Chinese Tencent Enters Russian Internet Service Market

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Apr. 13 – Digital Sky Technologies has sold 10 percent of their business to the largest Chinese Internet company Tencent, as reported by a joint press release.

London and Moscow based Internet investment group Digital Sky Technologies (DST) is owned by Russian businessmen Yuri Milner, Grigory Finger and Alisher Usmanov. The company has investments in, Forticom, vKontakte, Odnoklassniki and Astrum Online Entertainment among others. In May 2009 DST bought 1.96 percent of Facebook for US$200 million.

The general director and co-owner of DST, Jury Milner told Russian paper Vedomosti that the Chinese Tencent has paid US$300 million for DST Ltd additional issue.

As a result Tencent has received 10.26 percent in authorized capital of DST Ltd meaning that the Chinese company will get the right to nominate one observer in DST Board of Directors without the right to vote. Russians shareholders will still own more than 75 percent of DST assets. Before the transaction Milner and Finger owned more than 50 percent and Usmanov about 35 percent.

A press release stated that Tencent invested in DST hoping to “earn from Russia’s fast Internet growth, and also … to strengthen the leading position of Digital Sky Technologies, as well as open up new possibilities for the Russian-speaking Internet market”. DST is one of the largest companies on the Russian-speaking Internet market and in the Eastern Europe with an audience that exceeds 300 million people. “We hope to get long-term benefits from this partnership,” Tencent representative Katrin Chan said to Russian media.

Co-owner of DST Yuri Milner confided that this transaction is strategic one for his company both on its business model and on actives structure as Tencent is a close analogue of DST.

The Chinese company owns the game portal QQ and a similar named messenger service and a social network Ozone. According to Tencent data its cumulative monthly audience in 2009 was about 500 million unique users.

“Tencent is a very successful company, which knows how to make profit from Internet services, in particular how to integrate online games with social networks”, said Mr. Milner.

“Taking into consideration that the average Chinese population is poorer than Russia’s, there are something we can learn from Tencent,” he noted. “Besides, the two companies can get the chance to license new games in both Russia and China territories at once,” added Milner.

Milner presumes that funds from this transaction might be pay out for the ICQ purchase. ICQ’s instant-messaging service is the leading IM service in Russia. It has 42 million users globally and Russia accounted for 44 percent of the whole audience with about 18.5 million users a month. DST started the early stages of negotiations to acquire ICQ for between US$200 million and $250 million last December. Tencent was also shown its interest in the AOL owned instant-messaging service. Meanwhile some Russian experts confide that US$300 million for 10 percent of the Russian share of DST strongly overrates estimation.