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THE CUTTING EDGE: FOCUS ON TECHNOLOGY | Release 3.0

Old Rules Still Apply in E-Commerce

May 15, 2000|ESTHER DYSON

Some years ago, when I was writing about the software business in Russia, I came across a company called Trio-Plus, which sold through mail order to the remote regions outside Moscow and St. Petersburg.

Unlike in the jaded, over-marketed United States, the response rate was high, sometimes over 100% in certain villages. Goods and information were scarce and paper costs were expensive, so the catalogs were treasured and passed from hand to hand, sometimes generating several orders from a single catalog.

The biggest problem was orders coming in months later at old prices. Even dollar pricing couldn't quite solve that one.

So when I first heard the buzz rising last year around the notion of e-commerce in Russia, it sounded like some cruel joke.

Indeed, those of us who have been working in Russia for a while and fancy ourselves long-term investors often don't take kindly to the newcomers. They're naive; they give money to the wrong people, then lose it and leave embittered.

They don't understand how different Russia is. Indeed, in many ways Russia is another world, but experiences there can tell us a lot about how the fundamentals of the old economics keep working under different conditions--both in the strange world of Russia and the supposedly new-economics world of the Internet.

And that means that e-commerce is not just sugar-filled cake; in fact, it is nutritious: commerce made more efficient and effective with electronic communications. E-commerce is all about what Russia (and the world in general) needs: openness and transparency, informed competition, communication with customers. If you have to call that "e-commerce" to get people to invest in it in Russia, that's fine with me.

My own experience primarily concerns two companies I am advising and investing in, and I have just returned from a week following up on them.

What is actually happening under all the buzz? Foreign investment groups have made a number of investments in local portals and Web start-ups, but the numbers reported as investments are generally in fact valuations: That is, someone invested a couple of million for 10% of something valued in total at $30 million.

The oligarchs--Russia's oil and media tycoons--are also snooping around, some to raise money, others wanting to invest now and sell later.

But a Web site or an e-commerce operation is just like an oil company: It won't generate profit unless it is well-managed. And unlike an oil company, an e-commerce play probably has few assets to sell if it is not well-managed.

So the oligarchs are going to be disappointed to discover the truth: The best way they can make use of e-commerce is to run their existing businesses more efficiently and transparently.

Take Rambler, one of Russia's leading portals (http://www.rambler.ru), where I just joined the advisory board. One of the first things we did was to talk with Moscow's Center for Business Skills Development, to make sure our people are trained for the challenges ahead. We are also looking for additional staff with experience in marketing, e-commerce, management and strategy.

Our job is not to pick winners, but to build winners. Especially in Russia, where the overall level of commercial expertise is low, no one is going to succeed without lots of help from outside.

But not all "Western experience" is useful or relevant. For example, with Rambler I went to see a couple of advertising agencies about strengthening Rambler's brand, which is strong but certainly needs better marketing than it has had so far. Russia's advertising agencies are getting ready for a bonanza: Ozon.ru, Russia's answer to Amazon.com, is doing a formal launch next month, though the site is already up and is reportedly generating about $60,000 in business a month--let's face it, rather small change even for Russia. Sites such as Yandex and Port.ru are doubtless also planning new campaigns funded by their foreign investors.

Television seems the obvious answer and was indeed heavily pitched by one of the agencies. But the other agency correctly pointed out that Russia's Net has only about 2 million regular users (or less than 2% of the population), and using a mass medium such as television to reach them might not be the best use of scarce resources.

Indeed, in Russia the real problem is not that consumers are poor--though that is true--but that producers are unproductive. Unproductive workers inevitably lead to low-salaried consumers.

Whereas in the West the Net empowers consumers to make better use of their easy money and their scarce time, in Russia its value is more basic. Rambler and its competitors won't do well until somehow it can help make Russian industry and its employees more productive, and that's why it will surround its consumer services with a set of more business-oriented projects, probably including a job site as well as more business-to-business services.

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