Why Facebook needs DST in Russia
Updated at 8:30 p.m.: to correct that DST has no funding from the Russian government.
As reported earlier, Facebook is taking a $200 million round of funding from Digital Sky Technologies, a Russian investment company. While Facebook CEO Mark Zuckerberg said in a conference call Tuesday morning that Facebook revenue numbers were up, that the company was growing, and that Facebook was, "on track to creating a nice, self-sustaining business," he explained that at Facebook, "we're open to interesting offers."
With many companies wanting to invest in Facebook, what made the DST offer so interesting?
Regional knowledge
Facebook COO Sheryl Sandberg told me that Facebook was "not actively seeking investments." DST input will be key to Facebook's Eastern European business growth, though. "This is an investment with a strategic partner. We're excited for the learnings," she said.
New Facebook investor Alexander Tamas of Digital Sky Technologies.
(Credit: Facebook)But a source familiar with DST laid it out for me a bit differently: if Facebook wants to be successful in Russia, DST can bring a lot to the table besides knowledge. DST is close to the government there, the source said, and while outright involvement (or obstruction) from the Russian government is highly unlikely, if Facebook wants its business to go more smoothly, DST can help.
For example, should Facebook want to hire Russians, a connected investor like DST could help. DST influence could be even more important if Facebook wanted to acquire companies in the region.
DST's Alexander Tamas told me his company is private and does not have many interactions with the government. There is no government funding in DST. Still, our source says that DST's connections to the government, subtle though they may be, are important because the Russian market is not friendly to outsiders. "It's a market where you want a partner," I was told.
DST's investment gives it no power over Facebook in the United States, and reportedly no control of the company nor access to U.S. customer data. But through this arrangement, Facebook will likely have an easier time growing its market share in Russia, of obvious benefit to its new investor.
DST: Let them compete
A strong Russian Facebook will also force a competitive evolution of other Eastern European social sites. Tamas says that DST has more than a dozen social network investments, including the top three social sites in the region in terms of traffic (Forticom, VKontakte.ru, and Mail.ru). These sites, and others in the DST portfolio, compete with each other to an extent, and DST is fine with this. "We don't interfere with operations," Tamas says. This arrangement is in stark contrast to many U.S. venture funds, where investors and entrepreneurs expect that the funders' full attention will be on growing their portfolio company businesses. U.S. VCs often make sure their potential portfolio companies are, if anything, potentially cooperative before they invest, and will not take on companies competing for a market they are already in.
However, when your portfolio controls 70 percent of your market, as Tamas says DST's does (the market being the Russian-speaking Internet), there is no avoiding the competition. Adding Facebook to that stable will give DST an even more commanding position on the Russian social nets, even if Facebook itself will become just one of the region's big social sites.
DST's leadership position also creates an opportunity for DST to create a region-wide advertising network for these social sites, but Tamas said there are no plans to create an advertising network across the DST sites, "at this stage."
Facebook's Sandberg says that the approach of taking regional investors is not new to Facebook; Hong Kong's Li Ka-shing sunk $60 million into the company in 2007.
See also: Kara Swisher interviews Sandberg and Alexander.
Related: Facebook investment puts spotlight on Microsoft stake.
Additional reporting by Dan Farber in Carlsbad, Calif.
Rafe Needleman writes about start-ups, new technologies, and Web 2.0 products, as editor of CNET's Webware. E-mail Rafe. 
Russians believe, and not without reason, that anything western is going to overtake and completely overtake the local market, thats because of the sheer love Russians have for western culture.
So they have to be thinking facebook is going to jump in and transplant the more established and high quality sites like mail.ru.
And, they probably have no designs or dreams whatsoever, or any belief or any history to suggest it might be true, that they could jump into the U.S. market and transplant facebook on their own turf.
Frankly I think its a bit wrong headed to think that way, but its good for U.S. companies as long as this aura of invincibility hangs around.
The idea of needing DST partners in some ways is absurd...you don't understand how the internet works, unless the Russian government walls off the internet, they need not do anything inside Russia.
What facebook got, was not expertise, but $200 million.
They extracted a huge sum, and the Russians aren't going to realize right away how badly they got taken, for the simple fact, that they got to buy into a western firm, and to them its a prize of sorts, makes them look all international and modern.
The prime minister over there in Russia, Vladmir Putin, has his detractors, and some of the complaints about him are legitimate, but you should never demonize this person so much that you start granting him supernatural powers. He doesn't have his hand in everything, he doesn't know all the deals, or direct all of them. Frankly a lot of what his speeches are about, are his ideas and suggestions, but they don't have the weight of law behind them.
As a matter of fact, this is the type of deal that the Russian government has been vocally against for years. They think, and from their perspective anyway, I think they are correct, that they should not be looking for ways to invest their money in foreign firms at the highest of premiums, but rather they are preaching that they can compete, with their own tech.
Not that they can, or do...but leaving that point aside, my gut feeling is that this has nothing to do with the Russian government whatsoever, and its exactly the type of thing they don't really approve of, but, they don't shut it down either, because, after all, more or less they are a practicing capitalist system now, even with all the ridiculous red tape, and interference, and other things....initiatives from the wealthier oligarchs go on all the time, and the Russian government can only influence, not command.
- by SergeM256 May 27, 2009 11:03 AM PDT
- Social networks do exist in Russia already. Do they really need one more?
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- by dimkas13 July 17, 2009 8:27 AM PDT
- Facebook may offer 200 million people, their friends, relatives, interests, employment (a lot of information!) to russian secret service for their "games. $1 per soul, not a bad bargain...
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(7 Comments)Facebook for Russia would be a sort of separate service customized for Russia, practically isolated from English version of Facebook. It has to be in Russian - very few people in Russia know English well enough to use English version. Russians have different issues and interests and they unlikely to get connected with people outside of Russia. Service has to be optimized for dial-up connection - that's what most people have at home. I don't see what Facebook may offer that Russians don't have already.