $250+, 17% mCommerce Spending Per Smartphone/Tablet $43 $70 $106 $135 $157 $176 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 2010 2011 2012 2013 2014 2015 mCommerce Per Smartphone/Tablet
  98. 98. 97 CONFIDENTIAL Increasingly e-Commerce is Mobile
  99. 99. 98 CONFIDENTIAL Increasingly e-Commerce is Mobile Percentage of e-Commerce Spending From Mobile (Tablet and Phone) Sources: Comscore,Baymard & eMarketer 2% 3% 3% 6% 6% 8% 9% 8% 9% 10% 11% 11% 9% 0% 2% 4% 6% 8% 10% 12% Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Mobile Shoppers & Buyers (MM) Mobile Spending Amount Distribution 68 95 118 140 159 175 33 53 73 89 105 120 38% 52% 62% 72% 79% 85% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 0 50 100 150 200 250 300 2011 2012 2013 2014 2015 2016 Mobile Shoppers Mobile Buyers % of Digital Shoppers $1-20, 38% $21-100, 30% $101-$250, 15% $250+, 17%
  100. 100. 99 CONFIDENTIAL Share Of Time Spent Per DayUS Internet Minutes by Device Since the first iPhone was introduced in 2007, mobile smartphones and tablets have rapidly become a hugely important medium for users and advertisers. As Google itself says: Smartphones are the backbone of our daily media use. They are the devices used most throughout the day and serve as the most common starting point for activities across multiple screens. Smartphone penetration has risen to 56%. About 67% of those with smartphones access the internet every day on it, usually never leaving home without it By the end of 2013, tablet sales are expected to surpass PC sales for the first time According to Cisco, total global data carried over smartphones will surpass laptops and netbooks in 2013 Mobile accounts for 27% - 32% of retailer traffic and 60% of millennial shoppers shop on mobile Mobile Is Rapidly Overtaking Desktop 4% 7% 13% 19% 22% 23% 21% 19%4% 4% 4% 5% 41% 40% 39% 37% 15% 14% 13% 12%8% 7% 5% 5%7% 6% 4% 3% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2011 2012 2013 Other Offline Print Radio TV Other Digital Desktop/Laptop Mobile (Non-Voice) 47% 12% 41% Desktop Tablet Smartphone Source:Comscore excluding online video viewing minutes, & eMarketer

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