Global Internet Trends
04/07/06
mary.meeker@morganstanley.com brian.pitz@morganstanley.com brian.fitzgerald@morganstanley.com richard.ji@morganstanley.com
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1
Internet Trends – Many Things to Worry About…
1) Plethora of emerging opportunities can create near-term costs 2) Increasingly competitive landscape (intramural and other) can drive uncertainty 3) Infrastructure builds can increase costs 4) Rapid growth of mobile Internet can create transitions 5) Rapid growth of emerging markets can create challenges 6) Rising competition for talent can increase costs 7) Regulatory intervention can slow momentum 8) Impact of high oil prices plus on-going threats from likes of terrorism and pandemics can create uncertainties
2
Internet Trends – Many Things to Be Excited About!
1) Secular shift to IP-based digital media has tremendous momentum 2) Broadband penetration remains low 3) Online advertising spending relative to usage remains low 4) Online vs. offline commerce penetration remains low 5) Usage growth of digital content (broadband and mobile) remains robust 6) Monetization of broadband and wireless content / usage remains low 7) Global Internet usage growth (including mobile) remains healthy 8) Internet leaders have garnered significant audience / competitive advantage over the years 9) 2007 could be a year of leverage
3
Hierarchy of Needs?
1943 - Maslow 2006 - ? ;)
Selfactualization Esteem
Internet / Mobile Phone
Belonging Safety Physiological
Shelter
Food / Water
Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate.
4
Outline
1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) Public Internet Companies Communications Hubs? Global Broadband Mobile VoIP Video Local Finding Emerging Trends Emerging Companies Closing Thoughts Appendix
5
Public Internet Companies
1
6
US Companies = 82% of Global Market Value…
Company Market Cap ($B)
$281,510 97,820 78,544 53,190 43,119 15,656 15,055 10,210 9,944 9,157 5,901 5,643 4,458 4,299 3,652 3,480 1,954 1,629 1,587 1,549 1,457 1,374 1,327 1,251 1,160 1,072
Y/Y Change In Mkt Cap
3% 106 (2) 4 (2) (25) 6 114 (37) 12 62 (22) 12 15 32 7 47 66 137 33 48 176 34 6 (38) 12
C2005 Rev ($MM)
$39,788 6,139 43,652 4,552 3,696 2,862 8,490 2,548 5,754 2,038 987 1,609 497 758 169 1,484 353 304 308 --688 325 -1,203 330
Y/Y Change C2005 Op In Rev Inc ($MM)
8% 92 4 39 43 (10) 23 22 (7) 9 17 38 26 25 26 9 21 80 95 --36 22 -7 14 $16,642 2,129 7,502 1,442 1,160 351 465 636 345 524 176 225 134 72 27 41 41 79 61 --11 (17) -40 57
C2005 Op Margin
42% 35 17 32 31 12 5 25 6 26 18 14 27 10 16 3 12 21 20 --2 (5) -3 17
U.S.
Microsoft Google AOL Time Warner eBay Yahoo! Electronic Arts Amazon.com E*Trade InterActiveCorp Intuit Monster.com VeriSign NAVTEQ CheckFree WebMD Activision CNET ValueClick aQuantive THQ Interactive WebEx Communications Netflix RealNetworks RSA Security TakeTwo Interactive Internet Security Systems
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006).
7
…US Companies = 82% of Global Market Value…
Company Market Cap ($B)
$11,517 4,643 3,991 1,983 1,968 1,577 1,490 1,168 $38,029 27,785 18,443 9,903 3,292 1,935 1,457 1,315
Y/Y Change In Mkt Cap
(14%) (38) 18 7 2 1 (22) (20) 1% 95 26 (10) 17 198 13 16
C2005 Rev ($MM)
$2,730 6,727 768 607 809 845 -874 $1,099 7,809 4,808 1,099 2,432 225 263 381
Y/Y Change C2005 Op In Rev Inc ($MM)
0% (38) (7) (18) 0 32 -(40) 0% 0 0 147 0 0 0 57 $471 532 226 128 (141) --(87) $562 (237) 1,041 295 263 9 88 23
C2005 Op Margin
17% 8 29 21 (17) --(10) 51% (3) 22 27 11 4 34 6
Europe
T-Online International AG Thomson Multimedia TPI Eniro Seat Pagine Gialle Freenet.De Ag Kudelski Tiscali Yahoo! Japan Softbank Corp Nintendo Rakuten Konami Cyber Communications Koei Cyber Agent
Japan
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006).
8
…US Companies = 82% of Global Market Value
Company Market Cap ($B)
$2,811 1,313 1,269 1,098 $2,367 $4,052 1,265
Y/Y Change In Mkt Cap
95% (19) 89 83 99% 185% (17)
C2005 Rev ($MM)
--$65 123 $138 $253 280
Y/Y Change C2005 Op In Rev Inc ($MM)
--60% 0 0% 0% 0 --$27 31 $54 $66 94
C2005 Op Margin
--42% 26 39% 26% 34
China
Netease Sina.com CTrip Tom Online
Hong Kong Tencent Holdings S. Korea
NHN Corp Ncsoft Corp.
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006).
9
Powerful Non-US Market Capitalization Growth
1970
Rest of World 34%
2001
Rest of World 53%
2030E
Rest of World 73%
US 66%
US 47%
US 27%
Source: AXA. Projected data for C2030E calculated using the rate of growth of market capitalization for Rest of World and USA since 1970.
10
US Maintains Dominance in Global Tech Company Market Capitalization
Region % Total Market Value 63% 17 11 9 100% Market Value (12/31/05) $2,455B 665B 421B 361B $3,902B
Y/Y Change -1% 3 39 -5 3%
N. America Japan Asia Europe Total
Source: Morgan Stanley Technology Research.
11
Non-US Markets Gaining Share of Technology Financings
Geographic Distribution of Technology Equity and Equity-Linked Transaction Volume ($B)
100% 80% 60% 40% 20% 0%
$34
$109 $181
$67
$35
$58
$63
$55
2005 US – 38% Asia – 33% Europe – 20% Japan – 9%
1998 1999 2000 2001 2002 2003 2004 2005
U.S. Europe Asia Japan
Source: SDC, Dealogic, Morgan Stanley; 01/31/06
12
Leading Global TMT Companies
Telephone Lines Cable Subscriptions Installed PCs Mobile Subscriptions
171MM Cingular - 27% Verizon - 25% Sprint PCS - 12% T-Mobile - 10% Nextel - 8% 335MM China Mobile - 64% China Unicom - 36%
Mobile Handsets*
Internet Service Providers (ISPs)
171MM users AOL/RoadRunner - 27% Comcast - 8% NetZero/Juno - 6% SBC Yahoo! - 6% EarthLink - 5% 335MM users China Telecom - 15% China Unicom - 14% China Netcom - 10%
DSL
Credit / Debit Cards
878MM Citibank - 13% Bank One - 10% MBNA - 8% Bank of America - 8% JPMorganChase - 6% 685MM Ind. & Comm. Bank of of China - 20% Bank of China - 18% Agr. Bank of China - 14% China Const. Bank - 10% 645MM Sumitomo Mitsui - 16% UC Card - 15% Nippon Shinpan - 14% Credit Saison - 12% UFJ Card - 9% 96MM Bank. Berlin - 7% Citibank - 6% Barclaycard - 6% Commerzbank - 5% KarstadtQuele Bank - 4% 142MM Barclays Bank - 18% RBS/NatWest - 16% HSBC Bank - 6% MBNA - 6% Co-operative Bank - 4%
USA Pop. 294MM
184MM Verizon - 36% SBC Comm. - 31% BellSouth - 14% Qwest - 9% Sprint - 5%
99MM Comcast - 22% DirecTV - 14% EchoStar - 11% Time Warner - 11% Cox - 6% 128MM Shanghai Cable Tianjin Cable Beijing Cable
204MM Dell - 35% HP - 19% Gateway - 6% Apple - 5% Lenovo - 5% 42MM Lenovo - 26% Founder Elec.- 12% Tongfang - 8% Dell - 7% IBM - 5% 54MM NEC - 20% Fujitsu - 19% Dell - 11% Toshiba - 8% IBM - 7% 39MM Fujitsu Siemens - 21% HP - 11% Acer - 10% Medion - 10% Dell - 9% 26MM Dell - 29% HP - 16% Acer - 5% NEC/Packard Bell - 5% Toshiba - 5%
141MM Motorola - 35% LG - 17% Samsung - 16% Nokia - 14% Kyocera - 4% 85MM Noka - 26% Motorola - 10% Samsung - 9% Bird - 8% TCL - 6% 49MM NEC - 17% Panasonic - 14% Sharp - 13% Sanyo - 12% Fujitsu - 11% 30MM Nokia - 33% Samsung - 16% Motorola - 13% Siemens - 9% Sony Ericsson - 8% 30MM Nokia - 33% Samsung - 16% Motorola - 13% Siemens - 9% Sony Ericsson - 8%
5.8MM SBC - 38% Verizon - 31% Bell South - 18% Qwest - 9% 3.3MM ChinaNet China Netcom GBNet China Unicom
China
283MM China Telecom - 60% China Netcom - 36% Pop. 1,300MM China TieTong - 4%
Japan Pop. 128MM
78MM NTT KDDI Japan Telecom
21MM Sky Perfect - 15% Jupiter Telecom - 8%
85MM NTT DoCoMo - 56% KDDI (au) - 22% Vodafone - 17% TU-KA - 4% 68MM T-Mobile - 40% Vodafone D2 - 36% E-Plus - 13% O2 - 11% 54MM O2 - 25% T-Mobile - 24% Orange - 23% Vodafone - 23%
85MM users @nifty - 14% SoftbankBB - 13% NTT (OCN) - 12% NEC (biglobe) - 11% KDDI (dion) - 8% 68MM users T-Online - 53% freenet.de AOL Tiscalie 54MM users Freeserve - 9% World Online - 6% BT/Genie - 6% AOL - 5% LineOne - 5%
7MM NTT Regional - 43% BB Technologies - 25% ACCA Networks - 10% e-Access - 10% Japan Telecom - 7% 3.1MM Deutsche Telecom
Germany Pop. 83MM
57MM Deutsche Telecom - 89% Arcor Mobilcom
26MM Kabel Deustch. - 38% Ish (Kabel NRW) - 16% Premiere World - 13% Kabel Baden Wurt. - 9% EWT (UPC) - 8% 15MM Sky Digital - 48% Freeview - 30% NTL/Telewest - 22%
UK Pop. 60MM
33MM BT - 83% NTL/Telewest - 13%
0.55MM BT
Source: 2004 data from Morgan Stanley Research TMT database. Orange represents absolute market size within a given country; company market share listed below. For ISPs, the company market shares refer to share of the ISP market, while the user numbers refer to Internet users. *Shipment units.
13
Communications Hubs?
2
14
Next Generation Communications Hubs?
Internet Sites
Yahoo! Unique Visitors (1) (471MM) Google (1) Unique Visitors (1) (451MM) MSN Unique Visitors (1) (428MM) eBay Unique Visitors (1) (241MM) Amazon.com Active Customers (2) (52MM) MySpace.com Unique Visitors (1) (46MM) AOL Subscribers (2) (26MM)
Search Engines
Google Search Unique Visitors (1)
Email Providers
Yahoo! Mail
Unique Visitors (1)
IM / VoIP Services
MSN Messenger Active Accounts (2) (205MM) Yahoo! Messenger Unique Visitors (1) (79MM) Skype / eBay Registered Users (2) (75MM) AOL Instant Messenger Unique Visitors (1) (45MM) ICQ Unique Visitors (1) (34MM) Google Talk Unique Visitors (1) (4MM)
Payments
PayPal / eBay Accounts (2) (96MM)
(395MM) Yahoo! Search
Unique Visitors (243MM)
(1)
(233MM) MSN Hotmail Active Accounts (2) (230MM) Google GMail Unique Visitors (1) (54MM)
• Convergence is happening (~10% of Yahoo! IM sessions end in phone call). Opportunities exist for non-mobile players to leverage existing subscribers. • Who has the most valuable customer base as transition occurs? Who will have it when it is over?
(1) (2)
Source: Global Unique Visitors, comScore Media Metrix (1/06). Source: Company Reports, as of CQ4:05 for eBay, Microsoft, as of CQ3:05 for others. AOL subscribers based on sum of US and Europe AOL-branded subscribers.
15
Significant Infrastructure Builds
Capital Expenditures
(US$ in Millions)
C2003 $177 375% $117 128% $365 163% $46 17%
C2004 $319 80% $246 109% $293 (20%) $89 94%
C2005 $838 163% $409 66% $338 16% $203 128%
Google Y/Y Yahoo! Y/Y eBay (1) Y/Y Amazon.com Y/Y
Source: Company filings, Morgan Stanley Research. Figures exclude capital expenditures from acquired companies. (1) C2003 includes $125.1MM purchase of additional office space. E = Morgan Stanley Research estimates.
16
Global
3
17
Strong PC Unit Growth Driven Boosted by Internet & Consumer Demand…
Global Estimated PC Shipments by Segment
(PC Unit Shipment Data in Millions)
CQ1:04 CQ2:04 CQ3:04 CQ4:04 CQ1:05 CQ2:05 CQ3:05 CQ4:05
C2004 C2005 179
16%
Total Units
Y/Y Growth
42
17%
40
15%
45
13%
52
15%
47
13%
47
18%
53
17%
60
16%
208
16%
Enterprise SMB Consumer
29% 34 37
32% 34 33
32% 33 35
28% 33 39
28% 34 37
30% 34 35
30% 33 37
27% 33 40
30% 34 36
29% 34 38
Source: IDC and Morgan Stanley Research – R. Runkle, K. Huberty Note: Enterprise includes large enterprises and the government vertical. SMB stands for Small Medium Business.
18
Leading TMT Markets by Category
Category Internet Users Mobile Phones in Use Installed PCs Credit/Debit Cards in Use Cable TV Subscriptions GDP per Capita Telephone Lines Population 2004 Growth Rate 18% 14 11 9 9 6 4 1 Market Size (MM) 901MM 1,589 696 3,567 459 $19,168 1,198 6,288
Source: Morgan Stanley Research; GDP figures from IMF, shown in current USD. Note: Data include totals for 50 countries in our TMT database, updated for 12/2004; GDP updated for 12/2005.
19
Morgan Stanley TMT Market Sizing Methodology…
We measure 2004 market sizes / growth rates for 8 core TMT-related metrics: 1) 2) 3) 4) 5) 6) 7) 8) Population Nominal GDP per Capita Telephone Lines Cable Subscriptions Installed PCs Mobile Phones in Use Internet Users Credit/Debit Cards
We do this for the 50 most important economies, as measured in terms of population size, land mass, and GDP per capita.
20
…Morgan Stanley TMT Market Sizing Methodology
We measure market sizes and growth rates for core TMT metrics: nominal GDP per capita (USD, current); telephone lines; cable subscribers; installed PCs; mobile phones in use; Internet users and credit/debit cards in use. We do this for the 50 most important economies based on purchasing power / economic strength, as measured in terms of population size, land mass and 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 each country, we calculate past / present / potential global market weightings across seven TMT metrics - we call this our relative weighting - we use it to measure / rank a country’s propensity for TMT products and services.
Sample Calculation: Computing the relative weighting for US Telephone Lines and then the overall US relative weighting:
X −μ = Z − score + 5 = relative weighting
σ
183,688 −23,495 47,742
= 3.4 + 5 = 8.4
Following from this, the overall US relative weighting calculation (across the seven TMT categories) for the US is 9.16, derived by the equation: [6.4+8.4+11.3+7.6+8.9+10.7+9.6] / 7 = 9.0
21
China / India / Russia Likely to Continue to Make Impressive TMT Gains
2004
Rank 1 2 3 4 5 6 7 8 9 10 Country USA China Japan Germany United Kingdom India France Italy South Korea Canada Relative Weighting 9.0 8.2 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1
2010E
Rank 1 2 3 4 5 6 7 8 9 10 Country China USA India Japan Germany United Kingdom Russia France Brazil South Korea
Relative Weighting 8.7 7.7 7.0 5.9 5.3 5.2 5.2 5.1 5.1 5.0
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: nominal GDP per capita (current USD); telephone lines; cable subscribers; installed PCs; mobile phones in use; Internet users and credit/debit cards in use. For each economy, we calculate past / present / potential global market weightings across seven TMT metrics - we call this our relative weighting and we use it to measure / rank a country’s propensity for TMT products and services. We do this for the 50 most important economies based on purchasing power/economic strength, as measured in terms of population size, land mass and GDP per capita. We standardized each country’s position in the global market in each category and adjusted the values to reflect a positive scale. The relative ratings and ranks were determined by calculating an average of z-scores across categories. For example, in the United States, standardized and adjusted values of 6.4 in GDP per capita, 8.4 in telephone lines, 11.3 in installed PCs, 7.6 in mobile subscribers, 8.9 in cable subscribers, 10.7 in Internet users, and 9.6 in credit/debit cards produces a relative weighting of 9.0. 2010E relative weightings derived by assuming 2003-2004 growth CAGR for each category to 2010, and ensuring category penetrations were not exceeded.
Source: Morgan Stanley Research. Red indicates countries moving out of the top 10 TMT countries; green indicates countries moving into the top 10. GDP figures from IMF, shown in constant USD
22
Asia Pacific Should Lead World in Internet User Growth
Internet Users by Region
Rank 1 2 3 4 5 Region Asia Pacific Europe North America Rest of World Latin America TOTAL GLOBAL Internet Users C2004 308MM 236 224 87 47 901MM Internet Users C2007E 588MM 312 268 120 55 1.3B 3-Year CAGR 24% 10 6 11 6 14%
Source: Morgan Stanley Internet Research
23
China = Most Internet + Mobile Users Engineering Grads 4:1 vs. US + Capital Flowing
TMT Category Mobile Phones Cable TV Subscriptions Telephone Lines Internet Users Installed PCs Global Ranking 1 1 1 2 4 Units (MM) 335 128 283 94 42 2004 Growth 25% 16 14 18 17
Source: Morgan Stanley Research
24
2004 - Top TMT Countries
2004 Relative Weighting Telephone Lines (MM) Installed PCs (MM) Mobile Cable TV Phones in Use Subscriptions (MM) (MM) Internet Users (MM) Credit/Debit Cards in Use (MM)
Country
Population (MM)
GDP per Capita
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
USA China Japan Germany United Kingdom India France Italy South Korea Canada Brazil Spain Russia Netherlands Norway
9.0 8.1 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1 5.0 5.0 5.0 5.0 5.0
294 1,300 128 83 60 1,087 62 58 48 32 176 41 142 16 5
$39,935 1,272 36,596 33,390 35,548 622 32,911 29,014 14,151 31,134 3,325 25,320 4,087 37,326 54,600
184 283 78 57 33 47 34 27 25 20 42 18 38 10 3
204 42 54 39 26 13 23 15 27 16 19 10 19 8 3
171 335 85 68 54 40 42 54 37 15 49 37 58 14 4
99 128 21 26 15 49 8 3 13 10 2 3 10 6 1
202 94 73 46 35 39 25 29 32 22 18 13 22 11 3
878 685 645 96 142 38 30 55 66 62 175 95 24 30 7
25
N. America 36% of Internet Users in 2000E; 20% in 2007E
Geographic Distribution of Internet Users (MM)
379 482 610 761 901 1,039 1,191 1,343
100% 80% 60% 40% 20% 0% 2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
North America
Source: Morgan Stanley Research.
Europe
Asia/Pacific
Rest of World
Latin America
26
Broadband
4
27
Global Broadband – In / Entering Adoption Sweet Spot
US Residential Broadband Households (MM) 80 70 60 50 40 30 20 10 0
2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E
60%
Broadband Ramp in 25-30% Penetration Sweet Spot…
50% 40% 30% 20% 10% 0%
US Residential Broadband Households
Source: Morgan Stanley Research.
% of Total US Households
28
Global Broadband Trends
Broadband Data by Region, CQ4:05
Y/Y Growth
58% 43 29 23 52 42%
Rank
1 2 3 4 5
Region
Asia Pacific (ex. Japan) Europe North America Japan Latin America TOTAL GLOBAL
Subscribers(1)
70MM 60 50 22 7 209MM
Users(1)
140MM 120 100 44 14 418MM
Penetration(2)
11% 25 32 38 4 17%
Source: Morgan Stanley Research, Nick Sebrell, Paul Marsch, Richard Bilotti, Simon Flannery, Mitchell Kim. (1) Cable modem, DSL or FTTH deployments; In terms of broadband-users, we roughly estimate 2.0+ users per Internet subscription (2) Broadband subscriptions per household; data based on 2004 households from Morgan Stanley’s TMT database. Using subscriber-to-user multiplier, user penetration would be higher.
29
Mobile
5
30
Mobile to the Max?!
Blackberry – Protect Your Skull While You Destroy Your Thumbs
(Click to launch video clip)
31
Mobile Users 2x > Than Internet Users – N. America = 11% of Mobile / 23% of Internet Users
Internet Users – 1B C2005E (1) Mobile Subscribers – 2B C2005E (2)
N. America 11%
South America 5%
N. America 23%
Europe 19%
South America 11%
Europe 24%
ROW 12%
Asia Pacific 36%
ROW 18% Asia Pacific 41%
Source: Morgan Stanley Research and Morgan Stanley Communications Equipment Research - Scott Coleman, John Marchetti.
32
Mobile Leads Internet in Most Markets
Mobile Users (MM) 363 177 88 69 54 54 37 Internet Users Mobile Phone to Installed PCs (MM) Internet User Ratio (MM) 100 211 78 51 37 32 32 3.6:1 0.8:1 1.1:1 1.4:1 1.5:1 1.7:1 1.2:1 53 207 55 39 26 16 27
Country China US Japan Germany UK Italy S. Korea
Source: Euromonitor, CNNIC, World Bank, Morgan Stanley Internet Research (July 2005)
33
Global Mobile – Should Enter Adoption Sweet Spot in 2006 / 2007+
Global 2.5G / 3G Penetration
1,600 1,400 1,200 Subscribers (MM) 1,000 800 600 400 200 0 2005E 2.5G Subscribers 2006E 3G Subscribers 2007E 2008E 2009E % 3G Penetration 10% 0% 60% 50% 40% 30% 20%
2.5G Ramp in 2530% Penetration Sweet Spot…
% 2.5G Penetration
Source: Morgan Stanley Telecom Research Scott Coleman, John Marchetti.
34
% of Total Wireless Subscribers
Mobile – Next Internet Opportunity
•
Networked personal computer (thanks to broadband adoption) still has lots of evolutionary running room In 5th major computing cycle - Mobile Internet If past is prologue, Mobile Internet will likely be bigger (based on aggregate wealth creation) and have more reach (based on global users) than cycles that have come before it ~2B global mobile phones in use > ~1B Internet users in 2005 $19B in global Mobile Internet premium services revenue comparable to Internet advertising revenue in 2005
• •
• •
Source: Morgan Stanley Research.
35
Mobile – A New Computing Cycle
•
Mobile Internet represents a new computing cycle Mainframe Minicomputer PC PC Internet
Mobile Internet
•
Unlike past cycles, US is follower, not leader − 89% of mobile subscribers, 93% of Mobile Internet users in non-US markets; China is #1 Uncharted / new sources of usage generated for / from Mobile Internet platform − What will be the dominant killer application for the mobile consumer? E-mail? SMS? Ringtones? Games? Search? Blogs? Location-Based Services? Why now? 1) handsets becoming small functional computers; 2) cheaper / faster / more data; 3) more content − 334MM (48%) of handsets shipped (18% of base) Mobile Internet ready (can run Java or BREW applications…), 2005E − 374MM subscribers (20%) with 2.5G (~50Kbps) or 3G (~300Kbps) network access; 61MM 3G subscribers (3%) have broadband-like services (browsing, full track music) − Mobile content improving steadily - consumers are spending billions on it
•
•
36
Global Data Tell Story…
2.1B Mobiles 3.5x number of PCs, growing at 20% Y/Y vs. 12% for PCs Mobile carrier revenue was $600B+ (and rising) of the $1T+ telecom market in 2004 (Yankee 11/04) Asia / Pacific + Europe have 7x mobile subscribers (Morgan Stanley), 10x mobile data users than N. America (Informa 5/05) China Mobile - $2.8B mobile data revenue (+103% Y/Y, CH1:05), 20% of total revenue (vs. 7% average for US carriers) $171MM China Mobile ring back revenue, +961% Y/Y; #1 song had 5MM mobile downloads, comparable to #1 CD album 75MM Skype users as of 12/05 – fastest product ramp ever? – dual mode WiFi / GSM handsets shipping now MVNOs taking off worldwide, Virgin Mobile USA (3MM subscribers) buys voice / data transport from Sprint 37
$1 Trillion Asia & Europe 10x US
China
Wireless VoIP MVNOs
…Global Data Tell Story
Cameras $50B+ Messaging $3B Music Content Games Commerce Community 75% of cameras shipped (300MM) to be in mobile phones in 2005E (ex. disposables, Mobile Imaging Report 2005) 1.1T SMSs sent with $50B in revenue in 2004 (Informa 5/05); more emails sent in Japan via mobile phone than PC (DoCoMo 2005) $3B annualized ringtone sales (Informa 5/05) - vs. 1B cumulative iTunes songs sales (1/06); 50x more full track music & ringtones downloads done via mobile than PC in Japan VeriSign’s Jamba exceeded $530MM (+194% Y/Y) in 2005 revenue $1.8B to be spent on mobile gaming in 2005E, up 42% Y/Y (MS Research) 3MM+ NTT DoCoMo wallet phone users (CQ1:05) used pre-paid technology on mobile phones to complete transactions Mobile community leader SMS.ac exceeds 40MM users (6/05)
38
Business Leaders Tell Story
Mobile phones are more than a billion smart computers we can’t ignore that may create a software spiral like that of PC over the next 10 years. - Paul Otellini, Intel CEO We really believe we are on the cusp of a whole new era of mobile computing. - Steve Ballmer, Microsoft CEO This is much bigger than what we saw 10 years ago [with the PC Internet]. - Jonathan Sacks, MFORMA CEO Most people’s first computing experience will be via a cell phone. - Eric Rudder, SVP, Technical Strategy, Microsoft
39
Mobile Internet Is Here – $19B+ Revenue (+23% Y/Y in 2005E)
Mobile Internet with $19B in 2005E revenue is already as big as online advertising but with smaller wealth creation
Global Revenue (US$ in Billions)
2005E
2009E
$559 61 102 45 $46
CAGR
1% 2 (5) 24 25%
Transport (1) Voice $529 Data 55 Handsets (2) 124 (3) Mobile Internet Premium Services 19 Online Advertising (4)
•
$19
Transport growth hurt declining prices / slowing subscriber growth • Handset revenue growth decelerating hurt by declining ASPs not offset by volume growth • Mobile Internet premium services expected to grow steadily, in-line with online advertising … biggest threat to forecast could come from mobile content piracy
(1) Informa (5/05). (2) Frost & Sullivan (5/05). (3) Source: Morgan Stanley Research, total market. (4) Source: PriceWaterhouseCoopers (6/05).
40
Broadband – Internet /RevenuePays Vendor Seller Composition Broadband vs. Mobile InternetRevenue Composition Broadband vs. Mobile
[ask vlad Mobile – User Pays…Make Up on Volume?! Top 10 Internet Companies - Revenue Composition C2005 - $42B Mobile Internet - Revenue Composition C2005E - $19B
Payments 3%
Personalization (1) 35%
Music & Video 4% Games 10% Gambling 1%
Advertising 36% Commerce 61%
Search / 411 16% Enterprise Services 10%
Other Info & Infotainment 24%
Source: Left Chart - Morgan Stanley Research estimates: includes revenue from Google, eBay, Yahoo!, Yahoo! Japan, Amazon.com, T-Online, InterActive, Time Warner (AOL only, ex-access), Microsoft (MSN only, ex-access), and Rakuten. CQ3:05 annualized revenue for Rakuten, and T-Online. Right Chart – Morgan Stanley Research estimates, Global Data. Informa (5/05), Ovum (5/05). (1) Personalization includes ringtones, wallpapers, and screensavers. If SMS / MMS were added to Mobile Internet—it would add $55B to total revenue and would account for 74% of total revenue.
41
Games / Ringtones / Music - Most Popular
Type of content users expect to access within 12 months
Asia Pacific (%) Games Ring tones Music News Sports clips Multimedia images* Video clips** Full feature films 49% 73 55 31 29 56 25 11 Europe (%) 15% 20 15 15 12 16 7 8 North America (%) 11% 27 13 15 10 13 7 3 South America (%) 30% 25 28 23 13 13 10 8
Source: LogicaCMG 6/05. * includes screen savers. ** includes movie previews
42
Asia / Europe Lead – Mobile Internet Adoption + Carrier Revenue
900 800 700 600 500 400 300 200 100 0
Asia Pacific North America Africa / Middle East
Europe South America
Subscribers (MM)
25 20 15 10 5
20% 12% 7%
Mobile Subscribers Mobile Internet Users
Mobile Data as % of Revenue (leading carrier in region)
Source: Informa 5/05. Mobile Internet user defined as someone who regularly uses data (including SMS) a minimum of once per week, whether for internet browsing or regular push services to their terminal. For right chart, leading carriers by wireless subscribers in Asia Pacific, Europe, and North America are China Mobile, Vodafone, and Cingular, respectively.
43
Complexity of Mobile Internet
PC Internet • Simple ecosystem • Microsoft Windows operating system and Intel x86 architecture create standardized development platform for applications and content Mobile Internet • Complex ecosystem • Different handsets support different network standards (CDMA, GSM, HSDPA) • Handset replacement cycle time shrinking from 26 to 18 months (1) • Fragmented, proprietary operating system landscape (Java, Brew) • Multiple processor architectures (TI, Samsung, Intel)
(1) Source: Frost & Sullivan (2005).
44
Korea Mobile Broadband Sets Standard
Melon Unlimited MP3 Downloads KRW4,500/mo ($4.60/mo)
Cizle Movie Preview, Reservation and VOD viewing
GXG Mobile Games KRW14,000/mo ($14.30/mo)
45
China Internet Companies – Diversified Revenue Mix
Revenue Composition - Top 13 China Internet Companies CQ3 Annualized - $2B
Others 14% Gaming 27%
MVAS 31% Advertising 28%
Source: Morgan Stanley Research, company data. Based on CQ3:05 earnings results for Baidu, Shanda, NetEase, SINA, Tom Online, Tencent, Sohu, The9, Linktone, KongZhong, 51job, Ctrip, and Hurray. Companies selected based on market capitalization as of 2/13/06.
46
Mobile Internet Food Chain – US Example
2 billion people globally with mobile devices buy mobile content from 2 primary sources…
Wireless Carriers Portals, Websites, Media
…who in turn may obtain content from content providers…
…with the help of billing / payment processors / infrastructure providers
Source: Motricity, Morgan Stanley Research.
47
Off-Portal Sales Have Grown Share, at Margin
qPass’ Global Non-Operator Storefront Sales
• While most content transactions in US are consummated on carrier portal, we are likely to see value of this screen real estate reduced, as users navigate directly to content, but expanded / independent mobile payment systems are key. Similar trends played out on Internet, with homepage advertising for large sites.
Source: qPass Customer Data (1/06). Non-operator = 3rd party mobile content vendor, such as Jamster. On-portal = content purchased via nonoperator’s WAP site or Web site. Off-portal = not sanctioned by the operator or available via the operator’s deck of content.
48
But Off-Portal Distribution Varies by Geography
“Off-Portal” Revenue Share in Europe and the US
80% 70 60 50 40 30 20 10 0 2004 2005 EU 2006 US 2007 2008
• In Europe, where carriers partner with a greater number of content providers with their transparent billing systems, 70% of revenue is generated off-portal • In US, where access to transparent billing by content providers is limited and where content provision is not generally enabled off-portal, 30% of revenue is generated off-portal
Source: Yankee Group (2004), as quoted by qPass (4/05) http://www.qpass.com/connections/april2005/offportal.html.
49
Mobile Content Value Chain – Fighting Over End-User Wallet Share
• As content becomes richer, content owners may gain leverage / revenue share over time • Shift to real tones from polyphonic ringtones may potentially squeeze middlemen, increasing content owner / label share • Carriers, who possess extensive customer relationships (including billing) and distribution channels, are also likely to demand higher share of pie and fight to protect ‘walled garden’ fees • In US, carriers make ~20-30% for on-portal content, and potentially make less from off-portal content, per qPass • However, owing to differences in platform (on-portal vs. off-portal), content (polyphonic ringtone, mastertone ringtone, game), and service level (billing, customer service, marketing), carrier fees can vary from 5-40%
Source: Morgan Stanley Research and qPass (2005).
50
Walled Garden – Different Philosophies
1) Cingular
If a customer wants to do it [access content off Cingular’s deck], we need a darn good reason to block them. [Cingular services] should win on their merits, we want to be very open. - Jim Ryan, VP Cingular Data Cingular allows access to any web site, and more notably allows content downloads from any source, even those that bypass Cingular billing
2)
Verizon Wireless
Verizon is very particular and careful [about the content it selects], we are not interested in opening that up. – Jim Straight, VP Verizon Wireless Data Verizon Wireless recently moved to block access to any website except those accessible via Verizon’s deck; content downloads allowed only using Verizon billing and from Verizon deck
3)
China Mobile
China Mobile retains significant control over what content is offered, but is moving toward a more open and flexible walled garden approach: service providers choose to keep 85%, 70% or 50% of revenues depending on what level of service they want from China Mobile: 1) billing, 2) customer service, 3) marketing
51
Leading Global Wireless / Wireline Carriers – Skype / eBay = #8
Company China Mobile Vodafone (1) China Unicom Telefonica Moviles America Movil T-Mobile Orange NTT Cingular SBC (2) Verizon (2) NTT DoCoMo Verizon Wireless Sprint / Nextel Telecom Italia Mobile (1) Type Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireline Wireline Wireless Wireless Wireless Wireless Region China Europe / Japan China Europe / LatAm LatAm Europe / USA Europe Japan USA USA USA Japan USA USA Europe / LatAm Subscribers (MM) 247 171 121 90 93 87 84 56 54 49 49 50 51 47 44 Y/Y Growth 21% 13 15 26 53 12 16 (6) 10 (6) (7) 5 17 18 19 Market Cap ($B) $94 131 11 46 59 71 59 66 NA 92 95 67 NA 71 52
Skype (3) 75MM Registered Users (+277% Y/Y)
Average Growth:
12%
Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery. Note: Subscriber data based on most recent quarter. (1) As of CQ3:05. (2) Subscribers given as access lines. Total switched access lines do not include DSL. (3) Subscriber figure for Skype is registered user amount as of CQ4:05.
52
Leading Global Wireless / Wireline Carriers – ARPU Splits
Company Sprint / Nextel NTT DoCoMo T-Mobile Cingular Verizon Wireless Telefonica Moviles Orange Vodafone Telecom Italia Mobile NTT America Movil China Mobile China Unicom AT&T Verizon Type Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireless Wireless Wireline Wireline ARPU $62 59 52 49 49 40 38 37 35 23 15 10 6 --Voice ARPU $56 43 47 44 45 34 -30 29 -14 8 5 --Data ARPU $6 16 5 5 4 6 -7 6 -1 2 1 --% Revenue from Voice 90% 74 83 90 90 86 -82 74 -90 80 86 --% Revenue from Data 10% 26 17 10 10 14 -18 16 -10 20 14 ---
Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery. Note: Data from CQ4:05. Vodafone estimated on UK, Spain, Germany, Italy and UK average. For Telefonica Moviles and Telecom Italia Mobile, only domestic operations considered. Orange estimated on UK and France averages. Verizon and AT&T do not break out ARPU for wireline segments.
53
China Mobile (the Company) – Mobile Internet Ecosystem
•
247MM mobile subscribers (+21% Y/Y, C2005) $6B in data revenue (+59% Y/Y to 21% of revenue, C2005) - components include SMS & MMS ($3B in 2005), IVR, WAP and color Ringtones Mobile music is gaining momentum, color Ringtones downloaded 300MM+ times in C2005 Creation of powerful MVAS ecosystem - 80-85% revenue share with Mobile Internet companies (such as Tom Online) 70%+ of content for China Mobile is purchased off deck (vs. <20% for US market, per qPass)
•
•
•
•
Source: Morgan Stanley Research, China Mobile.
54
Mobile Internet Market Opportunities
• • • • • • • • • • • • • • • • • • • Converged devices / services Music Video New Media Devices Games & Gambling Paid Content Messaging Location-Based Services Cameras Community Search Advertising Payments Enterprise Productivity Telematics Battery Life Other Connected Devices Enabling Platforms & Infrastructure Services Browsers on Mobile Devices
55
Ten First Pass Mobile Internet Predictions
What’s going: 10. Expensive transport – VoIP & competition puts $600B transport business at risk 9. Microsoft monopoly – Linux has shot at mobile. MSFT has <1% share 8. Walled garden – cracking already. Emerging payment systems may assist 7. World wide wait – by 2006, 100MM+ subs w/ fast 3G, 500MM+ 2.5G 6. Hit content / media / studios / artists without mobile strategies What’s coming soon: 5. Mobile search, then mobile advertising – $3B market for 411 is good start 4. Smash hit IM / email / community / photo sharing applications 3. Yahoo! or Google of Mobile – may not be YHOO / GOOG or a carrier What’s coming later (5+ years to mass market): 2. Digital phone, in part, displaces analog wallet, keys & ID 1. Batteries that last and last – powered by motion, fuel cells …
56
Digital Paid-For Content – Developed on Mobile; Developing on Internet
Mobile Internet
Jamster
Text message short code in ad for content
Broadband Internet
iTunes Music + Video
+
See Jamster Ad for content
Desperate Housewives
+
Crazy Frog Ringtone 1 credit in 9 credit plan for $5.99 / month Spy Hunter Game 1 credit in 2 credit plan for $5.99 / month U2, Vertigo Song
+
Lost
$0.99 per song
$1.99 per video
57
Watch These Phones As Users Develop Co-Dependent Relationships With These Remote Control Devices
Denso Wave Barcode Reader in DoCoMo Phone Sling Box Samsung 7 Megapixel Phone
Barcode readers in phones can simply read product barcodes and automatically display order forms on the screen—and even make payments.
Watch / control your TV remotely. Slingbox enables you to watch your TV from wherever you are by turning virtually any Internet-connected PC into your personal TV. Whether you’re in another room or in another country, you have access to TV.
Camera resolution higher than most existing digital cameras.
58
Storage is Game Changer
iPod Nano
• 4GB in < 1.5 cubic inches!
59
Assume You Are On Candid Camera!
• Mass market adoption of camera and video phones may open up new markets (Google’s Blogger.com and upload.video.google.com) with potential for financial reward for citizen journalist / photographer…
• Check Out Korea: What allowed operators to see a return on investment on their EV-DO [3G] networks was not other content, but subscribers' own content. Content that was made by people and exchanged with others has been incredibly popular. – Hyeon Lee, VP Samsung
60
Mobile GPS – Keep on Trackin’
• About 10% of global handsets are GPS-enabled today, up from 1% in 1999(1)
+
+
=
Mapping services that know where you are
Vendor offering Location-Based Coupons
• Opt-in location-based coupons / advertising provide similar degree of engagement with consumers, on personalized / local / day-parted levels
(1) Source: Always On and American Tech Research.
61
Benefits of Recommendation Engines
• A recommendation engine is an application which suggests items for users to view based on user settings and past behavior/purchases – ‘users who liked this item also liked this item…’ One popular variant is Amazon.com’s recommendation engine, which creates suggestions based on purchase histories of other customers with similar tastes
•
Benefits of Recommendation Engines:
• • Increased page views Greater site stickiness • Higher Sales!
62
Mobile-PC as New Client-Server Model
Server
Client
User programs content on PC Abbreviated version of content syncs wirelessly with mobile device
63
VoIP
6
64
Skype (VoIP) = Fastest Growing Product Ever?
Skype Registered Users (1)
70,000,000 60,000,000 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0
75MM as of 12/05
1
4
7
10
13
16
19
Months Since Inception
(1) Source: Company Data, Morgan Stanley Research.
65
22
25
28
Pay Per Call – Compelling Conversion Rates
Step 1: Search for “Refinance” Step 2: Enter your Phone number Step 3: Wait for a call Step 4: Speak live with vendor
Source: Google.
66
Video
7
67
Rapid P2P Growth (Mostly Video) is Stressing Internet & is Undermonetized
• Peer-to-Peer (P2P) traffic was 60% (and rising) of Internet traffic in 2004, with BitTorrent accounting for 30% of traffic, per CacheLogic • “P2P affects Quality of Service (QoS) for ALL subscribers” (1)
Internet Protocol Trends (1)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1993 1994 Email 1995 FTP 1996 1997 1998 1999 2000 2001 2002 2003 2004
Other
P2P
Web
(1) Source: CacheLogic “P2P in 2005,” (9/05).
68
Video Dominates P2P
File Format Mix on 4 Major P2P Networks (1)
Other 27%
• Video is P2P bandwidth hog
Audio 11%
Video 62%
(1) Source: CacheLogic “P2P in 2005,” (9/05). Mix of file formats by volume of traffic generated over 4 main P2P networks: BitTorrent, eDonkey, FastTrack, and Gnutella. Weighted by volume of traffic on each network.
69
Video Should Help Drive Internet Infrastructure Growth
Video could drive difference between growth trajectories
Internet Capacity Requirements
Web Traffic + Video 300-500% Y/Y Growth Web Traffic alone 100% Y/Y Growth 2005
70
2015
Source: Cisco (12/05)
Online Video – P2P2 = Peer-to-Peer PLUS Pay-to-Play
1. 2. 3. 4. 5. 6. 2/04 – BBC launches private demo of Internet Media Player (iMP) allowing users to watch TV shows 24 hours after their initial scheduling date 10/05 – Disney / ABC and Apple to offer episodes of popular shows like Lost and Desperate Housewives available ad-free via iTunes for $1.99 apiece 10/05 – 1MM+ videos, priced at $1.99 each, downloaded from Apple’s iTunes site in less than 20 days 11/05 – Comcast / CBS and DirectTV / NBC to offer on-demand TV shows for $0.99 11/05 – Cisco to acquire Scientific Atlanta for $7B to prepare for demands of online video; expecting network traffic increases of 4-6x annually, instead of 2x gains seen in US and Europe, driven by video consumption requirements 11/05 – Time Warner to stream episodes for free (supported by 2-minute blocks of 15-30-second commercials) in Jan 2006. Initial run limited to 30 series (Wonder Woman, Growing Pains, Kung Fu…) but TWX plans to expand to 100+ series and 300+ episodes per month 11/05 – NBC Nightly News to air its entire broadcast on the Internet -- NBC Nightly News Netcast with Brian Williams will be available for free beginning at 10PM EST 12/05 – NBA to digitize 60+ years of footage and post on NBA.com, beginning in 2006, with a searchable database that will include players involved and exact locations on court 12/05 – CBS will offer NCAA basketball March Madness games for free in 2006, on streaming ad-supported basis
7. 8. 9.
10. 12/05 – CBS offers free streaming video of 2 comedy programs Two and a Half Men and How I Met Your Mother this Yahoo! during the week of 12/27 11. 12/05 – AOL / Google to collaborate to showcase AOL’s premium video service within Google Video 12. 1/06 – Google to offer for-pay video over Internet from likes of CBS and NBA 13. 1/06 – DirectTV / FOX to offer on-demand TV shows for $0.99 and pre-air shows for $2.99 14. 3/06 – Cingular to offer on-demand video service for 3G mobile phones for $20 a month
71
Online Video – It’s Findable, Should Be Tagged / Easy to Search!
72
Google Video – Short On-Demand Attention Spans Rule?!
Start Here: http://video.google.com Other Popular Video Sites
User-Generated Content
For-Pay Videos
Premium Content
Popular Videos
73
Local
8
74
Local Should Be Substantive Market
• 20% of US explicit searches local in nature; 40% of US implicit searches are local • Global local search market (Internet Yellow Pages, Geo-targeted search, Wireless) generated $3.4B in revenue in 2005E (+33% Y/Y), of this, US local search was $1B (+54% Y/Y) • US Yellow Pages off-line market of $15B (+1% Y/Y)
Source: The Kelsey Group (3/2006).
75
Mobile May Help Drive Local Growth
Google Local for Mobile
76
Yahoo! Go
Finding
9
77
SFO - Will There Be a Difference Between Advertising / Marketing / Selling?
Search for “TiVo” Find
Obtain
78
Google = On Demand Customer Acquisition Tool
Google gives advertisers / vendors a toolset / dashboard to manage / measure customer acquisition through sponsored search
79
Internet is a Distribution Channel – Search is Key Front-End
7% of global Internet traffic was derived from search while 65% of global users used search in CQ4, per comScore
50 Global Query Volume (B) 40 30 20 10 0 CQ1:04E CQ2:04E CQ3:04E CQ4:04E CQ1:05E CQ2:05E CQ3:05E CQ4:05E
27B 22B 30B 37B 34B 41B 40B 43B
Google
Yahoo!
MSN
Other Search
Source: comScore Global qSearch and MediaMetrix. Traffic is defined as page views.
80
SFO – Importance of Google / Yahoo! & Affiliates…
US Online Ad Revenue Mix (1)
Google, US Gross Ad Revenue (2) Yahoo!, US Gross Ad Revenue (2) Others (3)
1,400 1,200
US Ad Revenue ($MM)
53% 30% 25%
42%
1,000 800 600 400 200 0 CQ3:04E
27%
Total US, +34% Y/Y •Google, +84% •Yahoo!, +44% •Others (4), +8% Y/Y
22%
CQ3:05E
(1) (2) (3) (4)
Source: Ad revenue totals from IAB/PriceWaterhouseCoopers Interactive Advertising reports. Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue. Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue. Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up 20% Y/Y.
81
…SFO – Importance of Google / Yahoo! & Affiliates
• Google generated $1.9B in gross revenue in CQ4 it PAID OUT $629MM to thousands of partners like AOL, Ask Jeeves and EarthLink • Yahoo! generated $1.5B in gross revenue in CQ4 it PAID OUT an estimated $433MM to thousands of partners like MSN, ESPN and The Wall Street Journal
82
Payments – PayPal Has Impressive Broadband Internet Leadership With ~100MM Accounts. Mobile?
120 Total PayPal Accounts (MM) 100 80 60 40 20 0
CQ1:04 CQ2:04 CQ3:04 CQ4:04 CQ1:05 CQ2:05 CQ3:05 CQ4:05
9 8 7 6 5 4 3 2 1 0 Total Payment Volume (B) Total PayPal Accounts (MM) Total Payment Volume (B)
Source: Morgan Stanley Research.
83
Emerging Trends
10
84
Innovation / Network Effects Drive Usage Growth
• • • • • • • • • • • • • • • • Broadband Mobile User experience Search Personalization with more effective targeting User-generated content (RSS, blogs, reviews, video, images, audio…) Music Payments Short- and long-form video Interactive entertainment In-game Advertising VoIP Local Pay per call Digital Rights Management (DRM) Ubiquitous connectivity
85
Emerging Companies
11
86
Mobile Internet – A Younger Generation Goes Watch Where GlobalNew Client-Server World?
Ringtone Downloads, Connecting Mobiles to Net Social Networking Social Tagging
Web OS Programs
In-Game Advertising
87
UGC / Personalization / Community are Key
Yahoo! Movie Reviews Tencent Instant Messaging (PC / Mobile)
Social Networking / Tagging
eBay Feedback Ratings
Blogs
Google Video Search
88
Representative Emerging Companies to Watch – Based on Data Trends
Company Market
P2P File Sharing Online Video Content Online Marketplace Social Networking Personalized Search Personalized Radio News Aggregator IM for Gamers Blog Search Engine
Data Points
Accounted for 35% of all Internet traffic in 2004(1) 11MM uniques (1/06) vs. 327K (8/05) (2) 10MM uniques (1/06) vs. 6MM uniques (7/05) (2) 7MM uniques (1/06) vs. 3MM uniques (8/05) (2) 3MM uniques (1/06) vs. 1MM uniques (8/05) (2) 2MM uniques (1/06) vs. 528K uniques (7/05) (2) 2MM uniques (1/06) vs. 579K uniques (7/05) (2) 348K uniques (1/06) vs. 185K uniques (8/05) (2) 10K new customers / day (4) Over 29MM blogs indexed (3); 11% of U.S. Internet users read blogs (3)
Sources: Morgan Stanley Research, Alexa, comScore MediaMetrix. Note: Criteria for choosing companies based on the following variables: recent growth in Internet traffic, absolute Internet traffic, age of company, and presence on blogs and at conferences (1) Source: Cachelogic; (2) Source: comScore MediaMetrix; (3) Technorati; (4) Xfire.
89
Closing Thoughts
12
90
Internet Thesis
10-15% user growth 20-30% usage growth 30%+ monetization growth
91
A Look at Some of Biggest Winners of Our Day
Great Management Team, Constant Culture Improvement X X X X X X X X XX X X X X X X X
Huge Market Apple Cisco Dell eBay Google Intel Microsoft Yahoo! X X X X XX X X X
Simple, Focused Mission X X X X XX X X X
Active, Missionary Founders X O X X X X X X
Insane Customer Focus X X X X X X X X
Big Annuity Gross -Like Strong Margin Model Board 28 68 19 82 89 61 82 87 X X X X X X XX X X X X X X X X X
Source: Morgan Stanley Research (2005).
92
Appendix
13
93
Population – Top 15 Markets
2004 Population (000's) 1,300,024 1,086,529 293,819 221,279 175,507 150,109 142,655 142,362 127,641 103,975 83,986 82,786 70,589 69,330 68,317 6,288,463 2004 Growth 1% 2 1 1 1 2 3 -1 0 1 2 0 2 2 2 Worldwide Share 21% 17 5 4 3 2 2 2 2 2 1 1 1 1 1
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 China India USA Indonesia Brazil Pakistan Nigeria Russia Japan Mexico Philippines Germany Turkey Egypt Iran Total
94
Nominal GDP per Capita – Top 15 Markets
2003 GDP Per Capita (US$) $48,325 44,439 39,532 39,295 37,708 33,678 33,199 33,705 31,622 31,164 30,273 29,330 29,647 29,035 27,531 2004 GDP Per Capita (US$) $54,600 49,300 45,675 44,808 39,935 38,493 37,326 36,596 36,244 35,666 35,548 33,866 33,390 32,911 31,134 2004 Growth 13% 11 16 14 6 14 12 9 15 14 17 15 13 13 13
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Norway Switzerland Ireland Denmark USA Sweden Netherlands Japan Austria Finland United Kingdom Belgium Germany France Canada
Note: Morgan Stanley Research GDP per capita figures (current prices) from IMF.
95
Telephone Lines – Top 15 Markets
2004 Telephone Lines (000's) 282,524 183,688 77,790 56,936 47,188 41,568 38,035 34,223 33,374 26,720 24,681 19,943 19,068 18,234 17,280 1,198,245 2004 Growth 14% -1 2 3 7 3 4 0 -2 -1 3 -1 0 2 7 Telephone Line Penetration 22% 63 61 69 4 24 27 55 56 46 51 63 27 44 17 Worldwide Share 24% 15 6 5 4 3 3 3 3 2 2 2 2 2 1
Source: Morgan Stanley Research
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 China USA Japan Germany India Brazil Russia France United Kingdom Italy South Korea Canada Turkey Spain Mexico Total
96
Cable Subscriptions – Top 15 Markets
2004 Cable Subscriptions (000's) 128,000 99,091 49,234 25,801 21,165 15,148 12,793 10,086 9,927 7,861 6,334 5,660 5,094 4,810 4,134 459,236
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 China USA India Germany Japan United Kingdom South Korea Canada Russia France Netherlands Poland Taiwan Argentina South Africa Total
2004 Growth 16% 4 12 4 10 8 12 0 4 5 0 1 2 1 4
Cable Penetration 10% 34 5 31 17 25 26 32 7 13 39 15 22 12 9
Worldwide Share 28% 22 11 6 5 3 3 2 2 2 1 1 1 1 1
Source: Morgan Stanley Research
97
Installed PCs – Top 15 Markets
2004 Installed PCs (000's) 203,677 53,569 41,600 39,252 27,041 25,964 23,138 18,935 18,910 15,738 15,218 12,627 12,126 12,088 10,232 696,212
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 USA Japan China Germany South Korea United Kingdom France Russia Brazil Canada Italy India Mexico Australia Taiwan Total
2004 Growth 3% 4 17 1 2 4 5 19 19 1 8 29 20 1 5
PC Penetration 69% 42 3 47 56 43 37 13 11 49 26 1 12 60 44
Worldwide Share 29% 8 6 6 4 4 3 3 3 2 2 2 2 2 1
Source: Morgan Stanley Research
98
Mobile Phones – Top 15 Markets
2004 Mobile Phones In Use (000's) 334,820 170,723 85,147 68,121 57,620 53,964 53,662 49,171 41,506 40,323 37,164 36,862 36,625 32,919 32,130 1,588,805 Mobile Phones Penetration 26% 58 67 82 40 94 90 28 67 4 77 35 89 51 15
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 China USA Japan Germany Russia Italy United Kingdom Brazil France India South Korea Mexico Spain Thailand Indonesia Total
2004 Growth 25% 8 6 3 34 1 2 15 2 75 1 15 3 21 55
Worldwide Share 21% 11 5 4 4 3 3 3 3 3 2 2 2 2 2
Source: Morgan Stanley Research
99
Internet Users – Top 15 Markets
2004 Internet Users (000's) 201,833 94,000 72,677 46,312 39,200 35,179 31,600 28,610 24,848 22,300 21,850 17,945 13,611 13,440 12,250 900,981 Internet Users Penetration 69% 7 57 56 4 59 65 50 40 16 68 10 67 33 12
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 USA China Japan Germany India United Kingdom South Korea Italy France Russia Canada Brazil Australia Spain Mexico Total
2004 Growth 9% 18 14 19 57 11 5 25 13 49 24 16 29 37 33
Worldwide Share 22% 10 8 5 4 4 4 3 3 2 2 2 2 1 1
Source: Morgan Stanley Research
100
Credit / Debit Cards – Top 15 Markets
2004 Credit / Debit Cards (000's) 878,000 684,700 644,700 175,000 141,700 120,000 95,600 94,500 65,900 61,700 55,400 55,000 49,700 46,400 38,100 3,566,655 2004 Growth 7% 10 3 20 11 31 1 13 5 3 13 25 10 7 69 Credit / Debit Card Penetration 299% 53 505 100 236 521 115 230 136 193 96 78 48 229 4 Worldwide Share 25% 19 18 5 4 3 3 3 2 2 2 2 1 1 1
Source: Morgan Stanley Research
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 USA China Japan Brazil United Kingdom Taiwan Germany Spain South Korea Canada Italy Turkey Mexico Australia India Total
101
Mobile Network Speeds / Carriers / Uses
Beyond
Technology WiMax Wi-Fi Flarion HSDPA Average Speed 70 Mbps 35 Mbps + 1.5 Mbps 400-700 Kbps + 300-500 Kbps 220-320 Kbps 100-130 Kbps 100-130 Kbps 40-80 Kbps 30-40 Kbps US Players Various Various Nextel Cingular VZW, Sprint PCS Cingular Nextel Cingular, T-Mobile VZW, Sprint PCS AWE, Cingular, T-Mob Common Data Applications Stream. video, movie/MP3 downlds. Stream. video, movie/MP3 downlds. Stream. video, movie/MP3 downlds. Stream. video, movie/MP3 downlds. Stream. video, movie/MP3 downlds. Stream. video, movie/MP3 downlds. MMS, Video conferencing Multimedia e-mail, Web infotainment Video-conferencing E-mail and access to corporate data networks and the Internet SMS Two-way radio, Alphanumeric paging SMS SMS/multimedia games
3G 2.5G
EV-DO UMTS WiDEN EDGE CDMA1X GPRS
CDMA
10-20 Kbps 20 Kbps 9.6 - 21 Kbps 9.6 Kbps
VZW, Sprint PCS Nextel AWE, Cingular, T-Mob AWE, Cingular, T-Mob
2G
iDen GSM TDMA
Source: Morgan Stanley Telecom Research.
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Disclaimer
Disclosure Section The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley"). Analyst Certification 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: Brian Fitzgerald, Mary Meeker, Brian Pitz. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy This research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Mary Meeker Intuit (common stock), Amazon.com (common stock), Yahoo! (common stock), Microsoft (common stock), eBay (common stock); Brian Pitz - Amazon.com (common stock), Yahoo! (common stock), priceline.com (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 February 28, 2006, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Amazon.com, CNET, eBay, Google, VeriSign, Yahoo!. As of March 31, 2006, 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 this report (including where guarantor of the securities): Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Google, GSI COMMERCE. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign, Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from CNET, Intuit, Microsoft, priceline.com, VeriSign. 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 companies covered in this report: Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign, 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 companies covered in this report: CNET, eBay, Intuit, Microsoft, priceline.com, VeriSign. The research analysts, strategists, or research associates principally responsible for the preparation of this research report 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 & Co. Incorporated and/or Morgan Stanley DW Inc. is a director of Microsoft, Yahoo!.
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Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign, Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst's views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of March 31, 2006) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Underweight to hold and sell recommendations, respectively.
Coverage Universe Stock Rating Category
Overweight/Buy Equal-weight/Hold Underweight/Sell Total
Investment Banking Clients (IBC) % of Total % of Rating IBC Category Count % of Total Count
744 937 400 2,081 36% 45% 19% 276 323 95 694 40% 47% 14% 37% 34% 24%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
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Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in this report are available at www.morganstanley.com/companycharts or from your local investment representative. You may also request this information by writing to Morgan Stanley at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in this report may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. This report is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section lists all companies mentioned in this report where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in this report, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Employees of Morgan Stanley not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in its research reports on a principal basis. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.
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Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the cover page provides the closing price on the primary exchange for the subject company's securities. To our readers in Taiwan: Information on securities that trade in Taiwan is distributed by Morgan Stanley & Co. International Limited, Taipei Branch (the "Branch"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. This publication may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities. The Branch may not execute transactions for clients in these securities. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Dean Witter Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning this publication, please contact our Hong Kong sales representatives. This publication is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Hong Kong by Morgan Stanley Dean Witter Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Dean Witter Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International Limited, Seoul Branch; in India by JM Morgan Stanley Securities Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of this publication in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that this document has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated and Morgan Stanley DW Inc., which accept responsibility for its contents. Morgan Stanley & Co. International Limited, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International Limited representative about the investments concerned. In Australia, this report, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The trademarks and service marks contained herein are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard ("GICS") was developed by and is the exclusive property of MSCI and S&P. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley research is disseminated and available primarily electronically, and, in some cases, in printed form
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