Internet Trends
March 18, 2008
mary.meeker@ms.com / david.joseph@ms.com / anant.thaker@ms.com
Morgan Stanley is currently acting as a financial advisor to Microsoft Corp. ("Microsoft") in relation to their proposed offer to acquire Yahoo! Inc. ("Yahoo!"), as announced on February 1, 2008. The proposed offer is subject to definitive documentation, due diligence, the consent of Yahoo! shareholders, required regulatory approvals and other customary closing conditions. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Please refer to the notes at the end of the report.
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800624-2063 to request a copy of this research. This presentation can be found at www.morganstanley.com/techresearch. For analyst certification and other important disclosures, refer to the Disclosure Section.
Internet Trends
• Usage Patterns • Social Networking • Widget-ization + Component-ization • Measurability + Transparency + Customer Satisfaction • Video • Monetization • Mobile • Emerging Markets • Recession
2
Changes in Usage Patterns
3
Consumers Leading Way – 58% CAGR in IP Traffic, 2005E-2011E
Global IP Traffic
30,000,000 IP Traffic (TB / month) 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 2005E 2006E 2007E Total 2008E 2009E 2010E 2011E
Consumer IP traffic surpasses Business
Consumer
Business
Source: Cisco Systems, Global IP Traffic Forecast and Methodology; Mobility segment (0.1% of traffic in 2007) not displayed
4
Consumer Information Technology – Advancing Faster Than Enterprise
Fifteen years ago, enterprise technology was higher-quality than consumer technology. That's not true anymore. It used to be that you used enterprise technology because you wanted uptime, security and speed. None of those things are as good in enterprise software anymore [as they are in some consumer software]. Douglas Merrill Google Chief Information Officer, 3/18/08
Source: Interview with Vauhini Vara, ‘The Wall Street Journal’, 3/18/08
5
YouTube + Facebook Page Views > Yahoo! or Google – Massive Transition in Available Ad Units & Supply > Demand
Alexa Global Traffic – Relative Page Views
10
Daily Page Views (%)
8
6
4
2
0
2002
2003
2004
2005
2006
2007
2008
Source: Alexa Global Traffic as of 3/12/08
6
Social Networking – Fast Growth + Low Penetration
Worldwide Online Category Growth vs. Penetration
Category Penetration (% of Online Users)
Visitor Growth by Category (1/07-1/08)
Source: comScore ‘Digital World – State of the Internet’ 3/08
7
Social Networking – Significant Share Gains of Internet Traffic
Alexa Global Traffic Rankings 2005 (1)
Rank 1 2 3 4 5 6 7 8 9 10 Web site yahoo.com msn.com google.com ebay.com amazon.com microsoft.com myspace.com google.co.uk aol.com go.com Rank 1 2 3 4 5 6 7 8 9 10
2008 (2)
Web site yahoo.com youtube.com live.com google.com myspace.com facebook.com msn.com hi5.com wikipedia.org orkut.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).
(1) Rankings as of 12/31/05, excludes Microsoft Passport; (2) Rankings as of 3/12/08 Source: Alexa Global Traffic Rankings, Morgan Stanley Research
8
Social Networking – Connectivity Changing…Is E-Mail Becoming Archaic?
Worldwide Share of Online Time (1)
6% 14% 8%
Category didn’t exist 3 years ago
Connecting – Younger Users Via Social Networks + Older Users Via E-Mail? (2)
40%
35%
% of Total Minutes
37%
38%
30%
23%
20%
16%
16%
10%
22%
All Other Communications Social Connections Shopping & Travel Entertainment & Leisure Work, Business & Education
0% Yahoo! Mail Facebook
Age 15-24
Age 44+
Source: (1) comScore ‘Digital World – State of the Internet’ 3/08; (2) comScore global 1/08
9
Next Generation Assets – YouTube + Facebook + Skype + PayPal
Users Y/Y Growth Comments
#3 site in global minutes; 51% of users go to YouTube weekly or more; 50% watch all videos to the end; ongoing copyright challenges; 52% of 18-34 year-olds share videos with friends / colleagues often(1,3) #4 site in global minutes; 67MM+ active users; >50% of active users return daily; 20K applications + 95% of Facebook members have used at least one(1,4) $1.67 annualized revenue per registered user (+9% Y/Y) on peer-to-peer network; 1.6B Skype Out minutes (+10% Y/Y); 11.9B Skypeto-Skype minutes (+25% Y/Y)(2) Payment volume +35% Y/Y; On-eBay / offeBay payment volume +17% / +66% Y/Y (to 44% of TPV); Average transaction size of $68.88 (+10% Y/Y)(2)
258MM(1)
+94%
101MM(1)
+305%
276MM(2)
+61%
57MM(2)
+16%
Source: (1) comScore global 1/08; (2) eBay CQ4, Morgan Stanley Research; (3) YouTube; (4) Facebook
10
Social Networking – Changing the Way People Think About ‘Presence’
11
Internet + Personal Sources = Most Importance Sources of Information…Essence of a Social Network
Internet – Importance as Source of Information
100%
80%
% of Users Age 17+ Responding Important / Very Important 80%
73% 68%
63%
63%
60%
40%
20%
0% Internet Television Radio Newspaper Personal Source
Source: USC Annenberg School: Digital Future Report 2007
12
Facebook – Rapid User / Usage Growth
• 101MM visitors +305% Y/Y (67MM+ active users), 20B minutes (#4 globally behind Yahoo!, Live, and YouTube), +363% Y/Y; 250K new registrations per day since 1/07; >50% of active users return daily (Facebook 3/08, comScore 1/08) • 55K+ regional / work-related / collegiate / high school networks (>50% outside of college); Fastest growing demographic is those 25+ years old; 85% market share of 4-year US universities (Facebook 3/08) • 14MM+ photos uploaded daily; 6MM+ active user groups on site (Facebook 3/08) • Top non-US active users: UK (8MM+), Canada (7MM+), Turkey, Australia, France, Sweden, Norway, Columbia, and South Africa (Facebook 3/08)
120
Facebook Global Traffic
25
100 Total Unique Visitors (MM)
20 Total Minutes (B)
80 15 60 10 40 5
20
0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Total Unique Visitors (MM) Total Minutes (B)
0
Source: comScore global 1/08, Facebook 3/08, Morgan Stanley Research
13
Facebook – Top Applications
• In 5/07, Facebook opened its platform to third-party developers, allowing anyone to create widgets for use on Facebook pages • 20K applications, 859MM installations, 34MM usages per day since APIs opened – may be unprecedented ramp (adonomics.com 3/08) • Early to understand that individuals had the ability to innovate faster than it could, while users would govern quality / value as they customized their profiles
Application
Super Wall Top Friends FunWall SuperPoke! Movies Likeness Video Hug Me iLike Quizzes
Company
RockYou! Slide Slide Slide Flixster RockYou! Facebook RockYou! iLike N/A
(2)
Installs (% Active Users)
28MM (8%) 26MM (7%) 25MM (9%) 21MM (2%) 20MM (3%) 16MM (2%) 16MM
(1)
13MM (2%) 12MM (3%) 12MM (1%)
14
(1) Active user data unavailable; (2) E. Diep / J. Winterhalter; Source: adonomics.com 3/12/08
Facebook – Why is it Growing Faster than MySpace?
• Facebook offers a social network that is both standardized + self-controlled / flexible – a highly personalized first-stop portal for online connectivity – users can program their pages with growing number of drag-and-drop applications (aka widgets) • Users like the ability to express themselves + connect with friends in a protected environment where they know / trust people in their network + don’t feel exploited / spammed by intrusive ads
Less instrusive ads
?
Personalized News Feed Cleaner UI
‘Friends’ section more prominent
?
Personalized ad platform
Source: MySpace, Facebook
15
Facebook – ‘Presence’ Via Mobiles 24x7
Source: Facebook; C. Messina on flickr
16
Facebook Ads – Monetizing Word of Mouth / Conversations
Facebook prompt…
User restaurant rating entered
Becoming a ‘fan’ appears on News / Mini-Feed
…Appears on Facebook profile / News Feed
Source: Facebook, New York Times
17
Music – Monetizing Word of Mouth
Nine Inch Nails
• Ghosts I-IV online release – 800K transactions + $1.6MM sales in first week (1)
Radiohead
• In Rainbows ‘pay what you want’ online release – higher profit to the band than traditional record? Global Downloads (2)
Paid 38% Free 62%
$9 Average $ Spent $6.00 $6 $3.23 $3 $2.26 $1.68 $4.64 $8.05
$0 Global US Non-US All downloads
18
Paid downloads
Source: (1) Billboard 3/14/07, screenshots from Nine Inch Nails website; (2) comScore study 11/5/07, screenshots from Radiohead website
Widget-ization + Component-ization of Web – Users in Control of What They Want When They Want It
19
Not Your Father’s ‘Widget’
A Web widget can be best described as a mini application that can add functionality to your web page, blog, social profile, etc. If you find a widget that you like, you simply copy and paste some code and add it to the HTML of your web page. Photo galleries, news, videos, advertising, mp3 players and pregnancy countdown tickers! You name it, there is probably a widget that does it. David Lenehan, ReadWriteWeb
Yahoo! – Rock You – ‘Super Wall’ for Facebook Finance for iPhone Weather Channel – Forecast for iGoogle Amazon.com – ‘Giver’ for Facebook
Source: ReadWriteWeb, RockYou!, Yahoo!, Weather Channel, Google, Amazon.com, Facebook
20
iGoogle + Yahoo! Mobile
Add a tab + customize ‘gadgets’
Search
3rd party widgets in Yahoo! Go 3.0 Gmail
Weather
Maps
Movie showtimes
News
Wikipedia YouTube videos
Source: Google, Yahoo!
21
The BBC! – @ www.bbc.com + Facebook + YouTube…
Source: BBC
22
In Recession, Measurability + Transparency + Customer Satisfaction May Be More Important Than Ever
23
Personalization + Targeting Improvements – Driving Material Revenue
Amazon.com recommendation engine: Leveraging data Google ads: Improvements in relevance
What other customers are thinking
What other customers are buying
What other customers are doing
What other customers are saying
Source: Amazon.com, Google
24
Google Zeitgeist – Predictive Power of Data
Fastest Rising (global)
1. 2. 3. 4. 5. 6. 7. 8. 9. iphone badoo facebook dailymotion webkinz youtube ebuddy second life hi5
Fast Gainers by Quarter - 2007
Fastest Rising (US)
1. 2. 3. 4. 5. 6. 7. 8. 9. iphone webkinz tmz transformers youtube club penguin myspace heroes facebook
10. club penguin
10. anna nicole smith
Source: Google Year-End Zeitgeist, 2007
25
Lots of Servers…Lots of Interactions…Lots of Data
Google Data Center – The Dalles, Oregon
Source: The Financial Times 1/5/08
26
Search Impact – Still Early Stage & 66% Y/Y Google Query Growth (CQ4)
% Customers acquired from source
% of New Online Customers for Online Retailers / Marketing Spend Mix (2005) 50% 40% 30% 20% 10% 0%
pr og is on ra -s m ho s pp in Em g en ai lt gi o ne pr s os pe ct Tr in g ad lis i ti ts on al po rta ld ea N ls ew po rta ld ea ls g ffi c s m ar ke O th er
27
36%
29%
11% 10% 7% 5% 3% 3% 1%
tin
tra
O rg an ic
C
at Af fil ia
al
og
Se ar ch
en gi ne
Source: The State of Retailing Online 2006 (Forrester Research), comScore global 12/07, Morgan Stanley Research
C om pa r
te
Amazon.com – Continues to Gain Online + Offline Share
Amazon.com vs. US Retail E-Commerce Sales(1) Key Y/Y Growth Metrics – C2007
CQ1
30%
45% 40% 35%
CQ2 35% 17 13 25
CQ3 41% 17 15 32
CQ4 42% 19 17 33
Y/Y Growth
~23ppts
25%
Revenue Active Customers
32% 15 12 23
20% 15% 10% 5% 0%
CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07
TTM Revenue / Active Customer Units
US Adjusted Retail E-Commerce Sales Amazon.com North America Revenue
(1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: Amazon.com (CQ4:07), US Dept. of Commerce (CQ4:07), Morgan Stanley Research
28
While Only 13% of Top 15 Online Retailers are Internet Pure-Plays, Biggest $ Grower = Amazon.com
2006 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Company Amazon.com Staples Office Depot Dell HP Home & Home Office OfficeMax Sears Holdings CDW SonyStyle.com Newegg.com Best Buy J.C. Penney Wal-Mart QVC Apple Computer 2006 Online Global Sales (US$MM) $10,710 4,900 4,300 3,965 * 3,055 * 2,849 * 2,376 * 2,001 1,690 * 1,500 1,425 * 1,300 1,260 * 1,257 1,136 * Y/Y Growth 26% 29 13 6 8 11 10 13 4 15 12 25 20 24 39 2006 Online Global Sales as % of Total Sales 100% 27 29 7 3 32 4 29 0.5 100 4 7 0.4 18 6
29
* Denotes ‘Internet Retailer’ estimate; Source: Internet Retailer Report (2006)
Video
30
Ongoing Traction of Online Video
• YouTube - 258MM unique global visitors, +94% Y/Y, 25B minutes, +146% Y/Y ; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU…
(1)
• YouTube accounted for 56% of unique US video viewers + 33% of videos watched (2) online in 1/08
300 250 200 150 100 50 0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Total Unique Visitors (MM) Total Minutes (B)
YouTube Global Traffic
30 25 20 15 10 5 0 Total Minutes (B)
Total Unique Visitors (MM)
Source: (1) comScore global 1/08; (2) comScore Video Metrix (US) 1/08, Morgan Stanley Research
31
YouTube Content – Pro, Semi-Pro, Amateur + Combos
Most Viewed Videos Most Viewed Channels
Source: Google, YouTube 2/08
32
Still Early in 3G+ Ramp But… 2009 Should Be Inflection Point @ ~20% of Subscribers
Global 3G+ Penetration
4.5 4.0 3.5 Subscribers (B) 3.0 2.5 2.0 1.5 1.0 0.5 0.0
2005E 2006E 2007E 2008E 2009E 2010E
2.5G and Below Subscriptions 3G and Above Subscriptions
30% 25% 20% 15% 10% 5% 0%
% 3G and Above Penetration
Note: 2.5G can be compared to ‘narrowband’ Internet access, while 3G can be compared to ‘broadband ’ Internet access. 2G: Analog & TDMA, cdmaONE, PDC, iDEN; 2.5G: GPRS/EDGE, CDMA 2000-1x; 3G: W-CDMA/HSDPA/HSUPA, CDMA 2000-1x-EV-DO/Rev A, TD-SCDMA Source: iSuppli
% of Total Wireless Subscribers
51
Wireless Data Revenue Ramping Nicely – +58% Y/Y @ AT&T, CQ4
• ~12% of devices are integrated devices, with ARPU >2x the 2G base • ~13% of devices are 3G, which drives 20% higher ARPU than 2G base Wireless Data Revenue
% of Wireless Service Revenue 2.0 Wireless Data Revenue ($B) 1.6 1.2 0.8 0.4 0.0 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 25% 20% 15% 10% 5% 0%
AT&T – CQ4 Wireless Data Y/Y Revenue Growth • Internet access: >40% • Messaging: >50% • E-mail: >60% • Data access: >70% • MediaBundle: >70%
Wireless Data Revenue
Data % of Wireless Service Revenue
Source: AT&T
52
Asia / Europe Lead – Mobile Internet Adoption + Carrier Revenue, 2007E
1,600 1,400
30%
25%
25
Subscribers (MM)
1,200 1,000 800 600
20%
20 15 10
18%
400 200 0
5
Mobile Subscribers
Asia Pacific Europe
Mobile Data Subscribers
ROW LatAm N. America
Mobile Data as % of Revenue (leading carrier in region)
Source: Informa, Company Reports. Includes SMS; (1) Leading carriers by wireless subscribers in Asia Pacific, Europe, and North America are: China Mobile, Vodafone (Europe only), and AT&T, respectively.
53
Emerging Markets
54
Mobile Users 2x+ > Than Internet Users – N. America = 8% of Mobile / 16% of Internet Users
Internet Users – 1.3B C2007E (1) Mobile Subscribers – 3.3B C2007E (2)
N. America 8% Europe 29% LatAm 11%
N. America 16% LatAm 8%
Europe 26%
ROW 7% Asia Pacific 43%
Asia Pacific 40%
ROW 12%
Source: (1) ITU, Euromonitor, Morgan Stanley Research; (2) Informa, Morgan Stanley Research
55
TMT (Technology / Media / Telecom) Update = China / India / Russia / Brazil Gaining Ground
2004
Rank 1 2 3 4 5 6 7 8 9 10 Country USA China Japan Germany UK India France Italy S. Korea Canada Relative Weighting 9.0 8.2 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1 Rank 1 2 3 4 5 6 7 8 9 10
2006
Country USA China Japan Germany India UK France Brazil Russia Italy Relative Weighting 8.7 8.7 6.3 5.7 5.5 5.4 5.3 5.3 5.3 5.2
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: 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 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 in 2004, 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.
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
56
China Led in TMT Users in Many Categories - 2006
Category Population GDP (PPP) per Capita Credit / Debit Cards Mobile Subscriptions Telephone Lines Installed PCs Internet Users Cable / Satellite TV Subs.
Market Leader China Ireland China China China USA USA China
Leader Number (000) 1,314,100 $44,676 1,131,674 445,754 367,786 212,977 182,779 155,483
China Rank (2006) 1 43 1 1 1 2 2 1
China Number (000) -$7,722 ---102,068 137,000 --
China Rank (2001) 1 45 3 1 2 4 3 1
Source: Morgan Stanley Research TMT database
57
Leading TMT Markets by Category
Category Mobile Subscribers Internet Users Credit/Debit Cards in Use Installed PCs GDP per Capita (PPP) Telephone Lines Cable / Satellite TV Subscriptions Population
2006 Growth Rate 24% 15 11 8 7 6 6 1
Market Size 2,693MM 1,120MM 4,881MM 818MM $10,426 1,362MM 664MM 6,446MM
Source: Morgan Stanley Research TMT database
58
Majority of Visitors To Top Global Web Sites = From Outside US
Top Properties Worldwide
Global Unique Visitors (MM)
600 500 400 300 200
78% 72%
78%
76%
68%
56%
77% 64% 48% 77% 77%
100 0
az on
ct iv e
(1 )
Yo uT ub e
Ya ho o!
Ap pl e
so ft
pe di a
eB
AO
G oo gl e
M ic ro
US
Non-US
Fo x
In te ra
W iki
Am
CN
ET
ay
L
(1) Excludes YouTube; Source: comScore 1/08, Morgan Stanley Research
59
China – Global Leader in Internet Users 210MM in 2007 – 16% of total vs. <1% in 1995
Geographic Distribution of Internet Users (MM)
40
100%
74
117
182
275
390
490
620
723
850
975
1,120
1,320
80%
60%
40%
20%
0% C1995E C1996E C1997E C1998E C1999E C2000E C2001E C2002E C2003E C2004E C2005E C2006E C2007E
North America
Europe
Asia/Pacific
China
Latin America
Rest of World
Source: Morgan Stanley Research, ITU, Euromonitor, CNNIC
60
Internet Users – Top 15 Markets
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 USA China India Japan United Kingdom Germany Italy South Korea Brazil Russia Indonesia France Canada Mexico Spain Total
2006 Internet Users (000s) 182,779 137,000 72,746 67,489 43,752 40,039 35,370 34,592 34,174 32,841 32,744 31,520 22,304 19,614 18,060 1,119,949
2006 Growth 3% 23 41 2 6 6 9 4 23 40 45 11 5 16 11
Internet Users Penetration 61% 10 7 53 72 49 61 72 18 23 15 51 68 19 41
Worldwide Share 16% 12 6 6 4 4 3 3 3 3 3 3 2 2 2
Source: Morgan Stanley Research TMT database, ITU, Euromonitor
61
Mobile Subscriptions – Top 15 Markets
Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 China USA Russia India Brazil Japan Germany Italy United Kingdom Indonesia Mexico Turkey France Pakistan Spain Total
2006 Mobile Subscriptions (000s) 445,754 232,793 151,937 137,369 100,661 94,936 81,242 77,605 69,557 58,654 56,765 51,659 51,442 48,543 46,339 2,693,087
2006 Growth 18% 12 20 82 17 5 9 11 7 47 22 19 7 124 10
Mobile Subscriptions Penetration 34% 78 106 12 54 74 99 133 115 26 55 71 84 31 105
Worldwide Share 17% 9 6 5 4 4 3 3 3 2 2 2 2 2 2
Source: Morgan Stanley Research TMT database, Informa
62
Recession
63
Serious Risks / Challenges Posed by Competition + Recession…
• Impact of US subprime woes / tightening credit / rising commodity prices / global unrest should not be underestimated – depth / duration may surprise on downside + revenue should become increasingly difficult to garner. Leading Internet companies will be stress-tested to prove competitive advantages vs. offline companies – measurability / transparency / customer satisfaction should assist. • Average GDP growth rate forecasts for 2008 have fallen to 1.1% from 3.0% in 6/07 – a 63% reduction in rate of growth. Average annual GDP growth over past decade = 3.1%. When first car of a moving train slows…the cars that trail follow… • US less relevant to global economy - US share of global GDP has declined steadily since 1999 from 22% of GDP to 19% in 2007
Source: Morgan Stanley Economics Research
64
…Serious Risks / Challenges Posed by Competition + Recession
• Courtesy of aggressive monetary / fiscal stimulus + support from overseas growth, Morgan Stanley economists believe US recession could be mild + short…but they are becoming increasingly pessimistic about pace of recovery into 2009 • Main culprits – deepening credit crunch + supply shock of higher energy and food prices + growing consumer caution…all in the face of declining household wealth • Aggressive Federal Reserve ease + significant pending fiscal stimulus may not offset credit crunch…consequently, policymakers are considering array of responses designed to alleviate burden on troubled homeowners + forestall or at least cushion economic downturn
Source: Morgan Stanley Economics Research
65
US Payrolls Have Moved Into Recession Territory
90
400 300 200 100 0 -100 -200 -300 -400
Diffusion Index: Employees On Private Nonfarm Payrolls (% Rising, 3-month)
80 70 60 50 40 30 20 10 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Total private nonfarm payrolls, 3 month moving avg. of M/M change Diffusion index: employees on private nonfarm payrolls
Source: Morgan Stanley Economics Research
Private Nonfarm Payrolls (difference, 3-month moving average)
66
Asia / China Gaining Share of Global GDP
35
30
29%
% of Global GDP
25
23%
22% 19%
22% 18%
20
16%
15
11%
10
10%
11% 7% 7%
7%
6%
6% 6% 3% 3%
5
China
0
Asia exJapan
US
EU-15
Other
LatAm
Emerging Europe
Japan
Dollar bloc
% GDP Share in 1999
% GDP Share in 2007E
China GDP Share
Note: Based on PPP, World GDP based on current prices. Per IMF definitions, ‘Dollar bloc’ includes Australia, Canada, New Zealand; Source: IMF, Morgan Stanley Research
67
Disclosure Section
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley Dean Witter 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. 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: Mary Meeker. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley 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 (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), Intuit (common stock), Microsoft (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 February 29, 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, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Yahoo!. As of February 29, 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, Intuit, Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Dice Holdings, Inc., GSI COMMERCE, Intuit, TechTarget, Inc.. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay, Google, Intuit, Microsoft, TechTarget, Inc.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from CNET, eBay, Microsoft. 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, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., 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: CNET, eBay, Google, Intuit, Microsoft. 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 & Co. Incorporated is a director of Microsoft, Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
68
Disclosure Section
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 Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the 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 February 29, 2008) 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, Equal-weight 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 to hold and Underweight to sell recommendations, respectively.
Coverage Universe
Investment Banking Clients (IBC)
Stock Rating Category
Count
% of Total
Count
% of Total IBC
% of Rating Category
Overweight/Buy Equal-weight/Hold Underweight/Sell Total
1039 974 356 2,369
44% 41% 15%
322 300 100 722
45% 42% 13%
31% 31% 28%
69
Disclosure Section
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. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research 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 or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in Morgan Stanley Research 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 Morgan Stanley produces a research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. 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. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research 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 Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons Morgan Stanley and its affiliate companies do business that relates to companies/instruments covered in Morgan Stanley Research, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. With the exception of information regarding Morgan Stanley, research 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 Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research 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/instruments.
70
Disclosure Section
To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited ("MSTL"). Such information is for your reference only. The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research 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/instruments 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/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley 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 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 plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research 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 Morgan Stanley Research 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, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, 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 plc representative about the investments concerned. In Australia, Morgan Stanley Research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and FirstRand Investment Holdings Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. The trademarks and service marks contained in Morgan Stanley Research 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. Morgan Stanley Research, 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. Additional information on recommended securities/instruments is available on request.
71
Disclosure Section
© 2008 Morgan Stanley
72