Internet Trends Mary Meeker mary meeker morganstanley com Brian Pitz

Internet Trends Mary Meeker mary.meeker@morganstanley.com Brian Pitz brian.pitz@morganstanley.com Brian Fitzgerald brian.fitzgerald@morganstanley.com US Internet Team – April 2004 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. 1 Please see analyst certification and other important disclosures starting on page 80. Overview This presentation focuses on the twelve key trends that we believe are driving changes for many aspects of the Internet. For details on specific companies, financial models and valuation thoughts, please see our company and industry research reports. • • 2 Please see analyst certification and other important disclosures starting on page 80. Internet & PC Applications Software Industry Investment Thesis (Attractive) • We continue to believe that the Internet is still in the early stages of becoming a central communications, information, commerce, and entertainment medium. We estimate there are 750+ million Internet users worldwide using the Internet an estimated average of 30-45 minutes per day. We expect the number of Internet users to grow at 15%+ annually for the next several years, with stronger growth in non-US markets. And we believe that usage growth (in part because of ongoing broadband adoption) should continue to be higher, thus, demonstrating compelling underlying growth trends. • • Source: Morgan Stanley Research; Nielsen/NetRatings: Feb 2003 US, Japan, Germany, UK, France and Sweden Home and Work Internet Users 3 Please see analyst certification and other important disclosures starting on page 80. Internet & PC Applications Software Industry Investment Thesis (Attractive) continued • Given this relatively robust underlying growth, we continue to believe that the leading Internet companies should, over time, be able to generate strong double-digit top-line growth, and as the financial models scale towards higher long-term margins, should be able to generate even stronger earnings growth — AKA leverage. If the leaders execute to their opportunities, we believe that, over the long term, the leaders could continue to demonstrate classic growth-stock undervaluation characteristics. • 4 Please see analyst certification and other important disclosures starting on page 80. Key Underlying Trends 1) 2) 3) We believe the Internet should prove to be the growth distribution channel of the decade Search/find/obtain (SFO) is becoming a global reality and may be the next ‘killer application’ of the Internet Residential broadband (with an estimated 88MM global subscribers as of CQ4:03) has hit critical mass, and pricing continues to decline… The underlying growth rate for global Internet usage remains strong and global markets are ramping Online continues to gain share from offline “Mind share” well above “market share” demonstrates growth opportunity We view Internet momentum/opportunity as compelling compared to other media Consumer appears to be alive and well for key technology-related purchases. Small to medium-sized businesses (SMBs) have benefited Technology platform-driven convenience, low (and transparent) prices/pricing, uniquely strong 24x7 customer service, and extensive selection have been key factors behind growth Online advertising trends could surprise on the upside & online premium services have begun to ramp… Handful of industry leaders gaining share…operating leverage with inherently scalable models is powerful Positive earnings surprises can be, more often than not, followed by more of the same… 4) 5) 6) 7) 8) 9) 10) 11) 12) 5 Please see analyst certification and other important disclosures starting on page 80. 1 We believe the Internet should prove to be the growth distribution channel of the decade Companies that benefited from leveraging the PC as their distribution channel — like Microsoft and America Online — created significant new businesses and shareholder wealth. We believe an emerging group of still relatively earlystage companies should do the same with the Internet. 6 Please see analyst certification and other important disclosures starting on page 80. Market Cap Change Post IPO – MSFT, AOL, EBAY, YHOO & AMZN Mkt Cap ($MM) (MM Users) Apr ’04 750 $275B Internet Users (MM) Installed PCs (MM) Apr ‘04 500 $76B Apr ‘04 $50B 300 Apr ‘04 $37B Apr ‘04 $19B 100 Mar ’86 $519MM Mar ’92 $62MM Apr ’96 $334MM May ’97 $430MM Sept ’98 $715MM 5 1986 Microsoft IPO 1992 America Online IPO PC 1996 1997 Yahoo! IPO Amazon.com IPO Internet 1998 eBay IPO Source: World Bank; Morgan Stanley Estimate; AOL IPO Mkt Cap is not adjusted for Time Warner acquisition. Time Warner's market cap on 3/92 was $15B 7 Please see analyst certification and other important disclosures starting on page 80. Internet-based Supply Chain Management is in its Infancy…but it’s Working for the Innovators… • Dell – 3 days of inventory on $12B in CQ4 sales. Cash conversion cycle of negative 36 days eBay – zero inventory with $7B in gross merchandise sales in CQ4 Amazon.com – cash conversion cycle of negative 27 days in C2003 Cisco -- Internet-related savings of $2.1B in F2003 (July) • • • 8 Please see analyst certification and other important disclosures starting on page 80. 2 Search/Find/Obtain (SFO) is becoming a global reality and may be the next ‘killer application’ of the Internet Google, eBay, Amazon.com, Yahoo!, Expedia, Microsoft and Overture have driven this, and it benefits users/vendors as it helps reduce friction and makes markets more efficient. And strong SFO momentum for music & digital media and used items is becoming increasingly apparent. 9 Please see analyst certification and other important disclosures starting on page 80. Search/Find/Obtain (SFO) May Be 3rd Killer App of Internet... email/messaging Was 1st… Browser Was 2nd… Search Find Obtain Source: Morgan Stanley Research; Yahoo! 10 Please see analyst certification and other important disclosures starting on page 80. Search Moving Online. . . Google Reach (%) 40 30 20 10 0 Nov-01 Nov-02 May-02 May-03 Nov-03 Mar-02 Mar-03 Jan-02 Jul-02 Jan-03 Jul-03 Sep-02 Reach is a key indicator of the popularity and draw of various digital media properties. Reach measures the percentage of US digital media users that used some sort of online application during a particular time period. For example, in Feb ’03 Google recorded a reach of 34%, meaning that 34% of US digital media users visited one of Google’s sites or used one of its applications during the month. Source: Media Metrix, January 2004; Google 11 Please see analyst certification and other important disclosures starting on page 80. Sep-03 Jan-04 Key-Word Search Is Working Well…and It’s Just Beginning… Overture Revenue (MM) Y/Y Growth CQ3:02 $173 138% CQ4:02 $200 97% CQ1:03 $225 57% CQ2:03 $265 74% Advertisers (K) Y/Y Growth 73 49% 80 51% 88 47% 95 42% Average Price per Click Y/Y Growth $0.34 62% $0.35 52% $0.37 54% $0.40 33% Source: Morgan Stanley Research 12 Please see analyst certification and other important disclosures starting on page 80. Search Ad Spend Ramp – Could it be a Power Oligopoly? US Search Market Share Unique Visitors (000’s) MSN Search 50,000 Google Sites Yahoo! Search $5B US Search/Paid Inclusion Market Size ($B) 2006E ~ $5B 2001E ~ $1B Next 7 Sites 20,000 10,000 $0 0 CQ2:02 CQ3:02 CQ4:02 CQ1:03 CQ2:03 CQ3:03 CQ4:03 CQ1:04TD 2000E 2001E 2002E 2003E 2004E 2005E 2006E Source: Media Metrix, Feb 2004 Source: Morgan Stanley Research; Yahoo! Estimates 13 Please see analyst certification and other important disclosures starting on page 80. Find Moving Online . . . eBay (One Website) vs. All U.S. Newspapers (1,468 Dailies) Annual Classified Ads (MM) 650 600 550 500 450 eBay (U.S.) 400 All U.S. Newspapers 350 300 250 200 145 124 144 141 150 100 33 50 4 0 1997 1998 1999 602 Classified Ads / Listings (MM) 427 320 238 146 127 122 120 Source: Morgan Stanley Research 2000 14 2001 2002 2003 Please see analyst certification and other important disclosures starting on page 80. …Find Moving Online . . . …could US Yellow Pages begin to feel the web impact given ramp in local search? $13.4 B $13.8 B $13.9 B $14.5 B $11.4 B $12.0 B $12.7 B 1997 Source: Morgan Stanley Research 1998 1999 2000 2001 2002 2003 15 Please see analyst certification and other important disclosures starting on page 80. Obtain Moving Online . . . In just 3 years, eBay has become #1 in a 100+ year-old business... 120,000 U.S. Estimated Used Auto Units Sold per Qtr. 100,000 80,000 60,000 CarMax 40,000 20,000 0 eBay Motors 4/00 AutoNation eBay #1 CQ1:00 CQ2:00 CQ3:00 CQ4:00 CQ1:01 CQ2:01 CQ3:01 CQ4:01 CQ1:02 CQ2:02 CQ3:02 CQ4:02 CQ1:03 Source: eBay, AutoNation, CarMax, Morgan Stanley estimates 16 Please see analyst certification and other important disclosures starting on page 80. SFO – And Don’t Underestimate Music / Entertainment Momentum and Relevance… Source: Morgan Stanley Research; Kazaa; Apple iTunes 17 Please see analyst certification and other important disclosures starting on page 80. …SFO – And Don’t Underestimate Music / Entertainment Momentum and Relevance… What 18-34 Year Olds Care About While Online… Highest Online Reach-Indexing Categories for 18-34 Year Olds Entertainment-Music Sports Retail-Consumer Electronics Entertainment-Movies Directories/Resources-Personals Retail-Apparel Games-Gaming Information Careers Directories/Resources-Classifieds Retail-Tickets Automotive-Manufacturer Entertainment-Radio Retail-Movies Retail-Toys Travel-Car Rental 3% 13% 12% 11% 14% 20% 18% 31% 31% 30% 29% 28% 38% 43% 52% Source: Online Publishers Association/comScore Networks, March 2004; online behavior includes browsing buying and other transactional behavior 18 Please see analyst certification and other important disclosures starting on page 80. …SFO – And Don’t Underestimate Music / Entertainment Momentum and Relevance Movie Guides /Reviews/Info Local Restaurant/ Club Listings Movie/Theater Schedule Astrology/ Horoscope TV Programs/ Schedules Info Games/Codes Info Celebrities / Personalities Info 20% 31% 31% 29% 27% 34% 40% 24% 20% 19% 19% 24% 33% 35% 42% Internet is not only a source of direct entertainment for 18-34 year olds, they also use the Internet to inform their offline entertainment • 40% use web to help choose / find a movie • 33% use web to view local restaurant / club listings 14% 19% 23% 23% 24% 33% 30% 32% Age: 18-34 Total Internet (18+) Age: 35-54 Age: 55+ 13% 21% 21% 21% 21% Source: Online Publishers Association/comScore Networks, March 2004 19 Please see analyst certification and other important disclosures starting on page 80. SFO – And Don’t Underestimate the Momentum and Relevance of Used Items What kind of item(s) were you looking for on eBay? Used Bargains Collectible New Hard to find Just browsing Vintage Antique A specific brand Source: eBay Attractors Study, April 2003 46% 39% 38% 36% 35% 19% 17% 15% 14% 20 Please see analyst certification and other important disclosures starting on page 80. eBay User Feedback/Ratings System is Powerful & Unique and Helps Instill Buyer/Seller Trust eBay Power Seller Individual Feedback Information Pervasive User Feedback/Ratings System Source: Morgan Stanley Research; eBay 21 Please see analyst certification and other important disclosures starting on page 80. Unique Opportunity for Used Goods on the Web – Simply, This Kind of Market Didn’t Exist Before… Source: Morgan Stanley Research; eBay 22 Please see analyst certification and other important disclosures starting on page 80. 3 Residential Broadband (with an estimated 88MM global subscribers as of CQ4:03) Has Hit Critical Mass and Pricing Continues to Decline… •The early stage (and strong growth momentum, up 55% Y/Y in CQ4:03 to 88MM) of consumer broadband adoption, and the powerful usage patterns of broadband (vs. narrowband) users, should help pace strong growth for leading beneficiaries. •We believe the residential broadband ramp is part of an important inflection point for Internet usage, with broadband (vs. narrowband) users spending more time and money online, owing in large part to: 1) fast speed, 2) “always-on” functionality, and 3) high user satisfaction. 23 Please see analyst certification and other important disclosures starting on page 80. Residential Broadband has Hit Inflection Point and Critical Mass… C2000 TOTAL BROADBAND SUBSCRIBERS - Global (MM) Y/Y Growth DSL Subscribers Y/Y Growth FTTH & Cable Modem Subscribers Y/Y Growth C2001 32 142% 18 200% 14 95% C2002 56 74% 34 90% 22 54% C2003 88 55% 57 68% 31 36% 13 – 6 – 7 – Source: Morgan Stanley estimates updated 03/10/04; R. Bilotti, S. Flannery, S. Simon, P. Marsch, Y. Motoyama, M. Kim, N. Sebrell, B. Swinburne, L. Choi; FTTH = Fiber to the Home 24 Please see analyst certification and other important disclosures starting on page 80. U.S. Broadband Users Spend More Time & Money Online… A survey* of US consumers found: • 73% of home cable modem users and 71% of home DSL users are ‘very satisfied’ with their service, while only 31% of dial-up users are ‘very satisfied;’ 8 hours for dial-up users; • Broadband users spend an average of 13 hours per week online vs. • Residential broadband users spent 64% more purchasing dollars online (to $868) over the previous 12 months than those with dial-up access. total time online), reinforcing the point that broadband users spend significantly more time online. • In addition, 34% of US Internet users were ‘broadband’ (55% of the Source: comScore Media Metrix – March 2003; *Arbitron/Edison Media Research 25 Please see analyst certification and other important disclosures starting on page 80. High Level Thought Re: SFO… People have very little intuition for what it will mean when the top 40% of US households, based on income, have half a dozen computers, all of them connected to the Net, all of them with ‘instant on.’ They just don’t know how important a part of our daily life the online world will be! Jeff Bezos interview with Chip Bayers, Business 2.0 September, 2002 26 Please see analyst certification and other important disclosures starting on page 80. 4 Underlying growth rates for global Internet usage/users remain strong and global markets are ramping… In spite of (and, perhaps, in part, because of) a challenging economic and social environment, growth rates for global Internet usage/users remain strong. 27 Please see analyst certification and other important disclosures starting on page 80. Internet User Growth Remains Strong Though Going Forward, Usage Growth is Key… 02-05E 1998E 1999E 2000E 2001E 2002E 2003E 2004E 2005E CAGR Total Internet Users (MM) North America Europe Asia/Pacific Japan Rest of World Latin America 147 68 41 13 11 10 5 229 93 68 30 17 13 8 341 122 102 56 28 18 15 485 156 136 100 42 27 24 609 176 169 141 53 38 32 751 198 210 187 64 51 41 872 221 249 217 73 64 49 976 242 269 246 82 79 58 17% 11% 17% 20% 16% 28% 22% Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch 28 Please see analyst certification and other important disclosures starting on page 80. Global Broadband Subscriber Growth is Impressive C2000 Global Broadband Subscribers (000's) Y/Y Growth Q/Q Growth North America Y/Y Growth Q/Q Growth Europe Y/Y Growth Q/Q Growth Japan Y/Y Growth Q/Q Growth Asia-Pacific Y/Y Growth Q/Q Growth Latin America Y/Y Growth Q/Q Growth 13,366 --7,065 --1,284 --625 --4,351 --41 --C2001 32,411 142% -13,773 95% -4,771 272% -2,836 354% -10,707 146% -324 689% -C2002 56,399 74% -21,213 54% -9,620 102% -7,806 175% -16,999 59% -761 135% -C2003 87,640 55% -29,406 39% -15,942 66% -14,420 85% -26,350 55% -1,522 100% -- Source: Morgan Stanley estimates updated 03/10/04; R. Bilotti, S. Flannery, S. Simon, P. Marsch, Y. Motoyama, M. Kim, N. Sebrell, B. Swinburne, L. Choi; 29 Please see analyst certification and other important disclosures starting on page 80. North America Accounts for 26% of Internet Users Down From 46% in 1998 Japan 7% Rest of Asia Pacific World 6% Latin America 3% 9% Asia Pacific 25% Latin America North America Rest of 5% 26% World 7% Europe 28% North America 46% Japan 8% Europe 28% 1998-147MM Internet Users Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) 2003E-751 MM Internet Users http:// www.morganstanley.com/techresearch 30 Please see analyst certification and other important disclosures starting on page 80. Five Milestones for 2002 Global TMT (Technology/Media/Telecom) • • • There are more Internet users than PCs worldwide. There are more mobile phones than fixed telephone lines worldwide. North America is no longer the region with the largest number of Internet users; there are now more Internet users in Asia/Pacific (including Japan) than in North America. China has become No.1 in three out of the five TMT categories that we track. Global residential broadband appears to have hit critical mass, at an estimated 88MM subscribers as of CQ4:03 (up 55% Y/Y). • • Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch 31 Please see analyst certification and other important disclosures starting on page 80. China’s Leading Global Rank in TMT Categories TMT Category Mobile Phones Cable TV Subscriptions Telephone Lines Internet Users Installed PCs Global Ranking 1 1 1 2 4 Units (MM) 207 100 214 59 29 2002 Growth 43% 10% 20% 75% 21% Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch 32 Please see analyst certification and other important disclosures starting on page 80. Leading Internet User Markets – China Opportunity is Significant Internet Users 162 59 53 34 32 2002 Growth 14% 75% 27% 14% 33% Worldwide share 27% 10% 9% 6% 5% Country 1 2 3 4 5 USA China Japan Germany UK Penetration 58% 5% 42% 41% 54% Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch 33 Please see analyst certification and other important disclosures starting on page 80. China and the Internet China Internet Industry Landscape 1. 2. 3. 4. 5. 6. 7. Number of Internet users is significant and growing rapidly Relative Website usage momentum is strong Younger users are active on the Internet Development of online media is still in the early growth stages Wireless messaging services linking mobile phones with the Internet are ramping quickly, though transitions are occurring Broadband acceptance is growing rapidly eCommerce is in very early stage and governors exist Challenges for multinational companies create opportunities for Chinese companies Third generation Internet entrepreneurs are impressive, though broad-based experience/leadership is still not abundant Sustainability of Internet-related revenue and profits is still unproven but market opportunity is large Government is focused on ramping Internet users The government’s strategy, in part, reflects the need to boost domestic (urban to rural) as well as global trade Economic momentum is strong, though slowing Capital markets have been robust China Internet Competitive Landscape 8. 9. 10. China Macro Landscape for the Internet 11. 12. 13. 14. 34 Please see analyst certification and other important disclosures starting on page 80. 5 Online continues to gain share from offline Note Dell in PCs, Expedia in travel, eBay in collectibles and toys, and Yahoo! in news. e-commerce accounts for only 1.60% (and rising) retail sales in the US. Source: U.S. Department of Commerce, Jan 2004 35 Please see analyst certification and other important disclosures starting on page 80. Commerce – Online Share Gains Continue… C1999 Total US Retail Sales ($MM) Y/Y Change Total U.S. Retail E-Commerce Sales (MM)* Y/Y Change C2000 $3,072 7% $28 89% C2001 $3,153 3% $35 22% C2002 $3,245 3% $43 26% C2003 $3,422 5% $55 26% $2,868 -$15 -- E-Commerce as a % of Retail Sales 0.52% 0.92% 1.10% 1.34% 1.60% *Does not include travel, financial services, or event ticket sales. E-Commerce sales are goods and services where an order is placed by the buyer or price and terms of sale are negotiated over an Internet, extranet, EDI network, e-mail, or other online system. Payment may or may not be made online. Source: U.S. Department of Commerce, Jan 2004 36 Please see analyst certification and other important disclosures starting on page 80. Commerce – Online Share Gains Continue… U.S. Online Retailing Category Sizes by 2002 Spending (Total ~ $76B) Y/Y Growth Rate Travel Automotive Computer Hardware and Software Office, Home & Garden Apparel Consumer Electronics Food and Beverage Event Tickets Music and Video Toys Books Flowers, Cards, and Gifts Jewelry and Luxury Goods Sporting Goods and Equipment Health and Beauty $9.0 $8.4 $7.5 $5.6 $3.6 $2.6 $2.6 $2.3 $2.2 $2.1 $1.4 $1.4 $1.1 $0.7 $22.2 58% 69 42 28 67 38 67 33 16 7 29 102 17 25 29 Source: The State of Retailing Online 6.0 -- 2003 Shop.org survey conducted by Forrester Research, Inc. 37 Please see analyst certification and other important disclosures starting on page 80. Commerce – Online Share Gains Continue… Online Penetration of US Retail Market Category Computer hardware and software Tickets Books Travel Toys and Video Games Consumer Electronics Music and Video Flowers, Cards and Gifts Jewelry and Luxury Goods Apparel Health and Beauty Home and Garden Sporting Goods and Equipment Auto and Auto Parts Food and Beverage All online sales as a % of the total retail market 2000 17% 4 13 6 7 5 7 3 2 2 1 1 2 1 0 2.5% 2001 21% 13 11 6 6 4 6 2 3 2 2 1 2 1 0 2.5% 2002 32% 17 12 9 7 6 6 3 3 3 2 2 2 2 1 3.6% Source: The State of Retailing Online 6.0 -- 2003 Shop.org survey conducted by Forrester Research, Inc. 38 Please see analyst certification and other important disclosures starting on page 80. Wal-Marting of the Web – Part I • Wal-Mart Strategy - Move into small town with average of 5 distinct types of retail store per 1,000 people. • Within 3 years, Wal-Mart obtains a significant portion of retail spending in the community. Why? Convenience, price, product breadth... Small Town USA Appliance Store Five & Dime Record Store Shoe Store Before Wal-Mart: Market Share = 0% After Wal-Mart: Market Share Rises Clothes Store Market Share Wal-Mart Before Wal-Mart: Market Share = High (100%) After Wal-Mart: Market Share Falls Source: Morgan Stanley – The Internet Retailing Report 1997 http://www.morganstanley.com/techresearch 39 Please see analyst certification and other important disclosures starting on page 80. Wal-Marting of the Web – Part II • The Web is one big small town. Whether a user is in Shanghai, Peoria, or New York City, they shop at the same virtual store. • Within five years, Web shopping should obtain 1–4% of global retail spending. Why? Convenience, price, product breadth. • We should see super-consolidation, with a few winners  who needs thousands of bookstores? Bricks-and-Mortar World Amazon.com Books.com Barnes & Noble Borders 0 stores (0% market share) 0 stores (0% market share) 1,009 stores (13% market share) 1,118 stores (11% market share) Amazon.com Books.com Barnes & Noble Borders Hypothetical Virtual World* 1 Store (20% market share) 1 Store (15% market share) 1 Store (40% market share) Soon: 1 Store (15% market share) In the bricks-and-mortar market, share is restricted by physical location/distribution and thus share is highly fragmented. Source: Morgan Stanley – The Internet Retailing Report 1997 http://www.morganstanley.com/techresearch; *Morgan Stanley Estimate 40 Please see analyst certification and other important disclosures starting on page 80. 6 “Mind share” well above “market share” demonstrates growth opportunity An estimated 750+ million-plus Internet users and, for example, only 39 million active Amazon.com customers? 41 Please see analyst certification and other important disclosures starting on page 80. eCommerce – Market Share (Low @ < 5%) Should Move Closer to Mind Share (High) 750MM+ Global Internet Users 41MM eBay Active Users 39MM Amazon.com Active Users Source: eBay, Morgan Stanley Internet Research. Users are as of CQ4:03. eBay active user is defined as any user who has bid, bought or listed on eBay in the trailing twelve month period. This figure excludes users of Half.com and eBay’s Korean subsidiary. 42 Please see analyst certification and other important disclosures starting on page 80. 7 Internet momentum/opportunity is compelling compared to other media Per a Spring 2002 US survey by SRI, consumers spent 13% of media usage on the Internet (up 23% Y/Y) vs. slower growth for TV (48% of media usage), radio (31%), newspapers (5%) and magazines (3%). 43 Please see analyst certification and other important disclosures starting on page 80. Consumers Spend 13% (and Rising) of Media Usage on Internet Newspapers 5% Internet 13% Magazines 3% TV 48% Radio 31% TV Radio Internet Newspapers Magazines Source: SRI-Knowledge Networks, Media Scan-Spring 2002; Based on US people age 12-64 Weekly media usage measured between 6AM and Midnight; A Y/Y increase of 23% calculated from Spring 2001 and spring 2002 data 44 Please see analyst certification and other important disclosures starting on page 80. Predicted Change in Media Consumption 2001-2005 30.2% 30% % Change 20% 11.9% 10% 2.2% 0% -10% Total TV Radio 1.7% -3.4% Newspapers* Internet -5.6% Books -5.7% Consumer Magazines Entertainment** Source: Veronis Suhler Stevenson, July 2001 – Change noted and measured for hours *Daily Newspapers only; **Includes movies, home video, recorded music and video games 45 Please see analyst certification and other important disclosures starting on page 80. Younger Demographic Spending More Time Online vs. Other Media Average Hours per Week Internet (not including email) TV Radio Phone (Cell & Landline) Books & Magazines (not school related) 0 Source: Yahoo! and Carat Interactive – June 2003; U.S. Respondents ages 13-24 17 14 12 8 6 5 10 15 20 46 Please see analyst certification and other important disclosures starting on page 80. Relative Ad Spend – Online Ad Spend Out of Whack (Too Low) Relative to Usage Online TV % Of Time/Media Usage Radio Newspaper % Of Ad $ By Media Type Magazine Source: Forrester’s Consumer Technographics 2003 North American Benchmark Study; Online includes time spent at both home and work 47 Please see analyst certification and other important disclosures starting on page 80. Relative Ad Spend – Internet Upside is Compelling… 2003E U.S. Spending per Household for Various Media Medium 2003E Advertising Spending ($B) Households (MM) Ad Spending/ Household ($) Promotions * Newspapers Classifieds $97 45 15 99 50 55 $976 898 289 Direct Telephone Direct Mail Broadcast TV Radio Cable TV Yellow Pages Internet/Online Total Average 85 48 43 20 16 14 7 $374 42 99 99 99 60 70 99 60 735 82 863 483 429 328 226 146 120 $4,469 497 Source: Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Classifieds included in Newspapers *Promotions ($97B) include: incentives ($26B), promotional products ($20B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing ($6B), promotional fulfillment ($4B), product sampling ($2B), and in-store marketing ($1B). 48 Please see analyst certification and other important disclosures starting on page 80. Consumers Spending on Internet & Video Games is Growing Faster than other Media… Consumer Spending on Media ($ B) * % Chg. Video % Chg. Cable / % Chg. Box % Chg. Home % Chg. Recorded % Chg. Video Y/Y Music Y/Y Internet Y/Y Games Y/Y Satellite TV Y/Y Office Y/Y 2001 2000 1999 1998 1997 1996 $14 12 9 6 5 3 23% 24 53 34 59 --$6 6 6 4 4 3 8% 8 34 13 45 --$44 40 37 34 31 28 9% 9 10 9 11 --$8 8 7 7 6 6 10% 3 7 9 8 --$23 21 20 19 17 17 8% 7 6 8 1 --$14 14 15 14 12 13 -3% -2 7 12 -2 --- ’96-’01 CAGR 38% 21% 10% 7% 6% 2% Source: Veronis Suhler Stevenson, The Publishing Media Group, AC Nielsen EDI, Adams Media Research, AOL Time Warner, Association of Alternative Newsweeklies, Arbitron Book Industry Study Group, Editor & Publisher, Electronic Industries Assoc., eStats, The Financial Post, Forrester Research, The Gallup Organization, Magazine Publishers Association, Newspaper Assoc. of America, Jupiter Media Metrix, Kagan World Media, Motion Picture Assoc. of America, Nielsen Media Research, NPDFunworld, PC Data, RIAA, Screen Digest, SoundScan, Video Software Dealers Assoc * Spending consists of cost to acquire the distribution and/or content of the respective medium 49 Please see analyst certification and other important disclosures starting on page 80. 8 The consumer appears to be alive and well for key technology-related purchases Internet, digital cameras, MP3 players, WiFi, video games… could the consumer (vs. the enterprise) drive the next leg of technology-related growth and a PC upgrade cycle? In addition, we believe that many small to mediumsized businesses (SMBs) have benefited from the increased usage of the Internet as vendors/users/sellers. 50 Please see analyst certification and other important disclosures starting on page 80. ‘Power Consumers’ – Still Small as Percent of Total Internet Users Data Morgan Stanley Analysts Motoyama / Kim / Choi / Sebrell Active Amazon.com customers Active WiFi users US digital camera installed base Global portable MP3 installed base Meeker / Pitz Basu Runkle / Ono Runkle 39MM 25MM 43MM 32MM 34% 89% 55% 60% Y/Y Estimate Growth 88MM 55% Global broadband subscribers Bilotti / Flannery / Simon / Marsch Source: Morgan Stanley C2003E estimates updated 03/14/04; R. Bilotti, S. Flannery, S. Simon, P. Marsch, Y. Motoyama, M. Kim, N. Sebrell, B. Swinburne, L. Choi; FTTH = Fiber to the Home, 51 Please see analyst certification and other important disclosures starting on page 80. SMB’s are Faring Well… Index of Small Business Optimism 108 106 104 102 100 98 96 94 92 90 88 -9 M 8 ay -9 Se 8 p9 Ja 8 nM 99 ay -9 Se 9 p9 Ja 9 nM 00 ay -0 Se 0 p0 Ja 0 nM 01 ay -0 Se 1 p0 Ja 1 nM 02 ay -0 Se 2 p0 Ja 2 n0 M 3 ay -0 Se 3 p0 Ja 3 n04 Ja n Data Source: National Federation of Independent Business; 1986=100/Seasonally Adjusted 52 Please see analyst certification and other important disclosures starting on page 80. Small/Medium Businesses (SMBs) are Using the Web . . . Revenue Company Large Consumer Enterprise SMB Company Users Large Consumer Enterprise SMB Amazon.com 95% 3% 2% Amazon.com 95% 3% 2% eBay 30% 5% 65% eBay 92% 1% 7% Yahoo! 10% 40% 50% Yahoo! 60% 15% 25% Source: Morgan Stanley Research Estimates, CQ2:03 53 Please see analyst certification and other important disclosures starting on page 80. SMB and Consumer Data (Relative to Enterprise) Are Key… • Global PC unit shipment End-Market Demand (Rebecca Runkle) Consumer (35%) Enterprise (25%+) SMB (25%+) Education (~8%) Government (~6%) Enterprise (40%) SMB (39%) Consumer (21%) • Microsoft End-Market Demand Estimates (Mary Meeker/Brian Pitz) Based on the strong ongoing momentum in user/usage/revenue trends we are seeing at companies that increasingly are empowering consumers and SMBs (including eBay, Yahoo! and Amazon.com), trends remain impressive. And it seems we are still in the early stages of growth. Source Morgan Stanley Technology Research; SMB – Small Medium Business 54 Please see analyst certification and other important disclosures starting on page 80. 9 Technology platform-driven convenience, low (and transparent) prices/pricing, uniquely strong 24x7 customer service, and extensive selection . . . . . .have been key factors behind growth in leading online commerce (and information) sites and should continue to spur growth for the leaders. In addition, we believe that positive trends for the ramps in used and replacement goods continue to be quite strong, assisted by rising user confidence (in part, through customer ratings and feedback) in obtaining these types of goods/services. 55 Please see analyst certification and other important disclosures starting on page 80. Online Can be Much More Efficient than Offline Source: Morgan Stanley Research, Illustration by Michael Sorgatz 56 Please see analyst certification and other important disclosures starting on page 80. US Customer Satisfaction – Amazon is a leader Company Top 10 Score 90 89 88 87 86 86 86 85 85 85 Company 191 192 193 194 195 196 197 198 199 200 201 Bottom 10 America Online Northwest Airlines US Airways McDonald’s UnitedHealth Group Inc. United Airlines AltaVista Company Qwest Time Warner Cable Charter Comcast Score 65 64 64 64 64 63 63 62 61 55 55 1 Heinz – Food Processing 2 Cadbury Schweppes 3 Amazon.com 4 GM - Cadillac 5 Quaker 6 The Clorox Company 7 barnesandnoble.com inc. 8 BMW 9 Toyota 10 Hershey Foods Corp Source: American Customer Satisfaction Survey (ASCI), The University of Michigan -- Feb 2004; The ASCI is compiled on a rolling quarterly basis, with data for various industry groups published as compiled. 57 Please see analyst certification and other important disclosures starting on page 80. 10 Online advertising trends could surprise on the upside & online premium services have begun to ramp… In next 6–12 months we continue to believe the compelling ROI of online advertising will become more apparent to advertisers. We believe online advertising revenue (including pay-for-placement) could continue to accelerate into 2004. 58 Please see analyst certification and other important disclosures starting on page 80. Online Ad Trends are Strong… • • • • • • • Total ad industry revenue rose 6% Y/Y (to $128B) in 2003, per CMR Internet drove ~12-16% of annual growth in total ad industry revenue Online ad growth exited 2003 up 38% Y/Y (to $2.2B in CQ4) and accelerated for six quarters, per IAB Search spending increased 123% Y/Y to $2.1B in 2003, per eMarketer 36% of Americans used online search engine, in 1/04, per Nielsen Paid search took ~5 points of share from online impression-based buys Y/Y on a CPC basis, per Jupiter Search impact is category relevant and highest in areas with new / unfamiliar products (consumer electronics, prescription drugs and household products), per DoubleClick 59 Please see analyst certification and other important disclosures starting on page 80. …Online Ad Trends are Strong… DoubleClick Ad Traffic/Impressions 250 +49% 204 172 137 150 200 Billions 150 100 50 0 Q1:03 Q2:03 Q3:03 Q4:03 Source DoubleClick’s DART for Advertisers and DART for Publishers Ad Serving Dara Q1-Q4, 2003 60 Please see analyst certification and other important disclosures starting on page 80. Internet Advertising Revenue Has Been Turning Positive U.S. Internet Advertising Revenue ($B) Q4:00 Q1:01 Q2:01 Q3:01 Q4:01 Revenue ($B) $2.1 $1.9 Q/Q Change +9% -12% -3% Y/Y Change +19% $1.8 $1.8 -1% -12% -4% -9% $1.6 -7% -23% Q1:02 Q2:02 Q3:02 Q4:02 Q1:03 Q2:03 Q3:03 Q4:03 Revenue ($B) Q/Q Change Y/Y Change $1.5 $1.5 -7% -19% -4% -21% $1.5 $1.6 $1.6 -1% -18% +9% -4% +3% +7% $1.7 $1.7 $2.2 +2% +14% +5% +25% +20% +38% Source: Morgan Stanley Research; Update 2/13/04; 61 Please see analyst certification and other important disclosures starting on page 80. Paid Search Now 29% of US Online Advertising in CH1:03 vs. 8% in CH1:02 1998 1999 2000 2001 2002 CH1:03 CH1:03 Y/Y %∆ Companies Adding Most Revenue By Category Total ($MM) Display Ads Sponsorships Paid Search Classifieds Slotting Fees Interstitials $1,920 $4,621 $8,087 $7,134 $6,010 1,075 634 0 0 0 96 0 0 0 2,588 1,248 0 0 0 185 92 0 0 3,882 2,264 81 566 243 323 243 162 323 2,568 1,855 285 1,141 571 214 214 143 143 1,743 1,082 901 901 481 300 240 300 60 $3,292 757 395 955 560 165 99 132 198 33 +11% -23 -45 +301 +25 -31 +11 +11 +121 -45 AOL, Yahoo!, MSN AOL, Yahoo!, MSN Overture, Google eBay, Yahoo!, Monster AOL, Yahoo!, MSN ----- email/messaging Rich Media Referrals *Excluding AOL, Y/Y growth in total online advertising in 2001 would have been approximately -30% Source: Morgan Stanley Research; Update 11/14/03; Google launched its pay-for-performance search product in February 2002 62 Please see analyst certification and other important disclosures starting on page 80. 2003 Online Advertising Theme – Search, Search, Search Online Advertising Formats’ Share of Revenue Format Display Advertising (banners) Sponsorships Classifieds Keyword Search Interstitial E-mail Rich Media Referral Source: IAB/PricewaterhouseCoopers C2003 CQ2:02 32% 24% 15% 9% 3% 4% 3% 2% CQ2:03 22% 11% 18% 31% 3% 4% 6% 1% 63 Please see analyst certification and other important disclosures starting on page 80. Online Marketing Efficiency is Compelling… “Which of the following online marketing tactics do you currently use?” Email to house list PFP search placement Affiliate programs Traditional portal deals (e.g. AOL, MSN, Yahoo!) Search Engine Optimization Email to prospecting list Comparison-shopping engines Paid keyword placement Online banners New portal deals (e.g., Amazon or eBay) Pop-up ads 46% 38% 36% 28% 21% 21% 15% 11% 62% 55% 71% Use Tactic and Rate it as Effective/Very Effective 96% 94 99 81 94 53 86 Many retailers still do not use these effective tactics 92 54 83 71 Source: The State of Retailing Online 6.0 -- 2003 Shop.org survey conducted by Forrester Research, Inc. 64 Please see analyst certification and other important disclosures starting on page 80. Online Marketing Effectiveness is Compelling… High • In-store • Catalog • Direct mail by Marketing mailings postal service • Promotions Pop-up, • Event marketing under, and and sponsorships over ads •Newspapers • Outdoor Advertising • Television • Freestanding inserts Online banners (excluding portal deals) • Radio • In-catalog marketing Paid keyword placement • Public Relations Comparison shopping companies • Catalog Mailings Searchengine optimization E-mail to in-house lists Own website Affiliate programs Promotions Direct search inclusions Portal deals Effectiveness • Magazines E-mail to prospecting lists Online Offline • Coupon Packs Low Usage by online retailers High Source: The State of Retailing Online 6.0 -- 2003 Shop.org survey conducted by Forrester Research, Inc. 65 Please see analyst certification and other important disclosures starting on page 80. SMBs Represent a Significant Online Advertising Opportunity •10MM SMBs in US (estimates of 7-25MM) •~60% of SMBs advertise, per the Kelsey Group •~50% of SMBs that advertise have web sites (in June 2003), per the Kelsey Group’s Local Commerce Monitor •SMBs do most business within 50 miles of business location Source Kelsey Group (2003), Morgan Stanley Technology Research; SMB – Small Medium Business 66 Please see analyst certification and other important disclosures starting on page 80. Online Advertising is a Small Portion of the $22B Spent by SMBs on Local Advertising… Local Ad Revenue ($B) $10 2.9 2.4 1.3 1.3 0.9 0.7 0.4 0.4 0.2 0.2 1.1 $22 % of Total 46% 13 11 6 6 4 3 2 2 1 1 5 Yellow Pages Newspaper Web Sites Direct Mail Magazines Radio Search Engine Keywords Outdoor Advertising Print Coupons Web Banner Ads E-mail Marketing Other Advertising/Promo Activities Not Mentioned TOTAL Source: Local Commerce Monitor (SM) Wave VI (2003), Kelsey Group (2003) 67 Please see analyst certification and other important disclosures starting on page 80. Localization / Personalization Key to Future of Online Advertising… • Localization will likely become more important for advertisers. 560% of searches are local. ~10% of local searches have commercial intent, per Kelsey. Sites such as Google are using regional/local IP targeting to correlate ads with advertising Designated Market Areas (DMA’s). Internet Yellow Pages (iYP) should continue to take share from offline, given better search technology on top of structured back-end databases, as well as adoption of PPC pricing. Personalization, which integrates user profiles for custom news alerts, start/home pages, and iYP, will become increasingly more integrated into sites and search engines, enabling more detailed search queries. Contextual ads, or keyword targeted advertising on non-search pages, will likely receive more attention, as advertisers look for new, and more relevant ways to drive additional high quality leads to their web site. 68 Please see analyst certification and other important disclosures starting on page 80. • • • Yellow Pages Prove “Local” Market Thesis Involves Offline… $10-14B annual revenue business in the US in 2003, represents 4560%+ of total local ad dollars and 3-4% of offline ad revenue* Source: eMarketer (February 2004), Kelsey Group (2003), Morgan Stanley Media Research, wmph.org, Company websites * Based on Morgan Stanley Technology and Media estimates of $7B in online and $367B offline ad/marketing dollars in 2003, respectively 69 Please see analyst certification and other important disclosures starting on page 80. SMB Ad Budgets Trended Up…Online Local Ads could Nab Share… Budget $0 - $1,499 $1,500 - $4,999 $5,000 - $18,999 $19,000 + Don't Know Mean Budget Jan-00 31% 17 16 14 22 $4,230 Jan-01 35% 14 13 15 23 $4,650 Jan-02 34% 22 17 14 13 $4,510 Jun-03 31% 21 20 14 14 $6,070 Source: Local Commerce Monitor (SM) Wave VI (2003), Kelsey Group (2003) 70 Please see analyst certification and other important disclosures starting on page 80. Online Premium Services are Ramping… U.S. Annual Online Paid Content Revenue $1.3B $670 M Y 5% +9 /Y 2001 2002 Source: 2003 Online Publishers Association 71 Please see analyst certification and other important disclosures starting on page 80. Premium Services Drilldown… 2002 U.S. Content Spend ($MM) Personal/Dating Business Content/Investment Entertainment/Lifestyles Research Community-Made Directories Games General New s Personal Grow th Credit Help Greeting Cards Sports Source: 2003 Online Publishers Association $ 72 $ 21 4 $12 1 $ 58 $ 46 $ 47 $1 07 $ 91 $ 72 $ 228 $ 302 $ 292 $ 52 $ 70 $ 25 $ 44 $ 32 $ 40 $ 36 $ 30 FY 2001 FY 2002 $2 $1 0 72 Please see analyst certification and other important disclosures starting on page 80. In Premium Services, Subscriptions Dominate… Monthly Subscriptions 44% Single Payments 14% Subscriptions 86% Subscription Breakdown Annual Subscriptions 47% Source: 2003 Online Publishers Association Other Subscriptions 9% 73 Please see analyst certification and other important disclosures starting on page 80. 11 A handful of industry leaders gaining share with less competition on almost all fronts and operating leverage with inherently scalable models is powerful For example, Amazon.com got big fast, spent lots of money, now what? Fixed costs and operating leverage, in our view. 74 Please see analyst certification and other important disclosures starting on page 80. Examples of Operating Leverage… CQ4:03 Y/Y Revenue Growth CQ4:03 Y/Y Operating Income Growth Company CQ4:03 Operating Margin Amazon.com eBay Yahoo! 36% 57% 48% 50% 65% 85% 8% 34% 18% Source: Morgan Stanley Research, CQ4:03 Results 75 Please see analyst certification and other important disclosures starting on page 80. 12 Positive earnings surprises can be, more often than not, followed by more of the same… 76 Please see analyst certification and other important disclosures starting on page 80. Impact of Internet/Technology is Just Starting… • • • • • • • Commerce Shifts Search / Find / Obtain (SFO) Efficiency / Ramp Media Replacement Consumer/SMB Empowerment China Ramp as a Global Economic Player Ramp in Supply Chain Management Outsourcing 77 Please see analyst certification and other important disclosures starting on page 80. Stocks Ranked by Probability to Outperform Market with Degree of Risk Considered 4/5/04 Price $50 $47 $74 $26 $46 $11 $18 $6 $27 $39 Rank 1 2 3 4 5 6 7 8 9 10 Ticker YHOO AMZN EBAY MSFT INTU CNET VRSN DSCM PCLN ASKJ Company Yahoo! Amazon.com eBay Microsoft Intuit CNET VeriSign drugstore.com Priceline.com Ask Jeeves Rating O-V O-V O-V O-V O-V E-V E-V E-V E-V U-V C2003 175% 179% 91% 6% 13% 152% 103% 130% 86% 608% Market Cap ($MM) 34,319 19,636 49,091 282,477 9,236 1,603 4,325 412 1,072 2,274 Key Positive Double leverage Platform built Market leader 10-year plan Stable growth Market leader Big markets Market Leader Stability achieved Source: Morgan Stanley Research 78 Please see analyst certification and other important disclosures starting on page 80. Performance of S&P Composite was Very Strong in 1980s and Especially Strong in 1995-1999 From 1995-1999, S&P Composite averaged 25% compound annual return — highest consecutive returns from 1900-2003 (only close comparison was 1924-1928 when the average compound annual return was 24%). 23% decline in 2002 was greatest annual decline in quarter of a century (since 1974 when the oil shock occurred). S&P Composite Stock Price Returns, 1900-2003 50% 5 Powerful + Years 50% 30% 10% 1900 1902 1904 1906 1908 1900-1925 (5:3) 1926-1950 (8:3) 30% 10% War 1910 1912 1914 1916 1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940 1942 1944 1946 1948 2000 3 - Ye ars 2002 -10% -30% -50% -10% -30% -50% 3 - Ye ars 4 Pow e rful - Ye ars 50% 30% 10% 1951 1953 1955 1957 1959 1951-1975 (6:1) 50% 1976-2003 (9:1) 5 Pow e rful + Ye ars 8 + Ye ars Oil Shock 30% 10% 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 1961 1963 1965 1967 1969 1971 1973 1975 -10% -30% -50% -10% -30% -50% Diagonal hash bar denotes year when S&P Composite rose/fell in excess of 20%. Also noted ratios equal number of years during period that S&P Composite rose 20%+ compared with number of years S&P Composite declined by 20%+. Source: Morgan Stanley Research; data excludes dividends 79 Please see analyst certification and other important disclosures starting on page 80. 1950 Disclaimer 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, Lina Choi, Yoshiko Motoyama, Andy Xie, Stephen Roach, Mark Shuper, Viktor Ma, Eric Wen, Brian Pitz, Brian Fitzgerald, Minyan Liu, Shawn Kim, Mitchell Kim, Javier Marin. Global Stock Ratings Distribution (as of March 31, 2004) Coverage Universe Stock Rating Category Count % of Total Investment Banking Clients (IBC) Count % of Total IBC % of Rating Category Overweight Equal-weight Underweight Total 619 785 375 1,779 35% 44% 21% 262 280 101 643 41% 44% 16% 42% 36% 27% Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). 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 this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For definitions, please go to www.morganstanley.com/companycharts. 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 named on the cover of this report. 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 named on the cover of this report. 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 named on the cover of this report. Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. 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