All eyes on VK after Usmanov Mail.ru stock sale

Mar 15, 2013
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Alisher Usmanov, Russia’s wealthiest man, sold a 7.4-percent stake in his company Mail.ru for approximately $530 million.  The 28 February move, while still leaving him still in control of Mail.ru with 58.1-percent of voting shares, has many guessing about just what he’s got planned.

Pretty much anything Usmanov does gets heavy media attention, and this particular move sparked speculation that Usmanov had decided to diversify his already extensive holdings. Usmanov’s holding company, USM Holdings, told Reuters that it viewed the Russian Internet sector as a highly attractive investment opportunity, and many have pointed to VK, formerly known as VKontakte, as a likely target for Usmanov’s new cash.

VK, launched in 2006 by Pavel Durov, is commonly referred to as Russia’s Facebook clone and has quickly dominated the social networking scene in the former Soviet Union. While VK’s interface looks extremely similar to an older version of Facebook, the site offers additional services such as video and audio sharing that take advantage of lax enforcement of copyright laws, with which users have compiled an enormous library of copy-righted material.

Photo courtesy Flickr user Anton Fomkin

With these advantages, VK has taken a commanding lead over Odnoklassniki, Russia’s second-largest social network, which happens to be owned by Mail.ru.

Apart from domestic competition, VK has also proven to be surprisingly resilient to Facebook’s efforts to break into the Russian market. As Facebook expands overseas, it naturally competes with local networks. In countries like Brazil, for example, Facebook has been quite successful in pushing out smaller networks and taking over local markets. However, VK has managed to maintain a dominant market share, likely in part due to its similarity to Facebook.

At a Morgan Stanley investor conference on 27 February, Facebook CFO David Ebersman acknowledged the difficulties presented by VK’s model. “The entrenched player in Russia, who has a product that looks a lot like Facebook with some different features—and it’s a good product and it has done well—has been harder for us to usurp and compete with,” he said, according to ZDNet

Both profitable and competitive, VK looks to be a likely option for an investment from Usmanov, who could use the money from his recent sale to buy up to a 25-percent stake from VK’s owners. As discussed in the recent report written for Russia Beyond the Headlines, Usmanov’s company Mail.ru already does own a portion of VK. However, by directly buying such a large stake in VK, Usmanov would gain a more powerful voice in the future development in the company. Usmanov might use his new influence to create a close relationship between VK and Mail.ru, connecting social networking with email and other services as he has done with Odnoklassniki. Usmanov may also encourage VK’s founders to take advantage of their databases of personal information for advertising purposes, a move which Facebook has begun to refine while VK has only done on a very rudimentary level.

As of yet, it remains unclear whether Usmanov in fact intends to invest in VK, and whether VK’s owners would even be willing to sell him a sizable stake in the company. While VK has so far retained its advantage in the Russian market, competition from Facebook and others continues to encroach, and VK will have to evolve and innovate to remain ahead.

Usmanov, with his deep pockets and broad experience in the tech world, may be able to help VK keep ahead of the curve.



About the Author

D. Garrison Golubock

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