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					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.

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Outline
• Perspective
• ‘Age of Engagement’ – Internet Impact Just Starting • Search / Find / Obtain (SFO) • Numbers Tell Story • Data Tell Story • What’s Next? • Inventory!

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Perspective

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What We Have Lived Through with Internet

Patterns
Company Creation
Boom Bust Boom-let

Wealth Creation

Boom-let

Bust

Boom

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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.

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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!

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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

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…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

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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

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% 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

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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!

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…Content / User Experience Continues to Improve…

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…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

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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.

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‘Age of Engagement’ – Internet Impact Just Starting

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360° of Engagement

950MM+ global customers driving on same highway with same information at same time Only differences: ● speed ● language ● device (mobile, PC…)

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‘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
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Search / Find / Obtain (SFO)

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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!
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Search / Find / Obtain (SFO)

Search for “TiVo” Find

Obtain

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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

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Numbers Tell Story

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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.

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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.

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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.

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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.

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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

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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.

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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

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…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)

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Data Tell Story

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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)

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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.

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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.

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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.

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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

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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.

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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.”

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What’s Next?

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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…)
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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.

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Global Internet Thesis

10-15% user growth 20-30% usage growth 30%+ monetization growth

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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)
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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

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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

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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.

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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

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Will There be a Difference Between Advertising / Marketing / Selling?

Search for “TiVo” Find

Obtain

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Inventory!
• Video • Mobile • User-Generated Content • In-Game • IPTV

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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…

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Google and Yahoo! Search Don’t Help
Search: Tiger Woods 16th hole Augusta video

• Lots of news stories • No video

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Google & Yahoo! Video Search Don’t Help
Search: Tiger Woods 16th hole Augusta

• Pictures, text • Not video we’re looking for

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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…

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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)

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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…

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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
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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

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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

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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

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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
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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?

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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
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User-Generated Content…
Yahoo! Movie Reviews eBay Feedback Ratings

Google Video Search Blogs

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…User-Generated Content
Vlogs

Tencent Instant Messaging (PC / Mobile)

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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.

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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).

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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

•

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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.

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…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.

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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

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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

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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. Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.

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Disclaimer – www.morganstanley.com/techresearch
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