In further fallout from Russia's invasion of Ukraine, Yandex, the company that's sometimes referred to as the 'Google of Russia,' has signed a term sheet to sell its media division to VKontakte (VK), aka the local Facebook equivalent.
Yandex confirmed it has signed a term sheet to divest its news aggregator (News) and blogging/infotainment platform (Zen) with VK today. But it declined to provide further detail on the transaction that's been agreed with VK, including financial terms.
In a statement the Russian Internet group, which is registered in the Netherlands for tax purposes, said its main Russian operating subsidiary, Yandex LLC, has reached an agreement in principle With VK Group on the sale of News and Zen.
"While the parties have come to an agreement in principle on a transaction, they are continuing to discuss technical and financial details, which will be announced in due course," Yandex added, further noting that the transaction is subject to (and still pending) the approval of Russian's antimonopoly regulator, FAS.
As well as needing regulatory approval for the sale to go ahead, Yandex's investors will also need to agree to the deal terms.
The development confirms TechCrunch's reporting last month: Our sources named VK as the leading contender to acquire Yandex's media assets as the latter looked for an exit on rising risk in the wake of Russia's invasion of Ukraine and the Kremlin's tightening its grip on freedom of expression.
Shortly after reports of a potential sale of News and Zen began to circulate, Yandex told investors it was exploring strategic options for its media products -- saying it was potentially looking to sell its News aggregator and blogging 'infotainment' recommender platform, Zen.
Last month the EU sanctioned a key Yandex executive, Tigran Khudaverdyan -- citing accusations by a former head of its news operation over the role it plays in spreading Kremlin propaganda. It was quickly followed up by an announcement from Yandex that Khudaverdyan was stepping down as the deputy CEO and executive member of the board of Yandex NV, its Netherlands-based parent.
The latter is publicly traded on Nasdaq but trading of Yandex's stock was halted at the end of February after it had shed more than half its value in five days.
While there's no word on how much VK has agreed to pay to buy the two media products, the social media and services group reported issues with servicing its own debt last month -- saying it may not have enough liquidity to pay its debt holders if most of them demand their redemption rights on a $400 million bond, citing uncertainty around the impact of sanctions on Russia. So it's possible that the deal to acquire News and Zen is being done as an asset swap, rather than a cash transfer.
VK is known outside Russia for its eponymous Facebook-esque social networking platform but the company has expanded into many other tech-enabled lines of business including productivity, gaming, marketplaces, food delivery, transport, recruitment, payment processing and even its own hardware with a baked in AI assistant.
If the acquisition were to be an asset swap there are a number of options that might be attractive to Yandex, which also operates a number of areas beyond web search and ads -- from e-commerce and video streaming to food delivery and ride hailing.
That said, Yandex is also dealing with a revenue crunch as sanctions aimed at Russia's economy take their toll.
While the business itself has not been sanctioned, it is not insulated from the wider economic crisis hitting its home market and withdrew its 2022 financial guidance a week ago.
Reporting its Q1 earnings yesterday, Yandex revealed an adjusted net loss of 8.1 billion roubles ($110 million), via Reuters. Only five weeks of the quarter overlapped with Russia's invasion of Ukraine, which means that Yandex's Q2 earnings will show a fuller picture of how it's being affected by what its earnings note dryly refers to as "geopolitical developments."
Yandex's Q1 loss stems from rising operating expenses -- with the bulk coming from increases in payments to staff, per the earnings report. It said it paid this extra salary to all its employees (nearly 20,000 people) in the form of one-off support payments (costing a total of ~5,9 million roubles) to help staff deal with economic turmoil since the war began.
If the transaction to sell News and Zen goes through, Yandex's media exit is likely to further shrink its revenue.
A paragraph on financial outlook in the earnings report warns of "high" uncertainty affecting its ability to provide forward guidance to investors:
Given the significant changes to the external environment and the high degree of uncertainty concerning future geopolitical developments (including risk of further sanctions and their impact on the Russian and global economy), our visibility over the short- and medium-term is limited. Our previous guidance for 2022 should no longer be relied upon and we are not able to provide any forward-looking comments at this stage. We may resume providing our financial outlook for future periods when there is greater clarity over the macro environment in general and the impact on Yandex in particular.
Beyond financial impacts, it's not immediately clear how -- or even whether -- the sale of Yandex's news aggregator to VK will change Russians' access to information on current affairs.
Currently, Yandex plays an outsized role in disseminating state propaganda as a result of the popularity of its search service where the News feed is prominently displayed.
A Yandex search page displaying a News feed of Russian news -- the story selection includes a report (top right) claiming a "humanitarian" convoy of the Russian Federation came under fire from Ukrainian armed forces in the village of Zhuravlevka near Belgorod. Image Credits: Natasha Lomas/TechCrunch)
Earlier this month, jailed Kremlin critic Alexey Navalny hit out at the company in a lengthy tweet storm, discussing the parallel "information" war Putin's regime engages in, and accusing Yandex of "a solid shameless lie" in claiming to display "News" on its homepage.
The "news" sources which Yandex's aggregator picks up are Kremlin controlled because they are limited to those approved by the state media regulator. And Yandex News is the main source of information for 41% of the population, per Navalny -- hence his attack on the company for spreading the Kremlin's "shameless lies."
For its part, Yandex essentially argues its hands are tied over what the News aggregator amplifies as it has to follow Russia's media laws -- which dictate, via a state licensing regime, which news sources the algorithmic feed is able to draw on.
8/31 Не забывайте о том, что главным пропагандистам войны сейчас выступает совсем не телевизор, а российский IT-гигант @yandex. Новости с их главной страницы (а там сплошная бессовестная ложь) - основной источник информации для 41% населения. pic.twitter.com/lhGB511R2Z
— Alexey Navalny (@navalny) April 14, 2022
One key question, therefore, is whether Yandex will continue to display a feed of news on its homepage once/if its own aggregator is transferred to a new owner.
Given the context around its decision to exit the media space it seems unlikely Yandex would voluntarily keep distributing content that has led to such trenchant criticism over its role in bolstering the Kremlin's narrative.
However, given how many eyeballs its site attracts, it's possible to envisage Putin's regime seeking to force its hand -- if not by blocking a sale outright, perhaps by requiring search portals to license and prominently display news content from an approved news aggregator, whose sources the state already controls via a selective licensing regime.
As well as having to comply with regulatory requirements from the Russian state, Yandex agreed to a corporate restructuring, back in 2019, that was reported to have increased Kremlin control over the business.
"What if we just pull the trigger and turn it off?"
Discussing the history of Yandex's involvement with news aggregation/amplification, Grigory Bakunov, a former engineer and deputy CTO, who worked at Yandex between 2005 and 2012 -- spanning the period when it started building content ranking products -- recounts how a mixture of employee passion for building new algorithmic systems and staff naïvety at growing state interest in (and, later, appropriation/gaming of) those systems led to a situation where it became too late for Yandex to voluntarily shutter the product itself to escape the propaganda trap.
"The existence of Yandex News is 100% our fault," he tells TechCrunch. "But we made it in 2011-2014, because we were so naïve to think we can fight against state pressure."
Bakunov suggests the company first thought about shutting down News sometime in 2013-2014. But, at that time, he says there were pressures on the business following the death of one of its founders -- which meant its focus shifted to economic considerations since "we were facing a big crisis of understanding how to grow."
Years earlier, the developer-heavy company had been driven by the excitement of launching products and exploring what could be done with the internet, as he tells it.
It was also a time when Russia felt relatively free -- with journalism and media inside the country on the rise -- and with the Kremlin, apparently, not yet having taken a keen interest in how online content could be shaped to feed its agenda.
But, gradually, that began to change.
"Yandex got some attention from the Russia government in 2006 … when the presidential administration asked Yandex to build a special service (president.yandex.ru)," says Bakunov, explaining that this collected questions from an internet audience, aggregated them and showed "only the most popular." "We collected more than a million questions and I believe that was the start of the understanding of the Internet's growing force. After that the interest from the administration grew slowly but inevitably," he suggests.
Another instance he recounts is the launch by Yandex, around 2010, of a search and rating service for blogs. Political bloggers started to compete to win this rating, though he says Yandex missed the significance of that, noting now: "At least half of them (as we know it now) were paid by the state."
With the blogging ranking product being visibly gamed by state-funded bloggers -- who were better resourced (by payments from the Kremlin) to get their content shared widely enough to rank higher on Yandex's blog search rating -- he says Yandex did decide to shut down the product.
"After that we got a lot of questions from different state structures such as the president's administration," he goes on. "Now I understand it was because they use this instrument to check the status of political tension, and the position on rating was on KPI of the state's bloggers. But it was the first time when we found that it's really tough; we can't just close the product."
Per Bakunov, the trigger for Yandex considering closing its main news aggregator service was after it had started adding a top five "top news" items to the news feed, based on an algorithmic assessment of popularity across news sources -- when the company felt "a big pressure" in relation to what got lifted into that spotlight.
"At this time, I believe Yandex was a top 1 to top 3 source of information -- at least for young people (up to 40 years old)," he notes. But he says employees still felt they could workaround the Kremlin pressure by making sure independent news sources were included in the mix. "That was a turning point but the team who built the product decided 'we can balance between the state and non-state sources of news.' The idea was … to show [a spectrum] of information."
"At this point I believe there was a possibility to close it down," says Bakunov, suggesting a strategy which might have worked could have been to remove 'top news' from the main page -- creating a small enough "scandal" for the company to get away with -- after which they could have slowly decreased its popularity and let it fade away. But it seems the engineers were, ultimately, unwilling.
"Tbh, I think it [would have been] so painful for the team to kill their own product," he suggests.
That left the Kremlin free to complete its 'virtual takeover' of the algorithmic feed -- by, in 2017, passing a law that news aggregators could only use state-approved sites as news sources.
"That was not the start but the result of the government's research on how to push their news on top Russian news sites and aggregators," says Bakunov. "The algorithm inside Yandex News counts every news source as equal to each other, no matter how big it is. So the state's people start to manipulate the Top News by pushing the important (for them) information to all state controlled news (especially regional).
"I remember the discussion at the end of Spring 2017 about the shame of Yandex News' current status. We thought what if we just pull the trigger and turn it off?"
By then it was already too late. Bakunov says Yandex's board of directors included Kremlin supporters who told it the state would not allow News to be shut down. If the company had gone ahead and done that anyway, he says the Kremlin would have quickly replaced the "culprit" who took the decision with "the proper man" who would order the product restored.
"So, yes, by 2017 it was too late. Even if someone -- say 'Arkady' who was a CEO of the company -- had turned off the News, after a short time the trigger will be turned back on again, just with another team."
"Look at VK Group," Bakunov adds, pointing to the buyer that's now been lined up to take over Yandex News. "It's already happened to them. Now it's just 100% state controlled company."