One of Facebook's (NASDAQ:FB) biggest problems is that it's rapidly saturating the market. With more than half of the world's Internet population signing onto Facebook on a regular basis, the company is looking to alternative measures to grow its core market. That's why the company started Internet.org.
But there's one country where Facebook's market penetration is well below average. It has an Internet-using population nearing 70 million, yet only 41% of them use Facebook. What's more, Internet penetration is growing rapidly in the country and currently stands at just about 50%. Meanwhile, the market for digital advertising and e-commerce in the country is expected to grow at an average annual rate of 15% to 20% through 2018.
I'm talking about Russia, and Facebook is aggressively attacking the market dominated by homegrown competition.
The landscape of Russia's Internet market
Russia already represents the largest Internet population in Europe, and it's one of the fastest growing in the region as well. With just 50% penetration, Russia is well behind other European countries like Spain, France, and Germany -- where Facebook also has low penetration, but the Internet population isn't growing as quickly.
VK.com is Russia's most popular social network, followed by Odnoklassniki. Facebook goes as far as mentioning both by name in its 10-K, two of just four social networks the company mentions by name. It's clear Facebook takes the competition in Russia seriously.
Social networking isn't the only area where Russians prefer homegrown technology. In search, Yandex (NASDAQ:YNDX) dominates the market, accounting for over 60% of the countries search volume. Despite its best efforts, Google has been unable to make much of a dent in Yandex's share of the market.
Facebook has to overcome the unfavorable sentiment attached to foreign companies in order to grow its use and engagement in Russia.
So, how's it doing that?
Facebook has already had a lot of success growing its usage among Russians. In the third quarter of 2012, the company had fewer than 7 million users in the country. That number has quadrupled since then.
Earlier this year, Facebook partnered with Yandex to allow the search engine to index its public pages. The feature allows Yandex to provide real-time updates of search topics through Facebook's firehose of data. Meanwhile, Facebook gains added exposure to Yandex's sizable audience.
Facebook's latest efforts include attempts to attract game developers to its platform. Its pitch is that on VK, you can make a game that's really popular in Russia, but on Facebook, you can become a worldwide sensation. Most games are universal (e.g., Tetris), so there's very little additional development needed to make a game internationally friendly.
Why Russia is so important to Facebook
Wall Street has high expectations for Facebook. Next year, analysts expect the company to grow revenue 37% despite slowing user growth.
Most of Facebook's new users are coming from developing markets, where average revenue per user is very low. Russia is grouped in with Europe, the only region outside of the U.S. and Canada with an above average revenue per user. Drawing users from VK.com and Odnoklassniki will help Facebook keep up with analyst expectations.
Russia's Internet economy is growing rapidly, and Facebook is missing out on a large chunk. So, not only will capturing a larger part of market boost ARPU now, it will have an even bigger impact as Russia's digital advertising and e-commerce spending grow.
Facebook has a lot to overcome, but it's already on a path to hurdle over the competition. Investors should see the impact in the company's top-line growth.