Yandex (NASDAQ:YNDX), which owns the second largest search engine in Russia after Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google, recently launched a new video feature on its Zen recommendation platform to challenge YouTube.

The feature lets bloggers publish videos up to 15 minutes long, and Zen's AI algorithm recommends them to users based on their viewing preferences. Chinese start-up ByteDance's Toutiao, which has over 120 million daily active users (DAUs), uses a similar model of AI-curated content.

An illustration of a streaming video screen framed by two hands.

Image source: Getty Images.

Zen's main platform -- which recommends stories to users based on their browsing histories and user-specified interests -- has 46 million monthly active users (MAUs). During the initial tests of the video service, Zen's daily video views hit 20 million, with an audience of 11 million daily viewers. That puts it in striking range of YouTube, which has 13 million daily viewers in Russia and over 47 million monthly viewers.

Will copying ByteDance give Yandex an edge?

ByteDance's Toutiao is often overshadowed by its popular short video app TikTok (known as Douyin in China), which has over 500 million MAUs. However, Toutiao's aggregated news stories and user-created content have also become thorns in the sides of traditional search and news platforms.

China's tech companies responded to Toutiao's growth with investments in similar apps like Kuaishou, which is backed by Tencent and Qutoutiao, which counts Tencent and Alibaba as its top investors.

Yandex is clearly hoping that strategy catches on in Russia. Bloggers can already upload videos to YouTube and coast on its AI-powered recommendations, but Yandex is offering bloggers a more specialized platform built atop its news aggregator platform.

What does this mean for investors?

Yandex generates most of its revenue from online ads on its search portal, with smaller percentages coming from its ridesharing, classifieds, e-commerce, media services, and "other bets and experiments" unit.

Zen is part of its "other bets" segment, which also includes its cloud platform Yandex.Cloud, its carsharing service Yandex.Drive, its online education platform Yandex.Education, and its geolocation services.

Yandex's revenue from that unit more than tripled annually to 3.42 billion rubles ($54 million), or 8% of its top line, last quarter. Most of that growth was attributed to the "strong performance" of its Zen, Drive, and geo services.

During the conference call, Yandex CFO and COO Greg Abovsky declared that Zen "could become a true alternative to social networks with significant content base, user account, likes and comments." He noted that Zen's users now spend over 30 minutes per day on the platform, and that its annual run rate rose 63% annually to 6.9 billion rubles ($108 million) -- about 5% of its top line over the past year.

A robot hand and a human hand touch two halves of a brain.

Image source: Getty Images.

However, the "other bets" unit remains unprofitable, with its adjusted EBITDA loss widening from 733 million rubles ($11.5 million) to 947 million rubles ($14.9 million) between the second quarters of 2018 and 2019. It attributed that wider loss to higher investments in its cloud and carsharing services. It's unclear if Zen generates any profits on its own, but it seems unlikely since Google is likely still running YouTube at a loss.

Striking at Google's Achilles' heel

Google is the 800-pound gorilla of the online search market, but it's repeatedly failed to gain a foothold in the social networking market dominated, which is still dominated by Facebook. That's where Yandex sees an opportunity. If it can replicate Toutiao's success in China with Zen in Russia, it could expand that ecosystem with videos and other content to form a rival social network and pull users away from Google.

Toutiao growth notably coincided with a significant slowdown at Baidu, the top search engine in China. Toutiao hurt Baidu because it enabled mobile users to skip traditional online search engines and portals in favor of AI-curated content. Zen is already catching up to YouTube in terms of DAUs and MAUs, so Toutiao-like videos could help it eventually overtake the market leader.