advertising internet marketing business

Internet Advertising Trends 7/5/05 mary.meeker@morganstanley.com brian.pitz@morganstanley.com 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 800-624-2063 to request a copy of this research. 1 Please see analyst certification and other important disclosures starting on page 72. Outline • Perspective • ‘Age of Engagement’ – Internet Impact Just Starting • Search / Find / Obtain (SFO) • Numbers Tell Story • Data Tell Story • What’s Next? • Inventory! 2 Please see analyst certification and other important disclosures starting on page 72. Perspective 3 Please see analyst certification and other important disclosures starting on page 72. What We Have Lived Through with Internet Patterns Company Creation Boom Bust Boom-let Wealth Creation Boom-let Bust Boom 4 Please see analyst certification and other important disclosures starting on page 72. Top 5 Global Internet Market Cap Leaders Google + Yahoo! + eBay + Yahoo! Japan + Amazon.com • $ 2B = market value — pre-2000 IPO • $178B = market value — Nasdaq peak – 3/10/00 • $ 32B = market value — Nasdaq trough – 10/9/02 • $237B = market value — 6/27/05 Google included after company’s 8/04 IPO. 5 Please see analyst certification and other important disclosures starting on page 72. Internet 24x7…Everywhere Patagonia 7 Miles Above North Sea From: Peter Bloom To: Mary Meeker Sent: Fri Apr 15 11:04:43 2005 Subject: Amazing paradigm shift at 36,000 feet...the world really is getting smaller! I am currently 7 miles above the earth on an SAS flight somewhere over the North Sea. I am writing this email from one of the first planes to have a high speed continuous connection to the Internet. I am connected using standard wireless access and in addition to email I have three IM sessions running with instantaneous response and also just executed a trade on NASDAQ. [I plan to make a VoIP call later.] Truly awesome implementation of technology...but sadly the last haven from "the connected world" has now been obliterated. Someday we'll all take emails like this for granted but I couldn't pass up the opportunity to send one of the first ones. Coming up on Greenland! 6 Please see analyst certification and other important disclosures starting on page 72. Global Data Points… Google 7B global searches (+77% Y/Y, 4/05); 355MM global unique visitors (+31%, 5/05) per comScore 151MM global subscribers (+45% Y/Y, CQ1); 41MM in N. America; 52MM in Asia 917MM streaming video (music…) sessions (+119% Y/Y, CQ4) 400MM cumulative iTunes as of 5/05 (+270% in CQ1); 16MM iPods; digital music = 15% of US music units sold in 2004 40MM+ estimated My Yahoo! users 27% of US Internet users indicated they read blogs 13MM peak concurrent Instant Messaging users in China Broadband Yahoo! Digital Music Yahoo! Blogging Tencent 7 Please see analyst certification and other important disclosures starting on page 72. …Global Data Points Wireless Internet VoIP Shanda Networking PayPal Mobile Payments Global S. Korea China 196MM messaging subscribers (CQ4) in China, No. 1 in world 42MM registered Skype users (6/05) - fastest product ramp ever? 2MM peak concurrent online gamers (+69% Y/Y, CQ4) in China 72MM accounts (+57% Y/Y, CQ1); 22MM users (+52%) 3MM+ NTT DoCoMo wallet phone users (CQ1) in Japan N. America = 26% of Internet users in 2004; was 46% in 1998 Broadband penetration of 70%+ - No. 1 in world More Internet users < age of 30 than anywhere 8 Please see analyst certification and other important disclosures starting on page 72. Broadband Ramp in 25-30% Penetration Sweet Spot… 80 70 US Residential Broadband Subscribers (MM) 60 50 40 30 20 10 0 2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E 2011E 60% 50% 40% 30% 20% 10% 0% US Residential Broadband Subscribers Morgan Stanley Research. % of Total US Households 9 Please see analyst certification and other important disclosures starting on page 72. % of Total US Households Mobile Increasingly Important Country China US Japan Germany UK Italy S. Korea Mobile Phones (MM) 334 180 94 68 54 54 34 Internet Users (MM) 94 201 68 42 30 26 30 Mobile Phone to Internet User Ratio 3.6 : 1 0.9 : 1 1.4 : 1 1.6 : 1 1.8 : 1 2.1 : 1 1.1 : 1 Installed PCs (MM) 42 204 54 40 26 15 27 Euromonitor, CNNIC, World Bank, Morgan Stanley Research – 2004 year-end data 10 Please see analyst certification and other important disclosures starting on page 72. Content / User Experience Continues to Improve… Yahoo! Product Launches 2003 Front Doors Communications Search Front Page Search Redesign Mail Spam Tools, Messenger 5.0, Photos Relaunch Search 4.0, Enhanced News Search, Product Search, Shopping SmartSort Sports Upgrade, Finance Quotes Redesign, Movies User Reviews SBC 2.0, Yahoo! BT, Yahoo! Plus, Small Biz Merchant Solutions Front Page Relaunch Messenger 6.0, Mail Upgrade, Avatars 1.0 Proprietary Search Platform, News Search, Search Shortcuts, Toolbar Anti-spy, Search Results Redesign, Travel Search, Video Search Autos Redesign, Games Upgrade Small Biz Domains 2.0, HotJobs Local Listings, Personals Premier Messenger 6.0 (WW), LaunchCast (UK), Mail Upgrade, Toolbar Anti-Spy (EUR), Kelkoo Relaunch, My Yahoo! Relaunch (EUR), Front Page Relaunch (EUR) My Yahoo! Relaunch Maps, SmartView, Local Search Launch Mobile Site Upgrade, Messenger, Photos, Search BT Communicator, Rogers Portal, Y! Browser / Sidebar Overture Advertiser Tools, Overture Local Match Y! Partner Network Y! 360 Beta, Groups Redesign Mobile Mail Mail Storage Increase Desktop, Video, Y!Q Contextual Search, Firefox toolbar My Movies Recommend, Games/News Redesign HotJobs RSS, Free Local Business Sites Games Relaunch (EUR), My / Front Page on BT / Rogers 2004 2005 (through 4/22/05) Content Marketplaces International Personalization Local Mobile Access Partners Advertising Community Source: Yahoo! 11 Please see analyst certification and other important disclosures starting on page 72. …Content / User Experience Continues to Improve… 12 Please see analyst certification and other important disclosures starting on page 72. …Content / User Experience Continues to Improve Consumer Satisfaction with Merchants in CQ4 Holidays 80 Percent Selecting Response 70 60 50 40 30 20 10 0 Very Satisfied Somewhat Satisfied 2004 Shop.org/BizRate Research Online Holiday Mood Study BizRate Research, a Division of Shopzilla Conducted By Shop.org and BizRate Research 73% 58% 50% 29% 28% 22% 18% 12% 3% 2% 1% 2% 1% 0% 0% Neither Somewhat Dissatisfied Very Dissatisfied Wave 2 Dates 2002: 12/2 – 12/3 2003: 12/1 – 12/2 2004: 12/6 – 12/7 2002 2003 13 Please see analyst certification and other important disclosures starting on page 72. Hierarchy of Needs? 1943 - Maslow 2005 - ? ;) Selfactualization Esteem Internet / Mobile Phone Belonging Safety Physiological Shelter Food / Water Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate. 14 Please see analyst certification and other important disclosures starting on page 72. ‘Age of Engagement’ – Internet Impact Just Starting 15 Please see analyst certification and other important disclosures starting on page 72. 360° of Engagement 950MM+ global customers driving on same highway with same information at same time Only differences: ● speed ● language ● device (mobile, PC…) 16 Please see analyst certification and other important disclosures starting on page 72. ‘All the World’s Information…’ Our mission is to organize all the world’s information and make it universally accessible and useful. - Google More and faster progress may be made here than most folks imagine… Think about ~$600MM in annual capex and universal language translation on the fly 17 Please see analyst certification and other important disclosures starting on page 72. Search / Find / Obtain (SFO) 18 Please see analyst certification and other important disclosures starting on page 72. Jeff Rayport / Bernard Jaworski from Best Face Forward… Truth is that interactions with customers, and the customer experiences that result from those interactions, are, for many businesses, the sole remaining frontier of competitive advantage 1) In this era of near total commoditization, competitive differentiation along traditional dimensions of corporate performance is becoming largely unsustainable 2) There is longstanding evidence that quality of service matters very much to customers 3) Whether it’s labor / products / services, finding what you want is increasingly difficult Where can you find what you are looking for AND high quality service? THE WEB! 19 Please see analyst certification and other important disclosures starting on page 72. Search / Find / Obtain (SFO) Search for “TiVo” Find Obtain 20 Please see analyst certification and other important disclosures starting on page 72. Evolution of Search - eBay as Proxy As eBay and buyers / sellers became smarter, eBay’s online marketplace improved… eBay Listings, Gross Merchandise Volume (GMV) 500 450 400 350 300 250 200 150 100 50 0 ar Se - 98 pM 98 ar Se - 99 pM 99 ar Se - 00 pM 00 ar Se - 01 pM 01 ar Se - 02 p M - 02 ar Se - 03 pM 03 ar Se - 04 pM 04 ar -0 5 $12,000 10,000 8,000 6,000 4,000 2,000 0 Total GMV (MM) Listings (MM) As buyers, sellers and eBay became smarter about expanding / improving eBay’s user experience, volume and scope of listings and value of goods increased, while conversion rates (ex-ASP increases) remained relatively steady Similar trends playing out in search – as searchers, advertisers and search engines become more sophisticated about expanding / improving user experience and relevancy of sponsored / natural search results, search query volume, conversions and resulting revenue levels should increase Key takeaway -- more sophisticated user experience leads to a higher ROI, for both eBay and its sellers M Listings Morgan Stanley Research, eBay. GMV 21 Please see analyst certification and other important disclosures starting on page 72. Numbers Tell Story 22 Please see analyst certification and other important disclosures starting on page 72. Monetization Continues to Rise Revenue per User or Account 40 35 30 25 20 15 10 5 0 $2 C2002 C2003 C2004 C2005E $21 $14 $12 $37 $11 Google Net Revenue per Yahoo! Net Revenue per eBay Payments Revenue Unique User (1) Active Registered User (2) per Active Account (3) (1) Google unique user count from comScore and Morgan Stanley estimates of global users at year-end (’02 – 209MM, ’03 – 251MM, ’04 – 327MM, ’05 – 409MM). (2) Yahoo! active registered users per company reports and Morgan Stanley estimates (’02 – 101MM, ’03 – 133MM, ’04 – 165MM, ’05 – 202MM). (3) eBay Payments users per company reports and Morgan Stanley estimates (’02 – 8MM, ’03 – 13MM, ’04 – 20MM, ’05 – 26MM). eBay figures not presented pro-forma for PayPal acquisition, acquired 10/02. 23 Please see analyst certification and other important disclosures starting on page 72. Internet Ad Spend at $145 Per Home vs. $674 for Newspapers? Medium 2004E Advertising Spending ($B) Households (MM) Ad Spending / Household ($) Promotions Direct Telephone Newspapers Classifieds Direct Mail Broadcast TV Radio Cable TV Magazine Yellow Pages Internet / Online Total Average $101 91 48 17 51 45 20 18 21 15 10 $420 42 99 105 72 55 99 108 60 74 99 99 66 881 88 $1,022 865 674 302 514 416 334 240 216 151 145 $4,575 458 Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Newspapers include Classifieds. Promotions ($101B) include: incentives ($27B), promotional products ($22B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing ($6B), promotional fulfillment ($5B), product sampling ($2B), and in-store marketing ($1B). Households may use multiple advertising mediums. 24 Please see analyst certification and other important disclosures starting on page 72. Gap Between Internet Consumption and Ad Spend is Large US Media Usage 12.0x 10.0 8.0 6.0 4.0 2.0 0.0 New spapers + Magazines (1) to Ad Spending (2) Ratios 12.0x 10.0 8.0 4.7x Youth Media Usage to Ad Spending Ratios (3) (2) 11.3x 6.0 4.0 2.0 0.0 Total TV Radio Internet New spapers + Magazines Total TV Radio Internet (1) Adapted from SRI-Knowledge Networks, Fall 2003. (2) Adapted from Universal McCann, (6/03); Internet Advertising Bureau (3/04). (3) Veronis Suhler Stevenson (2003), Yahoo! Analyst Day (5/04). Youth defined as age 17 and under. Ratios are calculated as percent of US media usage on a medium divided by percent of US ad spending on a medium. 25 Please see analyst certification and other important disclosures starting on page 72. Advertising Moving Online at Rapid Clip Global Advertising Spending (1) eBay Advertising Spending (2) Online 3% Offline 38% Offline 97% Online 62% (1) PricewaterhouseCoopers, 2003 totals (6/04). (2) eBay (2004), Morgan Stanley. 26 Please see analyst certification and other important disclosures starting on page 72. eBay Has Grown Classified Market 900 800 700 Listings (MM) 603 eBay (US) All US Newspapers eBay (One W ebsite) vs. All U.S. New spapers (1,468 Dailies) Annual Classified Ads (MM) 764 600 500 400 300 200 100 0 4 141 427 320 238 144 33 123 145 146 127 122 119 119 1997 1998 1999 2000 27 2001 2002 2003 2004 Newspaper Association of America, eBay, Morgan Stanley Research Please see analyst certification and other important disclosures starting on page 72. Google + Yahoo! Account for 54% (and rising) of US Online Ad Revenue US Online Ad Revenue Mix (1) Google, US Gross Ad Revenue (2) Yahoo!, US Gross Ad Revenue (2,3) Others (4) $1,400 1,200 US Ad Revenue ($MM) 57% 47% 1,000 800 600 400 200 0 CQ1:04 CQ1:05 27% 23% 20% 27% Total US, +26% Y/Y •Google, +73% •Yahoo!, +46% •Others (5), +3% (1) (2) (3) (4) (5) Source: IAB/PriceWaterhouseCoopers Interactive Advertising reports. Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue. Yahoo! Gross US Ad revenue forecast by holding constant CQ4:04 reported TAC rate, and multiplying Overture 3rd Party & Affiliate revenue by TAC rate / (1 - TAC rate). Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue. Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up 14% Y/Y. 28 Please see analyst certification and other important disclosures starting on page 72. Don’t Underestimate Power of Google + Yahoo! Ecosystems… • While Google generated $1.2B in gross online advertising revenue in CQ1 it PAID OUT $462MM to thousands of partners like AOL, Ask Jeeves and iVillage • While Yahoo! generated $1.0B in gross online advertising revenue in CQ1 it PAID OUT an estimated $353MM to thousands of partners like MSN, ESPN and The Wall Street Journal 29 Please see analyst certification and other important disclosures starting on page 72. …Don’t Underestimate Power of Google + Yahoo! Ecosystems Google US Gross Revenue (2), $757MM Other 21% Q1:05 US Online Ad Revenue: $2.8B (1) Google, Gross (2) 27% AOL 29% (3) Google, Net (2) 50% Others (4) 46% Yahoo! US Gross Revenue (2), $749MM Other 28% Yahoo!, Gross (2) 27% (1) (2) (3) (4) (5) Source: IAB/PriceWaterhouseCoopers Interactive Advertising report. Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue. AOL estimates from Morgan Stanley Cable Analyst Richard Bilotti. MSN US ad revenue computed as reported MSN ad revenue multiplied by MSFT year-end percentage of US revenue. For F2005, US percentage estimated at 65%. Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue. Yahoo!, Net (2) 50% MSN 22% (4) 30 Please see analyst certification and other important disclosures starting on page 72. Data Tell Story 31 Please see analyst certification and other important disclosures starting on page 72. Search – Sponsored & Natural (iProspect) For a given query, which result is more relevant, natural or sponsored? Sponsored Search 40% Natural Search 60% iProspect Search Engine User Survey (5/04). Based on answer to question, “For a given query, which result is more relevant, natural or sponsored?” from a US survey of 1,649 respondents (http://www.iprospect.com/about/searchenginemarketingwhitepapers.htm) 32 Please see analyst certification and other important disclosures starting on page 72. Search – Driving Branding & Sales (SEMPO) To increase/enhance brand awareness of products/services To sell products, services, or content directly online To generate leads that we ourselves will close as sales via another channel To drive traffic to our Web site, the revenue model of which is online advertising To generate leads for a dealer or distributor network to close as sales To provide informational/educational content only 61% 58% 54% 44% 21% 14% 10% 20% 30% 40% 50% 60% 70% Percentage of Respondents A nswering 0% SEMPO (12/04); Based on answer to the question, “What is your company using search engine marketing to accomplish?” Survey of 288 search engine advertisers and SEM agencies. 33 Please see analyst certification and other important disclosures starting on page 72. Search – Driving Branding (IAB / Nielsen) Impact to Unaided Brand Awareness, by Category Health 1st Search Paid Ad 5th Search Paid Ad Content Ad Image Ad (728 X 90) 19% Auto 2% Beverage 14% Electronics 8% Retail 16% Financial 16% 8 (4) 6 6 11 11 7 2 2 5 14 10 4 5 2 4 8 8 IAB and Nielsen//NetRatings (6/04), as quoted by AR | Search, a division of Avenue A | Razorfish. Based on answer to question to request to name a specific brand within a tested industry, with 10,500 participants recruited from Survey Sample International. 34 Please see analyst certification and other important disclosures starting on page 72. Search – Driving Sales – Online & Offline (Overture / ComScore) Estimated 92% of conversion activity following a Consumer Electronics / Computer Search occurs offline Latent Online Conversion 7% Offline Conversion 92% Same Session Online Conversion 1% Search and the Consumer Buying Cycle, Overture and comScore study 2005, as quoted by AR | Search, a division of Avenue A | Razorfish. 25% of initial searchers purchased a product, and an estimated 92% purchased offline. Based on buying activity within 90 days of Internet users who conducted a consumer electronics or computer (CE/C) search at one of the top 25 search engines in CQ1:04. 35 Please see analyst certification and other important disclosures starting on page 72. Clicks in ‘Tails’ (findmefaster) Clickthrough Rate vs. Phrase Length 8% 7% Clickthrough Rate 6% 5% 4% 3% 2% 1% 0% 1 Word 2 Words 3 Words Phrase Length findmefaster (2004). Based on client data from findmefaster. Chris Anderson coined term “The Long Tail.” 7.1% 4.8% 2.8% 2.5% 1.0% 4 Words 5 Words 36 Please see analyst certification and other important disclosures starting on page 72. Conversions in ‘Tails’ (Oneupweb) Number of Words 1 2 3 4 5 6+ Average Conversion Rate (1) 6% 15 22 38 10 9 Oneupweb (1/05); (1) Based on Oneupweb client data, and high-traffic keywords, top 100 terms as ranked by total unique visitors. Conversion rate defined as the percentage of unique visitors that purchased or converted. 37 Please see analyst certification and other important disclosures starting on page 72. ROI in ‘Tails’ (findmefaster) How users navigate to findmefaster 1 Word 18% How findmefaster buys keywords 3+ Words $0.24 26% 1 Word 19% 3+ Words 46% 2 Words $0.49 55% 2 Words 36% findmefaster (2004). Based on findmefaster site data. Chris Anderson coined term “The Long Tail.” 38 Please see analyst certification and other important disclosures starting on page 72. What’s Next? 39 Please see analyst certification and other important disclosures starting on page 72. Innovation Will Drive Usage Growth • • • • • • • • • • • • • • Broadband Mobile User experience Search Personalization with more effective targeting User-generated content (RSS, blogs, reviews, video, images, audio…) Music Payments Short- and long-form video Interactive entertainment VoIP Local Pay per call Accessibility (PC + mobile…) 40 Please see analyst certification and other important disclosures starting on page 72. Usage Growth Will Drive Inventory Growth Expansion of highway system assisted growth in billboards / outdoor inventory Lots of unused inventory on the web Image sources: http://www.bctf.bc.ca/WorthSpeakingOutFor/materials/billboard.html, GameSpot. 41 Please see analyst certification and other important disclosures starting on page 72. Global Internet Thesis 10-15% user growth 20-30% usage growth 30%+ monetization growth 42 Please see analyst certification and other important disclosures starting on page 72. Creative Marketers in a Virtual Candy Store! Trends imply we are in first inning of development of optimized online advertising: • inventory • tools / measurability / targeting • ROI • revenue per user • international (+36% Q/Q to 39% of Google CQ1 gross revenue vs. 75%+ of Internet users outside US) 43 Please see analyst certification and other important disclosures starting on page 72. What Did Sergey Brin Say? We're moving to a world where we're able to show very, very clear value to advertisers in a way that's been unprecedented…in any form of advertising before. – Sergey Brin, Google, 4/05 44 Please see analyst certification and other important disclosures starting on page 72. What Did P&G Say? Commitments to cable channels will fall by as much as 25%...while spending on broadcast networks will be cut around 5% [for the 20052006 season]. -The Wall Street Journal, 6/13/05 45 Please see analyst certification and other important disclosures starting on page 72. What Would John Wanamaker Say? ~1900-1920 50% of advertising is wasted, we just don’t know which half 2010E 10% of advertising is online and less than 10% of it is wasted For discussion purposes only. Clearly, we don’t know what John Wanamaker would say in 2010, but we know he was a smart guy! Note that if US advertising spending grows at CAGR of 4% for 2006-2010 and online spending grows at CAGR of 21%, online would reach 10% of total ad spending, up from 4% in 2004. 46 Please see analyst certification and other important disclosures starting on page 72. What Happens When Measurability Gets Extended? Broadband IP will be everywhere…every electronic device will be a digital IP device…all content will be digitally distributed…IP delivery of digital media is the future for broadcasting of content. - Rob Glaser, Real, 6/05 47 Please see analyst certification and other important disclosures starting on page 72. Will There be a Difference Between Advertising / Marketing / Selling? Search for “TiVo” Find Obtain 48 Please see analyst certification and other important disclosures starting on page 72. Inventory! • Video • Mobile • User-Generated Content • In-Game • IPTV 49 Please see analyst certification and other important disclosures starting on page 72. Video You just heard you missed one of the greatest golf shots in the history of the game. You want see it and you are happy to pay to watch it or perhaps view an ad in front of the footage. You just want to watch it… 50 Please see analyst certification and other important disclosures starting on page 72. Google and Yahoo! Search Don’t Help Search: Tiger Woods 16th hole Augusta video • Lots of news stories • No video 51 Please see analyst certification and other important disclosures starting on page 72. Google & Yahoo! Video Search Don’t Help Search: Tiger Woods 16th hole Augusta • Pictures, text • Not video we’re looking for 52 Please see analyst certification and other important disclosures starting on page 72. What Does Help? • Blogger posts video in the spirit of creating a prototype Nike ad • It’s downloadable, it’s free, but potentially missing appropriate permissions… 53 Please see analyst certification and other important disclosures starting on page 72. click on image below for video clip The Shot! Note -- Adobe® Acrobat® Reader® version 6.0 or greater required to play video clip To download a free copy, go to http://www.adobe.com/products/acrobat/readstep2.html Source: Blogger (http://www.jaffejuice.com) 54 Please see analyst certification and other important disclosures starting on page 72. We Want it - Make it Easy! Content / Rights Owners User searches for content Search Engines User gets content Content owners receive payments via payment mechanism or ad Payment Mechanism Advertisements Such as… 55 Please see analyst certification and other important disclosures starting on page 72. What We Know About Making Money on Online Content Yahoo! — 917MM streaming video (mostly music) sessions (CQ4); < 10% preceded by streaming ads (rising to 50%, in our view) with compelling CPMs Korea — TV channels allow users to download shows for ~$1 Google — launched upload.video.google beta (4/05) Camera Phones – 263MM sold globally in 2004 Digital Music — 400MM iTunes / 16MM iPods sold Digital sales could rise to as much as 25% of global music sales in five years… At long last the threat has become the opportunity… -- IFPI, Digital Music Report, 2005 PayPal — 72MM accounts (CQ1); 22MM active users; 110MM payments with $6B in volume; 3-8% of iTunes Online Paid Content — $1.8B US revenue in 2004 per OPA 56 Please see analyst certification and other important disclosures starting on page 72. Mobile • Enables impulse purchases for digital content • Potential complement to search-based advertising, as local grows • Eventual rollout of video ringtones and mobile TV creates new inventory • Effectiveness of Jamster TV ads for ringtones, games, graphics and screensavers is immediately measurable, owing to unique SMS shortcodes 57 Please see analyst certification and other important disclosures starting on page 72. Mobile – Asia Leads • Mobile WAP browsing, at 8-10x higher speeds than the US, with graphical ads – surfing for latest news on Sina while on the bus in Shanghai • Instant messaging, connecting phones to PCs – messaging from restaurant in Beijing to friends back home in Guangzhou via Tencent QQ • Subscription and ad-supported digital content – accessing jokes, screensavers or horoscopes from Tom Online 58 Please see analyst certification and other important disclosures starting on page 72. Mobile - Coupons, Location-Based Services + + = Mapping services that know where you are Vendor offering Location-Based Coupon • Opt-in location-based coupons / advertising provide similar degree of engagement with consumers, on personalized / local / day-parted levels 59 Please see analyst certification and other important disclosures starting on page 72. Mobile - Next-Gen Radio • What we want: listen to a song on iPod radio, and click a button to sync with dock or wirelessly download • • • What we’ve got: Podcasting – interim solution to realtime wireless downloads to mobile device Hybrid satellite radio + mobile device + on-demand content + fast connection = fertile ad ground? Radio, like any medium, gets even more interesting for advertisers when they can know something about audience 60 Please see analyst certification and other important disclosures starting on page 72. Mobile – Business Models Model Free (with ads) Potential Examples Yahoo! daily weather update Google SMS Search with ads inserted NAVTEQ Opt-in Location Based Coupons VeriSign’s Jamster content plans Idetic’s mobiTV Tencent IM subscriptions Wireless carrier-originated ringtones iTunes Mobile Subscription Purchased a la carte Perhaps hubs — like Yahoo! — will be key? 61 Please see analyst certification and other important disclosures starting on page 72. Consumer is Center of Content, Device is Not… Consumers want integrated content, when they want it • Play games, check email, watch videos on handhelds • Watch high-quality video stored on PVRs or Media Center PCs • Program PVRs / similar devices / open garage door from mobile phone • HD video and audio on the consumers’ schedule, allowing consumers to create their own prime time • Listen to purchased music at home / work / in car without having to carry around many devices, mediums or wires 62 Please see analyst certification and other important disclosures starting on page 72. User-Generated Content… Yahoo! Movie Reviews eBay Feedback Ratings Google Video Search Blogs 63 Please see analyst certification and other important disclosures starting on page 72. …User-Generated Content Vlogs Tencent Instant Messaging (PC / Mobile) 64 Please see analyst certification and other important disclosures starting on page 72. QQ vs. TV? • 18MM households – CSI, #1 viewed TV show, 2004-2005 season (1) • 13MM peak concurrent users – Tencent’s QQ, #1 instant messaging service in China in CQ1 (1) Source: Morgan Stanley Media Research, Nielsen. Based on 16.4 ratings points for CSI, where 1 ratings point = 1.096MM households. 65 Please see analyst certification and other important disclosures starting on page 72. Yahoo! vs. CBS / Fox / NBC / ABC? Network Yahoo! CBS Fox NBC ABC (1) (2) Metric Global Unique Visitors Avg. Primetime Households Avg. Primetime Households Avg. Primetime Households Avg. Primetime Households Amount 372MM (1) 8.8MM (2) 6.8MM (2) 6.6MM (2) 6.4MM (2) Source: Yahoo! (CQ1:05). Source: Nielsen Media Research US data (4/05). 66 Please see analyst certification and other important disclosures starting on page 72. Yahoo! vs. ABC / CBS / FOX / NBC? It’s a matter of time before the Web will… • Serve as launchpad for content from major studios / content developers, like Yahoo!s deal with Showtime to stream complete first episode of Kirstie Alley’s Fat Actress Allow for user interaction / feedback (i.e. focus group-like feedback from the community) on developing content to allow for improved • relevance of content during development cycle • efficiency of content creation • reception of content upon entry to mass market • 67 Please see analyst certification and other important disclosures starting on page 72. In-Game… • Many gamers crave realism (and realistic backgrounds), and advertisers crave the gaming demographic • In-game advertising networks enable users to dynamically download contextual advertising into game • Highly targetable captive audience, measurable results Image sources: http://www.massiveincorporated.com/index.htm. From the game Splinter Cell. 68 Please see analyst certification and other important disclosures starting on page 72. …In-Game • Activision partnered with Nielsen to survey video game habits ~1,000 males, age 8-34. They found: • • • • • 75% owned a gaming system Video gaming is preferred equally to TV viewing Older males play video games at expense of TV viewing 70% of gamers feel real products make games more “genuine” Advertisers in 2003 spent $8.5B on TV and less than $0.002B on games • With 100MM+ (1) global console gamers, opportunity is large… (1) Total console gamers derived from console installed base figures from Morgan Stanley Research. 69 Please see analyst certification and other important disclosures starting on page 72. IPTV • At the risk of sounding like a skipping CD…TV + Internet-enabled set-top box can help marketers place targeted ads—in the TV guide, between shows, even during ad skipping + = Smart TV advertising • Potentially combines massive reach of TV with targeted advertising 70 Please see analyst certification and other important disclosures starting on page 72. Impact of Internet has Just Begun 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 71 Please see analyst certification and other important disclosures starting on page 72. Disclaimer – www.morganstanley.com/techresearch 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, Brian Pitz, and Brian Fitzgerald. Important US Regulatory Disclosures on Subject Companies The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (“Morgan Stanley”). The research analysts, strategists, or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Stock Ratings Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst’s views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor’s decision to buy or sell a stock should depend on individual circumstances (such as the investor’s existing holdings) and other considerations. Global Stock Ratings Distribution (as of May 30, 2005) Coverage Universe Investment Banking Clients (IBC) Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category Overweight/Buy 680 35% 263 40% 39% Equal-weight/Hold 880 46% 300 46% 34% Underweight/Sell 362 19% 91 14% 25% Total 1,922 654 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. 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