Nonzero-Sum Team

The focus on leadership, teamwork, and creativity helped Arkady Volozh create Yandex, the largest search system in the Russian Internet. Now, he is facing a choice of turning the company into a scalable, albeit austere and boring organization with orderly management – or going on in creative chaos.

Morning. Coffee. Check e-mail. Skim fresh business press. ICQ online. A flood of new funny stories from friends and coworkers. From habit, drop by a dating site – a new message from a beautiful unknown. Nice chat. Finally, lunch. More of stuffy office. Get chewed by the boss for an unfinished report – time to go to Yandex, need to shovel through more heaps of information.

Now, that is a typical working day for millions of white collars throughout Russia. Nine hours or work (including lunch break), eight of them in front of the screen – at the PC connected to the Internet. Some of these people get tired of the World Wide Web so much that they do not have an Internet connection on their home computers on principle; others get used to it so much that they come home, grab a sandwich, and hurry to get back to the Matrix. It is their personal desert of the real, the way Slavoj Žižek, a postmodernist, would have put it.

Yet, this desert is not what it was five or six years ago, when only hi-tech equipment producers put up their sites on the net. There are Internet messengers, online photo albums, online diaries (blogs), open access to digital music and movies. e-Commerce is booming, too. Quite recently, a Chinese businessman bought a MiG-21 fighter online at Ebay, paying USD27,000 for the treat. So none of the people in the hi-tech industry has any more doubts in the fact that the Internet (just as futurists prophesied) has become a new medium, a new place for social and business communication, bringing billions of dollars to Internet companies.

At the same time, the Internet as a business is a subject rather poorly covered in Russia. The names of the leaders – Yandex, Rambler, Mail.ru, RBC – have long been known, and they are considered rather good brands. However, how the business works is something known to a very small and detached group of people who have been in this field for years. Information is spread from hand to hand and from mouth to mouth; knowledge sharing is to a large extent based on insider activities. Only a few Russian Internet companies disclose their financial reporting, e commerce statistics vary substantially between sources, it is only the second year that estimates of online advertising market volume agree, and finally, if there are analysts who study the market, they do not publish any data. Expert decided to slightly lift the curtain of this mystery. In order to understand how Russian Internet companies arose, how they work today, what business models they adopt, and what prospects they have, we decided to look at Yandex, a pioneer of the market that now owns the largest search system in Russia.

Sunflower Seeds for Computers

In 1988, the renowned Law on Cooperation was approved. At that time, Arkady Volozh, a graduate of Gubkin Institute of Oil and Gas, was doing research in processing large data volumes. He had a job and pursued his extramural postgraduate studies. But the young postgraduate’s peaceful existence was interrupted by the tide of first cooperatives. “The institute received a directive from the district committee of the Communist Party of the Soviet Union: to create a cooperative in line with the Law on Cooperative Movement,” tells Arkady, “The director of the institute called the head of my department and told him: see, that’s how it goes, we need to decide something. And the head of the department decided – fine, that will be you, you, and you... That is how I became a cofounder of one of the first cooperatives.”

The cooperative bought sunflower seeds and supplied them to Austria in exchange for personal computers. The computers were used to create automated workplaces for Russian enterprises. The exchange itself was pure barter: a railcar of sunflower seeds for a railcar of computers. “At that time, domestic computers were a size of a room, while the first personal computers could easily fit on a table,” recalls Volozh. “Our giants could cost as much as several million dollars, while western PC only cost, don’t remember exactly, some RUB43,000. However, I did not have much first-hand knowledge of prices, since my part in the cooperative was technical: I was responsible for installation and setup – in fact, I have been programming for PCs since 1984.”

After engaging in business, Volozh abandoned his Ph. D. thesis, leaving it at some point in section two. To improve his skills, he decided to learn English. “Robert Stubblebine, an American, came to teach me. He was still pretty much a student, a year younger than me, and I saw that he had some computer magazines. Naturally, I asked him about it, and he told me: I’m going to supply computers to the USSR. I said, perfect, we also deal with computers here, why don’t you join us? And so I took him to the head of the cooperative. Regretfully, nothing came out of it at that time. Still, after a while the two of us were working together. He had a very good knowledge of Russian literature, could recite Pushkin by heart. Thus, in 1989 we created a firm. My partner visited companies and sold computers, and I took care of specifications and other stuff,” tells Arkady Volozh.

During the time with the cooperative, Volozh earned two computers. After selling them, he bought an apartment in Moscow, and his family moved there. Their old apartment was turned into headquarters for CompTek and another company that he conceived during his postgraduate studies.

Arkady + Arkady = Arcadia

“Having worked with data masses for a couple of years, we realized that in order to search well in texts, it would be nice to have a good understanding of the Russian language in general. At that time, I knew another Arkady – Arkady Borkovsky, who studied computer linguistics in the Academy of Science. We started working together. In this way, by combining the idea of search in large texts with language morphology, Arcadia company was born,” recounts Volozh. The new company’s first product was a Classifier of Inventions, nearly 10 Mb in size. The order came from the Institute for Patent Information, and the company hired a small team of programmers. To expand the market, the program was packed onto floppies and was sold as a boxed product. The buyers were primarily research institutes and organizations that dealt with patenting. “We spent three years working on the product, were actively selling it, even published ads in Izvestia,” recalls Arkady. “We wrote everything in my kitchen. All in all, this business fed some ten people.”

Market reforms did not leave Arcadia unscathed – enterprises could not be bothered with patents then. On the other hand, CompTek’s business flourished: the first banks, stock exchanges, and financial speculators bought PCs by the carload, the construction of new communication networks was beginning, and the company went into distribution of network technologies. That’s when we decided to turn Arcadia into one of CompTek’s departments. “We came to a decision that we did not want to have our people on a starvation diet any longer and that we would make them all a programming department of CompTek. Several programmers are a small cost item for a well-off computer company, and besides, we did not want to drop the search technology, so we began thinking about what else we could index,” tells Volozh.

The first big achievement of CompTek programmers was the digital issue of the Bible. Almost half of the Scriptures was typed manually, even Volozh’s wife had to assist in the job, but in the end, the Bible on floppies was quite in demand. The next order came from the Institute of World Literature – for a complete scholarly edition of literature classics, first Griboedov and then Pushkin.

Masculine in Nature

One of the “hungry programmers” who had to live off modest software sales since the early 1990-ies was Ilya Segalovich, who used to sit next to Volozh in the physics and math school. “I have always admired his entrepreneurial pitch,” recalls Segalovich today. “I bumped into Arkady by chance, and said, you know, I am a programmer, too, perhaps you might have a job for me? By the way, what are you working at? – Well, search. – Goodness, what trifles! And we are into integral equations of the second kind, geophysics, field conversion. Well, ok.”

Having spent a year on improving the code, Segalovich was going to leave for the US. “There was no technology to speak of at that time. The code was not good at understanding morphology, and query time was poor. But Arkady is a very sharp guy, it was like he felt that he shouldn’t let the project slip! The business was going up, the company had money – as I recall, we once made ninety contracts in three days! Then we became friends with the Institute for Information Transmission Problems and Yuri D. Apresyan (academician of the Russian Academy of Sciences, one of the most prominent Russian scientists in structural linguistics and theoretical semantics. – Expert), he chaired, perhaps, the best team of linguists in the country. We bought a dictionary from them, and we had to do something about it. Who can do it? Everyone looked around, and Arkady told me, go for it. So I got the task that captured me immediately, and I did not want to leave anywhere any more. I took to morphology and linguistics, and started writing the search-related part of the code,” tells Segalovich. Still, he does not think himself to be the only creator of Yandex, noting that at some point other developers (Michael Maslov, Dmitrij Tejblum, Sergey Ilyinski, Leonid Brovkin) joined the process.

“In 1995, we finally got connected to the Internet, and it was obvious straight away that we had to do something for it. By 1996, working simultaneously on Griboedov, we refined Yandex so that it could work on the Web,” continues Segalovich. “We made Yandex with a simple intention to demonstrate our breakthrough technologies,” adds Volozh. “At that moment, a technological fair was held in the city, and we participated there as CompTek. There were plenty of showcases of various companies, they all displayed network technologies or IP-telephony. And we decided to demonstrate our search technologies – to show that we can go and find anything that is on the Web. The search engine robot was completed in 1997, and we immediately indexed the entire Russian Internet.”

To this day, the origin of the company name remains one of the favorite tales in Yandex. The official story goes like this. Many professional programmers at that time used UNIX operating system, and among its users it was common to name products “yet another” with an addition of a word to define the program. As the official legend goes, Ilya Segalovich came up with Yet Another Index, Yandex for short. Volozh, wishing to stress the Russian background of the new program, suggested to put the Cyrillic letter ß at the beginning. That is how ßndex was born. Another funny story on the same subject came from the users. “Once we got a message that read this,” tells Volozh. “That’s a great idea you got about the Yin and Yang! Index sounds more like something feminine, but Yandex is something strong and masculine, an index that has balls!”

Marriage of Convenience

By 1999, Yandex was ranked fourth or fifth by popularity in the Internet. The fight for visitors (for hosts and clicks, in web-language) was getting increasingly acute. One of the oldest sites in the Russian Internet, Rambler, was created as early as in 1996 by a group of engineers from the Institute of Biochemistry and Physiology of Microorganisms of the Russian Academy of Sciences. Apart from Rambler, other sites that fought for attention of the first Russian internet users were portals List.ru and Mail.ru, and another search system – Aport.ru, the one that shared the fourth and fifth place with Yandex at that time.

In 1999, Arkady Volozh was still CEO of CompTek, and the company was one of the leading Russian providers of network solutions. However, it became clear that the Internet is no longer just for fun, and a choice had to be made between CompTek and Yandex. Besides, Yandex was in need of money, and risking the money of CompTek did not seem like a good idea. Volozh decided to look for a strategic investor for Yandex.

1999 was the best time for search. The hi-tech fever swept the markets, investors around the world rushed like crazy to put their money into Internet companies, scanning all the possible segments, including the Russian market, still embryonic at that time. The Russian Internet was tiny in 1999 (according to Rambler data, there were 2.2 million users, and the volume of online advertising market did not exceed USD2 million). Still, Internet companies got considerable amounts of money, and many of them succumbed to temptation.

Aport search system together with two popular portals @Rus and Omen.Ru was bought for USD25 million by Golden Telecom, a leading alternative carrier in Russia. (However, in 2001 Golden Telecom reappraised its Internet business and valued all purchased Internet assets at only USD1 million.)

Rambler was also tempted by investors. It sold the controlling stake to Russian Funds group and Orion Capital Advisors Limited in exchange for investments. “At first, investors were actively injecting money into Rambler. They invested up to USD6 million in 2000 in order to ‘inflate’ the company and then sell it. After the NASDAQ crisis and the dot-com bubble burst, they lost heart and in autumn 2000 attempted to sell the company to anyone who would buy. Under those conditions, they came up with a new ‘strategy’ every two weeks, and Rambler was losing the market,” recalls Igor Ashmanov, Rambler Director at that time, presently CEO of Ashmanov and Partners.

However, Volozh did not want to sell the entire company. He had two major requirements to potential partners: he wanted to retain control and to get as much money as possible for a minority stake.

“In 1999, we met with virtually all Russian Internet market leaders. At some point in September, I met Arkady and his team at a trade fair,” tells Elena Ivashentseva, a Partner of Baring Vostok Capital Partners (BVCP), a private equity firm. “Compared to other companies that I talked to, the guys were very open, very transparent, and had a good understanding of their strengths. They only had the search engine at that time; however, they realized that they were the strongest in that area, and they were willing to create and develop the rest.”

At that time, Yandex had annual revenues of some USD70,000 (!). The bulk of it came from selling the search engine packaged as a software program. However, the leading players in the Russian Internet have already begun selling advertisement at their sites, and Yandex took to it as well. The business model was still taking shape, and it seemed that there will be a single approach for all market players. Substantial fixed costs (development and technical infrastructure), small variable costs (programmers’ salaries), and “sales” of portal visitors to large advertisers. Baring understood that the Internet business model was still in the process of formation, and therefore, the advertising business on the Web was bound to begin growing rapidly in the coming years. The fund did not see the need to get a controlling stake or be involved in tactical governance of the company. To put it simply, they suited each other. In 2000, the deal was officially concluded. BVCP bought 35.7% in Yandex for around USD5 million.

“Volozh managed to resist the pressure from investors, he did not sell the whole company, he did not spread out and instead focused specifically on the search system, he came up with a slogan, he positioned his company well, he did everything right!” reflects Igor Ashmanov.

Creative Chaos

These days, six years after the deal, Yandex is moving to a new building. The company was long cramped in its old offices: first, Yandex split into two parts and two offices – the commercial section that was selling advertisement, and the developers (together with the management).

The first thing that hit you as you entered the previous office was a rich aroma of strong coffee floating through the premises. It seems that everyone drinks coffee here – could be due to intense brainwork; but more probably due to the fact that people work day and night. In Yandex, programming is believed to be an act of creation, so the work of programmers is the least regulated. Along narrow stairways, almost colliding in corridors, people run on their business. Neckties and silk shirts are mixed with jeans and t-shirts. T-shirts bearing the Yandex logo are extremely in vogue; the newest trend seems to be t-shirts with a bright red letter “ß” (standing for pronoun “I” in the Russian language) that read “I am not representative”. To a question about the company’s dress code, Elena Kolmanovskaya, Yandex Chief Editor, gave a very serious answer: “In our company, the employees are required to wear clothes.”

In 2000, when the company was still very small with some 70 people, the whole team was breathing this air of freedom, creativity, and endless search for self. But the most important trait that they all carried was their will to win. “When you take somebody else’s money, you feel awkward if you just sit and do nothing. And when you start doing something, you feel awkward if you do it bad,” explains Volozh. At first, the company managed to handle its growth while still trying to stick to its foundations: they hired mostly friends, then acquaintances, then friends of acquaintances, and so on. The growth resources of Yandex as a family were exhausted by 2004. “We realized that with this old approach we could not grow further and still keep the company manageable. And so we initiated a great changeover. New people came who we did not know by sight; we started to create a company structure. We all used to be neighbors, and then – there we were working in different buildings.”

However, the renovation of the company was governed by common sense rather than books on management theory. Thanks to this, the adjustment to the new way of life was not really painful. “In 2000, when we began building the management, the programmers just could not understand what we needed managers for,” tells Elena Kolmanovskaya. “They believed that a manager is a heavy burden, a pest bothering their workmen’s bodies. In a year, common sense started to win over, and the programmers got used to the new scheme so much that they didn’t wait long to say, ‘I can’t take it any more, where is the project manager?!’.” The organization structure of the company was created in a similar way: it was born of a short talk between Arkady Volozh and a young manager Dmitry Ivanov, who came to Yandex in 2003 from the Fund for Effective Politics.

“Dmitry asked me, how many people I could comfortably work with directly. I said something like seven. Fine, he said, let’s make seven departments. The department heads will work with the rest,” recounts Volozh. And so it went on. Every employee was assigned to one of the seven departments: project management, development, operations, commerce, marketing, accounting, and utilities (or support) that comprised secretaries, drivers, and housekeepers. The management system the company adopted was close to the matrix system: every employee works in his respective functional division and participates in projects that require his competences as needed. Volozh estimates that this system can handle up to 500 people; now Yandex has around 300 employees.

Still, even with more regulations and structuring of all the processes, with the managers operating on quarterly plans and programmers having budgets for guidance, the company still preserves its spirit of freedom, or, the way Segalovich prefers putting it, “our collective sense of beauty”. This is the first and perhaps the most important quality of Yandex as a team – the passion for freedom and self-expression. “We always let this feeling guide us! I am not sure if I am allowed to say it, but the amount of mess that we’ve got here is unparalleled. But I want to believe that it is the reason that makes us so flexible, uninhibited, and hopefully, creative,” contemplates Ilya Segalovich. “Yandex today is a very creative, innovative company that does indeed live in chaos. But from this chaos, the company comes up with brilliant ideas and products that are in high demand on the market,” agrees Elena Ivashentseva.

That is one of the paradoxes of Yandex. On the one hand, Yandex has all the features of “civilization” fitting for a modern company that works with western investors. The company keeps exact accounting and reporting, plans its activities, decisions are made by the management board and the board of directors. On the other hand, any decision can be disputed, questioned, or ostracized, authorities are often challenged, breaking multiple rules pertaining to a traditional red tape system in the process. Here, the quality that keeps the balance in the company was brought to Yandex by Volozh himself. “When we began working with Americans at CompTek, I learned something important from them,” tells Arkady. “We have to play as a team, but strive for a result. Some people understand business as a zero-sum game. If I win, someone must lose. In reality, business is a nonzero-sum game, it is about creating something new that benefits all. When A and B work together, their cooperation adds value, that is the magic of business. A businessman is a person who is capable to see where the new value can come from. And business negotiations are about distributing the added value.” “The company has the spirit, the feeling that they all work for the came cause, there is no authoritarian decision-making to the detriment of someone else,” recounts Elena Ivashentseva. “I believe that it is one of the keys to Yandex’s success: it is the result of joint creative effort.”

Another important quality that unites people of Yandex into a team and helps them find common ground is their we-are-the-best ideology. Some people in the Internet industry already call it star sickness, while Yandex employees believe it to be their common sense. “We hope that we are the coolest and are doing the coolest thing in the world!” says Segalovich.

Word Sellers

The ardent belief of the company employees that Yandex is the best is not groundless. According to Liveinternet.ru data on site referrals from search systems, in the last three months Yandex accounted for 60.5% of search queries of the Russian Internet users. Another 21.5 and 6.7% were held respectively by Rambler and Google Inc. (USA) with its search system Google. Mail.ru came fourth with 6.5% – notably, this portal uses Yandex’s search engine. “The secret of the huge success of Yandex is its outstanding marketing against weak promotion of Rambler and a complete failure of Aport,” believes Igor Ashmanov. Yet, the people in the company do not agree with that. “The key is to create a good thing. Promoting it is a purely technical task,” says Volozh.

The leading position in search helped the company decide on a new business model – context advertising. In the beginning, all Internet companies were focused solely on banner advertising; today, revenues are generated by media and context advertising. Media advertisements are banners placed on sites. Context advertising is more complicated: an advertiser pays a search system or a context ad system, and it displays his advertisement on the page containing search results or some other text, if the ad is relevant to the words in a query or the text itself. Being an actual monopoly on the context ad market, last year Yandex received USD35.6 million in revenues (with 80% coming from context advertising), and its income was USD13.6 million. According to experts, the total volume of Internet advertisement market was around USD100 million in 2005, with context advertising accounting for USD40 million (a 120% rise compared to 2004) and media advertising taking another USD60 million (an increase by 71%). USD100 million is only 2% of the total advertisement market volume in the Russian Federation. “Right now, the Russian Internet has an advertising budget of only around USD5 per user, compared to more than USD20 in the United States,” says Volozh. This gap makes him believe in the future of Russian Internet advertising, and therefore in the future of Yandex.

The company’s focus on context advertising is justified. Currently, the only serious competitor of Yandex in this field can be Google, Inc. Recently it officially opened an office in Russia and sells advertisement in addition to development. The context ad system AdSense used by Google is quite similar to Yandex.Direct. The fact that both Google and Yandex live mostly off context advertising makes them different from their nearest competitors. For example, the ideology of a US search system Yahoo! is more that of a portal, and it is therefore oriented towards selling multimedia content and media advertising, whereas its context ad system is still being finalized. Rambler is going along exactly the same tracks: it has diversified its business, going into television and mobile phone content. A Russian holding Mail.ru has also had portal ideology from the very beginning. So, despite the fact that all the “big three” companies – Yandex, Rambler, and Mail.ru – fight for the same audience, their money comes from different sources. And while Rambler and Mail.ru compete for more or less the same advertisers (large companies with sizeable advertising budgets), Yandex focuses on smaller plays that can spend some USD20-30 per month on ads. The effect is there, because the country has tens of thousands of such companies.

In the future, Yandex has no intention of entering segments that are already firmly occupied by its competitors. For Arkady Volozh, company strategy lies in developing the areas where Yandex is strong. “We’ll be implementing the following concept,” tells Volozh. “There are three types of applications in the world: pocket applications, desktop applications, and sofa applications. This has nothing to do with technology, the point here is your convenience and the tasks that you need to solve. For instance, notepads have always been there – that is what we call a pocket or mobile application. It is handy because you always have it with you. Desktop applications usually solved written tasks, like the quill, paper, candles, or abacus. Writing a letter, calculating something – it is most convenient to do it at the table. Finally, there are sofa applications, most often for entertainment. The simplest example is reading a book: you are lying, moving your eyes, doing nothing, and the plot is unraveling. Now we have TV, home theaters, stereo systems. Nothing has actually changed since the time they came about. There were plenty of attempts to mix them, but they failed. For example, hundreds, perhaps even thousands of people read books on their PDAs, millions of people have mobile phones. If I have to work, I shall sit at my table, I won’t struggle with a notepad. The main issue is that I need an interface that would fit my task. So, what is our strategy? First, we do desktop applications. We only do Russian language services. And we do mass services.”

Yandex does not only develop services for common Internet users. Arkady Volozh is especially proud of Yandex.Direct, the ad placement system, and he can talk about its technology and flexibility for hours on end. Company developers spend vast amounts of energy improving and refining it. The basis of Yandex.Direct is a system of auction bids, where the higher the cost per click you set, the higher the position of your ad. Also, you only make your payment to Yandex when a client clicks through to your site from the ad displayed at the search page. Therefore, the key task of Yandex is to increase the probability of clicks through the displayed ads. For example, the Autofocus function helps advertisers better reach their target audiences. Suppose, you sell trips to mineral water health resorts and buy ad displays at Yandex with this word combination. However, the system notes that “mineral water” is a word combination used in queries by people who want to better their health as well as by mineral water drinkers. In this case, the system displays your advertisement when people look for “health resort”, “treatment”, or “airport”, excluding queries with the words “office”, “market”, or “drinking”.

Digesting Millions

Naturally, investors are increasingly interested in Yandex. One possible source of investments is Google, the largest search system in the world. When Google opened an office in Russia, the market was immediately filled with rumors that the company is prepared to buy Yandex.

Another way of selling the company is to go public. There is little doubt that Yandex will be able to hold a successful IPO. Western portfolio investors’ demand for stocks of Russian hi-tech and media companies is still far from satisfied. A proof of that is the outstanding success of the primary placement of Rambler Media on the AIM market at London stock exchange last spring. The company with EBITDA at USD1.97 million and sales volume around USD12 million managed to attract nearly USD40 million for 26% of its shares.

Market rumors go that investment bankers frequently visit Volozh and offer to place Yandex at an even higher price, with a good premium. At such valuations (see insert How Much Can Yandex Cost?), it is surprising that Yandex has no plans of selling itself whatsoever: the company is not in need of money, assures Volozh. “The business is exceptionally profitable, the company does not manage to invest everything in further development and has to pay dividends to shareholders,” agrees Elena Ivashentseva. Baring Vostok Capital Partners do not intend to part with their stake yet, and Elena expressed serious doubts as for the actual possibility of a deal with Google. “Eleven years of experience in the field of investments have shown that we usually earn more from selling a company on the open market rather than to strategic investors. As for Google, it has not bought the Chinese search engine Baidu, has not bought Skype, has not bought a whole bunch of other attractive companies. Until now, it acquired developer teams rather than businesses.”

Moreover, Yandex will not be able to digest hundreds of millions of dollars in investment inflows. “Tens of millions make sense for companies like Yandex or Mail.ru, they already work with budgets of this size,” thinks Igor Ashmanov. “To grow five or ten times faster would mean to ruin the company,” claims Volozh. “What can we do with such money? Spend thirty million dollars to buy more servers? Make a tenfold salary hike?”

The final decision of the company management is still unknown, and Arkady himself is reluctant to discuss the IPO in any detail. He is facing other issues.

Steel Discipline or Chaordic Creativity?

In autumn 1968, when a little-known company Intel from the Silicon Valley was still working on semiconductor technologies, an employee called the company founder Bob Noyce out to the hall and asked, “Bob, I cannot understand the decision-making in this company, could you please tell me about its structure?” Noyce went to the board, took a piece of chalk, and wrote a small x, then circled it, and put six or seven more x’s around it. Then he joined all x’s with the center and said, ”In the center – that is you, and around you – that’s us, the Intel team.” That is how Yandex works today. At the first glance, it may seem that Yandex is a company built entirely around one person, Arkady Volozh, and is therefore centralized. In fact, that is not true. All the Yandex team have strong charismas: Segalovish, and Kolmanovskaya, and other company leaders are personalities as strong in character as Volozh himself. Intel used to be like that, too, each member of the team was a top class player, and compromise was born from heated discussion. However, in late 1970s – early 1980s Intel faced the fact that this management approach does not fit a large and serious company, even though it is willing to retain its creativity. Motorola and AMD were on Intel’s heels, and Japanese producers were rising on the semiconductors market. At the same time, the quality of chips made by Intel left much to be desired, the rate of defective products was very high, and developments were more like creative search rather than a systematic process. By that time, the reigns of power in the company were in the hands of Andy Grove, who came to Intel from Fairchild Semiconductors. Grove bent Intel into submission and turned the free creature of chaos into a mechanical construct. Strict planning, precise budgeting, regulation of all procedures, accurate reporting, rigorous evaluation and promotion system, and first and foremost, the indisputable authority of Grove himself – that is what defined Intel for decades. And the most improbable thing is that although dozens of creative people left Intel, unable to withstand this pressure, the company still retains its innovative character, remaining the absolute leader in the semiconductor industry.

Can a company that exists in creative chaos achieve rapid growth and preserve both its manageability and bright identity? The way Volozh puts it, every day Yandex has to decide what it “does not do” – the company lacks human resources. However, if Yandex intends to post annual revenue growth of 1.5-2 times and still keep its positions as the market leader, it will have to resolve the issue of growth. At the top management of the company, no one has a degree in management; the company also suffers from an acute shortage of competent project managers. “Sometimes I think that the team approach is both their strength and their major weakness. Implanting a new and strong outsider into this team at the top or middle level of management will be extremely difficult these days,” notes Elena Ivashentseva.

Still, the theorists of the science of management could dispute the idea that the company has no other option than strengthening formal procedures. The first word in Chaordic Leadership, a popular neologism coined by a US researcher Dee Hock, combines the notions of chaos and order and denotes self-organizing, self-managing, versatile, non-linear, complex organisms, communities, and systems. Advocates of the new management approach believe that in the postindustrial environment, chaotic order in an organization may become key to strategic success.

In any event, the choice lies with Arkady Volozh. Will he become Yandex’s Andy Grove? For many people, he still is a paradoxical personality: people call him a very authoritarian leader – and a rampant democrat. Clearly, his creative mind makes it possible to be both. Volozh himself is certain that he will manage to turn Yandex into something self-sustained. Naturally, there is always a risk of mistake, but we should not forget that the chaotic order of Yandex still carries great potential: as Mao Tze Tung used to say, “The Heavenly Kingdom is in the midst of a great turmoil. The conditions are favorable.”

Insert: How Much Can Yandex Cost?

A popular approach to estimating value of a company is via profit and sales multiples, based on comparison of the company with peer businesses. Unfortunately, there is not much room for such comparison. Yandex can be compared to the Russian holding Rambler Media that was admitted to trading on AIM market, London stock exchange (in 2005, Rambler got USD14.82 million, or 69% of revenues from the Internet), and to the Chinese search system Baidu listed at NASDAQ in mid-2005. Since the current income of Rambler Media is –USD2.38 million, a comparison to Rambler is possible by Price/Sales multiple (P/S). Over the last month, Rambler Media capitalization fluctuated around USD400 million, its 2005 revenues amounted to USD21.4 million, so its P/S equals 18.7. Presently, Yandex receives USD1 million per week from context advertising alone, which amounts to at least USD52 million for the full year, and another 20% of revenue come from media advertising – amounting in total to USD62–65 million. Consequently, at P/S of 18.7, by year-end the value of the company will be around to USD1.2 billion. For comparison of Yandex to Baidu, we need to consider the specific character of Internet markets in China and Russia. The current P/E (Price/Earnings) of Baidu is 268, and its capitalization stands at USD2.69 billion. For a more precise valuation, P/E has to be adjusted to account for several factors: the difference in Internet audiences of the two countries, market share, and the countries’ popularity with investors. The Internet audience of China reaches about 130 million people, in Russia it is some 30 million (by the end of 2006). Baidu has a market share of around 40%, and the market share of Yandex is close to 60%. Finally, investors clearly are overly attentive to the Chinese market, therefore, an adjustment for overheated market of 1.5 is in order. Consequently, the overall adjustment factor for P/E equals 130/30 * 0.4/0.6 * 1.5 = 4.33, and Yandex P/E amounts to 268/4.33 = 61.9. Based on the average company’s rate of return at 37% and full year sales at USD65 million, Yandex capitalization is 0.37 * 65 * 61.9 = USD1.489 billion.

Insert: How Yandex.Direct Works

Yandex was the first Russian search system that chose to focus on context advertising rather than banners. The right-hand side of Yandex search results page displays a list of companies offering goods and services relevant to the keywords of the search query. This is enabled by Yandex.Direct, a proprietary solution that is continuously being refined. Yandex.Direct is based on a system of auction bids, where the higher the cost per click set by an advertiser, the higher the position of the ad. Also, the advertiser pays to Yandex only after a client clicks through to the advertiser’s site from the ad displayed at the search page. Virtually holding a monopoly on the context ad market, last year Yandex generated USD35.6 million of revenues, with 80% coming from context advertising.