The reason cited has been a lack of clear information on the “individuals who can exert influence on the activity of the Google group, as well as a list of persons belonging to the Google group, including those outside Russia”. Without this information, the FAS board do not feel they can “objectively judge the impact on competition in the market for Internet search in our country”. Plus they have “concerns” that competitive conditions will be made worse by reducing the number of large players.
Ever since the deal was announced industry experts have speculated that Begun’s future is in doubt, considering that Google has such a well developed contexual ad system and brand of its own (Adwords). The value in Begun seems to lie with their contextual contracts, trained support staff and business customers. Rumours have also been circulated that Google was planning to provide organic results to Rambler as part of the deal. Either of these moves would effectively remove players from the Russian search scene.
“We’re very disappointed”, said Google PR Director in Russia, Alla Zabrovskaya. “We continue to believe that this transaction has improved the range of opportunities for Russian Internet users, advertisers, as well as the development of the industry as a whole. We now await the decision in the hands of the FAS and then will decide on our future actions”.
This is a massive blow to Google in the Russian market, which they recently estimated to be worth $1bn by 2011. This purchase would have consolated their position against market leaders Yandex. Begun.ru provides contexual advertising streams to a range of high profile sites, notably Rambler, the oldest search engine in Russia.
According to LiveInternet, Yandex holds 44.7%, against Google with 34.6%. Rambler has seen their market share plummet this year to 7.1% from 17% this time last year, despite the appointment of Ex-Yahoo! European Head Mark Opzoomer. Mail.ru, the other major player in Russian search has seen a rise in marketshare to 7.7%. Having cancelled a deal to carry Google’s contextual adverts in January of 2007, they have since been in partnership with Yandex.
So what does this FAS ruling mean? According to RosFinCom, things may not be so bad. The deal may still go through once Google meets the demands of the FAS board. “Finam” Vladislav Kochetkov agreed, “In our view, there is a great likelihood that the transaction will soon take place”. Not so, says Alexander Kuznetsov, an analyst at ING Wholesale Banking, who suggests the FAS is just looking for formal reasons to reject the deal. He maybe right.
As Kuznetsov points out, the marketshare Google will gain is not such a monopoly. He proposes that together they would only occupy 21% of the market. LiveInternet would put that nearer to 42% against Yandex with 53%. However you can find much higher percentages in the Russian telecommunications industry that have failed to draw regulator concern. Russian industry is defined by monopolies.
If this is not due to the marketshare, could it be more to do with Google’s position as a foreign company? Russian lawmakers have been taking an increasing interest in the Internet and pushed to have it included as a sector “strategically important to national security” in a law passed this April. That would have required foreign investors wishing to purchase more than 50% of a Russian company related to the Internet to obtain the approval of the Russian Government.
The bill was amended after intervention by President Medvedev but the list of strategic sectors still includes television/radio broadcasting and publishing. Companies that hold a dominant position in providing internet and telephone services are also included. In those cases, the Federal Anti-Monopoly Service can apply “limitations”. The FAS definition of “dominant” is defined for us by Russian Law News:
Article 5 of the New Law states that unless otherwise demonstrated, a business entity with more than 50% market share is presumed dominant; and less than 35% market share is generally not dominant. However, a group of up to three market leaders may be deemed dominant if they have aggregate market share of 50%; and the same applies to a group of up to five market leaders with aggregate market share of 70% (unless one of them has a market share below 8%)
Are we currently seeing the first “limitations” placed on Google by the FAS, to prevent them developing a dominant position in Runet? The Russian authorities can be deeply suspicious of foreign companies and publicised connections between Google and the CIA are unlikely to work in their favour. It is certainly a strange request by the FAS to know more about “individuals who can exert influence on the activity of the Google group”.
Government protection would give the home-grown engine Yandex a significant advantage and prevent the market domination Google has enjoyed across US and Europe. If their advancement in Russia has just become political, this may prove to be the greatest challenge the US search giant has faced to date.