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Where Google Isn't Goliath


Russia's Yandex—set to go public on Nasdaq—is innovating in a hurry to hold off the U.S. giant

Moscow - Want to know the distance from Moscow to St.Petersburg, the best place in town for borscht, or the weather in Novosibirsk? In most of the world you might Google (GOOG) the answer. But a Russian would more likely "Yandex" it.

Few outside of Russia have heard of the Yandex search engine, but that may soon change. Yandex has 44% of the Russian market—10 points ahead of Google—and is now the No. 2 search outfit in Europe, according to researcher comScore. Yandex is expected to list its shares on Nasdaq this fall, fetching as much as $2 billion. That would be Russia's largest-ever initial public offering in tech, valuing the company at around $5 billion. Although Yandex declined to comment about the listing, analysts and investors are expecting a blockbuster. "This IPO should be very popular," especially among investors eager to tap into Russia's Internet market, says Konstantin Belov, an analyst at Uralsib, a Moscow bank.

It's a market that promises serious growth. Although just a quarter of Russians are online, high-speed connections are starting to reach smaller cities. Broadband penetration, currently 10%, is forecast to triple by 2010. Google expects the market for search-related ads in Russia to rise from $200 million last year to $1 billion by 2010.

Yandex is likely to be a prime beneficiary of that expansion. Co-founder and CEO Arkady Volozh, a mathematics graduate of the Gubkin Institute of Oil & Gas in Moscow, got his start in business importing computers in the 1980s. During the '90s he branched out into software and worked with linguists on a program to parse the complex grammar of the Russian language. Volozh thought the application had potential as a search engine and tried to sell it to Internet portals.

When they didn't bite, Volozh and his partners in 2000 set up their own company. Thanks to the high quality of its search, Yandex quickly unseated Rambler, the Russian leader at the time. Since then, Yandex's revenues—mostly ad sales—have doubled each year, reaching $167 million in 2007. "Yandex concentrated on search and developed a really good engine," says Vladimir Dolgov, head of Google Russia.

BEEFING UP, FIGHTING BACK

Google, though, also has a really good engine, and it's making a big push in Russia. The U.S. giant opened its first office in the country in 2006 and has since raised its share from 5% to more than a third, comScore says. Its popularity has been helped by improved search algorithms, adapted to the language, and new Russia-oriented versions of international services such as YouTube (GOOG) and Google Maps.

Yandex will have a tough time competing on those fronts. But it's fighting back with innovative offerings of its own. Yandex Money, a Net payment system, lets customers make online purchases using scratch cards bought at kiosks. In July, Yandex is buying Smilink, a company that monitors traffic in Russian cities, in an effort to beef up its travel information services. And Yandex in 2007 acquired MoiKrug.ru ("My Circle"), a social-networking site for businesspeople. The strategy is a major departure for Yandex, which has flourished by stressing its core search business. But analysts say diversifying in the face of competitive pressure from the likes of Google is the right move for the company.

Even if Yandex loses more share to Google, it has significant advantages as a local player. China and Korea both have strong domestic search companies that manage to hold their own against the global giants by using their greater understanding of their home markets. "I'm optimistic about Yandex," says Anton Vorykhalov, an analyst at Moscow consultancy IKS. "Google may have a decent market share, but there will always be a leading place for big national players."

Bush is BusinessWeek's Moscow bureau chief .

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