Ruminations on Russia

I believe very strongly that different people have different strengths at different times in a company's life. It's easy to characterize it as pre-revenue to $5mn in revenues; $5-20mn and $20+. As with all generalizations it avoids the subtleties but hits the key points. I have learnt, painfully at times, that my strength is in the "pre-money to $5mn revenue" area. I am genuinely interested in all the bits that come with being a larger company but have very little to add to a CEO who has been there before. For those fighting through to the first year of product sales (as opposed to NRE or grants) I can offer a ton of tough love.

However, like any affair there is a good, better, worse moment to admit that your value on the board could be improved by a someone with skills in the next category up (or the workout category!!)

It does not make it any easier to step down, refocus on the company's where you add more value and move on.

Still feels like shit though when they are doing well.

I just passed the Apple Store on Lonon's Regent Street at 13.00 - ish. It's FULL. The queue at the checkout was about 20-25 minutes. Nearly everyone was buying i-Pod's and i-Pod accessories (a lot of sound options) but it was clear that people were looking at the Powerbooks and G5's as well.

Happy Christmas Apple.

Apologies to the Daily Telegraph for failing to remember the link to this. But its yet more evidence that inflation and the dollar's collapse, or the Rbl's rise (the mental masturbation required to make a difference is not worth the effort). Surprisingly it is at the high end where restaurant spend is on the up and up. I thought that the pain was being felt by the "middle-class."

Electronic Telegraph (UK)

December 10, 2004

Russia's super-rich steer clear of shops as boom era ends By Julius Strauss in Moscow

In Moscow's elite Tretyakov Passage, a typical offering at Tiffany's yesterday was a gold, pearl and diamond necklace for about £14,000. In the windows of Gucci, Dolce and Gabbana and Tod's, shimmering behind a phalanx of security guards, some of the smaller accessories cost more than an average Russian earns in a year. For those with serious money there were the Bentley, Maserati and Ferrari showrooms next door. But yesterday, barely a month before Orthodox Christmas and despite a warm spell that brought temperatures up to around zero, the outlets where the super-rich shop were almost empty.

In Russia, which has enjoyed five years of vigorous growth under President Vladimir Putin, experts say it is too early to speak of an economic slump. But economists and even government officials say that the boom which has given Moscow more billionaires than any other city in the world is now over. According to the latest figures, economic growth has fallen to its lowest in 22 months. Industrial growth is back to the levels last seen after the crash of 1998.

Anton Struchenevsky, economist at the investment company Troika Dialogue (sic), said: "This is more than a slowdown. In the second half of 2004 we are talking about stagnation in five leading industries."

In his first term Mr Putin made the goal of doubling the country's GDP by the end of the decade his top political priority. In scenes reminiscent of the Soviet era, he is now frequently shown on state television urging government ministers to ever-greater efforts in the pursuit of national prosperity.

But two mini-slumps this year mean that even government forecasts now say that his economic goal can not be achieved before 2012 at the earliest. With year-on-year growth down to around 4.5 per cent in November, it could take much longer. The downturn comes at a time when oil prices, the main source of Russia's wealth, are at record highs.

After coming to power in 2000, Mr Putin laid the ground for broad-based reforms. His economics minister, German Greff (sic), was allowed to pursue a western-style liberalisation of the economy that brought foreign money pouring in. But in the past two years the siloviki, former colleagues from the security services with little time for liberal democracy and a pool understanding of economics, have won the president's ear. The result has been a new chill in the country's business community.

Some economists now believe that Russia is on the cusp of a return to a state-run economy.

The unseating of Ukraine's pro-Russian president-elect, Viktor Yanukovich, has all but dashed Mr Putin's hopes of revamping a regional empire on the ashes of the Soviet Union. Now the former KGB officer, who likes to model himself on one of the greatest Russian modernisers, Peter the Great, is in danger of seeing an even greater ambition - that of turning Russia into a strong, wealthy and modern country - go the same way.

The Register on the EU on Roaming Charges.

It's interesting stuff if only because I am working with a couple of start-ups on ways to use VoIP rather than your mobile. Unfortunately nearly all solutions require either a phone hack or a network type solution. Which takes us back to the network operators. The easiest solution at the moment seems to be yet more death for fixed-line operators.

After this post on the lack of real thinking allowed in brokerage research I guess a market should open in days that he will be at Daiwa after bonus payment date.

In Saturday's FT there is a long piece on Liu Chuanzhi, Legend's CEO and The Man Who Ate IBM (Subscription only) The article says very little actually unless you are a sucker for reading PR releases.

Also in today's FT this piece on the first time in Ikea's history that they have failed to open a store on schedule. The blame is being put squarely on the local authorities shoulders who in a usual piece of shameless hucksterism saw a way to a quick bribe when they "discovered" that an obscure stamp on an obscure piece of paper had not been obtained. I am sure that it happened but normally Ikea would have solved the problem; whisper it quietly but the rumor doing the rounds of the retailers is that they were just not ready. Anyway this post is not about Ikea exploiting corrupt bureaucrats to cover their own problems.

The theme is China versus Russia. Mr. Liu Chuanzhi started Legend in 1984/5, 8 years before the collapse of the Communist regime of the former Soviet Union. After a couple of missteps they localized IBM PC's. They started building their own brand PC's in 1990. Today he runs a business that has bought the PC making business of the guys who invented (sic) the PC. Does it seem likely that a Russian-led firm will buy IBM chip design business before 2010?

The question is in itself flawed, as the comparison is actually apples and oranges. Legend has taken over a business that is about inventory and logistics and the application of technology. Russia will never compete in this business space. The real question is where are the international business leaders in Russia who have boot-strapped businesses and when will they start to challenge to be global leaders. Where is the Russian tech business that is exploiting Russia's great talents to take on the world?

My life is about entrepreneurs not established businesses. However, I don't feel or see management quality almost anywhere. There are some inordinately clever people surrounding the Oligarchs and a bunch of pretty clever ones around the Minigarchs. But they are not building businesses they are deploying overwhelming financial power to win in not very crowded spaces. They are not and never will be entrepreneurs. For the record let it be known that VC's are not entrepreneurs either. Some may think more entrepreneurially than others but our future is safe - until it's time to raise the next fund. I spent some time with a pizza & cinema entrepreneur from the regions this week. His mantra is quality of execution. There are very few other businesses where I get that feeling.

There was a point to the Ikea link. Business in both Russia and China is fundamentally corrupt at the bureaucratic level. Yet China has succeeded in creating a number of international businesses that compete on their ability alone; Legend, Huawei and UT Starcom straight off the top of my head. Where is the Russian UT Starcom?

A previous post despaired at the India versus Russia comparison because it is so meaningless. This one despairs at the China versus Russia comparison because it is so huge.

Messages - DFJ Nexus

For nearly all of you please ignore this message. On 12/7/2004 someone asked about the status of our raising for DFJ Nexus. We are.

Please contact me at astobie at dfjnexus dot com

The Next Big Issue

It's interesting to watch an issue emerge and the reasons for which they emerge. Ukraine is now a VERY big issue in Russia. It became a big issue when Russia failed to steal an election and the people decided to respond in a very unexpected way (for Eastern Europeans.) However, what should be a minor issue has become something considerably more significant in terms of Russia / Western Elections.

Putin Warns West to Back Off

Hypocrisy

This from Dan Gillmor's eJournal on the steroid story that refuses to go away in professional sports.

His last point is that he has tuned out the steroid story to focus on the Middle East and a lot of people dying. I believe that this is the worng answer. We have tuned out too much and accept being lied to as the norm. I tried to add this to the comments section but hit server problems.

I would never compare deaths in Iraq with taking drugs in sport. However, our ability to tune out events that we knew to be lies, corrupt, hypocritical started with sports and then moved pretty rapidly to low-level politics, then to national politicians and then suddenly to voting and participating in society.

Drugs in sport is just another example of us (the people) being taken for a ride by the establishment. In some cases it does not matter; take boxing for example which is now so corrupt that it barely registers a flicker before being ignored again. In too many cases just ignoring the bad and corrupt leads to a situation where we accept being lied to as part of the daily truth.

At some point we have to stand up and be counted by demanding that lies be accountable. Sports is not a bad place to start.

Ukraine

Goodbye And Farewell Baring Asset Management

The Economist today reports the sale by ING of Baring Asset Management;

ING agreed to sell Baring Asset Management to two American firms. Northern Trust will pay the Dutch giant some �260m ($489m) for Baring's financial-services business, while MassMutual will pay an undisclosed sum for the investment-management business.

I was at BAM when Nick Leeson and the management succeeded in selling the business to ING for GBP1 and some fairly large debts. Given what came later at LTCM it was pretty small fish.

It was a great learning experience. My boss, Richard Sobel, taught me a huge amount about the Russian venture capital, private equity business. What the organization taught me though was as important. Treat people like human beings and not as cattle. Seniority, or time served, does not equal a divine right to be respected or paid like a king whilst the performers are kept down in concerns about over-spending.

I joined BAM pretty much straight out of the Army. The Army is a hierachical organization but it was clear when orders were being followed because they were orders and when it was done from respect. Senior management never learnt that lesson.

Russian's Go Home

Some 25% of all Israeli's holding with higher education received their education in Russia or the former Soviet Union. And now they are comig back Israel faces Russian brain drain from our friends at the BBC.

If Russia can get at least some of their entrepreneurialism that would be a good thing.

• A high-to-mid end consumer electronics distributor (-30% versus forecast) who are pleased with themselves because they are still outperforming their competitors. They are no longer serving one of the larger retailers who they believe will soon fail.
• A direct marketing organization. Again 20-30% down against forecast (up to August they were both outperforming against plan)
• A residential real estate company which says that to the extent that deals are being done at all prices are down 50% since pre-summer.
• An advertising agency which reports that car sales have stalled - "there are no cars being sold" since the summer
• another advertising agency which reports that its staff are unhappy because their pay is $ -indexed and inflation is Rbl-indexed. The Agency is considering billing in Rbls and having to lift prices in line with inflation.

Russia Teaches Ukraine How To Steal Elections

Some coverage from the Moscow Times on the theft of the Ukrainian election Outrage as Yanukovych Takes the Lead. I spent some time yesterday with a Soviet era bureaucrat who has made himself unbelievably wealthy through some insider gas deals. We spoke briefly about the elections (it was his money I wanted) he believes that there will be real trouble in the Ukraine.

It only goes to prove that ex-KGB men are brilliant at stealing elections - just less good at knowing what to do once they have stolen them. For those who have yet to work out that I am British (Scotish) note that this is called under-statement.

Stupidity of the Highest Order

Up until this point I have been a strong supporter of Andrei Fursenko who has shown himself to be an intelligent and critical minister. Thisrubbish on resticting the Internet does not sound like him. Maybe the geniuses who have failed to corrupt elections in Abkahazia (its about 1,000km after nowhere on your map) and the Ukraine (only marginally closer) have realized that television is not the only information medium.

Battery Power and Skype

A long term sceptic of Skype's ability to disrupt mobile communications I was just made very aware of how good it is.

A call from Palo Alto (Sand Hill Road to be precise) to my Moscow mobile roaming in Zurich could not connect - lots of SS7 messages agreeing that we were talking but no sound. Log in to the WiFi network and Skype away (w/o headset and mike; is it worse to hear the whole conversation but not understand or is hearing only one way worse?) But I went from 20% of battery power to critical in less than 10 minutes. That's not sustainable.

A conference I went to a year ago mapped various tech advances against battery advances. It had to be on a log scale so that battery power did not merge with the x-axis.

Sistema Triple Play

It's pretty difficult to get overly enthused by anything Sistema does or says its almost a direct copy of the countries bureucracy. James Enck posts on the announcement that Sistema and Alcatel are partnering for a DSL triple play. With ARPU's in this market at $20 and heading toward $14 pretty rapidly, with 13 free-to-air channels broadcasting all the meaningful content and with still crappy pulse dial up I cannot see DSL being a winner. Having said that Sistema has access to the best new "elitny" houses which is where pricing is fairly inelastic - maybe there they have a chance. My bet is with the Ethernet home LAN's being aggregated.

No this is not another rant about the stupidity of people in Russia's government - though I will take the opportunity to have a go later on.

I caught the train to St. Petersburg on Wednesday night to speak at InfoCom 2004's wireless forum. Not quite as prestigous as speaking at VON. I took the opportunity to try out my how creative destruction in the telephony world will affect Russia. If I was a good writer I would now set out the state of the telecom industry in Russia. That would take too much time and isn't as much fun as trying to determine where its going.

In short;

Substantially all residential is still on pulse dial-up
Large corporations are well covered by a mixture of politically-connected incumbents who have aggregated CLEC's and the one or two CLEC's that made it, such as Golden Telecom - now NASDAQ listed and one of my previous investments.
A motley band of smaller CLEC's trying to service SME's and SMB's who cannot get anything approaching service from the above
Another (motley?) bunch of local home network/cable/ethernet/wireless (quasi-licensed) most of whom are cf positive - they have to be. But none of whom are really growing that quickly. A bunch of them just received investment from Oligarchic groups. A favorite of mine just got funded to the tune of $50mn.
Three principal cellular networks and a WCDMA player in the 450 band trying to break in.

The incumbents are profitable though I would bet that the Sage of Omaha would contend that as free cash flow is less than depreciation that they aren't really. The 2-3 incumbents and successful CLEC's are wildly profitable/cf positive - albeit with crap service. The motley crews are substantially all cf positive but until very recently w/o the capital to grow and capture the opportunity. The mobile guys are an interesting group. Growing rapidly in the regions the main markets are rapidly approaching/have reached the point that customer acquisition costs produce ever lower returns on investment. They really need the wealth to grow in to them rather than reaching down to acquire unprofitable subscribers. Meanwhile, GPRS is only really a reality in Moscow (Blackberrys don't work in St. Petersburg - roaming issues related to billing infrastructure rather than lack of network). But you can already see trial UMTS networks in Moscow with the right equipment. In addition an also run network is the first to trial WCDMA (I think) in Russia in an attempt to break in to data markets. It's an interesting play in Russia but I'm not sure what roaming capabilities it will have.

So that's the preview I wasn't going to give. What's the opportunity in creative destruction?

The cable guys aren't selling cable TV but high-speed internet and quasi-IP telephony. The PSTN's won't invest in local access, except in "elitny" housing and cannot provide business services. Cable TV is an add on sale (I'll go into this more some other time - think German cable in the meantime.)

Voice is free in the local loop - all of Moscow's 8mn inhabitants plus calls to all local mobile numbers call each other for free, so its difficult to disrupt a model where you will be charged the same for interconnect - which leads to a thought; is SkypeOut just a discount calling card with a fancy GUI?

I have always struggled with the opportunity to disrupt mobile companies from a business model point of view. I just don't buy in to mobile operators providing a pipe to better-than-Skype's. Put another way - the big mobile companies intend to keep the walls around their gardens very high. I also understand that Vodafone is not going to use a true VoIP solution when they launch UMTS. Which would suggest that they have not solved packet hierarchy issues. So they can lock in a lot of their value. Don't get me wrong - technology advances will eat away at/destroy roaming charges, lowest cost routing savings will be passed on to the customer. Data will at best keep ARPU's where they are. Single number plans will do further damage. However nothing is as fundamental as the pain that fixed line providers are going to face.

My conclusion is that in addition to creative destruction in applications we will also need to see alternative delivery methods. I don't believe that Intel's WiMax push will be part of the creative destruction. I was bamboozled today by a Professor talking about Russia's efforts in DAB/DVT in conjunction with GSM - is this it?

Anyway my takeaway is that I failed to be controversial because Russia is still getting used to what already exists and does not want to see a disruptive future - more importantly it does not care less about the disruption to its PSTN's.

Brad Feld lays out some good thoughts on the future of watching programming. I am currently lugging around a 100 page presentation by one of the Big 4 on the future of media. Based on a series of interviews with CEO's of Disney, Viacom, BSkyB etc they try to get to the bottom of how they view the future. Let me say at this point that I am on page 50-something but my big takeaway is that they all have different views of the future - except they all know that the 30 second add is dead.

I sat for a while on the boards of 2 TV network / station groups in Russia, am an investor in Russia's largest producer of Russian language content for TV, and are currently selling a media-selling agency, but feel all at sea in this business. As I don't spend much/any time in Beverly Hills I can't say whether medialand spends much time talking to VC's like Brad - they need to. Innovation is about to eat them up. What will be left is some of the least profitable parts of their business (gross margins at less than 40%).

Martin Geddes put in a great post on creative destruction in the telecom industry from VON. I have not seen the same introspection in the media industry.

Tom Keating has more interesting coverage of Popular Telephony's global numbering efforts ("GNUP"), also from James Enck on Popular's global numbering. I don't like this, read what someone else wrote blogging style but a comment and subsequent response from Peerio (the name of Popular's product) is worth covering;

In order to implement peering between disparate networks, this would need a media wrapper (or gateway) to exist between protocols, wouldn't it?
Posted by: Andrew at October 18, 2004 11:35 PM

Not really... There are no networks really... SIP or H.323 or whatever... it is all on the user machine isn't it?
Posted by: Peerio at October 19, 2004 10:52 AM

As a Mac user I have yet to check out their claims but it seems to me that they are way ahead of the crowd.

Update: Martin Geddes posts from VON with some great thoughts including why we should all be scared about communications. Key take aways;

• Too many border session controllers = trying to make the IP network resemble the current TDM network
• Popular are "hijacking and subverting" the global numbering plan (this was meant in a good way)
• A lot of money will be lost in VoIP - see point 1 to understand the coming crisis - So if you’re putting your pension savings into the VoIP business, tread very, very carefully. This boom going to hurt as bad as the .com explosion. One way or another, there’s going to be a lot of roadkill, and a lot of get-rich-quick money from inflated promises.
• VoIP is a classic separation of application from carrier and more importantly the financial relationship between the two - someone astutely commented that a key aspect of IP was not just decoupling of the applications from the service. It is also the decoupling of the financial relationship between the connectivity and service provider.

All this should apply to the mobile network as much as the fixed. However I recently saw a line in a RFP to a global service provider that said in effect that GPRS and 3G are not yet robust enough to support true VoIP connectivity - bomb shell. Put another way voice is going to continue to have its own protected piece of bandwidth until QOS issues can be resolved.

In today's FT (subscription required) is a fascinating review of Seymour Hersh's new book - Chain of Command - the road from 9/11 to Abu Ghraib by David Scheffer. Scheffer was apparently US Ambassador at large for war crimes issues (1997-2001). He finishes his review:

Chain of Command shows the critical need for evidence of illegal conduct by US forces to reach high levels quickly and elicit rapid responses. The White House needs a special prosecutor on international law to brief the President honestly and rein in officials who might forget or deliberately derail what the US stands for as a nation.

A nation at war, with itself?

Jeff Nolan has two excellent posts on the Vortex conference Day 1 and Day 2.

I'm not really going to comment on the specifics of the posts other than to say that his additional notes and commentary provide way more insight than the blog it as it's said stuff. This is super intelligent reporting that its impossible to buy. No journalist would ever know this much about a subject. I have printed them off and am reading more slowly for greater insight in to an area I understand only a little.

Copied below in its entirety is a research piece from UFG (40% owned by Deutsche Bank) on the legal games being played around Yukos. What murder being a sell-side analyst trying to paint a positive picture of what is clearly a mess;

An article in today's Vedomosti draws attention to speculation in the market about the possibility of Yuganskneftegaz passing automatically into state property. Such speculation should not be taken seriously in our view. Unless you should want us to pay us to short the stock - unfortunately you are likely to be using RenCap to do that.

The grounds for this scare are a provision in the relevant law (the Law on Enforcement Proceedings) that if an asset selected for the purpose of debt recovery has not been sold by the selling agent two months after being frozen, the creditor has the right to simply keep the asset in question. Yukos' 100% stake in Yugansk was first frozen on 14 July. A court decision of 6 August released the asset from the freeze, which was then re-imposed on 9 August by another court decision (procedurally dubious, as it turned out, but such details have long since ceased to matter). It follows that the two-month deadline expires next Saturday. We are quoting the law in the off chance that it makes a difference - we know it doesn't and our last sentence shows as much but we are like lawyers and paid by the word.

Our discussions with legal practitioners in the debt recovery field suggest that the standard practical application of the law is that the two month period begins from the moment the bailiffs hand an asset over to the selling agent. That moment has been on hold for weeks while DKW has been valuing Yugansk. Actually what our legal advisors said was; this is the law but given that the President couldn't give a damn for the constitution you might as well vote for the democrats in Florida.

Secondly, if the tax authorities did claim a right to appropriate Yugansk under the two-month rule, this would contradict another law - namely, the Tax Code, which states that tax liabilities (which is, of course, the nature of the debt being recovered) can only be settled in cash. As if they think that the law applies to them. A real estate report in the English language Moscow Times today reports that the most attractive Moscow real estate is owned by Government employees. Try this maths. "Golden Mile" real estate $5-7/km2, suburb real estate $500k-1.5mn. Average salary of government officials $100 - $2k month ($k applications are correct.)

On this basis alone, the authorities can be expected to at least proceed with the planned sale of Yugansk, rather than short-cut the whole process in what would be a scandal to put the whole of the Yukos affair to date into the shade. In any case, the law simply states that the creditor "can" appropriate the unsold asset as such. It does not oblige the creditor to do so. Apparently we can still be shocked by the application of power (sorry the law) in the Yukos affair.

Own investment promotion time. Congratulations to Tom Martinson and the team at jNETx on being chosen to the Pulver 100.

Also well done to Mera on also being chosen. Mera are very high on my would like to invest list - if I could come to a conclusion about value in the telco universe.

Whilst I am at the praising Russian-originated companies game; I would like to claim Dmitry Goroshevsky from Popular Telephony.