mary meeker economy & internet trends dec/19/2008
TRANSCRIPT
Economy / Internet Trends
December 19, 2008
[email protected] / [email protected]
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2
Outline
• Economy
1. Recession – a long time coming, how long will it last?
2. Advertising Spending – closely tied to GDP growth
• Technology / Internet
1. Digital Consumer – Undermonetized social networks / video / VoIP driving powerful usage growth
2. Mobile – Innovation in wireless products / services accelerating
3. Emerging Markets – Pacing next wave of technology adoption
4. Cloud Computing – Access / storage need / virtualization driving change
• Closing Thoughts
1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time…
Economy
1) Recession – a long time coming, how long will it last?Ten years of inflated growth to be followed by ____?
Hope for 1 tough year but plan for 5?
3
10 Years Ago –I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998
Source: YouTube. 4
58%
60%
62%
64%
66%
68%
70%
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
U.S
. Hom
e O
wne
rshi
p R
ate
0%
4%
8%
12%
16%
20%
U.S
. Int
eres
t Rat
e &
Per
sona
l Sav
ings
Rat
e
U.S. Home Ownership RateU.S. Interest Rate
January 1993: HUD began promoting broader home ownership. US home ownership = 62MM
June 2004: US home ownership = 73MM
U.S. Home Ownership Rate 30-year (1965-1995) Trendline
U.S. Personal Savings Rate
USA Homeownership Rates vs. Interest Rates vs. Pers onal Savings Rates, 1965-2008
Roots of Economic Challenge?10+ Years of Rising Home Ownership + Declining Interest / Savings Rates
Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate.
Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.5
Market & Regulatory Pressure Made Home Buying More Accessible…1998
In addition to a buoyant economy, the overall housing industry owes its enduring vigor to innovations in mortgage finance that have helped not only expand homeownership opportunities, but also reduce market volatility. Under market and regulatory pressure to makehome buying more accessible to low-income and minority households, financial institutions have revised their underwriting practices to make lending standards more flexible. In the process, they have developed several new products to enable more income-constrained and cash-strapped borrowers at the margin to qualify for mortgage loans.
- 1998 State of the Nation’s Housing Report
6Note: Quoted in Gary Gorton’s NBER Working Paper Series “The Panic of 2007” (Working Paper 14358), p.5.
Source: Harvard University, Joint Center for Housing Studies, 1998.
10 Years of Rising Home Prices – Up ~2x
Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller.
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
% C
hang
e F
rom
196
5 Le
vel
U.S. Real Home Price Index U.S. Real Building Cost Index
USA Real Home Price & Building Cost Indexes, % Chan ge 1965 - 2007
7
Systemic Leverage Helped Pace ‘Easy Money’Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries
Note: Foreign ownership of US treasuries data N/A before 1965.Source: Federal Reserve Board, Ned Davis Research, Bridgewater, Morgan Stanley Research. 8
0%
10%
20%
30%
40%
50%
60%
70%
For
eign
Ow
ners
hip
of U
.S. T
reas
urie
s,%
of T
otal
Mar
ket C
ap
100%
150%
200%
250%
300%
350%
400%
1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
Tot
al D
ebt a
s %
of G
DP
U.S. Total Debt, % of GDP
Foreign Ownership of US Treasuries, % of Total Mark et Capitalization
1931: 2.7x GDP
2008: 3.6x GDPU.S. Total Credit Market Debt as % of GDP& Foreign Ownership % of U.S. Treasuries,
1920 - 2008
Mortgage PoolsMortgage Pools9%9%
ABS IssuersABS Issuers8%8%
Other FinancialOther Financial15%15%
HouseholdHousehold27%27%
CorporateCorporate14%14%
GovernmentGovernment15%15%
OtherOther11%11%
USA Debt Mix Shift –Mortgages / ABS / Financials Up
Note: Other financial debt include those issued by commercial banks, insurance companies, broker-dealers, Government Sponsored Enterprises (GSEs), REITs, Savings & Loans institutions, credit unions, and finance companies, etc. Debt amounts
are nominal, ABS is Asset Backed Security. 2008 data as of CQ3. Source: Federal Reserve, Morgan Stanley Research.9
2008U.S. Total Debt: $52T
Total Financial Debt: $17T
1984U.S. Total Debt: $7T
Total Financial Debt: $1T
Mortgage Pools Mortgage Pools –– 4%4%
ABS Issuers ABS Issuers –– 0%0%Other Other –– 15%15%
Other FinancialOther Financial10%10%
CorporateCorporate19%19%
HouseholdHousehold26%26%GovernmentGovernment
25%25%
USA Mortgage Delinquency @ Record High 6.99%
0%
5%
10%
15%
20%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Del
inqu
ency
Rat
es (
%)
All U.S. Mortgages Prime Mortgages Subprime Mortgages
USA Mortgage Delinquency Rates, CQ1:98 – CQ3:08
Note: National delinquency rate of 6.99% in CQ3:08 is the highest since CQ1:1972, when data first became available;Average national mortgage delinquency rate from 1972-2007 is 4.70%; Source: Mortgage Bankers Association. 10
-0.5% Q/Q USA GDP Growth in CQ3 / Consumer Spending Fell 3.7% Biggest Q/Q Decline Since 1980 – October < September < August < July
U.S. Real GDP vs. Real Personal Consumption Expendi tures (PCE)Q/Q % Change, 2005-2008
-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
Q/Q
Gro
wth
Rat
es
U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
Note, Real GDP and real PCE are inflation- and seasonally adjusted. CQ3:08 data is preliminary, may differ from final reported #s.
Source: BEA, Morgan Stanley Research.11
Discouraging Monthly Trends –Amplified by Internet-Driven Information Transparency?
0%
-2%
-10%
6%
-1%-3%
-7%
-11%
-14%
-20%
-28%-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Com
para
ble
Sto
re S
ales
Y/Y
% C
hang
e
Abercrombie & Fitch Same-Store SalesY/Y % Change, 1/08 – 11/08
Note: Same-store sales are sales in stores open more than one year. Source: Abercrombie & Fitch, British Retail Consortium. 12
3%2%
-2% -1%
2%
0% -1% -1% -1%-2% -3%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Com
para
ble
Sto
re S
ales
Y/Y
% C
hang
e
UK Retail Same-Store SalesY/Y % Change, 1/08 – 11/08
13
Global GDP Growth Forecasts =Downward / Decelerating Bias
Country / Region 2006 2007 2008E 2009E 2008E 2009E
USA 2.8% 2.0% 1.4% -0.7% -0.1% -0.8%
Euro zone 2.8 2.6 1.2 -0.5 -0.1 -0.7
UK 2.8 3.0 0.8 -1.3 -0.2 -1.2
China 11.6 11.9 9.7 8.5 -0.1 -0.8
India 9.8 9.3 7.8 6.3 -0.1 -0.6
Russia 7.4 8.1 6.8 3.5 -0.2 -2.0
Brazil 3.8 5.4 5.2 3.0 -- -0.5
Developed Markets(1) 3.0 2.6 1.4 -0.3 -0.1 -0.8
Emerging Markets(2) 7.9 8.0 6.6 5.1 -0.3 -1.0
World 5.1 5.0 3.7 2.2 -0.2 -0.8
Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 11/08. Morgan Stanley Research.
IMF Forecasts, 11/08Difference from
10/08 IMF Forecasts
USA Manufacturing Contracting Rapidly –Lowest Level (and Declining) Since 1982 for PMI Index
U.S. PMI (Purchasing Mangers Index), 1/48 – 11/08
Note: PMI is a composite index based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and employment environment. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that
the industry is contracting. Source: Institute for Supply Management (ISM), Morgan Stanley Research. 14
20
30
40
50
60
70
80
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
ISM
PM
I Ind
ex (
%)
May 1982PMI=35.5
Feb 1991PMI=39.4 Nov 2008
PMI=36.2
Oct 2001PMI=40.8
PMI > 50=
Expansion
PMI < 50=
Contraction
60-year Average= 52.8
Unemployment Rising Rapidly But 110 Basis Points Below Previous PeaksMore Often Than Not, Peak Unemployment = Good Time to Invest
Note: Unemployment rates from 1928–1943 are annual estimates from John Dunlop and Walter Galenson’s Labor in the Twentieth Century (1978); data unavailable between 1943-1948; Post 1948 unemployment data from BLS, peaks are: 9/49 - 7.9%; 9/54 - 6.1%; 7/58 - 7.5%; 5/61 – 7.1%; 8/71 - 6.1%; 5/75 - 9.0%; 11/82 - 10.8%; 6/92 - 7.8%; 7/03 - 6.3%.
Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.15
1
10
100
1000
10000
1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
S&
P 5
00 In
dex
Val
ue (
Log
Sca
le)
0%
5%
10%
15%
20%
25%
30%
Une
mpl
oym
ent R
ate
S&P 500 Index Price Unemployment Rate
S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008
Recessions Unemployment Peak
Note: all indices start at a value of 100 on 12/16/05; data as of 12/18/08; Source: FactSet.
Stock Market = Leading Indicator of Economic Growth Russia off 73% vs. 12-Month Peak, Oil -71% / China -63% / India -52% / Japan -45% / S&P500 -41%
16
0
100
200
300
400
500
600
12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08
Inde
xed
Val
ue (
base
= 1
00)
S&P 500 NASDAQ Composite IndexChina Shanghai SE Composite India SENSEXRussia RTS Light Crude Oil - Continuous ContractGold - Continuous Contract Japan Nikkei 225
2006 20082007
Note: (1) % Change from S&P 500 peak on 10/9/07 to 12/18/08; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change.
Source: Bloomberg, Morgan Stanley Research.
S&P500 –Key Spending Sectors Have Taken Big Hits
17
Total MktCap ($B) 2008 Peak to
S&P Sector 12/18/08 2006 2007 YTD Current (1) Market Cap Leaders
Financials 1,061 16% -20% -53% -62% JPMorgan, Wells Fargo
Consumer Discretionary 686 9 -18 -38 -49 McDonald's, Walt Disney
Materials 242 10 14 -44 -47 Monsanto, DuPont
Industrials 846 8 7 -42 -47 GE, United Technologies
Information Technology 1,242 11 12 -44 -46 Microsoft, IBM
Telecom Services 293 32 -12 -36 -42 AT&T, Verizon
Energy 1,026 14 36 -39 -36 Exxon, Chevron
Utilities 317 17 6 -31 -34 Exelon, Southern
Health Care 1,153 1 1 -26 -29 Johnson & Johnson, Pfizer
Consumer Staples 1,121 8 10 -21 -20 Wal-Mart, Procter & Gamble
S&P 500 Total (2) 7,987 11% 1% -39% -43%
% Change
2007
2005
1994
1993
1992
1987
1984
1978
1970
1960 2006
1956 2004
1948 1988
1947 1986
1923 1979
1916 1972
1912 1971
2000 1911 1968
1990 1906 1965
1981 1902 1964
1977 1899 1959
1969 1896 1952
1962 1895 1949
1953 1894 1944 2003
1946 1891 1926 1999
1940 1889 1921 1998
1939 1887 1919 1996
1934 1881 1918 1983
1932 1877 1905 1982
2001 1929 1875 1904 1976
1973 1914 1874 1898 1967
1966 1913 1872 1897 1963 1997
1957 1903 1871 1892 1961 1995
1941 1890 1870 1886 1951 1991
1920 1887 1869 1878 1943 1989
1917 1883 1868 1864 1942 1985
1910 1882 1867 1858 1925 1980
1893 1876 1866 1855 1924 1975
1884 1861 1865 1850 1922 1955
1873 1860 1859 1849 1915 1950
2002 1854 1853 1856 1848 1909 1945
1974 1841 1851 1844 1847 1901 1938 1958 1954
1930 1837 1845 1842 1838 1900 1936 1935 1933
1907 1831 1835 1840 1834 1880 1927 1928 1885
1857 1828 1833 1836 1832 1852 1908 1863 1879
1931 1937 1939 1825 1827 1826 1829 1846 1830 1843 1862
-50 to -40% -40 to -30% -30 to -20% -20 to -10% -10 to 0% 0 to 10% 10 to 20% 20 to 30% 30 to 40% 40 to 50% 50 to 60%
2008 YTD-40%
S&P500 Down 40-50% 2x in 183 Year History – 2008 / 1931Bad Years Often Follow Good Years
Note: S&P 500 2008 YTD performance as of 12/18/2008, S&P 500 historical info from 1825 to 2007.Source: Value Square Asset Management, Yale University.
18
GSEs / Washington
Plan
Lehman Bankruptcy
AIG Nationalized
MS / MUFG Investment
JPM Acquires
WaMu
Wells Fargo Acquires Wachovia
Fortis Nationalized
Leading Banks Enter
Preferred Stock
Purchase Program
BofA Acquires ML
GS / Berkshire
Investment$700Bn TARP
B&B Nationalized
Santander / Sovereign
UK Bank Bail Out
September 7 September 14 September 16 September 22 September 25 October 3September 29 October 14
EuropeUnited States
(23%)
5 Weeks in History – Financial Services Restructuring(~$3T in US Aggregate Sector Market Value 1/1/07…now ~$1T)
Dow Jones Industrial Average, 9/8/08 – 10/14/08
Note: Aggregate sector market value is the combined market cap for all companies in the S&P500 financials index,$2.9T as of 1/1/08, $1.2T as of 12/8/08.
Source: Morgan Stanley IBD; Bloomberg.19
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
11,000
11,200
11,400
11,600
Dow
Jon
es In
dust
rial A
vera
ge
Consumer Wealth Destruction = ~15% –56%+ of USA Household Assets in Real Estate + Stocks
Real EstateReal Estate38%38%
Equities +Equities +Mutual FundsMutual Funds
18%18%
PensionPensionReservesReserves
22%22%
DepositsDeposits12%12%
Credit MarketCredit MarketInstrumentsInstruments
7%7% OthersOthers3%3%
USA Household Asset Breakdown, C2007A
-40%
-30%
-20%
-10%
0%
10%
CQ1:07 CQ3:07 CQ1:08 CQ3:08
% C
hang
e fr
om C
Q1:
07
S&P/Case-Shiller Home Price IndexS&P 500 Index
Real Estate & Equities Market Performances,% Change from CQ1:07
Note: Median household income in 2007 was $50,233, per U.S. Census Bureau. 56% accounts only real estate + equities / mutual funds; many pension funds also invest in the U.S. equities market, thus actual exposure to these asset classes will likely be higher. Wealth destruction of approx. 15% is calculated
by multiplying the asset allocation of real estate & equities / mutual funds with respective market indices’ declines from CQ1:07 –2008 YTD. Asset allocation % is 2007 average. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 20
Extraordinary Market Volatility = Treacherous Investment EnvironmentGood News = Volatility Has Begun to Decline
0
10
20
30
40
50
60
70
80
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
VIX
Inde
x V
alue
(%
)
Chicago Board Options Exchange (CBOE) Volatility In dex, 1990 - 2008
Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options.Source: Morgan Stanley IBD; Bloomberg. 21
Economy
2) Advertising Spending –closely tied to GDP growth…challenges for Internet but likely
not as draconian as 2000-2002?
22
Retail Sales Growth Rates Slowing
0%
10%
20%
30%
40%
CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08
Y/Y
Gro
wth
US Adjusted Retail E-Commerce Sales US Total Retail Sales
Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: US Dept. of Commerce (CQ3:08), Morgan Stanley Research.
Retail Sales vs. Adjusted E-Commerce SalesY/Y Growth, CQ3:01 – CQ3:08
23
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08
Y/Y
Gro
wth
Rat
e
Overall Cable+Broadcast TV MagazinesNewspapers Internet* OutdoorRadio
Advertising Growth Rates Slowing
U.S. Advertising Spending by Medium, Y/Y % Change
*Note: Internet is adjusted to include search ad spending - TNS excludes search revenue from Internet ad spending, thus unadjusted data may under-report online ad spending / growth. Source: TNS, IAB, Morgan Stanley Research. 24
-10%
-5%
0%
5%
10%
15%
20%19
86
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
U.S
. Ad
Spe
nd v
s. G
DP
, Y/Y
Gro
wth
U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth
U.S. Advertising Spending Y/Y Growth vs. Real GDP Y /Y Growth, 1986 – 2007
1991 Ad Growth = -2%
Median Y/Y Ad Spend Growth Rate = 5%
2001 Ad Growth = -12%
Source: Zenith Optimedia, IMF, Morgan Stanley Research. 25
Advertising Spending & GDP Growth =High Correlation of 81%
Simple Regression Analysis:1) Ad spend growth 3x sensitivity of real GDP growth
2) If GDP flat in 2009E, ad spend could decline ~4% Y/Y
Note: R2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation.Source: Zenith Optimedia, IMF, Morgan Stanley Research. 26
U.S. Advertising Spending vs. Real GDP1986 – 2007
y = 3.0263x – 0.0394R2 = 0.6553
y – ad spend growthx – real GDP growth
-10%
-5%
0%
5%
10%
15%
20%
-1% 0% 1% 2% 3% 4% 5%
Real GDP Y/Y Growth
Ad
Spe
nd Y
/Y G
row
th
U.S. Ad Spend vs. Real GDP Y/Y GrowthLinear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553)
If real GDP Ad spendY/Y growth Y/Y growth
is… could be…
5% 11%4 83 52 21 -10 -4
-1 -7-2 -10-3 -13-4 -16-5 -19
$267$907
$1,921
$4,621
$8,225$7,134
$6,009
$7,267
$9,475
$12,542
$16,879
$21,206
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
U.S
. Onl
ine
Ad
Spe
ndin
g ($
MM
)
-50%
0%
50%
100%
150%
200%
250%
Y/Y
Gro
wth
Rat
e
U.S. Internet Ad Spending Y/Y Growth Rate
Source: IAB, Morgan Stanley Research. 27
U.S. Online Advertising Spending & Y/Y Growth Rates , 1996-2007
Online Ad Spending Bad News =From 2000 to 2002, USA Spending Fell 27%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08
U.S
. Onl
ine
Spe
ndin
g &
Sea
rch
Rev
enue
($M
M)
-50%
0%
50%
100%
150%
200%
250%
300%
Tot
al U
.S. O
nlin
e S
pend
Y/Y
Gro
wth
U.S. Online Ad Spending Spending on SearchY/Y Growth Online Ad Spend Polynomial Trendline
Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs.Trend Line However, Q/Q Pattern Looks a Bit Like Early 2001
U.S. Online Advertising Spending & Y/Y Growth Rates , CQ1:96-CQ3:08
Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research. 28
Intel – Technology Spending ProxyRevised CQ4E Guidance Implies -16% Y/Y, Worst Since CQ4:01
-12% Q/Q in Seasonally Strong CQ4, Worst in History?
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000C
Q1:
97
CQ
3:97
CQ
1:98
CQ
3:98
CQ
1:99
CQ
3:99
CQ
1:00
CQ
3:00
CQ
1:01
CQ
3:01
CQ
1:02
CQ
3:02
CQ
1:03
CQ
3:03
CQ
1:04
CQ
3:04
CQ
1:05
CQ
3:05
CQ
1:06
CQ
3:06
CQ
1:07
CQ
3:07
CQ
1:08
CQ
3:08
Rev
enue
($M
M)
-30%
-20%
-10%
0%
10%
20%
30%
40%
Y/Y
Gro
wth
Revenue Y/Y Growth
CQ
4:08
E
Note: CQ4:08E based on the midpoint of company’s revised guidance on 11/12/08. Source: Intel, FactSet. 29
Average Y/Y Growth = 6%
Intel Revenue & Y/Y Growth Rate, CQ1:97 – CQ4:08E
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,0001Q
87
1Q88
1Q89
1Q90
1Q91
1Q92
1Q93
1Q94
1Q95
1Q96
1Q97
1Q98
1Q99
1Q00
1Q01
1Q02
1Q03
1Q04
1Q05
1Q06
1Q07
1Q08
Rev
enue
($M
M)
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
Y/Y
Gro
wth
Revenue Y/Y Growth
20-yr Average Y/Y Growth =
7%
Note: S&P500 has 84 financial services companies as of 12/9/08. CQ3:08E are FactSet mean estimates. Source: FactSet.
Financial Services – Revenue Back to 10 Year Ago LevelsFor Now, CQ3E of -13% Y/Y Well Below +7% 20-yr Average
Revenue & Y/Y Growth Rate for S&P500 Financial Serv ices Companies
30
31
USA Corporate Sales Quickly Falling Behind Forecasts
0%
10%
20%
30%
40%
50%
60%
CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1 :07 CQ4:07 CQ3:08
Above Plan Below Plan
Overall Corporate Sales Survey Results, CQ1:01 – CQ4 :08
How is your company doing with regard to meeting its sales plan revenue objectives for the current quarter? Are you coming in above plan, even, or below plan?
Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08
CQ4:0851%
CQ3:0150%
32
Consumer Spending Trending Lower
0%
10%
20%
30%
40%
50%
60%
Jun-06
Aug-06
Nov-06
Jan-07
Mar-07
May-07
Jun-07
Aug-07
Sep-07
Nov-07
Jan-08
Feb-08
Apr-08
May-08
Jul-08
Aug-08
Sep-08
Nov-08
Dec-08
Spending More Spending Less
Overall Consumer Spending Results – 6/06 - 12/08
Would you say your overall spending over the next 90 days will be more than last year, less than last year, or the same as last year?
Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 12/11/08.
12/0860%
Obama Presidency – USA in Need of a Forced Upgrade,There’s No Time Like a Crisis to Make Changes
• Transportation / Infrastructure (~$225B) – Create millions of jobs via single largest new investment in our national infrastructure since creation of federal highway system in 1950s.
• Technology / Internet (~$100B) – Renew America’s information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how we’ll strengthen America’s competitiveness in the world.
• Manufacturing / Clean Tech (~$100B) – Extend funding to manufacturing innovators; Advance next generation of bio-fuels & infrastructure / accelerate commercialization of plug-in hybrids, etc.
• Hospital / Health Care (~$10B) – Ensure hospitals are connected to each other through Internet / make sure every doctor’s office and hospital is using cutting edge technology and electronic medical records.
• Public / School Buildings (~$70B) – Make public and school buildings more energy-efficient by replacing old heating systems and installing efficient light bulbs / put new computers in classrooms.
Source: Change.gov, WSJ.com. 33
Economic Recovery Policy Proposals
34
1) Digital Consumer –Our bet = At margin, consumers spend more – not less – time on
Internet in difficult times – it’s a cheap / efficient / transparent thrill! Undermonetized social networks / video / VoIP
driving powerful usage growth – opportunity for innovative marketers to capitalize on low CPMs
Technology / Internet
Discretionary Spending –Broadband Internet Among Last Things to Go
7.2 7.2 6.8 6.6 6.6 6.5 6.4 6.2 5.9 5.6 5.54.7
3.9 3.5
0123456789
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tronic
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Fixed-
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Economic Vulnerability Scores for Items of Discreti onary Expenditure10 = Most Vulnerable / 0 = Least Vulnerable
Note: In 9/08, 8,000 consumers in the UK, France, Germany and Spain were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure. 10 = extremely likely to cut back; 0 = not at all likely to cut back. Source: Execution Primary Research, quoted in UK Ofcom’s “The International Communications Market 2008” report, p. 39. 35
36
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
2005E 2006E 2007E 2008E 2009E 2010E 2011E
IP T
raffi
c (T
B /
mon
th)
Total Consumer Business
Global IP Traffic
Consumer Surpassed Business IP Traffic in 2008E –58% IP Traffic CAGR, 2005-2011E
Source: Cisco Systems, Global IP Traffic Forecast and Methodology; Mobility segment (0.1% of traffic in 2007) not displayed
Consumer IP traffic surpasses Business
YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share
Global Minute Share, 6/06 – 10/08
Source: ComScore Global 10/08, Morgan Stanley Research. 37
0%
2%
4%
6%
8%
10%
12%
14%
6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08
% S
hare
of G
loba
l Min
utes
Yahoo.com Msn.com Google.com YouTube.com Facebook.com
38
Users Y/Y Growth Comments
344MM(1) +50%
#3 site in global minutes; 5B views of online video in the US (Americans watched a total of 12.6B videos / 591MM hours online in 9/08); #2 global search engine – search queries on YouTube reached 9.2B in 8/08 (+123% Y/Y), surpassing Yahoo! sites with 8.5B searches (+2% Y/Y).(1,2,3,6)
182MM(1) +112%
#5 site in global minutes; 140MM+ active users; 50%+ users outside of college; 52K+ applications + 95% of Facebook members have used at least one(1,4)
370MM(5) +51%
If ‘carrier’ then #2 behind China Mobile; $1.55 annualized revenue per registered user (-3% Y/Y); 2.2B Skype Out minutes (+54% Y/Y); 16.0B Skype-to-Skype minutes (+63% Y/Y)(5)
65MM(5) +19%
$15B total payment volume (TPV), +28% Y/Y, higher than eBay’s global gross merchandise volume; Off-eBay payment volume +49% Y/Yto 51% of TPV(5)
Source: (1) comScore global 10/08; (2) comScore Video Metrix 8/08; (3) YouTube; (4) Facebook; (5) eBay CQ3, (6) comScore qSearch, 8/08. Morgan Stanley Research.
Undermonetized Internet Usage Growth Drivers –Video + Social Networking + VoIP + Payments
Next Generation Platforms =Easy-to-Use + Applications + Users
Note: Kindle’s 200k+ apps refer to book titles available, ~12% of sales of these books were on Kindle. iPhone user estimates exclude channel inventory + duplicates from iPhone 2.5 G users who upgraded to 3G, Y/Y growth from CQ4:07 to CQ4:08E; YouTube, Facebook users per comScore global 10/08, Y/Y growth from 10/07 – 10/08. Facebook application downloads are
cumulative monthly active users for the 200 most-used applications, per AppData (as of 12/18/08).Source: Amazon, Apple, AppData, Facebook, Youtube, Morgan Stanley Research. 39
Time Since Y/Y Applications ApplicationsPlatform Inception Users Growth Available Downloaded
Facebook 4.8 Yrs 182MM 112% 48K+ 308MM+
Apple Wireless Devices 1.5 Yrs 30MM 244% 100K+ 300MM+
iPhone (2.5G + 3G) 1.5 Yrs 14MM 291% 100K+ --
iPod Touch (Wi-Fi) 1 Yr 16MM 210% 100K+ --
YouTube 3.8 Yrs 344MM 50% -- --
Amazon Kindle 1 Yr -- -- 200K+ --
Younger Generations Drive Online Usage Changes
Note: Selection based on (1) comScore’s reported global unique visitors for each website in 9/08;excluding sites with negative Y/Y growth, and (2) Alexa global traffic ranking.
Source: ComScore Global, 9/08, Alexa, Morgan Stanley Research. 40
Social NetworkingBlogs
(Sina Blog)
Video / Music Online Gaming
Knowledge Sharing
Social Bookmarking
41
• YouTube - 344MM unique global visitors, +50% Y/Y, 43B minutes, +99% Y/Y(1)
; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU…
• YouTube = 63% of unique US video viewers + 39% of videos watched online + 34% of total minutes
(2)
0
50
100
150
200
250
300
350
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
Tot
al U
niqu
e V
isito
rs (
MM
)
0
5
10
15
20
25
30
35
40
45
Tot
al M
inut
es (
B)
Total Unique Visitors (MM) Total Minutes (B)
YouTube Global Traffic
Source: (1) comScore global 10/08; (2) comScore Video Metrix (US) 9/08, Morgan Stanley Research
Online Video –Traction High + Increasing
Hulu –Quickly up to 2% of YouTube’s Global Visitors(1)
• Hulu – 6.1MM global unique visitors (+74% M/M), 111MM minutes (+95% M/M) in 10/08.
• 11.6 minutes of average duration of videos viewed at Hulu, ~4x USA average
• Content support from major networks (NBC, Fox, USA, Bravo, FX, SciFi, E!...) + film studios (Universal, 20th Century Fox, MGM, Sony, Lionsgate)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
Tot
al U
niqu
e V
isito
rs (
000)
0
20
40
60
80
100
120
Tot
al M
inut
es (
MM
)
Total Unique Visitors (000) Total Minutes (MM)
Hulu Global Traffic
Note: (1) comScore Video Metrix (US only) utilizes a different methodology and reports that Hulu has 24% of YouTube’s US unique viewers & 22% of YouTube’s US minutes in 10/08. US average duration of online video was 3.0 minutes in 10/08. Global unique
visitors & minutes per comScore global, 10/08. 42
43
YouTube –New Portal(s) = Video Distribution Channel + Social Network
Source: Google, YouTube 11/08
News & Politics - Most Viewed
• ‘Organize the world’s information and make it universally accessible and useful’ – in the most effective way for high customer satisfaction – sort by most active / discussed / recent / responded / viewed / etc.. More / more content providers should get on board, after all, users are voting it’s what they want.
• Monetize away litigation - with new ad formats + finger printing advances + revenue shares?
Sports - Most Viewed
• Digg - 16MM unique visitors, +31% Y/Y, 28MM minutes, +13% Y/Y in 10/08
• User-driven editorial / selection of content (news, videos, images, etc.) through sharing / discovery / democratization – vs. traditional media determining front-page / lead stories
• Users in control – search for preferred content + find what others deem relevant / interesting
Consumers Expect –Wisdom of Crowds / Rankings / Searchability
44Source: comScore global 10/08, Digg.com.
Consumers Expect –Fun / Images / Insight from Others
Find friends who share the visual DNA Find hotels vi a Hotels.com Visualiser
• Youniverse.com – 670K unique visitors, +182% Y/Y, 7MM minutes, +134% Y/Y in 10/08.
• Finds one’s visual DNA by asking users to select pictures in response to a series of questions.
• Social networking – ability to find other people who share your visual DNA.
• Market Research – enables advertisers to mine user preference data;
• In 9/08, Hotels.com launched a Youniverse Visualiser to find out customers’ preference of the trip to provide hotel recommendations.
Source: comScore global 10/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 45
46
Consumers Expect –Personalization
Nike.com – NikeiD
Footjoy.com – Myjoys Picturedoor.co.uk
Source: footjoy.com, nike.com, picturedoor.co.uk, mymms.com
MMs.com – MyM&M’s
Consumers Expect –Citizen Journalism
• User-generated content (news, videos, images, etc.) uploaded directly to UReport site
• Fox News selectively airs popular stories that have been vetted
• Competitors: CNN’s iReport; MSNBC’s First Person
Source: Foxnews.com. 47
Searchability
User rating / popularity
Upload from anywhere –UReport iPhone app
Online Content Consumption Mix in 5 Years?
• Consumer or professional generated?− 40% of USA consumers create entertainment (edit movies / music / photos...)
• Consumer enhanced professional content?
48Note: Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte.
Video Monetization – YouTube = <$1 Per User(1) –Paid Search / Click-to-Buy / Pre-Post-In Video Roll / Interactive
Note: (1) per year in 2007; average users per comScore global, revenue per our estimates. Source: YouTube 10/08. 49
Search for ‘iPhone 3G’…
…ads for ‘invisible shield’
Like the music?...
…click to buy from iTunes / Amazon mp3
Creative / Interactive...
‘Wario Land: Shake It’ video breaks YouTube’s UI
50
Social Networking –Significant Share Gains of Internet Traffic
Rank Web site2005 (1)
12345678910
yahoo.commsn.com
google.comebay.com
amazon.commicrosoft.commyspace.comgoogle.co.uk
aol.comgo.com
Traffic rank is based on three months of aggregated historical traffic data from Alexa Toolbar users and is a combined measure of page views / users (geometric mean of the two quantities averaged over time).
Rank Web site2008 (2)
12345678910
yahoo.comgoogle.com
youtube.comlive.com
facebook.commsn.com
myspace.comwikipedia.orgblogger.comyahoo.co.jp
Alexa Global Traffic Rankings
(1) Rankings as of 12/31/05, excludes Microsoft Passport; (2) Rankings as of 12/18/08Source: Alexa Global Traffic Rankings, Morgan Stanley Research.
0%
20%
40%
60%
80%
100%
0% 10% 20% 30% 40% 50% 60%
Unique Visitors Y/Y Growth
Pen
etra
tion
(% o
f Onl
ine
Use
rs)
SocialNetworks
Photos
Online Gaming
Reference
Sports
Auto
Travel
InstantMessengersGeneral
News
Business /Finance
Multimedia
E-mailRetail
Entertainment
Search
Portals
World Wide Visitor Growth = 10.4%
Social Networking –Fast Growth + Low Penetration
Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08. 51
Global Internet Category Visitors Y/Y Growth & Pene tration
52Source: USC Annenberg School: Digital Future Report 2007.
0%
20%
40%
60%
80%
100%
Internet Television Radio Newspaper PersonalSource
% o
f Use
rs A
ge 1
7+ R
espo
ndin
g Im
porta
nt /
Ver
y Im
porta
nt
Importance as Source of Information
73%80%
68%63% 63%
The New Social Network =Personal Sources on Internet
Messaging by Generation –Text…Facebook Wall…Email…Phone…US Postal Service
53
Brother (Rob - College)Wrote on my Facebook Wall
Brother (Rob - College)Wrote on my Facebook Wall Wife (Melissa)
Funny emailWife (Melissa)Funny email
Brother (James - High School)Text Message via Mobile
Brother (James - High School)Text Message via Mobile Mom (Victoria)
Phone call (45 minutes!!!)Mom (Victoria)
Phone call (45 minutes!!!)
Grandparents (Dom & Ida)Birthday card with $25
Grandparents (Dom & Ida)Birthday card with $25
Kids (Zach 5 & Jackson 3 yrs.)Hugs and Kisses
Kids (Zach 5 & Jackson 3 yrs.)Hugs and Kisses
Birthday Boy (Tom Zawacki)Happy Birthday from my Family
Birthday Boy (Tom Zawacki)Happy Birthday from my Family
Source: Tom Zawacki – CEO of Lemonade.
54
6%14%
8%
22%
35%
16%
All OtherCommunicationsSocial ConnectionsShopping & TravelEntertainment & LeisureWork, Business & Education
Worldwide Share of Online Time (1)
Category didn’t exist 3
years ago14%
35%38%
22%
0%
10%
20%
30%
40%
Yahoo! Mail Facebook%
of T
otal
Min
utes
Age 15-24 Age 45+
Connecting – Younger Users Via Social Networks + Older Users Via E-Mail? (2)
Social Networking –Connectivity Changing…Is E-Mail Archaic?
Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 8/08.
55
Facebook –Rapid User / Usage Growth
0
20
40
60
80
100
120
140
160
180
200
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08
Tot
al U
niqu
e V
isito
rs (M
M)
0
5
10
15
20
25
30
35
40
Tot
al M
inut
es (B
)
Total Unique Visitors (MM) Total Minutes (B)
Facebook Global Traffic
Source: comScore global 10/08, Facebook 11/08, Morgan Stanley Research.
• 182MM visitors, +112% Y/Y (140MM+ active users), 34B minutes (#4 globally behind Yahoo!, Live and YouTube), +79% Y/Y
• Avg user has 100 facebook friends; 13MM+ users update their status daily; 2.6B minutes spent on Facebook every day (worldwide)
• 10B+ photos uploaded to the site; 700MM+ photos / 4MM+ videos uploaded each month;
• 660K+ developers / entrepreneurs; 52K+ applications built to date; 140 new apps added per day; 95%+ members have used at least one app.
56
Facebook -Connecting is Key
Note: Genre breakdown per O’Reilly Media’s analysis of the primary user goals of 261 of the most-used Facebook application.Source: O’Reilly Media, Inc (March 2008 report), Morgan Stanley Research.
Genres of Facebook’s 261 Most Used Applications
9%
3%
3%
5%
5%
7%
10%
10%
11%
12%
26%
Other
Playing games
Playing with digital pet
Self expression
Media sharing
Sending gifts
Categorizing friends
Profile enhancement
Playing social games
Comparing yourself with others
Enhanced communication
Top 40 Apps' # of Apps# of Monthly Active w/ 1MM+
Category Applications % of Total Users (MM) MAUs
Just For Fun 15,005 31% 137 37Games 4,496 9 78 25Sports 4,020 8 4 0Education 2,424 5 37 5Utility 2,287 5 20 2Music 1,918 4 11 13Chat 1,865 4 16 3Dating 1,840 4 52 13Messaging 1,716 4 30 8Photo 1,571 3 36 3Video 1,532 3 47 4Business 1,520 3 1 0Events 1,493 3 23 5alerts 1,313 3 27 7Fashion 1,155 2 5 1Food & Drink 1,056 2 8 1Politics 976 2 22 7Travel 873 2 7 2Money 553 1 1 0Mobile 482 1 7 1Classified 468 1 0 0File Sharing 303 1 1 0
Overall* 48,549 204 66
Facebook –48K+ Applications – 48% = Fun / Games / Sports
Note: Category breakdown per Facebook, one application can belong to multiple categories; Overall* statistics eliminate these duplications; Facebook reports 52,000+ apps “built to date” while AppData reports 48,549 available as of 12/18/08.
Source: Facebook, AppData, Morgan Stanley Research. 57
Facebook –Home Page for Next Generation – Customized / Current
• Facebook rolled out cleaner / simpler design 7/20/08 aiming to provide easier navigation with separate tabs for Wall (updates), Info (background), Photo, and Boxes (applications).
• Biggest change: Wall is now default tab, with full multimedia feeds integration – showing most recent and relevant info both about the user and by the user.
Tabbed Browsing
Integrating Feeds into
the Wall
Picture / Video Updates on the
Multimedia Wall
Third-party Applications
Now on Toolbar
Online Chatting Function
Source: Facebook 58
‘Engagement Ads’ – Thump Up to Recommend
to Friends
59Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates.
Source: Facebook.
Social Networking – Facebook = $2 Per User(1)
Opportunity to Get in Middle of Conversations
Virtual Gift – $1 = One Wish
…Friends Notified via News Feeds
Become a Fan of …
Source: Company Reports, Morgan Stanley Telecom Research. Note: (1) Subscriber data based on CQ2:08; (2) Subscribers given as access lines, excluding DSL. (3) China Netcom officially
merged into China Unicom on 10/15/08, China Unicom wireless sold all CDMA business to China Telecom; (4) Market Cap data as of 10/14/08; (5) Subscriber figure for Skype is registered user amount as of CQ3:08.
Company
China Mobile (1)
Vodafone (2)
China Telecom (1)
Telefonica MovilesAmerica Movil China Unicom (3)
T-MobileOrangeChina Unicom (3)
AT&T WirelessTelecom Italia MobileVerizon WirelessBharti AirtelAT&TNTT DoCoMoNTTSprint / Nextel Verizon
RegionSubscribers
(MM)Market Cap (4)
($B)
ChinaEurope / Japan
ChinaEurope / LatAm
LatAmChina
Europe / USAEuropeChinaUSA
Europe / LatAmUSAIndiaUSA
JapanJapanUSAUSA
415269215183165 128125 11410973706969 5954454338
$199 11034986837606713
155188230
15563541282
Y/YGrowth
25%16(4)542
134
11(6)15111162(8)1
(9)(6)10
Type
WirelessWirelessWirelineWirelessWirelessWirelessWirelessWirelessWirelineWirelessWirelessWirelessWirelessWirelineWirelessWirelineWirelessWireline
Skype (5)
370MM Registered Users(+51% Y/Y)
Average Growth: 11%
VoIP –Skype = #2 Global Wireless / Wireline Carrier
60
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3 :07 CQ4:07 CQ1:08 CQ2:08 CQ3:08
Glo
bal O
nlin
e A
dver
tisin
g R
even
ue ($
MM
)
Google Yahoo! Microsoft AOL
Online Advertising –Google Share = 67% in CQ3:08 vs. 46% in CQ3:05
Global Online Advertising Revenue (1)
(1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research 61
46%46%
34%34%
10%10%
7%7%
20%20%
67%67%
6%6%
10%10%
62
Source: (1) Google, Morgan Stanley Research (calculated as reported gross ad revenue multiplied by US % share of gross revenue)(2) Yahoo!, Morgan Stanley Research (calculated as gross Marketing Services revenue multiplied by US % share of gross revenue);
(3) Internet Advertising Bureau (IAB) / PriceWaterhouseCoopers (PWC) Internet Advertising Revenue Reports (calculated as difference between total IAB US ad revenue and sum of Google, Yahoo! gross ad revenue), Morgan Stanley Research. Assuming
that TAC of Google and Yahoo! was included in others total, this segment would have been up ~10% Y/Y
0
500
1,000
1,500
2,000
2,500
3,000
CQ3:07 CQ3:08
US
Ad
Rev
enue
($M
M)
Google, US Gross Ad Revenue (1) Yahoo!, US Gross Ad Revenue (2) Others (3)
42%
20%
44%
19%
US Online Ad Revenue Mix
37%38%
Google + Yahoo! = ~63% of US Online Ad Revenue -‘Others’ Grew ~10% (vs. ~6%) Owing to Google / Yahoo! Affiliate Assist, CQ3:08
63
• Google generated $5.5B in gross ad revenue in CQ3:08; it PAID OUT $1.5B (28%) to thousands of partners like AOL, Ask Jeeves, EarthLink, + HowStuffWorks(1)
• Yahoo! generated $1.6B in gross ad revenue in CQ3:08; it PAID OUT $461MM (30%) to partners like CNN, ESPN, + The Wall Street Journal (2)
Google + Yahoo! Share Significant Portion of Revenue with Partners + Affiliates
Source: (1) Google gross Advertising revenue, Morgan Stanley Research; (2) Yahoo! gross Marketing Servicesrevenue, Morgan Stanley Research.
64Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 9/08, Morgan Stanley Research.
6%4%
35%
1% 1% 1%
27%30%
9%6%
13%
4%
11%
4%2%
7% 7%
18%
4%5%2%
3%2%
0%
10%
20%
30%
40%
Searc
h en
gine
mar
ketin
gOrg
anic
traffic
Affiliat
e pr
ogra
ms
to p
rosp
ectin
g lis
ts
Shopp
ing
com
paris
on en
gines
Catalo
gsNew
por
tal d
eals
Offline
adv
ertis
ingBan
ner a
ds
Tradit
ional
por
tal d
eals
Sweeps
take
s
Social
net
workin
g sit
es
Co-re
gistra
tion
on o
ther
Web
site
s
2006 2007
% of New Online Customers for Online Retailers / Ma rketing Spend Mix
N/AN/A
% C
usto
mer
s ac
quire
d fr
om s
ourc
e
N/A
Search Should Continue to Become More Important –34% Y/Y Google Query Growth (CQ3:08)
U.S. Internet Ad Revenue Share by Pricing Model, 20 00 - 2007
Note: Performance based advertising includes search, lead-generation, among others; Hybrid pricing model includes a mix of impression-based pricing plus cost-per-click, sale, lead / straight revenue share;
Source: IAB, Morgan Stanley Research 65
Performance-Based Advertising Gaining Share+20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue
10%12%
21%
37%41% 41%
47%51%
0%
15%
30%
45%
60%
2000 2001 2002 2003 2004 2005 2006 2007
% S
hare
of T
otal
Rev
enue
Performance CPM HybridSearch Revenue Share
0%
20%
40%
60%
80%
100%
2002 2003 2004 2005 2006 2007
U.S
. In
tern
et A
d S
pend
% M
ix
Search Advertising Banner Ads Rich MediaClassified Advertising E-mail and Other
Search =Dramatic Share Gains of Online Ad Spending
Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research 66
U.S. Internet Advertising Mix
52%52%
20%20%
10%10%
12%12%
7%7%
15%15%
14%14%
15%15%
9%9%
47%47%
Search =Still Lots of Share to Grab
U.S. Internet Search Spendingvs.
Ad Spending on Classified, Yellow Pages & Newspaper , 2000-2007
$122 $299 $889 $2,133$4,113
$6,910$9,430
$12,282
$68,402
$61,224 $60,890$63,265
$67,115$69,923
$65,146
$70,348
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
2000 2001 2002 2003 2004 2005 2006 2007
Ad
Spe
nd (
$MM
)
Internet Search Combined Classified, Yellow Pages & Newspaper
Source: IAB, search spending adjusted by our estimates;Classified, Yellow Pages & Newspaper spending per MS Media team.
Morgan Stanley Research. 67
68
$30
$25
$31$28
$2$3$2 $1
$26
$34
$22
$18
$0
$10
$20
$30
$40
2005 2006 2007 2008E
Sea
rch
vs. D
ispl
ay E
ffect
ive
CP
M
Search Banner Ads Rich Media
Note: (1) Search effectiveness here measured by dividing the total search advertising revenue by total search ads impressions (000);(2) Banner Ad / Rich Media CPM calculated as total banner / rich media advertising revenue divided by total impressions (000).
Source: Morgan Stanley Research.
CPMs –Search vs. Banner vs. Rich Media
2005-2008ECAGR
8%
-19%
-19%
69
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
3/05
9/05
3/06
9/06
3/07
9/07
Impr
essi
ons
(MM
)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
CP
M
Banner Ads Impressions Banner Ads CPM
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
3/05
9/05
3/06
9/06
3/07
9/07
Impr
essi
ons
(MM
)
$0
$5
$10
$15
$20
$25
$30
$35
$40
CP
M
Rich Media Impressions Rich Media CPM
Near term: Ad Supply > Ad Demand –Ad Impressions Growing Rapidly…CPMs Declining
Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research.
U.S. Banner Ad Impressions & CPM,2005-2007
U.S. Rich Media Impressions & CPM,2005-2007
$0.40 $0.41
$0.44 $0.43 $0.42$0.44
$0.46$0.44 $0.45
$0.48 $0.49$0.51
$0.53 $0.54 $0.53
$0.00
$0.10
$0.20
$0.30
$0.40
$0.50
$0.60
1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08
Search Cost Per Click
Search =CPC Trend - Up / Down / Sideways?
Google Cost Per Click, 2005 - 2008
Source: Google, Morgan Stanley Research 70
71
E-Commerce -USA Online Penetration = 4-6% and Rising
Note: (1) Our proprietary adjusted e-Commerce sales & Census Bureau’s quarterly total retail sales data suggest ~4% penetration, Forrester claims 6%.
Source: The State of Retailing Online 2008 (Forrester Research).
Categories’ Online Penetration of US Retail Market, 2007
1%Food / beverage / grocery10%Movie tickets
2%Auto / auto parts10%Apparel / footwear
4%Pet supplies11%Jewelry
5%Appliances / tools12%Flowers / cards21%Gift cards / certificates
6%OTC meds / personal care13%Office supplies24%Music / video
8%Sporting goods / apparel18%Consumer electronics24%Books
9%Cosmetics / fragrances19%Baby products27%Other event tickets
9%Home furnishings19%Toys / video games45%Computer products
>20% 10 - 20% <10%
72
Amazon.com’s Recommendation Engine =Web’s Most Search Engine + Advertiser?
Source: Amazon.com, Google
Amazon.com search + recommendation engine: Leveraging data
What other customers are
thinking
What other customersare saying
What other customersare buying
New formats: Kindle
What Amazonrecommends
73
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08
Y/Y
Gro
wth
US Adjusted Retail E-Commerce Sales Amazon.com North America RevenueUS Total Retail Sales
Amazon.com vs. US Retail E-Commerce Sales (1)
~24ppts
(1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: Amazon.com (CQ3:08), US Dept. of Commerce (CQ3:08), Morgan Stanley Research.
Amazon.comKey Operating Metrics
CQ4:07 CQ1:08 CQ2:08 CQ3:08
Revenue $5,673 $4,135 $4,063 $4,264
Y/Y Growth 42% 37% 41% 31%
Active Customers 76 79 82 85
Y/Y Growth 19% 19% 18% 17%
TTM Revenue per Active Customer
$195 $202 $210 $215
Y/Y Growth 17% 17% 19% 18%
Total Units 241 196 190 203
Y/Y Growth 33% 31% 32% 30%
(All metrics in MMs, except for TTM Revenue per Active Customer)
Amazon.com Should Continue to Gain ShareHigh Customer Satisfaction / Recommendation Engine / Impressive Metrics
74
Amazon.com –Following Its Customers By Leading With Technology
* Note: Amazon.com utilizes its Mechanical Turk to try to match the product with the picture you sent. These “Mechanical Turks”are not Amazon employees or any artificial intelligence, but ordinary folks around the world. Once product is matched, you can
access the findings on both your iPhone and Amazon.com. Source: Amazon.com.
• Search on any keyword (e.g. item name, author, artist, etc.) or ISBN / UPC code
Amazon TextBuyIt
1 2
Text search keywords to ‘AMAZON’(262966)
Reply with 1 or 2 to buy an
item from search results
3
Answer call to hear details + confirm order
Amazon iPhone Application - Amazon Remembers*
75
2) Mobile –Innovation in wireless products / services accelerating – changes
should create + destroy significant wealth
Technology / Internet
76
Nintendo Wii
30MM consoles since 11/06 launch – raised bar with motion sensors + playability
Apple iPhone 3G
1MM units sold in three days; 300MM apps downloaded since 7/11/08 launch; mobile browser market share already 50% > Windows Mobile –raised bar with ease-of-use + functionality
Microsoft Xbox 360
12MM Xbox Live members (+100% Y/Y) since 11/02 launch – raised bar with online playability
3 Skype Phone
500K+ units in < 200 days. Leverage large Skype / Facebook user base of 370MM (+51%Y/Y) / 161MM (+119%Y/Y) + create a low-cost web-enabled VoIP, social networking, digital presence phone. Now INQ1…
Amazon.com Kindle
With free EV-DO + 200K titles + newspaper / magazine / blog subscriptions. Amazon may do with books what Apple did with tunes. Kindle accounts for 12% of AMZN’s sales for titles available on Kindle
Netbooks (Asus Eee PC)
Estimated 5.2MM units will be shipped in 2008; as much as 50MM could be shipped in 2012, per Gartner – low price points + high mobility + wireless / 3G access pioneering ‘Cloud Computing’ usage model.
Source: Nintendo (CQ2:08), Microsoft, Amazon.com, Apple, TechCrunch estimates, eBay (CQ3), Gartner, Morgan Stanley Research.
Mobile –A New Computing Cycle With Game Changer Products with
Extraordinary Ease-of-Use
77
Notebooks Retrofitting to Cloud Via 3G –PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?!
• 64% of new Austrian broadband subs used cellular modems, CQ2:07
• Global cellular modem to rise from 5MM in 2006E to 68MM+ shipments in 2012E (53% CAGR) – ABI Research, 5/07
• 13MM cellular modem users in USA, CQ2:08E – Nielsen Mobile
• 66MM global WiFi unit shipments, C2007E - Synergy Research
Note: Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); Source: ABI Research, Informa, Nielsen Mobile, Synergy Research.
78Source: Opera Software, Morgan Stanley Research.
A full web experience + 50% faster Pages transcoded p er month (Bn)
− Remote Server first pre-processes requested web pages
− Web content is then compressed to reduce the size of data transfer
− Fully-rendered web pages sent to your phone
− Advantage: full web rendering and faster browsing on simpler phones
2006 2007 2008
Opera Mobile Web Browser Shows Mobile Internet Growth -~21MM Users (+311% Y/Y), 5B+ Page Views (+326% Y/Y), 10/08
Mar JunSep Mar Oct
5
4
3
2
1
17.121.1
25.6
32.4
43.3
52.1
58.3
0
10
20
30
40
50
60
70
CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08
Mes
sage
s D
eliv
ered
by
Ver
iSig
n (B
n)
VeriSign Mobile Message Shows Mobile Internet Growth –~58B Messages (+142% Y/Y), CQ3:08
Global Mobile Messages Delivered by VeriSign, CQ1:0 7 – CQ3:08
Note: Mobile messages include both text and multimedia messages. Source: VeriSign Mobile Messaging Index Report. 79
Mobile Internet Evolving at Uniquely Fast Clip
Source: Nokia, AT&T, Apple, Motorola, Google, T-Mobile, RIM, 3 UK, as of 12/12/08. Morgan Stanley Research. 80
Date Important Announcements in the Mobile Industry
12/05/08 3 UK launches INQ1, the world's first social networking phone, with 50,000 pre-registration
10/01/08 AT&T announces reorganization to better align broadband, TV and mobile services for consumers.
10/01/08 Apple drops the non-disclosure agreement (NDA) for iPhone application developers.
9/30/08 Nokia to acquire leading consumer email and instant messaging provider OZ Communications.
9/29/08 Nokia’s Chief Technology Officer Bob Iannucci resigns.
9/28/08 Motorola to build a 350-person Android team.
9/24/08 Google, T-Mobile and HTC launch G1, the first phone based on Google’s Android open mobile platform.
8/04/08 Motorola hires Qualcomm’s Sanjay Jha as co-chief executive to oversee the mobile devices division.
7/23/08 Nokia, Qualcomm settle patent dispute.
7/11/08 Apple and AT&T launch iPhone 3G in the U.S.
6/24/08 Nokia acquires Symbian Limited and establishes the Symbian Foundation.
5/12/08 RIM introduces the BlackBerry Bold smartphone.
5/12/08 RIM, RBC and Thomson Reuters to anchor a $150MM BlackBerry Partner Fund focused on developing mobile applications.
5/08/08 Apple, KPCB launches $100MM iFund venture capital pool to support iPhone / iPod Touch application development.
81
Still Early in 3G+ Ramp But…2010 Should Be Inflection Point @ ~22% of Subscribers
0
1
2
3
4
5
2007E 2008E 2009E 2010E 2011E 2012E 2013E
Sub
scrib
ers
(B)
0%
10%
20%
30%
40%
50%
% o
f Tot
al W
irele
ss S
ubsc
ribe
rs
2.5G and Below Subscriptions 3G and Above Subscriptions % 3G and Above Penetration
Global 3G+ Penetration
Note: 2.5G can be compared to ‘narrowband’ Internet access, while 3G can be compared to ‘broadband ’ Internet access.Source: Ovum, Morgan Stanley Research.
Japan Internet Users by Access Device
40%
58%
73%
81% 81% 83%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2003 2004 2005 2006 2007
% o
f Jap
an In
tern
et U
sers
% using PC % using Mobile
Source: Japan Ministry of Internal Affairs and Communication. 82
Japan Shows Way in Mobile Internet Usage –Mobile Nearly Matches PC
83
Apple Changed Mobile Game…With Impressive UI + 2.5G!i – NOT – A - Phone
Source: Apple
Apple iPhone 3G –Winning Consumers Via Simple + Useful Applications
Speak Mandarin?
Lonely Planet Mandarin
Phrasebook will say it for you.
Catchy Tunes?
Shazam will listen and find the song
for you.
Source: Apple. 84
Apple iPhone –Data Usage 6-10x Higher than Average USA Mobile UsersApp Downloads per iPhone 100x Higher than non-iPhones
13%7% 9%
6% 4% 5%
85%
74%70%
59%
50%
31%
0%
20%
40%
60%
80%
100%
BrowsingNews
Music Games Web Search SocialNetworking
MobileVideo
% o
f U.S
. Mob
ile S
ubsc
riber
s
Average U.S. Mobile Users iPhone Users
Note: KPCB iFund estimates 14MM total weekly app downloads for 12MM iPhone users, and 3MM weekly mobile app downloads on 250MM non-iPhones, thus translating into mobile application downloads 100x higher on iPhone. Source:
M:Metrics, 1/08 Survey of U.S. mobile subscribers, n= 31,389, Games category per KPCB estimates. 85
Mobile Content Consumption
Stunning Growth in iPhone Applications Since 7/08 Launch –~10K Apps, 34% = Games / Entertainment, 300MM Downloads (~10 per User)
Note: Data as of 11/30/08. ~10 downloads per user include iPod Touch users. Source: Apple iTunes, Morgan Stanley Research. 86
# of Apps % of Total# of Paid
Apps
Paid as % of Category
Total
Average Price of Paid
Apps
Games 2224 23% 1756 79% $2.24Entertainment 1054 11 784 74 1.64Utilities 974 10 708 73 3.08Education 716 7 654 91 5.59Book 499 5 459 92 2.11Productivity 491 5 374 76 3.92Lifestyle 490 5 362 74 3.05Reference 429 4 360 84 7.27Travel 408 4 310 76 7.88Healthcare & Fitness 342 4 284 83 3.14Music 316 3 233 74 5.13Sports 298 3 185 62 4.65Navigation 269 3 209 78 5.88Business 261 3 191 73 11.07Finance 248 3 187 75 7.99Photography 189 2 136 72 2.67Social Networking 170 2 59 35 3.07News 136 1 60 44 2.06Medical 83 1 71 86 35.40Weather 48 0 33 69 5.02
Total 9645 7415 77% $4.15
Category
INQ1 –World’s First Social Phone + 50K Registered Potential Users Before Launch
• Full Facebook integration with phone’s contacts / messages / notification system
• Seamless Skype integration (free Skype-to-Skype calls over 3’s network) + full web browser based on WebKit (the rendering engine behind iPhone and Android’s browser) + doubles as a 3G modem
• Preloaded with Google apps / YouTube link / eBay tracker / MySpace / 3Music Store, etc.
• Free on contract (from £15 / month) / £79.99 on Pay-As-You-Go.
Note: 50K people registered an interest in the INQ1 phone prior to official launch in 11/08, these are not pre-orders.Source: Three, Morgan Stanley Research. 87
FacebookWindows Live
MessengerSkype ‘Live Contacts Book’
USA Mobile Carriers –Data ARPU Growth Offsetting Declining Voice ARPU
$50 $50 $49$47 $46 $45 $46
$44 $43 $43 $43$41 $40 $40 $39
$3 $4 $5 $5 $6 $6 $7 $8 $8 $9 $10 $10 $11 $12 $12
$0
$10
$20
$30
$40
$50
$60
$70
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08
Voice ARPU Data ARPU Total Average ARPU
Source: Simon Flannery, Morgan Stanley Research.
Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08
88
Global Wireless Data ARPU –Japan in Clear Lead, USA Catching Up Faster Than Others
Data ARPU as Percentage of Total, CQ1:05 – CQ3:08
Note: Western Europe is the weighted average of UK, Germany, Spain, Italy & France; Asia (ex. Japan) is the weighted avg of China, India, Indonesia, S. Korea, Thailand, Philippines, Malaysia and Singapore. Blended ARPU includes both pre-paid and contract plans.
Asia (ex. Japan)’s blended ARPU ranges from $5 (Philippines), $10 (China), to $18 (Malaysia) and $37 (S. Korea). USA (iPhone) ARPU is contract only, per AT&T. Latin America data ARPU is ~13% of total in CQ3:08. Source: Morgan Stanley Research. 89
26% 26% 26% 26%28% 28% 29% 29%
31% 32%33%
35%
37%39% 39%
6% 7%9%
10%11%
12% 13%15%
16%18%
18%20%
21%22%
24%
0%
10%
20%
30%
40%
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
Dat
a A
RP
U a
s %
of T
otal
Japan Western Europe Asia (ex. Japan) USA
$54CQ3:08 Blended
ARPU (US$) : $5 - $37$37 $51 ($95)
(iPhone)
Quarterly Worldwide Smartphone Sales by Operating S ystem
0
5
10
15
20
25
30
35
40
CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1 :08 CQ2:08 CQ3:08
Uni
ts S
hipp
ed (M
M)
Symbian RIM Microsoft Apple Linux Palm Others
Source: Gartner. 90
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
EMEA North America APAC ex. Japan Japan Latin AmericaCQ
3:08
Dis
t.of S
mar
tpho
ne S
ales
Symbian Dominates Smartphones But Losing Share –USA Could Gain Lead in Mobile Internet Innovation?
91
Technology / Internet
3) Emerging Markets –Pacing next wave of technology adoption – leading players in
many emerging markets aren’t the usual suspects…
Broadband + Mobile + Internet =Especially High Global Growers
2002 Y/Y 2007 Y/Y Global 2007 NetCategory Growth Rate Growth Rate Market Size Additions
Broadband Subscribers 78% 23% 349MM 64MM
Mobile Subscribers 20 20 3,319MM 563MM
Internet Users(1) 26 16 1,352MM 182MM
Financial Cards(2) 12 11 8,016MM 804MM
Installed PCs 12 8 900MM 66MM
Cable / Satellite TV Subscriptions 8 6 761MM 40MM
GDP per Capita 2 3 22K 1K
Population 2 1 6,501MM 77MM
Telephone Lines 5 -0 1,277MM -4MM
Note: (1) Include mobile Internet users, based on ITU’s compilation of country reports, surveys and estimates; (2) Includes credit / debit / ATM / charge cards in circulation; Source: Morgan Stanley Research. 92
Top 10 Emerging Markets to Surpass Top 10 Developed Markets in Internet Users in 2008
Top 10 Emerging Markets vs. Top 10 Developed Market s – Internet Users
Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP.Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia;Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia;
Source: IMF, ITU, Morgan Stanley Research. 93
0
100
200
300
400
500
600
700
2001 2002 2003 2004 2005 2006 2007 2008E
Inte
rnet
Use
rs (
MM
)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Y/Y
Gro
wth
Top 10 Emerging Markets Top 10 Developed Markets
Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth
94
Rank CountryRelative
Weighting
2004
Rank CountryRelative
Weighting
12345678910
12345678910
USAChinaJapan
GermanyUK
IndiaFranceItaly
S. KoreaCanada
9.08.26.55.75.55.35.25.25.15.1
ChinaUSA
JapanGermany
IndiaUK
FranceRussia
S. KoreaBrazil
2007
Note: Red indicates countries moving out of the top 10 TMT countries;Green indicates countries moving into the top 10 and highlights China / India
Source: Morgan Stanley Research
TMT (Technology / Media / Telecom) Update =China #1 + Rest of BRIC Gaining Ground
8.98.86.15.65.65.35.35.25.25.2
From our database on market sizing of global TMT (Technology, Media & Telecommunications) products and services. We measure market sizes and growth rates for core TMT metrics: GDP per capita (PPP), telephone lines, cable / satellite TV households, installed PCs, mobile subscribers, internet users, financial cards(1), and broadband subscribers. We do this for the 52 most important economies based on purchasing power / economic strength, as measured in terms of population / GDP per capita. We standardized each country’s position in the global market in each category and adjusted values to reflect a positive scale. The relative ratings and ranks were then determined by calculating an average of Z-scores across categories. For example, in the United States in 2007, standardized and adjusted values of 6.58 in GDP per capita, 7.57 in telephone lines, 10.79 in installed PCs, 7.30 in mobile subscribers, 8.55 in cable subscribers, 9.60 in Internet users, 10.91 in financial cards, and 9.45 in broadband subscribers, produces a relative weighting of 8.84.
Internet User Net Additions –China, Brazil, Pakistan, Columbia, India, Iran, Russia Impressive
Note: Penetration is per person. Source: ITU, Morgan Stanley Research. 95
2007Net Internet
Users Added 2007 PenetrationRank Country (000's) Y/Y Growth Level
1 China 73,000 53% 16% 2 United States 9,800 5 73 3 Brazil 7,400 17 26 4 Pakistan 5,500 46 11 5 Colombia 5,395 80 25 6 India 5,000 7 7 7 Iran 5,000 28 32 8 Russia 4,311 17 21 9 Germany 3,900 10 52
10 France 3,553 12 55 11 Vietnam 3,188 22 21 12 Canada 3,000 12 85 13 Egypt 2,620 44 12 14 Indonesia 2,424 23 6 15 United Kingdom 2,400 6 66 16 Mexico 2,248 11 22 17 Thailand 2,003 18 20 18 Nigeria 2,000 25 7 19 Poland 1,915 14 42 20 Venezuela 1,580 38 21
Note: (1) Penetration is per person; mobile subscribers include all active SIM card subscriptions; people in many countries outside of the US use more than one SIM cards on a regular basis, which may results in greater than 100% penetration levels.
Source: Morgan Stanley Research.96
Mobile Subscriber Net Additions –Pakistan = 226% more than USA, Indonesia = 33% more than USA, Iran just 5% less than USA
2007 NetMobile Subs 2007 Penetration
Rank Country Added (000's) Y/Y Growth Level (1)
1 China 86,228 19% 41% 2 India 67,570 41 21 3 Pakistan 44,346 129 50 4 Brazil 21,062 21 64 5 Russia 19,326 13 120 6 Indonesia 18,032 28 36 7 United States 13,596 6 85 8 Iran 12,910 77 42 9 Egypt 12,046 67 41
10 Germany 11,499 13 118 11 Mexico 11,237 20 65 12 Thailand 10,654 26 78 13 Turkey 9,313 18 90 14 Argentina 8,891 28 103 15 Saudi Arabia 8,718 44 117 16 Vietnam 8,225 53 28 17 Nigeria 8,073 25 28 18 Philippines 7,306 17 57 19 Peru 6,645 76 55 20 Algeria 6,565 31 80
Non-US Markets Lead Usage Penetration in Many Categories
Source: Morgan Stanley Research
Social Networking: Brazil / S. Korea
E-commerce: Germany
Mobile Payments + TV: Japan
Broadband:S. Korea
Online Gaming: China
Microtransactions via SMS: Philippines
Online Advertising: UK
97
A Scary Thing Happened on the Way to the Forum –Rampant Piracy in Most Emerging Markets
21%
33%
59%
60%
65%
68%
0% 10% 20% 30% 40% 50% 60% 70% 80%
North America
Western Europe
Asia-Pacific
Middle East / Africa
Latin America
Central / Eastern Europe
Piracy Rate
Note: per BSA (Business Software Alliance) and IDC Global Software Piracy Study, which covers piracy of all packaged software that runs on personal computers, the study excludes types of software that run on servers or mainframes or software sold as a service.
Source: BSA.
Packaged Software - Piracy Rate by Region, 2007
Russia Russia –– 73%73%
China China –– 82% / India 82% / India –– 69%69%
98
Brazil Brazil –– 59%59%
99
4) Cloud Computing –Access + storage need + virtualization driving change
Technology / Internet
100
Storage Growth +62% in 2007E –Consumer > Professional Demand
Source: Seagate, Katy Huberty, Morgan Stanley Research
0
20,000
40,000
60,000
80,000
100,000
120,000
2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
Pet
abyt
es
Home Professional
Global Storage Sold Annually
Cloud Computing –Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model
Amazon.com Salesforce.com
101Source: Amazon.com, Salesforce.com, Morgan Stanley Research
102102Source: Getty Images
Google Data Center – The Dalles, Oregon
‘A Giant Supercomputer’ –Datacenter Behind the Cloud
103
1. sarah palin
2. beijing 2008
3. facebook login
4. tuenti
5. heath ledger
6. obama
7. nasza klasa
8. wer kennt wen
9. euro 2008
10. jonas brothers
Google Zeitgeist –Predictive Power of Data Underutilized
Trendsetters 2008 – Going Green
Source: Google Year-End Zeitgeist, 2008.
Fastest Rising (global)1. obama
2. facebook
3. att
4. iphone
5. youtube
6. fox news
7. palin
8. beijing 2008
9. david cook
10. surf the channel
Fastest Rising (US)
Economy – Layaway Makes a Comeback Politics – U.S. Presidential Election
104
Amazon Web Services –Providing Cheap / Reliable Storage in Cloud
0
50
100
150
200
250
300
350
400
450
CQ2:05 CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2 :07 CQ3:07 CQ4:07 CQ1:08 CQ2:08
Tot
al R
egis
tere
d D
evel
oper
s (0
00)
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q/Q
Gro
wth
Total Registered Developers (000) Q/Q Growth
Amazon Web Services
• Simple Storage Service (S3) – Provides a simple web services interface that can be used to store (for as low as $0.12 per GB per mo.) / retrieve any amount of data, at any time, from anywhere. 29B+ objects stored by the end of CQ3, +32% Q/Q.
• Elastic Compute Cloud (EC2) – Provides resizable compute capacity in the cloud, with users paying only for capacity they actually use (starting $0.10 / instance-hour).
Source: Amazon.
105
Closing Thoughts
1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need
value more than they have needed it in a long time
HugeMarket
Simple, FocusedMission
Active, MissionaryFounders
GreatManagement
Team,Culture
ConstantImprovement
InsaneCustomer
Focus
BigGross
Margin (1)
Annuity-Like
ModelStrongBoard
X
X
X
X
XX
X
X
X
XX
X
X
X
X
X
X
X
Apple
Cisco
Dell
eBay
Intel
Microsoft
Yahoo!
X
O
X
X
X
X
X
X
34
65
18
77
83
56
79
81
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
2% of Public Tech Companies Create 100% of Wealth* –A Look at Some of Biggest Winners of Our Day
Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’ 106
Top 15 Global Internet Companies
(US$ in Millions, except per share data, as of 12/18/08)
Global Top Internet Companies by Market Value
Note: ~60% of Softbank’s C2007A revenue was coming from their mobile business.Source: FactSet; Morgan Stanley Research. Data as of 12/18/08. 107
12/18/2008 Market C2007A Total Return % 52-WeekRank Company Region Price (US$) Value ($MM) Revenue ($MM ) 2005 2006 2007 2008 YTD High Low
1 Google US $310 $97,610 $16,594 115% 11% 50% (55%) $716 $247
2 Yahoo! Japan Japan 390 23,096 2,625 36 (37) 11 (12) 548 257
3 Amazon.com US 52 22,307 14,835 6 (16) 135 (44) 97 35
4 eBay US 15 19,797 7,672 (26) (30) 10 (56) 35 11
5 Yahoo! US 13 18,119 6,969 4 (35) (9) (45) 30 9
6 Softbank Japan 17 17,997 27,817 174 (48) 7 (14) 22 7
7 Activision US 9 12,442 1,395 21 25 72 (38) 19 9
8 Tencent China 7 11,891 523 91 240 116 (8) 9 4
9 Rakuten Japan 572 7,480 1,912 (11) (47) 7 17 642 373
10 Electronic Arts US 17 5,412 3,665 (15) (4) 16 (71) 60 16
11 NHN Korea 97 4,685 1,079 231 38 97 (60) 277 59
12 Baidu China 131 4,224 239 -- 79 246 (66) 418 101
13 Alibaba China 1 3,748 296 -- -- -- (79) 4 0
14 NetEase China 21 2,574 303 6 33 1 10 27 15
15 Expedia US 8 2,387 2,665 -- (12) 51 (74) 33 6
108
CBS Television
CBSSports.com
CBS Mobile
2007 Football Season
• Plasma Screen TV – HD Quality Event
• PC Screen – Fantasy, Stats, and Injury Reports
• Mobile Screen – Highlights, Scores
ThursdayKickoff
Patriots vs.Colts
NFLSundays
Old Media (TV) / New Media (Internet + Mobile) –Complementary Platforms
2007 Football Season
Source: CBS Sports Interactive.
Every Generation or So –A Politician Leverages a New Medium Especially Well
1935, FDR, Radio 1960, JFK, TV
2007 / 2008, All Presidential Candidates, Internet
109
Barack Obama = USA President Elect –Without Internet + Complementary Platforms?
Mobile – iPhone AppSocial Networking - Facebook Video – YouTube Channel
110Source: Facebook, YouTube, BarackObama.com.
Younger Generation (18-41) –Spend Most Time on Internet vs. Other Media
% of Media Consumption
Seniors(Age 63+)
Younger Generation(Age 18 - 41)
Total Hours of Media Usage Per Week:49 Hours
Total Hours of Media Usage Per Week:37 Hours
Note: Data per Forrester Research’s 2007 North American Technographics Consumer Benchmark Survey;Age 18-41 data is the average of age 18-27 & 28-41.
Source: Forrester Research. 111
Newspaper - 3%Magazine - 4%
Video Game- 6%
Movie - 11%
Cell Phone- 15%
Radio - 14%
Internet - 25%
TV - 22%
Newspaper- 13%
Magazine - 8%
Video Game- 2%
Movie - 8% TV - 38%
Internet - 12%
Radio - 13%
Cell Phone- 13%
37%
29%
19%
8% 7%
32%
8% 9%
20%
6%
0%
5%
10%
15%
20%
25%
30%
35%
40%
TV Internet Radio Newspaper Magaine
% o
f Tot
al M
edia
Con
sum
ptio
n T
ime
or A
dver
tisin
g S
pend
ing
Time Spent Ad Spend
Media Time Spent vs. Ad Spend Out of Whack –Internet (upside…) vs. Newspaper / Magazine / TV (downside…)
Note: Data per Nielsen Media Research’s Custom Survey; Due to different survey agencies / methodologies / category breakdowns, time spent or ad spend % data may not match previous slides – use for directional purpose only.
Source: Nielsen Media Research.
% of Time Spent in Media vs. % of Advertising Spend ing
112
-30%
-20%
-10%
0%
10%
20%
30%
40%
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
Y/Y
% C
hang
e
National Retail Classified Total Print Total Online Total
Newspaper Advertising Revenue Down 18% Y/Y, CQ3
U.S. Newspaper Advertising Revenue, Y/Y % Change
Source: Newspaper Association of America. 113
114
Newspapers include Classifieds. Promotions ($116B) include: incentives ($30B), promotional products ($27B), point-of-purchase ($19B), specialty printing ($9B), coupons ($7B), premiums ($7B), promotional licensing ($7B), promotional fulfillment ($6B), product sampling ($2B), and in-store marketing ($2B). Households may use multiple advertising mediums.
Direct TelephonePromotionsNewspapers
ClassifiedsDirect MailBroadcast TVCable TVInternet / OnlineRadioYellow PagesOutdoor
$1101164615614427212016
7
1071155656
1141128071
113114114
$1,0321,011
81826053239032728817214163
2007 Advertising Spending ($B) Households (MM)
Ad Spending / Household ($)Medium
TotalAverage
$46947
$4,774477
Internet Advertising – Lots of Ad Share to Gain$288 Per Home for Internet vs. $818 for Newspapers Implies Upside
Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research. 114
Note: (1) We use IAB and ZenithOptimedia data to estimate U.S., online ad spend as % of total ad spend;(2) E-Commerce sales adjusted for eBay by adding eBay US gross merchandise volume and subtracting
eBay US transaction revenue; e-commerce data unavailable before 2000. 20-yr average from 1987-2007. Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research 115
0%
2%
4%
6%
8%
10%
12%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
U.S. Online Ad Spending as % of Total Ad Spending
U.S. Adjusted E-Commerce as % of Total Retail Sales
(1)
(2)
U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007
% o
f Tot
al
20-y
r A
vera
ge Y
/Y G
row
th20-yr Average Total Ad Spending & Retail
Sales Y/Y Growth = 5%
USA Online Ad Spend + E-Commerce Penetration –Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back!
2007 2007Total Ad Internet Ad Internet
Rank Company Industry Spending ($MM) Spending ($MM) % of Total (2)
1 Procter & Gamble Consumer $5,230 $81 2%2 AT&T Telecom 3,207 136 63 Verizon Telecom 3,016 189 94 General Motors Automotive 3,010 212 105 Time Warner Media 2,962 98 66 Ford Automotive 2,525 164 107 GlaxoSmithKline Healthcare 2,457 29 28 Johnson & Johnson Consumer 2,409 49 39 Walt Disney Media 2,293 141 10
10 Unilever Consumer 2,246 47 511 Sprint Nextel Telecom 1,903 71 512 General Electric Conglomerate 1,791 79 713 Toyota Automotive 1,758 57 514 Chrysler Automotive 1,739 53 515 Sony Technology 1,737 72 716 L'Oreal Consumer 1,632 12 217 Sears Retail 1,628 23 318 Kraft Foods Consumer 1,508 36 319 Bank of America Financial 1,491 72 1820 Nissan Automotive 1,423 34 4
Largest USA Advertisers Under Spend on Internet Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average
Note: (1) 8% is the average of the top 100 US ad spenders in 2007, per Ad Age. Data via TNS, which excludes search revenue. We use IAB and ZenithOptimedia data to estimate that in the U.S., online ad spend (including search) = ~12% of total ad spend;
(2) Percentage of total measured advertising spending, which is smaller than the total ad spending figures provided. Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research
116
Key to Progress = Learning to Speak Different Languages and Walk Miles in Moccasins – Google / P&G Employee Swap
• P&G employees were surprised during a Tide brand meeting when a Google job-swapper didn't realize Tide's signature orange-colored packaging is a key part of the brand's image.
• Google employee caused a stir when she showed P&G staffers some Google data indicating online searches for word "coupons" are up ~50% over past 12 months.
• When P&G unveiled an ambitious promotion for the Pampers brand, the Google team was stunned to learn that Pampers hadn't invited any "motherhood" bloggers -- women who run popular Web sites about child-rearing -- to attend the press conference.
P&G’s ‘The Talking Stain’ Campaign Engages YouTube Vi ewers
Source: The Wall Street Journal 11/28/08, Advertising Age, P&G. 117
While CPMs / CPCs May be Under Near-Term Pressure, If Targeting / ROI Continue to Improve (as they should) There Should Be Long-Term Upside
Estimated CPMs
Source: Yahoo! Investor Presentation, 3/08. 118
History Proves That Ads Follow Eyeballs,It Just Takes Time
1996 – Morgan Stanley Global Estimates in ‘The Interne t Advertising Report’ 2007 – We’re @
Internet Users:
1.35B(1)
Online AdRevenue:
$41B(2)
Ad Revenue per User:
$30(3)
Note: (1) ITU, Morgan Stanley Research estimate, comScore reports a lower number for global unique visitors due to their sampling method;(2) ZenithOptimedia; (3) Using comScore’s #s, global online ad revenue per unique user would have been ~$53;
Source: ITU, ZenithOptimedia, Morgan Stanley Research. 119
We are Undergoing the Greatest Media Transformation in History
120
Amazon.com =Greatest Advertiser / Agency of Past Decade?
121
• Online advertising underperforms relative to potential – 76% of USA consumers find Internet ads more intrusive than print ads, 64% pay more attention to print ads than those online, per Deloitte.
• Amazon.com turns intrusive ads into useful / desirable information
Demo: Step 1: Show your interests in a camera
Step 2: Amazon.com returns with ‘ads’ for compatible lens / battery / memory card, etc.
Source: Deloitte, Amazon.com.
Source: Advertising Age, WikipediaNote: 2 ads before 1900 are included in 1900s decade.
Alka-Seltzer ads are included in 1960s decade. 122
0%
5%
10%
15%
20%
25%
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s
% o
f Top
100
Ads
Advertising Age – Best Campaigns 1900-2000 –Most Fertile Decades = 1950-1980
Source: Advertising Age. 123
These Campaigns Were Really / Really Awesome –They Sold Lots of Product
Rank Company Commercial Ad Agency Year
1 Volkswagen Think Small Doyle Dane Bernbach 1959
2 Coca-Cola The pause that refreshes D'Arcy Co. 1929
3 Marlboro The Marlboro Man Leo Burnett Co. 1955
4 Nike Just do it Wieden & Kennedy 1988
5 McDonald's You deserve a break today Needham, Harper & Steers 1971
6 DeBeers A diamond is forever N.W. Ayer & Son 1948
7 Absolut Vodka The Absolut Bottle TBWA 1981
8 Miller Lite Beer Tastes great, less filling McCann-Erickson Worldwide 1974
9 Clairol Does she...or doesn't she? Foote, Cone & Belding 1957
10 Avis We try harder Doyle Dane Bernbach 1963
11 Federal Express Fast talker Ally & Gargano 1982
12 Apple Computer 1984 Chiat/Day 1984
13 Alka-Seltzer Various ads Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene 1960s, 1970s
14 Pepsi-Cola Pepsi-Cola hits the spot Newell-Emmett Co. 1940s
15 Maxwell House Good to the last drop Ogilvy, Benson & Mather 1959
16 Ivory Soap 99 and 44/100% Pure Proctor & Gamble Co. 1882
17 American Express Do you know me? Ogilvy & Mather 1975
18 U.S. Army Be all that you can be N.W. Ayer & Son 1981
19 Anacin Fast, fast, fast relief Ted Bates & Co. 1952
20 Rolling Stone Perception. Reality. Fallon McElligott Rice 1985
21 Pepsi-Cola The Pepsi generation Batton, Barton, Durstine & Osborn 1964
22 Hathaway Shirts The man in the Hathaway shirt Hewitt, Ogilvy, Benson & Mather 1951
23 Burma-Shave Roadside signs in verse Allen Odell 1925
24 Burger King Have it your way BBDO 1973
25 Campbell Soup Mmm mm good BBDO 1930s
We are Undergoing the Greatest Media Transformation in History
Where is the great creative?
Great creative sells great products.
Great creative (in a new medium) for great products helps create great companies.
124
Great Internet Creative –The Time is Now…
• When the going gets tough, the tough get going.
- Joe Kennedy (1888-1969)
• Necessity is the mother of invention.
- Plato (~400BC)
• Speed up in a slowdown.
- Google (2008)
125
The Internet –What Would William Bernbach or Leo Burnett Do?
• Rules are what the artist breaks; the memorable never emerged from a formula.
- William Bernbach (1911-1982)
• Just do it. - Wieden & Kennedy (1988)
126
127
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley").For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA.
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker.Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
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Important US Regulatory Disclosures on Subject Comp anies
The following analyst, strategist, or research associate (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Mary Meeker - Amazon.com (common stock), eBay (common stock), Yahoo! (common stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition.As of November 28, 2008, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Amazon.com, eBay, Google, GSI COMMERCE, Yahoo!.As of November 28, 2008, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Amazon.com, eBay, GSI COMMERCE, Yahoo!.Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Dice Holdings, Inc., eBay, Google, GSI COMMERCE.In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!.Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from eBay, Google.Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Amazon.com,Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!.Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: eBay, Google.The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.An employee or director of Morgan Stanley is a director of Yahoo!.Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, drugstore.com, eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!.Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
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Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category
Overweight/Buy 838 36% 254 40% 30%
Equal-weight/Hold 1037 44% 282 45% 27%
Not-Rated/Hold 32 1.4% 8 1.3% 25.0%
Underweight/Sell 427 18% 90 14% 21%
Total 2,334 634
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