Yandex Came to Israel for the Brains, Not the Taxis, Says CEO

The young, bright entrepreneurs that flit around WeWork’s Tel Aviv space pass Arkadi Volozh by without a hint of recognition. Strolling around the space, Volozh could pass as one of them: a little older, perhaps, but dressed in a white T-shirt and denim and lightly stubbled. His intonation is soft and quiet, and he does not look like a man who co-founded and is heading a Nasdaq-listed company with a market capitalization of $12.8 billion. Volozh does not arouse curiosity from most passersby even when several people—exclusively of Russian descent—approach Yandex NV’s CEO and ask for a joint selfie.

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Google co-founders Sergey Brin and Larry Page, Amazon’s Jeff Bezos, or even Uber’s Travis Kalanick would have probably garnered a different response from the tech-savvy crowd. But Volozh has remained largely anonymous despite being the man behind what has been called Russia’s Google, Amazon, and Uber. Yandex operates a search engine, offers e-commerce options, and runs a taxi-hailing service. In a rare interview with Calcalist, held last week, Volozh defined the company as “the Russian Silicon Valley.”

Volozh is none-too-fond of the comparison with Google, though. “Yandex’s search engine went live in September 1997, almost a year before Google,” he pointed out.

In 2003, Brin and Page came to Moscow to meet with Volozh and his partner and co-founder Ilya Segalovich, who died of cancer in 2013. The similarities were apparent: all four men were math enthusiasts, the offspring of scientists, who met one another in school. Of the four, three were Soviet Union-born Jews (Page is half-Jewish on his mother’s side and was born in the U.S.). Google, while not yet public, was already much larger than Yandex at the time. Brin and Page offered $100 million for Yandex. Everything seemed to be in order, and then Volozh and Segalovich realized Yandex would disappear into Google and they would turn from founders into hired engineers. The deal was off.

Most companies that try to battle Google on its own turf collapse. Yandex instead flourished to become an octopus. Alongside its initial search engine it offers a Gett-like taxi-hailing service, known in some countries as Yango; an Uber-like food delivery service; a music streaming service similar to Spotify; a navigation service similar to Waze; a virtual personal assistant à la Alexa and Siri; Dropbox-like cloud storage; an online map service; a shared-vehicle service; an online payments processing service; automatic translation tools; and the relatively new Yandex Market, intended to become the Amazon of Russia. Overall, Yandex offers around 90 different services.

The company, which employs 12,000 people, offers its services in 18 countries, among them Russia and many other former Soviet countries, as well as some of Russia’s neighbors such as Finland, Turkey, and Romania. It states it controls 57% of the Russian search market. While in terms of revenue it is still far behind Google, it is growing fast, and is extremely profitable: it ended 2018 with revenues of $1.9 billion (up 36% from 2017) and a net profit of $660 million. Online advertising still accounts for most of its income, but its taxi service is now contributing a fifth of all revenues after tripling sales in 2018.

Volozh, who never stops thinking ahead, is the driving force behind Yandex’s success. The same visionary drive is also what is pushing him to place his bets on the autonomous vehicle industry with the objective of making Yandex a world leader.

And that’s where Israel comes into the picture. First, because the country offers a lot of talent in the domains of automotive vehicles and machine learning—which Yandex is attempting to snatch from wherever it can—such as Eli Osherovich, who formerly headed the development of Amazon Go, and is now the head of Yandex’s self driving car lab. While the company currently employs only a few dozen software engineers in Israel, it intends to reach a few hundred, and has already leased new offices in Tel Aviv to accommodate them.

“I hope to have a significant research and development center here,” Volozh said. “We’ve had the idea for a while now, but the local human resource market is very difficult, there is great demand for employees, and everyone is already taken. You need to teach people yourself.” For that purpose, Yandex also runs a machine learning academic program called Ydata in partnership with Tel Aviv University, in the hopes of hiring its graduates. 43 students are set to graduate in the upcoming days, and due to demand next year the program will be offered in Ben-Gurion University of the Negev as well. The Hebrew University of Jerusalem has also recently expressed interest in a similar program, Volozh said.

 

A second reason for choosing Israel is that it functions as a convenient gateway to the West. If there is one thing Russian businessmen realized in recent years it is that they may leave mother Russia behind, but no one, neither in Russia nor in the U.S., will forget their origins. An autonomous vehicle developed and tested in Israel, one that may be spun off Yandex as an independent business in the future, could provide Volozh with a solution. That is why when Yandex received approval from the Israeli Ministry of Transportation to test its autonomous vehicles in Tel Aviv—the company is already testing them in Russia and the U.S.—Volozh jumped on the opportunity.

“In this industry, we can be a step ahead of even Google,” he said. “We will not need to define ourselves as Russia’s Google any longer. I hope that when they say Yandex, they’ll now think of autonomous vehicles.”

Volozh, 55, guards his privacy zealously. Except for the fact that he is married with five children, not much is known about his private life. In 2012, he jumped to second place on Russia’s list of richest people, with a private fortune that is today estimated to be around $1.6 billion; his face became so well-known he shaved his mustache to recover his anonymity. He almost completely avoids Russian high-society events, and avoids attending political events as well. The only photo of him with Vladimir Putin is from when the Russian president visited Yandex’s Moscow offices in 2017.

Volozh and Yandex do not exist in a vacuum, however. The company may be kind of like Google, Amazon, Spotify, and so on—but “of Russia.” The issue resurfaced around Yandex’s Nasdaq IPO in 2011. Yandex, which listed according to a valuation of $8 billion, was the largest tech IPO in the U.S. that year. It raised $1.3 billion and saw its stock boom. But backstage there was a quiet drama, as the Russian regime was less than enthusiastic about the possibility that foreign shareholders would own part of Russia’s largest search engine. Putin took a stand with state-owned PJSC Sberbank, which received a golden share in Yandex, allowing it to block any sale of a 25% stake. Alexander Voloshin, formerly chief of the Russian presidential administration, was appointed to Yandex’s board of directors.

Another reminder occured in 2018, when Russian media reported that Volozh is set to sell his stake to Sberbank. Volozh owns 48% of Yandex’s B voting stock (10% of the company’s total stock), and a group composed of Yandex’s founders and first employees has another 9% of its voting stock. The reports caused the company’s stock to crash by 18%, and recovery came only after Volozh denied the rumored sale. A few months later, Volozh was conspicuously absent from Putin’s annual meet with Russia’s business sector leaders. Approached for comment, he told newspapers he was out of the country at the time of the event. He declined to comment on the matter to Calcalist.

The Russian government’s influence on Yandex is far from over. In June, Putin gave Yandex a double-edged compliment when he said the company is successfully competing with Google in Russia, “not without help from the government,” adding “you are a good company.” In May, Yandex announced the appointment of Tigran Khudaverdyan to the newly created position of deputy chief executive officer, a move that Volozh said would enable him to “focus on broader strategic opportunities.” The company’s deputies, which until now reported directly to Volozh, now report to Khudaverdyan.

That is one of Yandex’s main challenges: no matter how advanced, how attractive, it is still, at its core, a Russian company. This “Russian discount” is reflected in major issues such as its market capitalization, but also in matters like the hiring of new employees outside of Russia. It is not limited to the suspicion Yandex is encountering in its attempts to recruit new employees in Israel. When it launched its taxi service in Lithuania, the country’s Ministry of Defense and Cyber Directorate advised people to avoid the service, hinting at the possibility of the app being used to spy on users. Today the service is still available in Lithuania, but government officials are forbidden from using it.

Volozh is aware of rumors that the Russian government is mining data from Yandex. Yandex operates in markets outside of Russia, he said, and all governments are tackling their own issues of privacy and GDPR compliance. There are two ways a company can choose to approach the issue, he said. “The first is, we are a global company with our own rules, and we operate in your country whether you want us to or not,” he said, aiming a barb in the direction of American giants Google and Facebook. “We come from a smaller market, so we must be more humble.” Yandex follows the local rules in each market it enters, he said, and will only reveal user data following a court order.

Yandex’s integration into the Israeli market could have gone smoother, he said, and a shortage of cars and drivers is just one of the issues the company faces in the country. Israeli regulation does not allow the company to offer fares as low is it would in other countries, he said. The company’s recent attempt to allow drivers to collect a pre-established price instead of operating a meter has landed it in hot water with the Israeli Ministry of Transportation.

Unlike companies like Uber and Lyft, who cautioned they may never become profitable and had a less than warm market response when they went public, Yandex’s taxi service has been profitable since the third quarter of 2018, according to Volozh. In Russia, as in Israel, the company only works with licensed cabs, he said, but in Israel, taxi licenses are much harder to come by. That is why taxis cost 10 times as much as a bus in Israel, he said, though apps could be cutting that cost in half. Yandex is one of the only companies that use self-developed maps, unlike Uber, for example, which buys its maps from Google, he said. “Thanks to our technology and our large fleet, our system has achieved a level of optimization where our cabs are occupied at least 60%-70% of the time, compared to the 30% seen in the industry on average,” he said.

Israel, with its population of 8.9 million, is not an attractive market for Yango on its own, Volozh said. He came here for the minds. “Today we have 750,000 drivers globally, but it is not enough, it is boring, routine work. That’s why automation is so important.” Israel, he said, should be at the forefront of technological development. “More autonomous vehicles should operate here than in any other country.”

Yandex is also considering importing to Israel its shared vehicle service, which today numbers over 10,000 vehicles, making it one of Europe’s largest fleets of its kind, second only to BMW and Daimler AG’s joint venture. Tel Aviv already has a city sponsored shared vehicle service called Autotel, but according to Volozh, Yandex’s service will be more like shared e-scooter services such as Bird and Lime. The cars would be able to park anywhere with legal parking, he said.

Volozh’s understanding of the Israeli market is not that surprising, considering he has close family living here. He has declined to answer whether he has an Israeli citizenship, though it is certainly possible given the high frequency of his visits to the country. In the past, he has confirmed he has a Maltese citizenship, which makes moving around the world easier.

Though one might be tempted to lump him in with Russia’s oligarchs, Volozh is very different from that Russian class of nouveau riche that made their fortune off of gas and oil. Though he had attended The Gubkin Russian State University of Oil and Gas in Moscow, which gave rise to quite a few of Russia’s oil and gas barons, he majored in applied mathematics. He was in the midst of his PhD when Russia had its big financial revolution, and set up a company called CompTech in 1989 and another called Arkadia in 1990. Shortly after he partnered with Segalovich to found Yandex, the name of which was short for “yet another index.”

At first, Yandex digitized Russian texts. The first large project was the bible; the second, executed in partnership with one of Russia’s leading universities, was the digitization of all of Russia’s literary classics, and was used mainly by academics to study literary patterns. “We started before there was an internet,” Volozh said, “but in 1996 we went online with the largest, heaviest page on Russia’s internet at the time: an index of all the literary classics, 4 gigabites-worth.”

Lately, Yandex has come back to its roots, with virtual personal assistant Alice. “Alice is more than Alexa and more than Siri,” Volozh said. “Neither of them can openly converse, but you can hold a conversation with Alice.” To develop that ability, Yandex made use of its original literary index. “It seemed like a simple mission,” he said. “To teach her the language, we inputted all Russian classics.”

But the result was surprising. Alice turned out to be a depressive creature who was no fun to talk to. Every conversation ended on a down note, Volozh said. They then took a contrary approach, inputting text collected from social media. “The result was the complete opposite,” he said. “Alice was reborn as a youngster who frequently cursed and told dirty jokes. We had to educate her like one educates a child.”

Alice was launched in Russia two years ago, and today can be found in homes across the country, providing conversation to the lonely and telling children bedtime stories.

Like them, Yandex is also looking forward to a happy ending.