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Yandex: Applause from Putin amid Hacking Report

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Can Yandex maintain its competitiveness?

Hackers acting on behalf of intelligence agencies for a handful of Western countries breached Yandex’s (YNDX) system late last year. More details have just been released about the hack, according to a Reuters report. Yandex confirmed the attack. However, the company said that the hack didn’t cause any damage since it was caught early.

The Reuters report stated that the Yandex attack targeted the company’s R&D (research and development) unit. R&D units are critical for technology companies because that’s where innovation takes place. Tech companies invest a lot of resources in innovation to stay competitive. In the first quarter, Yandex invested 18% of all the revenues it generated during that period in R&D. Google parent Alphabet (GOOGL) and Baidu (BIDU) each invested 17% of their first-quarter revenues in R&D projects. Facebook (FB) invested 19% of its first-quarter revenues in R&D.

Currently, Yandex is leaning heavily on innovation to broaden its business scope. The company wants to secure its future in the rapidly evolving technology industry. Besides the search business, Yandex has diversified into businesses like e-commerce, cloud computing, ride-hailing, and online music subscription. The company has also ventured into selling hardware products. Last year, Yandex released new hardware products for the smartphone and smart speaker market. Smart speaker is one of the fastest-growing consumer device categories. According to estimates from Allied Market Research, the global smart speaker market will grow to $23.3 billion by 2025 from $4.4 billion in 2017. Smart speakers are being adopted as hubs for controlling smart-home appliances, which is fueling their uptake. Currently, Amazon dominates the global smart speaker market.

The goal of the hack on Yandex’s R&D system wasn’t to steal its trade secrets or intellectual property. The hack intended to spy on the company’s users, according to the Reuters report.

Yandex steps on the self-driving accelerator

Yandex has expanded its autonomous driving tests in Russia. The company has more self-driving vehicle tests on public roads in Moscow, according to a report from Tass. Yandex is also testing its self-driving vehicles in the US and Israel. The company plans to ramp up its autonomous driving program in 2019. Yandex aims to have more than 100 self-driving cars on roads around the world by the end of the year.

The other companies that are building or have built self-driving vehicles include Alphabet’s Waymo, Baidu, and Ford (F). Self-driving vehicles have many potential applications including being used for taxi services and package deliveries. For example, Walmart has struck deals to use self-driving vehicles to ship packages to its online customers. The field that’s seeing the most rapid adoption of self-driving technology is ride-hailing—a subset of the taxi business that involves using a mobile app to summon a taxi driver. Last year, Yandex and Waymo started providing autonomous ride-hailing services in Russia and the US, respectively. Baidu is gearing up to join them as soon as this year. Baidu’s service will be launched in China. Baidu has also built a self-driving shuttle bus that can be used to transport people in locations like airports and parks.

Yandex’s taxi unit

As Yandex develops self-driving vehicles that it could use in its ride-hailing business, the company is also exploring taking the taxi business public through an IPO. Yandex’s ride-hailing unit is called “YandexTaxi.” The unit is a joint venture with Uber Technologies (UBER). Yandex is the majority shareholder in the taxi unit with a 59.3% stake. Uber owns a 36.6% stake in the business, while the remaining 4.1% is owned by taxi unit employees.

Last month, Greg Abovsky, Yandex’s CFO, told Reuters that Yandex hasn’t decided where to list its ride-hailing unit. Abovsky said that the timing of the riding-hailing business’s IPO is also pending. JD.com (JD), which has a business partnership with Yandex, is also exploring the IPO of its logistics arm. However, JD.com hasn’t decided where or when to list the unit.

Ride-hailing is a huge business. According to a report from Goldman Sachs, the global ride-hailing market will grow nearly ten times in the next decade to reach $285 billion in 2030 from $36 billion in 2017. Yandex could use self-driving vehicles to make its ride-hailing business more efficient and profitable.

Music business gains strong momentum

Yandex doubled its online music subscriber base in the 12-month period to June, according to a report from Billboard. Yandex has over 2.0 million subscribers on its YandexMusic service—compared to 1.0 million subscribers in June 2018. The growth in Yandex’s streaming music business has increased in recent years. YandexMusic launched in 2010 but took six years to reach 250,000 subscribers. In one year, YandexMusic’s subscriber base grew from 1.0 million subscribers to 2.0 million subscribers.

Falling Internet data costs and expanded access to Internet devices due to cheap smartphones helped fuel music streaming services’ uptake globally. Spotify (SPOT), the world’s leading streaming music company, finished the first quarter with 100 million music subscribers worldwide. The company launched in India in February. Recently, Apple said that it has 60 million music subscribers. Pandora is part of SiriusXM (SIRI). Pandora closed the first quarter with 6.9 million music subscribers.

YandexMusic has been rolled out in ~12 countries mainly in eastern Europe and northern Asia. The service costs ~$2.60 per month in Russia. Yandex could be making $52 million per month from its 2.0 million music subscribers. Spotify, Apple, and Pandora’s music subscription services start at $10 per month. Currently, Spotify isn’t available in Russia. Yandex still has room to grow its music subscription business faster before the market becomes crowded.

The global music subscription market will grow to $$33.5 billion by 2026 from $6.4 billion in 2017, according to predictions from Persistence Market Research.

Putin applauds Yandex 

During President Vladimir Putin’s annual address in June, he said that Yandex is competing successfully with global giants like Google in the Russian market. According to a report from Tass, Putin said that Yandex is a wonderful Russian company. He signaled that the Russian government is keen to help Yandex succeed in its businesses. Yandex is called the “Google of Russia” since it dominates the Internet search market in the region.

Yandex held a 49.4% share of the search market in Russia in June, compared to Google’s 47% share, according to StatCounter data. Mail.Ru and Microsoft (MSFT) held a 2.3% and 0.51% share of the Internet search market share in Russia last month. Mail.Ru is a business affiliate of Chinese e-commerce giant Alibaba (BABA). Mail.Ru, Alibaba, and several other partners have formed an e-commerce joint venture to serve the Russian market. Yandex and Google also compete in fields like cloud computing and digital payment. Both of the companies are also in the hardware business with a range of devices.

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