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. Last Updated: 07/27/2016

PwC Internet Guru Says the Romance Is Over

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Russian e-business is experiencing hard times. Internet projects have found it almost impossible to make a profit, and a large number have stalled or shut down altogether.

Boris Krasnyansky, a senior partner at consulting firm PricewaterhouseCoopers, spoke about the reasons for e-business's present disappointment and the market's prospects. Krasnyansky was appointed PwC's head of management consulting in Russia in April and supervises the company's e-business work for the former Soviet Union.

Q: People have started talking about a crisis in the global Internet economy. How did these problems in e-business arise?
A: Overall investor activity is falling. In the first quarter of 2001, venture capitalists invested slightly more than $10 billion. Of that, 75 percent, as in the past, was invested in Internet companies. When compared to the fourth quarter of last year, the volume of investment in the Internet fell by 43 percent. However, the general volume of investment by venture capitalists fell by 40 percent. This indicates that the share of investment in Internet companies remained sufficiently stable. Accordingly, it would be wrong to attribute [the entire trend of falling investment] to Internet businesses. Moreover, investor behavior is cyclical and susceptible to trends. And even though investment activity has suddenly dropped, venture capitalists all over the world are now investing twice as much money as they did in the period preceding the Internet boom.

Q: All the same, you cannot deny that high-tech companies are experiencing very serious problems.
A: Certainly, a large number of Internet companies have gone bankrupt. Their capitalization was unjustifiably inflated. The fact that companies in the so-called new economy were worth tens of billions of dollars and consisted only of computers and manpower — insisting their primary resources were their clients — goes against logic. Those companies' valuations on the market were in no way connected to their profitability or even to predictions on the flow of investment but merely reflected a gold-rush mentality among investors.

The forecasts were beautifully written but were not in touch with reality. Investors overestimated the importance of e-commerce — that part of the electronic business connected with the sales, distribution and provision of products or services to the population.

Q: Are consulting firms to blame for this? Why did consultants fail to advise their clients about the dangers of investing in the Internet?
A: One reason for this is that the price [for an Internet company] to become active on the market is sufficiently low compared to that for a traditional business. One well-known example of this is when a number of university students somewhere in California devised an ingenious plan and within several months their capitalization totaled billions of dollars. Precisely because of the ease [involved in establishing an Internet company], excess supply appeared within a very narrow market. The market's inflated valuation, combined with its trendiness and easy access, led to a huge number of players.

As for the mistakes of consulting firms, I have never seen a consultant advise someone to invest in a purely e-commerce venture that bears no relation to the general context of e-business. No one was asking for advice — everyone was too engrossed. The companies in the traditional economy waited it out. At the beginning of the boom, many of my colleagues noted the excessive and artificial growth of that market.

However, I'm now prepared to say the Internet has a great future as a medium for conducting business. The reason is that there is a difference between the concepts of e-business and e-commerce. E-commerce, or sales through the Internet, has limited application. At the same time, electronic business — solutions for the traditional economy with the help of the Internet — has only started to develop, although some large successful projects already exist in this area.

Q: For many users, the Internet is represented by the web sites they visit most frequently. What are your predictions for Russian portals that are financed by income from advertisements?
A: The market for Internet advertisements is growing, but it is limited. We have three portals: Yandex, Rambler and Port.ru. Sometime this year, at least one merger or takeover should take place. By the end of the year, I don't think there will be more than two large Russian portals of that type.

Q: Which of the big names in Russian e-commerce will be able to survive the present crisis?
A: I believe only a few will be able to survive as independent businesses. I cannot give specific names here because not one Russian company has managed to grow to the size of Western companies such as eBay, America Online and Amazon.

The players who will survive are those who will be in some way connected with a traditional business, whether that is a store, production or something else.

If a person were down to his last dollar, he'd be unlikely today to invest it in an Internet project. The Russian Internet economy follows Western trends, and everyone knows the level of investment in Internet solutions has significantly dropped. It is practically impossible now to find the additional millions needed to survive several more years if a company can't demonstrate positive cash flows.

Q: So in general, "everyone has died?"
A: The period of romanticizing the Internet has passed. Now it's possible to say things that would have been regarded as seditious in the past. The Internet is not a pot of gold, it should be looked on as a new instrument, new technology that can be used and is starting to be used by traditional companies to improve the operation of their primary business.

One of the most significant potential results of using the Internet is the fact that the consumer can be placed at the center of any business. The Internet is the best available technology for guaranteeing maximum consumer satisfaction, which makes the technology attractive from the point of view of distribution and marketing. For example, a business can independently carry out its distribution or supply with the help of Internet solutions, including e-procurement and e-sales.

On the other hand, the Internet makes it possible to establish vertical and horizontal trading premises, throwing out superfluous links in economic chains. In the same way, the company makes itself more transparent.