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Meeker Tech '09

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Meeker Tech '09 Powered By Docstoc
					Economy + Internet Trends
March 20, 2009

mary.meeker@ms.com / collis.boyce@ms.com / mayuresh.masurekar@ms.com / liang.wu@ms.com

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

Economy + Internet Trends Outline
• Economy 1. Recession – a long time coming, how long will it last? 2. Advertising Spending – closely tied to GDP growth • Technology / Internet 1. Digital Consumer – Undermonetized social networks / video / VoIP driving powerful usage growth + material disruptions for traditional players that may accelerate in recession 2. Mobile – Innovation in wireless products / services accelerating 3. Emerging Markets – Pacing next wave of technology adoption 4. Cloud Computing – Access / storage need / virtualization driving change • Closing Thoughts 1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time…
2

Economy
Recession = Long time coming, how long will it last? Ten years of inflated growth to be followed by ____? Hope for six more tough months but plan for 3-5 years Advertising Spending = Closely tied to GDP growth. Challenges for Internet but likely not as draconian as 2000-2002 Commerce = Slowing but Amazon.com + iTunes data illustrate material online share gains from offline, recession / mobile should accelerate share gains

3

10 Years Ago –
I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998

Source: YouTube.

4

Roots of Economic Challenge?
10+ Years of Rising Home Ownership + Declining Interest / Savings Rates
USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008
70%
June 2004: US home ownership = 73MM

20%

68%
January 1993: HUD began promoting broader home ownership. US home ownership = 62MM

66%

12% 64% 8% 62%

60%

4%

58% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
U.S. Home Ownership Rate U.S. Interest Rate U.S. Personal Savings Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline

0%

Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. All data as of 12/31/08. Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.

U.S. Interest Rate & Personal Savings Rate

16%

U.S. Home Ownership Rate

5

Market & Regulatory Pressure Made Home Buying More Accessible…1998
In addition to a buoyant economy, the overall housing industry owes its enduring vigor to innovations in mortgage finance that have helped not only expand homeownership opportunities, but also reduce market volatility. Under market and regulatory pressure to make home buying more accessible to low-income and minority households, financial institutions have revised their underwriting practices to make lending standards more flexible. In the process, they have developed several new products to enable more incomeconstrained and cash-strapped borrowers at the margin to qualify for mortgage loans. - 1998 State of the Nation’s Housing Report

Note: Quoted in Gary Gorton’s NBER Working Paper Series “The Panic of 2007” (Working Paper 14358), p.5. Source: Harvard University, Joint Center for Housing Studies, 1998.

6

10 Years of Rising Home Prices – Up ~2x at Peak
USA Real Home Price & Building Cost Indexes, % Change 1965 - 2008
80%

% Change From 1965 Level

60%

40%

20%

0%

-20% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

U.S. Real Home Price Index

U.S. Real Building Cost Index
7

Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller.

Systemic Leverage Helped Pace ‘Easy Money’
Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries
400%
U.S. Total Credit Market Debt as % of GDP & Foreign Ownership % of U.S. Treasuries, 1920 - 2008

70%

2008: 3.6x GDP
60%

1933: 3.0x GDP
Total Debt as % of GDP

50%
300%

40%
250%

30%
200%

20%
150%

10%

100% 1920

0%
1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization
Note: Foreign ownership of US treasuries data N/A before 1965. Source: Federal Reserve, Ben Wattenberg, The Statistical History of the United States, From Colonial Times to the Present, Bridgewater, Morgan Stanley Research.

Foreign Ownership of U.S. Treasuries, % of Total Market Cap
8

350%

Excessive Debt Levels = 2008 & 1933
Corporate Debt Much Lower on Relative Basis Now
U.S. Total Credit Market Debt as % of GDP, 1929 – 2008 & Sector Share Breakdown
350%
% Share of Total Debt 1933 2008 1984 - 2008 Net Increase Amount ($T) $14.4 11.9 8.8 8.5

300% U.S. Credit Market Debt / GDP (%)
Government + GSE 24% 18 51 7 33% 27 22 18 Households Corporates

250%

GSE Financials

200%

Financials

150% Government Corporates 50% Households 0% 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 Households Corporates Financials GSE Government
9

100%

Note: GSE (Government Sponsored Enterprises) debt includes various agency-backed mortgages; Source: Federal Reserve, Ben Wattenberg, The Statistical History of the United States, From Colonial Times to the Present, Morgan Stanley Research.

USA Debt Mix Shift –
Mortgages / ABS / GSE Up to 23% of Debt vs. 7% 2 ½ Decades Ago
1984 U.S. Total Debt: $7T Total Mortgage / ABS / GSE Debt: $0.5T 2008 U.S. Total Debt: $53T Total Mortgage / ABS / GSE Debt: $12T Mortgage Pools 9% ABS Issuers 8% Other 20% GSE 6%

Mortgage Pools – 4% ABS Issuers – 0% Other – 22% GSE – 3% Household 26% Government 25%

Government 16% Household 27% Corporate 14%

Corporate 19%

Note: Debt amounts are nominal, ABS is Asset Backed Security, GSE is Government Sponsored Enterprise. Source: Federal Reserve, Morgan Stanley Research.

10

USA Mortgage Delinquency @ Record High 7.88%
USA Residential Mortgage Delinquency Rates, CQ1:98 – CQ4:08

20% Delinquency Rates (%)

15%

10%

5%

0% 1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

All U.S. Mortgages

Prime Mortgages

Subprime Mortgages

Note: National delinquency rate of 7.88% and Q/Q jump of 89 basis points in CQ4:08 are the highest since CQ1:1972, when data first became available; Average national mortgage delinquency rate from 1972-2007 is 4.70%; Source: Mortgage Bankers Association.

11

Unemployment Benefits At 38-Year High and Rising
U.S. Unemployment Rates & Total Benefits Paid, 1971 - 2009
$6,000 12%

$5,000 Real Benefits Paid ($MM)

10%

$4,000

8%

$3,000

6%

$2,000

4%

$1,000

2%

$0 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

0%

Real Benefits Paid

Unemployment Rate
12

Note: Unemployment Insurance : Benefits Paid Through State Programs are inflation adjusted, but not seasonally adjusted, while Civilian Unemployment Rates (16 yr+) are seasonally adjusted. Source: Bureau of Labor Statistics. Morgan Stanley Research.

Unemployment Rates

Michigan Unemployment @ 11.6%, Up Nearly 2x Y/Y
USA @ 7.6%, On Way to California Level of 10.1%?
U.S. State Unemployment Rates, 1/08 vs. 1/09
13% 11.6% 11% Jan-08 10.4% 10.3% 10.1% 9.9% Jan-09
1/09 National Average

9.7%

9.4%

9.3%

9.2%

Unemployment Rate

9% 7.3% 7% 5.7% 5% 6.3% 6.1% 5.3% 5.0% 5.3% 4.8% 5.9%

8.8%

8.7%

8.7%

8.6%

8.6%

5.7%

6.0% 5.5% 5.3% 5.2%

3%
N ev ad a ng to n D C In di an a C ar ol R in ho a de Is la nd C al ifo rn ia O re N go or n th C ar ol in a ig an hi o y eo rg ia G si pp i ck tu Te es s nn O ee

M ic h

M is si s

ut h

Note: 2/09 preliminary U.S. national unemployment rate was 8.1%. Source: Bureau of Labor Statistics. Morgan Stanley Research.

W as hi

So

K en

13

Rising Unemployment

Higher Mortgage Defaults…
Initial Claims For Unemployment Insurance Y/Y Growth
14

Residential Mortgage Delinquency Rates Y/Y Growth

40%

U.S. Residential Mortgage Delinquency Rates vs. Initial Claims For Unemployment Insurance Y/Y Growth, 1973 - 2008

100%

30%

80%

60% 20% 40% 10% 20% 0% 0% -10%

-20%

-20% 1973

-40% 1976 1980 1983 1987 1990 1994 1997 2001 2004 2008

U.S. Residential Mortgage Delinquency Rates Y/Y Growth U.S. Initial Claims For Unemployment Insurance Y/Y Growth
Note: Both mortgage delinquency rates and initial claims for unemployment insurance are seasonally adjusted. Source: Mortgage Bankers Association, Bureau of Labor Statistics, Morgan Stanley Research.

…Higher Unemployment / Mortgage Defaults Rising Personal Bankruptcy Filings…
U.S. Weekly Personal Bankruptcy Filings, Y/Y Growth, 2000 - 2009
150%

100%

50%

0%

-50%

-100% 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Note: “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” went into effect on 10/17/05, causing anomalies in the Y/Y growth series from late 2005 through early 2007. Source: Lundquist Consulting, US Census, Administrative Office of the US Courts, Morgan Stanley Research, Betsy Graseck, Cheryl Pate and Justin Kwong.

15

… Consumer Confidence Falling
Overall Consumer Spending Survey Results – 6/06 - 2/09
Would you say your overall spending over the next 90 days will be more than last year, less than last year, or the same as last year? – 60% survey respondents now saying they’ll spend less money
60%
Spending More Spending Less

2/09 61%

50%

40%

30%

20%

10%

0%
Jun-06 Nov-06 Mar-07 Jun-07 Sep-07 Jan-08 Apr-08 Jul-08 Sep-08 Dec-08 Feb-09

Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 2/18/09.

16

Average Consumer Wealth Destruction = ~25% Through CQ4:08 – 56%+ of USA Household Assets in Real Estate + Stocks
USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances, % Change from CQ1:07
10%

Credit Market Instruments 7%

% Change from CQ1:07

Others 3%

0%

Deposits 12%

-10%

Real Estate 38%

-20%

Pension Reserves 22%

-30%

Equities + Mutual Funds 18%

-40% CQ1:07 CQ3:07 CQ1:08 CQ3:08 S&P/Case-Shiller Home Price Index S&P 500 Index

Note: Median household income in 2007 was $50,233, per U.S. Census Bureau. 56% accounts only real estate + equities / mutual funds; many pension funds also invest in the U.S. equities market, thus actual exposure to these asset classes will likely be higher. The total value of all USA household’s real estate + equities + mutual funds + pension fund reserves declined 25% from the peak in CQ2:07; the Y/Y decline in CQ4:08 is -21%; the Y/Y decline of total household assets in CQ4:08 is -15%. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 17

Difficult Retail Environment
Abercrombie & Fitch Same-Store Sales Y/Y % Change, 1/08 – 2/09
10% 6% 5% Comparable Store Sales Y/Y % Change Comparable Store Sales Y/Y % Change 0% 0% -2% -5% -10% -10% -15% -20% -20% -25% -30% Jan Mar May Jul Sep -20% -24% -28% Nov -30% Jan -11% -14% -1% -3% -7% 5% 0% -2%-1% -5% -10% -15% -20% -25% -30% Jan Mar May Jul Sep Nov Jan 0% -1%-1%-1% -2%-3% -2% -3% 3% 2% 2% 1% 10%

UK Retail Same-Store Sales Y/Y % Change, 1/08 – 2/09

Note: Same-store sales are sales in stores open more than one year. Source: Abercrombie & Fitch, British Retail Consortium.

18

Retail Sales + e-Commerce Growth Rates Slowing
Adjusted Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 – CQ4:08
40%

30%

Y/Y Growth

20%

10%

0%

-10% CQ3:01

CQ3:02

CQ3:03

CQ3:04

CQ3:05

CQ3:06

CQ3:07

CQ3:08

US Adjusted Retail E-Commerce Sales

US Total Retail Sales
19

Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: US Dept. of Commerce (CQ4:08), Morgan Stanley Research.

Corporate Sales – Increasingly Below Plan Since CQ1:06
Overall Corporate Sales Survey Results, CQ1:01 – CQ4:08
How is your company doing with regard to meeting its sales plan revenue objectives for the current quarter? Are you coming in above plan, even, or below plan?
60%

CQ3:01 50%
50%

Above Plan

Below Plan

CQ4:08 51%

40%

30%

20%

10%

0% CQ1:01

CQ4:01

CQ3:02

CQ2:03

CQ1:04

CQ4:04

CQ3:05

CQ2:06

CQ1:07

CQ4:07

CQ3:08

Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08.

20

Material Revenue Growth Declines – TMT Companies
Intel + Nokia = Accelerating -20%+ Declines
75% 60% Y/Y Revenue Growth 45% 30% 15% 0% -15% -30% CQ1:07 CQ3:07 CQ1:08 Microsoft Intel Disney Viacom* Yahoo! Google AT&T Verizon CQ3:08
Cisco News Corp Amazon.com
TMT Companies Revenue Y/Y Growth, CQ1:07 – CQ1:09E

CQ1:09E Nokia Time Warner eBay
21

Note: CQ1:09E figures based on FactSet consensus estimates; CQ4:08 for VIA is an estimate. Source: Company data, FactSet, Morgan Stanley Media Research.

Technology Revenue – So far, a 2001 Redux of 5 Flat / Down Sequential Quarters…Now 4…This Time, Secular Outlook Worse
Global Technology Sector Revenue & Y/Y Growth, CQ1:98 – CQ4:08

700

35% 30%

600

Average Y/Y Growth = 11%

25% 20% 15% 10% Y/Y Growth
22

500 Revenue ( $B)

400

300

5% 0% -5%

200

100 -10% 0 CQ1:98 -15% CQ3:99 CQ1:01 CQ3:02 Revenue CQ1:04 CQ3:05 Y/Y Growth CQ1:07 CQ3:08

Note: Revenue and Y/Y Growth compiled from 570 publicly traded global technology companies. Source: FactSet, Morgan Stanley Research.

USA Manufacturing Contracting Rapidly –
12/08 PMI Index Lowest Level Since 1980, 2/09 PMI = 35.8
80

U.S. PMI (Purchasing Managers Index), 1/48 – 2/09
70 PMI > 50 = Expansion

60-year Average = 52.7

60 ISM PMI Index (%)

50

40 PMI < 50 = Contraction Feb 1991 PMI=39.4 Oct 2001 PMI=40.8 Dec 2008 PMI=32.9

30

May 1982 PMI=35.5

20
19 48 19 51 19 54 19 57 19 60 19 63 19 66 19 81 19 69 19 84 19 72 19 87 19 75 19 78 19 90 19 93 19 96 19 99 20 02 20 05 20 08

Note: PMI is a composite index based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and employment environment. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting. Source: Institute for Supply Management (ISM), Morgan Stanley Research.

23

-6.2% Q/Q USA GDP Growth in CQ4 / Consumer Spending Fell 4.3%
Biggest Q/Q Decline in GDP / PCE Since CQ1:82 / CQ2:80
U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE) Q/Q % Change, 2005-2008

5%

3% Q/Q Growth Rates

1%
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08

-1%

-3%

-5%

-7% U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth
24

Note, Real GDP and real PCE are inflation- and seasonally adjusted; CQ4:08 data is preliminary, may differ from final reported #s. -6.2% Q/Q real GDP decline is the largest since CQ1:1982; -4.3% Q/Q real PCE decline is the largest since CQ2:1980. Source: BEA, Morgan Stanley Research.

Global GDP Growth Forecasts = Continued Trend of Downward Revisions
IMF Forecasts, 1/09 Country / Region USA Euro zone UK China India Russia Brazil Developed Markets(1) Emerging Markets(2) World 2007 2.0% 2.6 3.0 13.0 9.3 8.1 5.7 2.7 8.3 5.2 2008 1.1% 1.0 0.7 9.0 7.3 6.2 5.8 1.0 6.3 3.4 2009E -1.6% -2.0 -2.8 6.7 5.1 -0.7 1.8 -2.0 3.3 0.5 2010E 1.6% 0.2 0.2 8.0 6.5 1.3 3.5 1.1 5.0 3.0 Difference from 11/08 IMF Forecasts 2009E -0.9% -1.5 -1.5 -1.8 -1.2 -4.2 -1.2 -1.7 -1.8 -1.7 2010E 0.1% -0.7 -0.9 -1.5 -0.3 -3.2 -1.0 -0.5 -1.2 -0.8

Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 1/09. Morgan Stanley Research.

25

Stock Markets Stabilizing = Leading Indicator of Economic Growth
500 450 400 Indexed Value (base = 100) 350 300 250 200 150 100 50 0 3/06 2006 2007 2008

Russia off 74% vs. 36-Month Peak, Oil -67% / China -63% / India -57% / Japan -56% / S&P500 -49%

6/06

9/06

12/06

3/07

6/07

9/07

12/07

3/08

6/08

9/08

12/08

3/09

S&P 500 China Shanghai SE Composite Russia RTS Gold - Continuous Contract

NASDAQ Composite Index India SENSEX Light Crude Oil - Continuous Contract Japan Nikkei 225
Note: all indices start at a value of 100 on 3/17/06; data as of 3/18/09; Source: FactSet.

26

S&P500 –
Key Spending Sectors Have Taken Big Hits
Total Mkt Cap ($B) 3/18/2009 825 661 618 229 1,255 281 936 294 1,065 998 7,506 % Change 2009 2008 YTD -52% -40 -38 -45 -43 -34 -37 -28 -24 -20 -37% -23% -27 -14 -9 -4 -9 -15 -14 -11 -14 -14%

S&P Sector Financials Industrials Consumer Discretionary Materials Information Technology Telecom Services Energy Utilities Health Care Consumer Staples S&P 500 Total
(2)

2007 -20% 7 -18 14 12 -12 36 6 1 10 1%

Peak to Current (1) Market Cap Leaders -71% -58 -54 -50 -46 -44 -42 -39 -35 -29 -49% JPMorgan, Wells Fargo GE, United Technologies McDonald's, Walt Disney Monsanto, DuPont Microsoft, IBM AT&T, Verizon Exxon, Chevron Exelon, Southern Johnson & Johnson, Pfizer Wal-Mart, Procter & Gamble

Note: (1) % Change from S&P 500 peak on 10/9/07 to 3/18/09; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change. Source: Bloomberg, Morgan Stanley Research.

27

S&P500 Down 39% in 2008, 2nd Worst in 183 Year History –
Bad Years Often Follow Good Years
2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 1956 1948 1947 1923 1916 1912 1911 1906 1902 1899 1896 1895 1894 1891 1889 1887 1881 1877 1875 1874 1872 1871 1870 1869 1868 1867 1866 1865 1859 1856 1844 1842 1840 1836 1826

2008 -39%
1931 1937

2002 1974 1930 1907 1857 1939

2001 1973 1966 1957 1941 1920 1917 1910 1893 1884 1873 1854 1841 1837 1831 1828 1825

2000 1990 1981 1977 1969 1962 1953 1946 1940 1939 1934 1932 1929 1914 1913 1903 1890 1887 1883 1882 1876 1861 1860 1853 1851 1845 1835 1833 1827

2006 2004 1988 1986 1979 1972 1971 1968 1965 1964 1959 1952 1949 1944 1926 1921 1919 1918 1905 1904 1898 1897 1892 1886 1878 1864 1858 1855 1850 1849 1848 1847 1838 1834 1832 1829

2003 1999 1998 1996 1983 1982 1976 1967 1963 1961 1951 1943 1942 1925 1924 1922 1915 1909 1901 1900 1880 1852 1846

1997 1995 1991 1989 1985 1980 1975 1955 1950 1945 1938 1936 1927 1908 1830

1958 1935 1928 1863 1843

1954 1933 1885 1879 1862

-50 to -40%

-40 to -30%

-30 to -20%

-20 to -10%

-10 to 0%

0 to 10%

10 to 20%

20 to 30%

30 to 40%

40 to 50%

50 to 60%

Note: S&P 500 historical info from 1825 to 2007. Source: Value Square Asset Management, Yale University.

28

Current USA Bear Market – 3rd Worst in History Duration Still Relatively Short
S&P 500 Peak-to-Trough Magnitude (%) -86% -60 -55 -49 -49 -48 -46 -44 -40 -36 -34 -30 -29 -28 -27

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Duration Days 704 1,284 497 637 459 436 602 283 268 389 71 761 1,178 136 430

Start Date 1929 - Sep 16 1937 - Mar 10 2007 - Oct 9 2000 - Mar 24 1906 - Jan 19 1973 - Jan 11 1901 - Jun 17 1919 - Nov 3 1916 - Nov 21 1966 - Nov 29 1987 - Aug 25 1946 - May 29 1909 - Nov 19 1961 - Dec 11 1980 - Nov 28

End Date 1932 - Jul 8 1942 - Apr 28 TBD 2002 - Oct 9 1907 - Nov 15 1974 - Oct 3 1903 - Nov 9 1920 - Dec 21 1917 - Dec 19 1970 - May 28 1987 - Dec 4 1949 - Jun 13 1914 - Jul 30 1962 - Jun 26 1982 - Aug 12

Note: Current bear market is on-going, data as of 3/19/09, duration only includes trading days. Source: ISI.

29

5 Weeks in History – Financial Services Restructuring
(~$3T in US Aggregate Sector Market Value 1/1/07…now $0.8T)

Dow Jones Industrial Average, 9/8/08 – 10/14/08
September 7 September 14 September 16 September 22 September 25 September 29 October 3 October 14

11,600 11,400 11,200

GSEs / Washington Plan

Lehman Bankruptcy BofA Acquires ML

AIG Nationalized

MS / MUFG Investment GS / Berkshire Investment

JPM Acquires WaMu

Fortis Nationalized B&B Nationalized

Wells Fargo Acquires Wachovia $700Bn TARP

Dow Jones Industrial Average

11,000 10,800 10,600 10,400 10,200 10,000 9,800 9,600 9,400 9,200 9,000 8,800 8,600 8,400

Leading Banks Enter Preferred Stock Purchase Program UK Bank Bail Out Santander / Sovereign

(23%)

United States

Europe

Note: Aggregate sector market value is the combined market cap for all companies in the S&P500 financials index, $2.9T as of 1/1/08, $0.8T as of 3/18/09. Source: Morgan Stanley IBD; Bloomberg.

30

Credit Spreads @ 100-Year Extreme –
Current Level Down From 12/08 Peak, But Still 250bps+ Higher Than Post-Depression Peaks
Credit Spreads (to U.S. Treasury Securities), 1925 - 2009

Current (3/09) Level: 655 bps

600 Spread to Tsy (bps)

400

200

0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 BBBs (to Tsy) AAA/AA (to Tsy)
Source: Moody’s, Yield Book, Morgan Stanley Credit Strategy Research.

31

Stock Market Volatility Implies High Uncertainty –
VIX Index Down From All-Time High But Still High
Chicago Board Options Exchange (CBOE) Volatility Index, 1990 - 2009
80

60 VIX Index Value (%)

40

20

0 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008
32

Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options. Source: FactSet.

When Does Vicious Cycle End?
More Often Than Not, Peak Unemployment = Good Time to Invest
S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008
10000 30%

25% S&P 500 Index Value (Log Scale) 1000 20% Unemployment Rate
33

100

15%

10% 10 5%

1 0% 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008

Recessions

S&P 500 Index Price

Unemployment Rate

Unemployment Peak

Note: Unemployment rates from 1928–1943 are annual estimates from John Dunlop and Walter Galenson’s Labor in the Twentieth Century (1978); data unavailable between 1943-1948; Post 1948 unemployment data from BLS, peaks are: 9/49 - 7.9%; 9/54 - 6.1%; 7/58 - 7.5%; 5/61 – 7.1%; 8/71 - 6.1%; 5/75 - 9.0%; 11/82 - 10.8%; 6/92 - 7.8%; 7/03 - 6.3%. Latest data shows 2/09 unemployment rate at 8.1%, 270 basis points below 11/82 peak. Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.

Sequencing the Asset Recovery Process –
High Quality Financials / USA Non-Cyclicals / IG Super Senior Should Lead the Way
Recovery Phasing and Duration
Start End

High Quality Financials US Domestic Non-Cyclicals Investment Grade (IG) Super Senior Europe/Asia Non-Cyclicals IG Senior IG Equity Tranche CLO AAAs IG Cyclicals US High Yield IG Junior Mezz CMBX Ajs EU High Yield US Loans EU Loans Asia High Yield
Note: The yellow bars represent the relative phasing in and out, as well as the duration of the recovery process for each asset class. For example, in our view, high quality financials will recover first, and Asia high yield will be among the last. IG is Investment Grade; CLO is Collateralized Loan Obligations; Source: Gregory Peters, Sivan Mahadevan, Neil McLeish, Morgan Stanley Global Credit Strategy Research.

34

Advertising Spending & GDP Growth = High Correlation of 81%
U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007
20%

15% U.S. Ad Spend vs. GDP, Y/Y Growth

10%
Median Y/Y Ad Spend Growth Rate = 5%

5%

0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

-5%
1991 Ad Growth = -2% 2001 Ad Growth = -12%

-10% U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth
Source: Zenith Optimedia, IMF, Morgan Stanley Research.

35

Simple Regression Analysis: 1) Ad spend growth 3x sensitivity of real GDP growth 2) If GDP flat in 2009E, ad spend could decline ~4% Y/Y
U.S. Advertising Spending vs. Real GDP 1986 – 2007 y = 3.0263x – 0.0394 R2 = 0.6553
y – ad spend growth x – real GDP growth

20%

15% Ad Spend Y/Y Growth

10%

If real GDP Ad spend Y/Y growth Y/Y growth is… could be… 5% 4 3 2 1 0 -1 -2 -3 -4 -5 11% 8 5 2 -1 -4 -7 -10 -13 -16 -19

5%

0% -1% -5% Real GDP Y/Y Growth -10% U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) 0% 1% 2% 3% 4% 5%

Note: R2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation. Source: Zenith Optimedia, IMF, Morgan Stanley Research.

36

Online Ad Spending Bad News =
From 2000 to 2002, USA Spending Fell 27%
$25,000

U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007
$21,206

250%

200% $20,000 U.S. Online Ad Spending ($MM)
$16,879

150% $15,000
$12,542

100% $10,000
$8,225 $7,134 $6,009 $4,621 $7,267 $9,475

50%

$5,000
$1,921 $267 $907

0%

$0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

-50%

U.S. Internet Ad Spending

Y/Y Growth Rate
Source: IAB, Morgan Stanley Research.

Y/Y Growth Rate
37

Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs. Trend Line However, Q/Q Pattern Looks a Bit Like Early 2001
U.S. Online Advertising Spending & Y/Y Growth Rates, CQ1:96-CQ3:08

$6,000 U.S. Online Spending & Search Revenue ($MM)

300%

$5,000

250% Total U.S. Online Spend Y/Y Growth
38

200% $4,000 150% $3,000 100% $2,000 50% $1,000

0%

$0 3/96 3/97 3/98 3/99 3/00 U.S. Online Ad Spending Y/Y Growth 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 Spending on Search Online Ad Spend Polynomial Trendline

-50%

Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research.

Technology / Internet

1) Digital Consumer – Our bet = At margin, consumers spend more – not less – time on Internet in difficult times – it’s a cheap / efficient / transparent thrill! Undermonetized social networks / video / VoIP driving powerful usage growth – opportunity for innovative marketers to capitalize on low CPMs

39

Internet Becoming Necessity – Broadband Internet Last Thing to Go in Consumer Survey
Economic Vulnerability Score 10 9 8 7 6 5 4 3 2 1 0
co ve r

Economic Vulnerability Scores for Items of Discretionary Expenditure 10 = Most Vulnerable / 0 = Least Vulnerable
7.2 7.2 6.8 6.6 6.6 6.5 6.4 6.2 5.9

5.6

5.5 4.7 3.9 3.5

Note: In 9/08, 8,000 consumers in the UK, France, Germany and Spain were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure. 10 = extremely likely to cut back; 0 = not at all likely to cut back. Source: Execution Primary Research, quoted in UK Ofcom’s “The International Communications Market 2008” report, p. 39.

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40

Consumer IP Traffic Driving Growth – 46% IP Traffic CAGR, 2007 – 2012E
Global Internet Traffic, by Type 2006 – 2012E
50,000 Total Internet IP Traffic (Petabyte per month)
3%

2007-2012E CAGR

40,000

Mobility

125%

30,000
74%

Consumer

49%

20,000
75%

10,000
71% 62%

Business

35%

0 2006 2007 2008 2009E 2010E 2011E 2012E

Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. 41

YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share
Global Minute Share, 6/06 – 1/09
12% % Share of Global Minutes

10%

8%

6%

4%

2%

0% 6/06 9/06 Yahoo.com 12/06 3/07 Msn.com 6/07 9/07 12/07 3/08 6/08 9/08 12/08

Google.com

YouTube.com

Facebook.com

Source: ComScore Global 1/09, Morgan Stanley Research.

42

Undermonetized Internet Usage Growth Drivers – Video + Social Networking + VoIP + Payments
Users Y/Y Growth Comments
#2 site in global minutes; 6B views of online video in the US (Americans watched a total of 14B videos / 771MM hours online in 12/08); #2 global search engine – search queries on YouTube reached 10.8B in 1/09 (+45% Y/Y), surpassing Yahoo! sites with 9.0B searches (+2% Y/Y).(1,2,3,6) #4 site in global minutes; 175MM+ active users; 50%+ users outside of college; 52K+ applications + 95% of Facebook members have used at least one(1,4) If ‘carrier’ then #2 behind China Mobile; $1.43 annualized revenue per registered user (-14% Y/Y); 2.6B Skype Out minutes (+63% Y/Y); 21.0B Skype-to-Skype minutes (+72% Y/Y)(5) $16B total payment volume (TPV), +14% Y/Y, higher than eBay’s global gross merchandise volume; Off-eBay payment volume +35% Y/Y to 52% of TPV(5)
43

363MM(1)

+40%

236MM(1)

+135%

405MM(5)

+47%

70MM(5)

+23%

Source: (1) comScore global 1/09; (2) comScore Video Metrix 12/08; (3) YouTube; (4) Facebook; (5) eBay CQ4, (6) comScore qSearch global, 1/09. Morgan Stanley Research.

Younger Generations Drive Online Usage Changes

Blogs

Social Networking

Video / Music

Online Gaming

(Sina Blog)

Knowledge Sharing Social Bookmarking

Note: Selection based on (1) comScore’s reported global unique visitors & Y/Y growth for each website in 12/08; excluding sites with negative Y/Y growth, and (2) Alexa global traffic ranking. Source: ComScore Global, 12/08, Alexa, Morgan Stanley Research.

44

Next Generation Consumer Technology Ecosystems = Cheap / Efficient / Fun / Disruptive
Platform
Skype YouTube Facebook iTunes Store Nintendo Wii Apple Wireless Devices iPhone (2.5G + 3G) iPod Touch (Wi-Fi) Amazon Kindle

Time Since Inception
5.5 Yrs 3.9 Yrs 4.9 Yrs 8.0 Yrs 2.2 Yrs 1.6 Yrs 1.6 Yrs 1.3 Yrs 1.1 Yrs

Users
405MM 363MM 236MM 75MM 45MM 33MM 15MM 13MM --

Y/Y Growth
47% 40% 135% -125% 265% 301% 239% --

Applications Available
--52K+ 10MM+ ~1K 25K 25K 25K 240K+

Applications Downloaded
--308MM+ 6B+ 189MM+ * 800MM+ ----

Note: * Nintendo Wii applications refer to game titles, downloads refer to game units sold. iTunes’ users only include paid-users; applications available / downloads refer to songs available / downloaded. Kindle’s 240k+ apps refer to book titles available. iPhone users are estimates by Katy Huberty, YouTube, Facebook users per comScore global 1/09; Source: Amazon.com, Nintendo, YouTube, Facebook, Apple, Morgan Stanley Research.

45

Video-Related IP Traffic Driving Growth –
To 49% Consumer Internet Traffic in 2012E vs. 32% in 2008
Global Consumer Internet Traffic, by Segment 2006 – 2012E
20,000
17%

Total Consumer Internet Traffic (Petabyte per month)

2007-2012 CAGR

Internet Video to TV Internet Video to PC

104% 57% 44% 24% 30% 31% 34%

15,000
31%

Video Communications VoIP Gaming

10,000

13% 30% 33%

5,000
25% 44% 60% 37%

P2P Web, email, data

0 2006 2007 2008 2009E 2010E 2011E 2012E

Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. 46

YouTube USA IP Traffic > 2000 Total USA Internet Traffic
Internet Traffic per Month
100,000 IP Traffic (Terabytes per month)

80,000
100,000 TB / Mo (Global)

60,000

40,000

20,000

25,000 TB / Mo

30,500 TB / Mo (USA)

33,000 TB / Mo

0 USA Internet Backbone, 2000 Year End YouTube, 5/08 China P2P Video Streaming, 1/08

Note: Monthly traffic are estimates by Cisco. Source: Cisco, Approaching the Zettabyte Era, 6/08.

47

Online Video – Traction High + Increasing
• YouTube - 363MM unique global visitors, +40% Y/Y, 48B minutes, +92% Y/Y ; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU… • YouTube = 68% of unique US video viewers + 43% of videos watched online + 30% (2) of total minutes
(1)

YouTube Global Traffic
400 350 Total Unique Visitors (MM) 300 250 200 150 100 50 0 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 10 0 40 30 20 Total Minutes (B) 60 50

Total Unique Visitors (MM)

Total Minutes (B)
48

Source: (1) comScore global 1/09; (2) comScore Video Metrix (US) 1/09, Morgan Stanley Research

YouTube –
New Portal(s) = Video Distribution Channel + Social Network
• ‘Organize the world’s information and make it universally accessible and useful’ – in the most effective way for high customer satisfaction – sort by most active / discussed / recent / responded / viewed / etc.. More / more content providers should get on board, after all, users are voting it’s what they want. • Monetize away litigation - with new ad formats + finger printing advances + revenue shares?

News & Politics - Most Viewed

Sports - Most Viewed

Source: Google, YouTube.

49

Video Monetization – YouTube = <$1 Per User(1) –
Paid Search / Click-to-Buy / Pre-Post-In Video Roll / Interactive

Search for ‘iPhone 3G’…

Like the music?...

Creative / Interactive...

…ads for ‘invisible shield’

…click to buy from iTunes / Amazon mp3 ‘Wario Land: Shake It’ video breaks YouTube’s UI

Note: (1) per year in 2008; average users per comScore global, revenue per our estimates. Source: YouTube.

50

Hulu – Quickly up to 12% of YouTube’s U.S. Minutes(1)
• Hulu – 6MM global unique visitors (+9x Y/Y), 121MM minutes (+18x Y/Y) in 1/09. • 7.7 minutes of average duration of videos viewed at Hulu, ~2x USA average • Content support from major networks (NBC, Fox, USA, Bravo, FX, SciFi, E!...) + film studios (Universal, 20th Century Fox, MGM, Sony, Lionsgate)
7,000 6,000 Total Unique Visitors (000) 5,000 4,000 3,000 2,000 1,000 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Total Minutes (MM) Nov-08 Jan-09

Hulu Global Traffic

140 120 100 80 60 40 20 0

Total Unique Visitors (000)

Note: (1) comScore Video Metrix (US only) utilizes a different methodology and reports that Hulu has 24% of YouTube’s US unique viewers & 12% of YouTube’s US minutes in 1/09. US average duration of online video was 3.5 minutes in 1/09. Global unique visitors & minutes per comScore global, 1/09.

Total Minutes (MM)
51

Netflix Online Streaming – 1MM+ Subscribers in 6 Months Since Launch
• 10MM+ offline subscribers as of 2/09, 1MM+ streaming subscribers / 1.5B+ streaming minutes since 9/08 launch. • 12K+ movie / TV show titles available for instant streaming to PCs / living room TVs via Xbox Live / Roku digital video box / LG & Samsung Blu-Ray players / TiVo • Streaming is free + unlimited for any member with an $8.99+ monthly plan Watch Movies Instantly on Your TV, via Xbox Live / TiVo / Roku

Source: Netflix.

52

Social Networking – Significant Share Gains of Internet Traffic
Alexa Global Traffic Rankings 2005 (1)
Rank 1 2 3 4 5 6 7 8 9 10 Web site yahoo.com msn.com google.com ebay.com amazon.com microsoft.com myspace.com google.co.uk aol.com go.com Rank 1 2 3 4 5 6 7 8 9 10

2009 (2)
Web site google.com yahoo.com youtube.com live.com facebook.com msn.com wikipedia.org blogger.com myspace.com yahoo.co.jp

Traffic rank is based on three months of aggregated historical traffic data from Alexa Toolbar users and is a combined measure of page views / users (geometric mean of the two quantities averaged over time).

(1) Rankings as of 12/31/05, excludes Microsoft Passport; (2) Rankings as of 2/25/09 Source: Alexa Global Traffic Rankings, Morgan Stanley Research.

53

Social Networking – Fast Growth + Low Penetration
Global Internet Category Visitors Y/Y Growth & Penetration
100% World Wide Y/Y Visitor Growth = 10.4% Portals Search 80% Entertainment Penetration (% of Online Users) Retail 60% Business / Finance 40% General News Travel Sports Auto 20% Online Gaming E-mail Multimedia / Video

Instant Messanging

Reference Photos Social Networks

0% 0% 10% 20% 30% Unique Visitors Y/Y Growth
Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08.

40%

50%

60%

54

The New Social Network = Personal Sources on Internet
Importance as Source of Information
100%

80%
% of Users Age 17+ Responding Important / Very Important 80%

73% 68%

63%

63%

60%

40%

20%

0% Internet Television Radio Newspaper Personal Source

Source: USC Annenberg School: Digital Future Report 2007.

55

Messaging by Generation – Text…Facebook Wall…Email…Phone…US Postal Service

Kids (Zach 5 & Jackson 3 yrs.) Kids (Zach 5 & Jackson 3 yrs.) Hugs and Kisses Hugs and Kisses

Grandparents (Dom & Ida) Grandparents (Dom & Ida) Birthday card with $25 Birthday card with $25

Brother (James -- High School) Brother (James High School) Text Message via Mobile Text Message via Mobile

Mom (Victoria) Mom (Victoria) Phone call (45 minutes!!!) Phone call (45 minutes!!!)

Birthday Boy (Tom Zawacki) Birthday Boy (Tom Zawacki) Happy Birthday from my Family Happy Birthday from my Family

Brother (Rob -- College) Brother (Rob College) Wrote on my Facebook Wall Wrote on my Facebook Wall

Wife (Melissa) Wife (Melissa) Funny email Funny email
Source: Tom Zawacki – CEO of Lemonade.

56

Social Networking – Connectivity Changing…Is E-Mail Archaic?
Worldwide Share of Online Time (1)
6% 14% 8%
Category didn’t exist 3 years ago

Connecting – Younger Users Via Social Networks + Older Users Via E-Mail? (2)
50%

35%
% of Total Minutes

42%
40% 30% 20%

29% 23% 12%

16%

22%
All Other Communications Social Connections Shopping & Travel Entertainment & Leisure Work, Business & Education

10% 0% Yahoo! Mail Facebook

Age 15-24

Age 45+

Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 1/09.

57

Facebook – Rapid User / Usage Growth
• 236MM visitors, +135% Y/Y (175MM+ active users), 42B minutes (#4 globally behind Yahoo!, YouTube and Live), +110% Y/Y • Avg user has 120 facebook friends; 15MM+ users update their status daily; 3B+ minutes spent on Facebook every day (worldwide) • 850MM+ photos / 5MM+ videos uploaded each month; • 660K+ developers / entrepreneurs; 52K+ applications built to date; 140 new apps added per day; 95%+ members have used at least one app.
250

Facebook Global Traffic

45 40

Total Unique Visitors (MM)

200

35 30

150 25 20 100 15 50 10 5 0 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 0

Total Unique Visitors (MM)

Total Minutes (B)
Source: comScore global 1/09, Facebook 2/09, Morgan Stanley Research.

Total Minutes (B)

58

Facebook Connecting is Key
Genres of Facebook’s 261 Most Used Applications
Enhanced communication Comparing yourself with others Playing social games Profile enhancement Categorizing friends Sending gifts Media sharing Self expression Playing with digital pet Playing games Other

26% 12% 11% 10% 10% 7% 5% 5% 3% 3% 9%
59

Note: Genre breakdown per O’Reilly Media’s analysis of the primary user goals of 261 of the most-used Facebook application. Source: O’Reilly Media, Inc (March 2008 report), Morgan Stanley Research.

Facebook –
15k+ Applications ‘Just For Fun’ / Top 40 Apps have 204MM+ Downloads
Category Just For Fun Games Sports Education Utility Music Chat Dating Messaging Photo Video Business Events alerts Fashion Food & Drink Politics Travel Money Mobile Classified File Sharing Overall* # of Applications 15,005 4,496 4,020 2,424 2,287 1,918 1,865 1,840 1,716 1,571 1,532 1,520 1,493 1,313 1,155 1,056 976 873 553 482 468 303 48,549 % of Total 31% 9 8 5 5 4 4 4 4 3 3 3 3 3 2 2 2 2 1 1 1 1 Top 40 Apps' Monthly Active Users (MM) 137 78 4 37 20 11 16 52 30 36 47 1 23 27 5 8 22 7 1 7 0 1 204 # of Apps w/ 1MM+ MAUs 37 25 0 5 2 13 3 13 8 3 4 0 5 7 1 1 7 2 0 1 0 0 66

Note: Downloads refer to Monthly Active Users (MAU); Category breakdown per Facebook, one application can belong to multiple categories; Overall* statistics exclude these duplications; Facebook reports 52,000+ apps “built to date” while AppData reports 48,549 available as of 12/18/08. There are 17k ‘Just For Fun’ apps as of 2/26/09. Source: Facebook, AppData, Morgan Stanley Research. 60

Facebook – Home Page for Next Generation – Customized / Current
• Facebook rolled out cleaner / simpler design 7/20/08 aiming to provide easier navigation with separate tabs for Wall (updates), Info (background), Photo, and Boxes (applications). • Biggest change: Wall is now default tab, with full multimedia feeds integration – showing most recent and relevant info both about the user and by the user. Tabbed Browsing

Integrating Feeds into the Wall

‘Engagement Ads’ – Thump Up to Recommend to Friends Picture / Video Updates on the Multimedia Wall

Third-party Applications Now on Toolbar

Online Chatting Function

Source: Facebook

61

Social Networking – Facebook = $2 Per User(1) Opportunity to Get in Middle of Conversations
Become a Fan of … Virtual Gift – $1 = One Wish

…Friends Notified via News Feeds

Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates. Source: Facebook.

62

Facebook Mobile – Explosive User + Usage Growth
• 20MM+ mobile active users in CQ4:08, > 4x Y/Y. • Mobile facebook users on average 50% more active than non-mobile facebook users. • 1MM users commented on their friends’ status changes on mobile within the first 24 hours of this feature’s launch.

Source: Facebook presentation at Palm’s CES keynote.

63

VoIP –
Skype = #2 Global ‘Carrier’ + 8% of Cross-Border Calling Minutes
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Company China Mobile Vodafone China Telecom America Movil Telefonica Moviles China Unicom T-Mobile Orange China Unicom / Netcom Mobile Telesystem Bharti Airtel AT&T Mobility Telecom Italia Mobile Verizon Wireless PT Telkom (2) AT&T NTT DoCoMo Turkcell NTT Sprint / Nextel BT (UK) (2) Verizon (3) BSNL Deutsche Telekom France Telecom Total* Wireless Wireline
(1)

Type Wireless Wireless Wireline Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireless Wireline Wireless Wireline Wireline Wireless Wireline Wireline

Region China Europe China LatAm Europe / LatAm China Europe / USA Europe China Europe India USA Europe / LatAm USA Asia USA Japan Europe Japan USA Europe USA India Europe Europe

Subscribers (MM) 450 280 210 173 172 133 127 118 107 88 77 75 71 71 61 56 54 51 44 42 38 36 36 35 33

Y/Y Growth 22% 10 -10 18 20 13 8 12 -4 9 59 14 6 11 36 -10 2 12 -0 -9 -2 -10 24 -6 -1

Blended ARPU (US$) $12 35 8 11 41 6 21 44 10 12 7 51 27 52 5 80 66 17 34 53 38 85 7 29 43

Y/Y Growth -8% 5 4 -5 -6 -13 -11 0 30 13 -15 0 -4 1 -20 3 -11 13 -0 -5 4 3 -15 -2 14

Market Cap ($B) $186 108 28 50 91 15 59 65 15 9 25 148 27 89 11 148 76 11 68 7 14 89 -59 65

Skype (5) 405MM Registered Users (+47% Y/Y)

2.6B 10% $25 -1% $1,250B 2.1B 16 25 -3 977 0.6B -7 28 5 486 Note: Subscribers / ARPU data as of CQ3:08. Market Cap as of 1/15/08. *total excludes duplicates (mkt val); (1) China Netcom merged with China Unicom in 11/08; (2) AT&T & Verizon’s wireline ARPU is revenue per RGU (revenue generating unit) and include business lines; (3) BSNL is owned by the Indian government, thus with no market value. (5) Subscriber figure for Skype is registered user amount as of CQ4:08. Source: company reports, Morgan Stanley Research.

64

Unified Communications For Consumers –
Skype = Voice / Video / SMS On Your PC / Netbook / Cell Phone & More
Skype on PC / Laptop Skype on Netbooks / Internet Tablets

Skype on … 3 SkypePhone Skype on Smartphones Cordless Phone Wi-Fi Phone

Source: Skype / eBay.

65

Unified Communication For Consumers –
Google Voice Gives User One # + VoIP + Voicemail Transcription + SMS
• Google Voice – Launched on 3/11/09, gives user a single telephone number, to which all calls to user’s home / office / cellphone can be forwarded • Voicemail transcription + SMS + future integration with Gmail • VoIP calls can be initiated if user calls his / her own Google Voice number

Source: Google.

66

Online Content Consumption Mix in 5 Years?

• Consumer or professional generated?
−

40% of USA consumers create entertainment (edit movies / music / photos...)(1)

• Consumer enhanced professional content?
- Anchored with first-class pro content…augmented with first-class user-generated content that’s ranked / reviewed / ‘edited’…supplemented by all-comers usergenerated content that’s ranked / reviewed…all presented in a holistic / widgeted way - Clean combo of = wsj.com + bbc.co.uk + digg + techmeme + youtube + nytimes.com/technology + allthingsd + facebook + twitter…

Note: (1) Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte.

67

Consumers Expect – Wisdom of Crowds / Rankings / Searchability
• Digg - 20MM unique visitors, +56% Y/Y, 44MM minutes, +74% Y/Y in 1/09 • User-driven editorial / selection of content (news, videos, images, etc.) through sharing / discovery / democratization – vs. traditional media determining front-page / lead stories • Users in control – search for preferred content + find what others deem relevant / interesting

Source: comScore global 1/09, Digg.com.

68

Consumers Expect – Real-Time News / Opinions / Updates / Social Networking
• Twitter – 6M global unique visitors, +4x Y/Y, 50MM minutes, +6x Y/Y in 1/09 • Real-time micro-blogging / social networking / search, each text entry (tweet) limited to 140 characters • Large ecosystem with complementary sites (twitpic, etc.) + 3rd-party applications on facebook / iPhone / Android… Follow / Blog On Twitter.com… On Facebook… And On iPhone

Source: comScore global 1/09, Twitter.com, Morgan Stanley Research.

69

Consumers Expect –
Citizen Journalism
• User-generated content (news, videos, images, etc.) uploaded directly to UReport site • Fox News selectively airs popular stories that have been vetted • Competitors: CNN’s iReport; MSNBC’s First Person
Upload from anywhere – UReport iPhone app

Searchability

User rating / popularity

Source: Foxnews.com.

70

Consumers Expect – Fun / Images / Insight from Others
• Youniverse.com – 322K unique visitors, +204% Y/Y, 3MM minutes, +386% Y/Y in 12/08. • Finds one’s visual DNA by asking users to select pictures in response to a series of questions. • Social networking – ability to find other people who share your visual DNA. • Market Research – enables advertisers to mine user preference data; • In 9/08, Hotels.com launched a Youniverse Visualiser to find out customers’ preference of the trip to provide hotel recommendations.

Find friends who share the visual DNA

Find hotels via Hotels.com Visualiser

Source: comScore global 12/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 71

Consumers Expect – Location-Aware Social Networking
• Loopt – shows users where friends are located and what they are doing via maps on their mobile phones / can share location updates, geo-tagged photos and comments with friends in their mobile address book or on online social networks, communities and blogs • Loopt Mix – opt-in discovery feature to help users connect with new people nearby who share common interests and affiliations • Available on 100+ handset models / 7 national carriers in the USA • Other location-based mobile social networking products include: Google Latitude, Joyity, Local, etc. See Friends’ Location Find Interesting Explore Places With Geoon Your Map People Nearby tagged Photos / User Reviews

Source: Loopt, Morgan Stanley Research.

72

Consumers Expect – Real-Time Video Streaming On Their Mobiles`
• CBS Sports NCAA March Madness On Demand iPhone App • $4.99 to stream every NCAA March Madness game on demand • Live video streaming on Wi-Fi connection, live audio streaming on 3G / EDGE • Also features game recaps / video highlights on demand / bracket information / real-time scores / stats / headlines. March Madness in Your Palm Bracket Information Recaps / Highlights Live Scores / Stats

Source: CBS Sports, Apple iTunes.

73

Consumers Expect – Price Transparency…in <30 Seconds
• Shop Savvy – Allows mobile (G1…) users to scan product barcodes and automatically retrieve best pricing information from web + local stores • For web results, user can go to site or email link to friends…for local results, user can see store locations / get directions / call stores • Additional functions include price alerts (notifies user when price is cheaper / hit user’s preset price target) / wish lists / search history • Won Google’s Android Developer Challenge; featured in T-Mobile G1 ads Step 1: Step 2: Step 3: Step 4: Tap Search Scan Barcode See Results Click to Buy

Source: Big In Japan, Morgan Stanley Research.

74

Consumers Expect – Personalization
Footjoy.com – Myjoys Picturedoor.co.uk

Flip Mino HD Video Camera

MMs.com – MyM&M’s

Source: footjoy.com, theflip.com, picturedoor.co.uk, mymms.com

75

Online Advertising – Google Share = 67% in CQ4:08 vs. 48% in CQ4:05
Global Online Advertising Revenue (1)
$9,000

Global Online Advertising Revenue ($MM)

$8,000 $7,000 $6,000 $5,000 $4,000 $3,000
33%

6% 7%

20%

10% 10% 67%

$2,000 $1,000 $0 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 Google Yahoo! Microsoft AOL
48%

(1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research

76

Offline CPMs Materially Higher Than Online CPMs = Potential for Significant Dislocation / Arbitrage
CPM Comparisons

Broadcast TV Newspaper Cable TV Spot TV Internet Magazine Radio Out-of-Home CPM <$2 $6 $10 $14 $18 $22 $26 $30 >$34

Source: Media Dynamics, 6/08, Morgan Stanley Media Research.

77

Online CPMs Challenge = Significant Ramp of ‘New’ Social Inventory
CQ4 Unique Users ('000) Total Internet Y/Y Growth Google.com (2) Y/Y Growth Yahoo! Y/Y Growth MySpace Y/Y Growth Microsoft Y/Y Growth AOL Y/Y Growth YouTube Y/Y Growth
(4)

CQ4 Total Pages Viewed (MM) 6,701,135 11% 114,137 1% 311,673 -1% 127,360 -10% 216,661 -8% 80,232 129,440 62%

CQ4 Total Minutes (MM) 4,063,148 10% 60,381 6% 355,942 6% 55,591 12% 568,438 18% 117,919 133,930 98%

CQ4 Annualized Global Ad Revenue per User $50.07 (1) -1% $28.05
(3)

CQ4 Ad Revenue per 1,000 Page Views $1.86 (1) 9% $29.58 (3) 21% $3.73 (3) 1% $1.12 (3) 4% $3.06 16% $4.42 $0.46 -8%
(5)

996,143 23% 481,450 18% 558,135 14% 122,338 14% 641,771 20% 269,705 351,457 48%

3% $8.33
(3)

-12% $4.68 (3) -18% $4.14 -11% $5.27 $0.68 1%

Note: (1) ZenithOptimedia C2008E, 12/08; (2) Assumes 90% of Google Sites excl. YouTube revenue is from Google.com; (3) Net revenue estimates (ex-TAC), Microsoft does not breakout TAC;( 4) comScore restated AOL metrics in 1/08; (5) Negative growth due to YouTube Page Views’ 62% Y/Y growth is much higher than our estimated revenue growth, youtube.com’s minutes 2x of google.com. (6) comScore adjusted their global Internet unique visitors estimates in 7/08, resulting in a higherthan-normal users Y/Y growth and lower / flat ad revenue per user growth. Source: Morgan Stanley Research.

78

Ad Supply > Ad Demand – Ad Impressions Growing Rapidly…CPMs Declining
U.S. Banner Ad Impressions & CPM, CQ1:05-CQ2:08 U.S. Rich Media Impressions & CPM, CQ1:05-CQ2:08

1,000,000

$3.50 $3.00

40,000 35,000 30,000

$40 $35 $30 $25 $20 $15 $10 $5 $0
CPM
79

900,000 800,000 Impressions (MM)

Impressions (MM)

700,000 600,000 500,000 400,000 300,000 200,000

$2.50 $2.00
CPM

25,000 20,000 15,000 10,000 5,000 0
3/ 05 9/ 05 3/ 06 9/ 06 3/ 07 9/ 07 3/ 08

$1.50 $1.00 $0.50

100,000 0
3/ 05 9/ 05 3/ 06 9/ 06 3/ 07 9/ 07 3/ 08

$0.00

Banner Ads Impressions

Banner Ads CPM

Rich Media Impressions

Rich Media CPM

Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research.

Search Should Continue to Become More Important –
35% Y/Y Google Query Growth, 12/08
% of New Online Customers for Online Retailers / Marketing Spend Mix % Customers acquired from source
40%
35% 30% 27%

30%

20%

18% 13% 11% 6% 7% 6% 5% 4% 4% 3% 4% 2% 2% 4% 2%
N/A

10%

9% 7%

1%
N/A

1%
N/A

1%

0%
g ct co in g m lis pa ts ris on en gi ne s tra ffi c ra m s tis in g ea ls ds s ar ke tin s at al og ra ad ve r or ta ld pr og ld ea l an ic po rta nn e

pr os pe

O rg

Sw ee

in e

ew

en g

na

et w gi st ra tio n

in e

ia t

Af fil

O ffl

cia ln

N

itio

ar ch

Em ai lt

Tr ad

Se

Sh

op p

in

2006

2007
80

Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 12/08, Morgan Stanley Research.

C

ore

So

g

on

o

ot

sit es he rW eb sit es

Ba

e

lp

or ki ng

m

C

ps ta ke s

Search =
Dramatic Share Gains of Online Ad Spending
U.S. Internet Advertising Mix
100%
14% 7% 12%

U.S. Internet Ad Spend % Mix

80%

15% 10% 9%

60%

20%

40%

47% 52%

20%
15%

0% 2002 2003 2004 2005 2006
Rich Media

2007

Search Advertising Classified Advertising

Banner Ads E-mail and Other

Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research.

81

Paid Search Placement = Top ROI For Marketers
0% Paid Placement Organic SEO Email marketing TV advertising Print mag ads Direct mail Conferences and exhibitions PR Contextually targeted text ads Search KW graphical ads Web graphical display Print newspaper Affiliate mktg Paid inclusion Radio ads Print yellow page Telemarketing Web rich media POS promo Paid listings on shopping dir Coupons Online yellow pages Other 10% 20% 30% 40% 50% 60%

Survey Question: "What are the top-three mostefficient forms of advertising or marketing you spend money on in terms of the return on investment (ROI) or return on ad spend (ROAS) that they yield?“ (ranked 1-3)

Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=317.

82

Search Engine Marketing (SEM) = Taking Budgets Away From Other Advertising Forms
0% Print magazines advertising Direct mail Print newspaper advertising Web site development TV advertising Conferences and exhibitions Print yellow page advertising Radio advertising Email marketing Web graphical display advertising Affiliate Marketing Public relations Online yellow page advertising Paid listings on shopping directories Web rich media advertising Coupons Telemarketing Point-of-sale promotions Out of Home Other
Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=317.

5%

10%

15%

20%

25%

30%

Survey Question: "From which marketing/IT programs are you shifting budget away and moving it to your search marketing programs?"

83

Video Search – Advertisers Showing Rising Interest
Survey Question: Would you be interested in contextually targeted advertising attached to video search results? Breakdown: If yes, how interested are you in the following? (Scale of 1-5, 1=lowest, 5=highest)

0%

20%

40%

60%

80%

100%

Survey Result:

Video Based 7% 11%

27%

33%

22%

NO – 46% YES – 54%

1

2

3

4

5

Text Based 7% 10%

29%

34%

20%

Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229.

84

Performance-Based Advertising Gaining Share
+20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue

60%

U.S. Internet Ad Revenue Share by Pricing Model, 2000 - 2007
51% 47%

% Share of Total Revenue

45%
37%

41%

41%

30%
21%

15%

10%

12%

0% 2000 2001 2002 Performance 2003 2004 CPM 2005 Hybrid 2006 2007

Search Revenue Share
Note: Performance based advertising includes search, lead-generation, among others; Hybrid pricing model includes a mix of impression-based pricing plus cost-per-click, sale, lead / straight revenue share; Source: IAB, Morgan Stanley Research.

85

Advertisers = Willing to Bid More For Behavioral Targeting

Survey Question:

Survey Result:

Are you willing to bid more for clicks based on behavioral information such as in-market consumers (i.e. consumers currently shopping for a specific product)? YES – 75% NO – 25%

Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229.

86

E-Commerce USA Online Penetration = 4-6% and Rising
Categories’ Online Penetration of US Retail Market, 2007 >20%
Computer products Other event tickets Books Music / video Gift cards / certificates 45% 27% 24% 24% 21%

10 - 20%
Toys / video games Baby products Consumer electronics Office supplies Flowers / cards Jewelry Apparel / footwear Movie tickets 19% 19% 18% 13% 12% 11% 10% 10%

<10%
Home furnishings Cosmetics / fragrances Sporting goods / apparel OTC meds / personal care Appliances / tools Pet supplies Auto / auto parts Food / beverage / grocery 9% 9% 8% 6% 5% 4% 2% 1%

Note: (1) Our proprietary adjusted e-Commerce sales & Census Bureau’s quarterly total retail sales data suggest ~4% penetration, Forrester claims 6%. Source: The State of Retailing Online 2008 (Forrester Research).

87

Amazon.com’s Recommendation Engine =
Web’s Most Effective Search Engine + Advertiser?
Amazon.com search + recommendation engine: Leveraging data
New formats: Kindle

What Amazon recommends

What other customers are buying

What other customers are thinking What other customers are saying
Source: Amazon.com, Google

88

Amazon.com – Following Its Customers By Leading With Technology
Amazon TextBuyIt
• Search on any keyword (e.g. item name, author, artist, etc.) or ISBN / UPC code

1 Text search keywords to ‘AMAZON’ (262966)

2 Reply with 1 or 2 to buy an item from search results

3 Answer call to hear details + confirm order

Amazon iPhone App w/ Amazon Remembers

Source: Amazon.com

89

Amazon.com Should Continue to Gain Share
High Customer Satisfaction / Recommendation Engine / Impressive Metrics

50%

Amazon.com vs. US Retail E-Commerce Sales(1)
Revenue Y/Y Change

Amazon.com Key Operating Metrics
CQ1:08 CQ2:08 $4,063 41% 82 18% $210 19% 1,420 18% 190,113 32% 140 CQ3:08 $4,264 31% 85 17% $215 18% 1,405 17% 202,566 30% 185 CQ4:08 $6,704 18% 88 16% $218 12% 1,500 18% 308,606 28% 230 $4,135 37% 79 19% $202 17% 1,300 17% 196,135 31% 115

40%

30%

Y/Y Growth

Active Customers Y/Y Change TTM Revenue per Active Customer

20%

10%

~25ppts

Y/Y Change Active Sellers ('000)

0%

Y/Y Change Total Units

-10%
CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08

Y/Y Change Kindle Books Available ('000)

US Adjusted Retail E-Commerce Sales Amazon.com North America Revenue US Total Retail Sales

(All metrics in MMs, except for revenue per customer data and when noted)

(1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: Amazon.com (CQ4:08), US Dept. of Commerce (CQ4:08), Morgan Stanley Research.

90

Technology / Internet

2) Mobile – Innovation in wireless products / services accelerating – changes should create + destroy significant wealth

91

Mobile – New Computing Cycle With Wireless Game Changer Products with Extraordinary Ease-of-Use
Nintendo Wii
45MM consoles sold since 11/06 launch (+125% Y/Y) – raised bar with motion sensors + playability

Apple iPhone / iPod Touch
30MM combined units sold (17MM iPhone / 13MM iPod Touch) since 6/07; 18K apps, 500MM+ downloads since 7/08; – raised bar with ease-ofuse + functionality

Sony PSP
52MM units sold since 12/04 launch (+42% Y/Y) – raised bar with online playability + built-in web browser

3 Skype Phone
500K+ units in < 200 days. Leverage large Skype / Facebook user base of 370MM (+51%Y/Y) / 200MM (+116%Y/Y) + create a low-cost webenabled VoIP, social networking, digital presence phone. INQ1 next with 50K+ preregistrations…

Amazon.com Kindle
With free EV-DO + 240K titles + newspaper / magazine / blog subscriptions. Amazon may do with books what Apple did with tunes. Kindle accounts for ~12% of AMZN’s sales for titles available on Kindle

Netbooks
Estimated 12MM units shipped in 2008; as many as 45MM could be shipped in 2012E – low price points + high mobility + wireless / 3G access pioneering ‘Cloud Computing’ usage model.
92

Note: iPhone units sold includes ~2MM inventory-built units in CQ3:08; Netbook shipment estimates per Katy Huberty. Source: Nintendo, Sony, Amazon.com, Apple, 3, Morgan Stanley Research.

Key Mobile Internet Technologies Related to Networks / Devices / Services Hitting Critical Mass
• Infrastructure – broadband Internet, WiFi, high-speed cellular + GPS networks… • Hardware – small / fast / cheap processors / storage / touch screens, GPS, motion sensors… • Software – optimized user interfaces, browsers, widgets, operating systems, digital stores, centralized billing… • Communication Tools – messaging (text / multimedia / chat / tweets…), social networking, VoIP, camera, interactive games… • Digital Content – optimized music, video, news, search, shopping, weather, maps…

93

Notebooks Retrofitting to Cloud Via 3G – PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?!

• Global cellular modem shipment exceeded 35MM in 2008 – ABI Research,
2/09

• 64% of new Austrian broadband subs used cellular modems, CQ2:07 • 70%+ 3G network coverage in US / Japan / UK / France / Italy / Germany in 2007 – UK Ofcom • 13MM cellular modem users in USA, CQ2:08E – Nielsen Mobile

Note: Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); 3G networks include HSPA (Europe & Japan) and EV-DO Rev A (US), coverage is % of population in 2007. Source: ABI Research, Informa, Ofcom, Nielsen Mobile.

94

Global Mobile Subscribers > 2x Internet Users – Illustrates ‘Up Sell’ Opportunity
• • Global mobile subscribers exceed Internet users by > 2x As mobile Internet usage penetration increases, we expect these figures to converge
Internet Users – 1.4B 2007 Mobile Subscribers – 3.3B 2007
ROW 13%
ROW 6% Latin America 10% North America 18%

North America 8%

Latin America 11% Europe 25%

Asia / Pacific 42%

Europe 24%

Asia / Pacific 43%

Note: ROW = Rest of World; Source: ITU, Morgan Stanley Research

95

Japan Shows Way in Mobile Internet Usage – Mobile Nearly Matches PC
Japan Internet Users by Access Device
100% 90%
81% 81% 83%

% of Japan Internet Users

80% 70% 60% 50%
40% 58%

73%

40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007

% using PC

% using Mobile

Source: Japan Ministry of Internal Affairs and Communication.

96

Opera Mobile Web Browser = Strong Mobile Internet Growth ~20MM Global Users, 7.6B Page Views (+325% Y/Y, Accelerating), 1/09
Global Opera Mini Browser Pages Transcoded per Month, 1/06 – 1/09
8,000

A full web experience + 50% faster

−

6,000

−

Web content is then compressed to reduce the size of data transfer Fully-rendered web pages sent to your phone Advantage: full web rendering and faster browsing on simpler phones

5,000

− −

4,000

3,000

2,000

1,000

0 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09
97

Source: Opera Software, Morgan Stanley Research.

Total Pages Transcoded per Month (MM)

Remote Server first preprocesses requested web pages

7,000

Western Europe + North America Hit 3G Penetration Inflection Point in 2007 – 2008, Global in 2010
3G* Enabled Handset & Penetration by Region, 2007 – 2013E
(All connection numbers in 000s)

2007
80,558 17% 72,691 72% 57,679 21% 48,027 4% 11,095 2% 5,980 2% 3,082 1% 279,113 8%

2008
153,064 31% 90,949 86% 86,135 29% 81,928 5% 21,193 4% 15,042 4% 9,455 2% 457,765 12%

2009E
255,379 49% 102,851 93% 121,338 39% 150,020 8% 34,650 6% 33,120 8% 20,611 5% 717,971 16%

2010E
355,360 67% 111,544 97% 155,759 47% 277,333 13% 67,171 10% 58,151 13% 38,898 8% 1,064,215 22%

2011E
430,425 80% 116,917 98% 186,090 54% 444,346 18% 116,047 16% 94,173 21% 71,846 15% 1,459,844 29%

2012E
487,109 88% 121,234 99% 221,214 62% 655,544 25% 174,103 22% 137,913 31% 122,082 24% 1,919,200 36%

2013E
528,030 94% 124,191 99% 262,947 71% 933,717 33% 246,432 30% 186,896 42% 168,742 32% 2,450,956 44%

Western Europe 3G Penetration Japan 3G Penetration North America 3G Penetration Asia / Pacific (ex. Japan) 3G Penetration Middle East & Africa 3G Penetration Eastern Europe 3G Penetration South & Central America 3G Penetration Total 3G Penetration

Note: Regions ranked by 2008 absolute numbers of 3G-enabled devices in use. 3G* technologies include WCDMA, HSPA, TDSCDMA, 1xEV-DO, LTE and WiMax. Source: OVUM, Morgan Stanley Research.

98

Apple Changed Mobile Game…With Impressive UI + 2.5G! i – NOT – A - Phone

99

Apple iPhone 3G – Winning Consumers Via Simple + Useful Applications

Catchy Tunes?

Speak Mandarin?

Shazam will listen and find the song for you.

Lonely Planet Mandarin Phrasebook will say it for you.

Source: Apple.

100

Apple iPhone – Digital Content Ecosystem Augmented by iTunes Store
iTunes App Store on PC App Store on iPhone

Source: Apple

101

iTunes App Store – Rapid Ramp to 25K Apps, 74% Paid(1)
25,000

iTunes App Store # of Apps, Paid vs. Free, 7/11/08 – 3/11/09
Paid Apps Free Apps M/M Growth

120%

20,000
Total Apps Available

100%
5,761

80%
M/M Growth

15,000
4,228

60%

10,000
2,994 2,238 16,476 10,978 7,110 5,009

40%

5,000
1,036 747 1,476

1,480 3,442

20%

0

173 391 At Launch (07/11/08)

410 787

2,256

0%

1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 7 Month Later Later Later Later Later Later Later Later (08/11/08) (09/11/08) (10/11/08) (11/11/08) (12/11/08) (01/11/09) (02/11/09) (03/11/09)
Note: (1) Apple announced on 3/17 that there’re 25K+ apps, chart shows data through 3/11/09, when there were 22K apps available102 Source: Apple iTunes, Morgan Stanley Research.

iTunes App Store –
14% Games, 12% Books, 11% Entertainment + 800MM Downloads (~13 per User)
# of Paid Apps
2,001 2,675 1,716 1,474 1,662 1,023 1,064 905 802 664 559 594 577 422 399 366 176 151 237 88

Category
Games Books Entertainment Utilities Education Lifestyle Travel Reference Productivity Sports Music Navigation Healthcare & Fitness Business Photography Finance Social Networking News Medical Weather

# of Apps
3,326 2,837 2,587 2,067 1,929 1,404 1,258 1,177 1,027 895 838 727 704 601 534 511 404 343 280 127

% of Total
14% 12 11 9 8 6 5 5 4 4 4 3 3 3 2 2 2 1 1 1

Paid as % of Category Total
60% 94 66 71 86 73 85 77 78 74 67 82 82 70 75 72 44 44 85 69

Average Price of Paid Apps
$2.23 3.82 1.44 2.66 5.16 2.21 5.09 6.52 3.59 3.11 3.90 6.88 2.94 9.08 2.32 5.11 2.31 1.89 22.01 3.02

Total

23,576

17,555

74%

$3.93
103

Note: Data as of 3/20/09, only showing apps available. Downloads per person assumes 50% are new downloads / 50% are update downloads. Apple announced that total apps / downloads reached 25K / 800MM as of 3/18. Source: Apple iTunes, Morgan Stanley Research.

Apple iPhone –
Data Usage 6-10x Higher than Average USA Mobile Users App Downloads per iPhone 100x Higher than non-iPhones
Mobile Content Consumption
100% Average U.S. Mobile Users % of U.S. Mobile Subscribers 80% 79% 70% 60% 66% 66% 57% 54% 40% 40% 39% 38% 37% 29% 20% 14% 9% 0%
ai l ar ch es * or es ki ta ng ur an tG In ui st de an s tM es sa Pe gi rs ng on al Ba nk in g M ob ile Vi O de nl in o e Sh op pi ng us ic Em am N ew s

iPhone Users

10%

8%

9%

7%

5%

9% 4% 3% 3%

G

Se

M

si ng ro w B

eb

W

So ci al

N

Note: KPCB iFund estimates 14MM total weekly app downloads for 12MM iPhone users, and 3MM weekly mobile app downloads on 250MM non-iPhones, thus translating into mobile application downloads 100x higher on iPhone. Source: comScore M:Metrics, 8/08 Survey of U.S. mobile subscribers, *Games category per KPCB estimates.

R

et w

104

USA Mobile Carriers – Data ARPU Growth Offsetting Declining Voice ARPU
Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08
$60 $50 $50 $50

$49

$47

$46

$45

$46

$44

$43

$43

$43

$41

$40

$40

$40

$39

$30

$20 $10 $10 $11 $12 $12

$10 $3 $0 1Q05 2Q05 3Q05 4Q05 $4 $5 $5

$6

$6

$7

$8

$8

$9

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

Voice ARPU

Data ARPU

Total Average ARPU
Source: Simon Flannery, Morgan Stanley Research.

105

Global Wireless Data ARPU –
Japan in Clear Lead, USA Catching Up Faster Than Others
Data ARPU as Percentage of Total, CQ1:05 – CQ3:08
40%
37% 35% 33% 31% 32% 39% 39%

Data ARPU as % of Total

30%
26% 26% 26% 26%

28%

28%

29%

29%

24% 21% 22% 20% 16% 15% 11% 12% 13% 18% 18%

20%

10%
6% 7%

9%

10%

0% CQ1:05
CQ3:08 Blended ARPU (US$) :

CQ3:05 Japan
$54

CQ1:06

CQ3:06

CQ1:07

CQ3:07

CQ1:08

CQ3:08

Western Europe
$37

Asia (ex. Japan)
$5 - $37

USA (iPhone)
$51 ($95)

Note: Western Europe is the weighted average of UK, Germany, Spain, Italy & France; Asia (ex. Japan) is the weighted avg of China, India, Indonesia, S. Korea, Thailand, Philippines, Malaysia and Singapore. Blended ARPU includes both pre-paid and contract plans. Asia (ex. Japan)’s blended ARPU ranges from $5 (Philippines), $10 (China), to $18 (Malaysia) and $37 (S. Korea). USA (iPhone) ARPU is contract only, per AT&T. Latin America data ARPU is ~13% of total in CQ3:08. Source: Morgan Stanley Research. 106

Symbian Dominates Smartphones But Losing Share – Apple / RIM Gaining Ground
40

Quarterly Worldwide Smartphone Sales by Operating System

Units Shipped (MM)

35 30 25 20 15 10 5 0 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08

CQ3:08 Dist.of Smartphone Sales

Symbian
14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 EMEA

RIM

Microsoft

Apple

Linux

Palm

Others

North America

APAC ex. Japan

Japan

Latin America

Source: Gartner.

107

Technology / Internet

3) Emerging Markets – Pacing next wave of technology adoption – leading players in many emerging markets aren’t the usual suspects…

108

Broadband + Mobile + Internet = Especially High Global Growers
2002 Y/Y Growth Rate 78% 20 26 12 12 8 2 2 5 2007 Y/Y Growth Rate 23% 20 16 11 8 6 3 1 -0 Global Market Size 349MM 3,319MM 1,352MM 8,016MM 900MM 761MM 22K 6,501MM 1,277MM 2007 Net Additions 64MM 563MM 182MM 804MM 66MM 40MM 1K 77MM -4MM

Category Broadband Subscribers Mobile Subscribers Internet Users(1) Financial Cards(2) Installed PCs Cable / Satellite TV Subscriptions GDP per Capita Population Telephone Lines

Note: (1) Include mobile Internet users, based on ITU’s compilation of country reports, surveys and estimates; (2) Includes credit / debit / ATM / charge cards in circulation; Source: Morgan Stanley Research.

109

Top 10 Emerging Markets = to Surpass Top 10 Developed Markets in Internet Users in 2008
Top 10 Emerging Markets vs. Top 10 Developed Markets – Internet Users
700 600 Internet Users (MM) 500 400 40% 300 30% 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008E Top 10 Emerging Markets Top 10 EM Y/Y Growth Top 10 Developed Markets Top 10 DM Y/Y Growth 20% 10% 0% 80% 70% 60% 50% Y/Y Growth

Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP. Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia; Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia; Source: IMF, ITU, Morgan Stanley Research. 110

Top 10 Emerging Markets = 2x Top 10 Developed Markets in Mobile Subscribers in 2008
Top 10 Emerging Markets vs. Top 10 Developed Markets – Mobile Subscribers
1,800 1,600 50% 1,400 Mobile Subs (MM) Y/Y Growth 1,200 1,000 30% 800 600 400 10% 200 0 2001 2002 2003 2004 2005 2006 2007 2008E 0% 20% 40% 60%

Top 10 Emerging Markets Top 10 EM Y/Y Growth

Top 10 Developed Markets Top 10 DM Y/Y Growth

Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP. Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia; Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia; Source: IMF, ITU, Morgan Stanley Research. 111

TMT (Technology / Media / Telecom) Update = China #1 + Rest of BRIC Gaining Ground
2004
Rank 1 2 3 4 5 6 7 8 9 10 Country USA China Japan Germany UK India France Italy S. Korea Canada Relative Weighting 9.0 8.2 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1 Rank 1 2 3 4 5 6 7 8 9 10

2007
Country China USA Japan Germany India UK France Russia S. Korea Brazil Relative Weighting 8.9 8.8 6.1 5.6 5.6 5.3 5.3 5.2 5.2 5.2

From our database on market sizing of global TMT (Technology, Media & Telecommunications) products and services. We measure market sizes and growth rates for core TMT metrics: GDP per capita (PPP), telephone lines, cable / satellite TV households, installed PCs, mobile subscribers, internet users, financial cards(1), and broadband subscribers. We do this for the 52 most important economies based on purchasing power / economic strength, as measured in terms of population / GDP per capita. We standardized each country’s position in the global market in each category and adjusted values to reflect a positive scale. The relative ratings and ranks were then determined by calculating an average of Z-scores across categories. For example, in the United States in 2007, standardized and adjusted values of 6.58 in GDP per capita, 7.57 in telephone lines, 10.79 in installed PCs, 7.30 in mobile subscribers, 8.55 in cable subscribers, 9.60 in Internet users, 10.91 in financial cards, and 9.45 in broadband subscribers, produces a relative weighting of 8.84. Note: Red indicates countries moving out of the top 10 TMT countries; Green indicates countries moving into the top 10 and highlights China / India Source: Morgan Stanley Research

112

Internet User Net Additions –
China, Brazil, Pakistan, Columbia, India, Iran, Russia Impressive
2007 Net Internet Users Added (000's)
73,000 9,800 7,400 5,500 5,395 5,000 5,000 4,311 3,900 3,553 3,188 3,000 2,620 2,424 2,400 2,248 2,003 2,000 1,915 1,580

Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Country
China United States Brazil Pakistan Colombia India Iran Russia Germany France Vietnam Canada Egypt Indonesia United Kingdom Mexico Thailand Nigeria Poland Venezuela

2007 Y/Y Growth
53% 5 17 46 80 7 28 17 10 12 22 12 44 23 6 11 18 25 14 38

Penetration Level
16% 73 26 11 25 7 32 21 52 55 21 85 12 6 66 22 20 7 42 21

Note: Penetration is per person. Source: ITU, Morgan Stanley Research.

113

Mobile Subscriber Net Additions – ‘Emerging’ Markets Providing Growth
2007 Net Mobile Subs Added (000's)
86,228 67,570 44,346 21,062 19,326 18,032 13,596 12,910 12,046 11,499 11,237 10,654 9,313 8,891 8,718 8,225 8,073 7,306 6,645 6,565

Rank
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Country
China India Pakistan Brazil Russia Indonesia United States Iran Egypt Germany Mexico Thailand Turkey Argentina Saudi Arabia Vietnam Nigeria Philippines Peru Algeria

2007 Y/Y Growth
19% 41 129 21 13 28 6 77 67 13 20 26 18 28 44 53 25 17 76 31

Penetration Level(1)
41% 21 50 64 120 36 85 42 41 118 65 78 90 103 117 28 28 57 55 80

Note: (1) Penetration is per person; mobile subscribers include all active SIM card subscriptions; people in many countries outside of the US use more than one SIM cards on a regular basis, which may results in greater than 100% penetration levels. Source: Morgan Stanley Research.

114

Non-US Markets Lead Usage Penetration in Many Categories
E-commerce: Germany Online Gaming: China Broadband: S. Korea Mobile Payments + TV: Japan

Online Advertising: UK

Social Networking: Brazil / S. Korea

Microtransactions via SMS: Philippines
Source: Morgan Stanley Research

115

Technology / Internet

4) Cloud Computing – Access + storage need + virtualization driving change

116

Storage Growth +62% in 2007E – Consumer > Professional Demand
Global Storage Sold Annually
120,000

100,000

80,000
Petabytes

60,000

40,000

20,000

0 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E

Home

Professional
Source: Seagate, Katy Huberty, Morgan Stanley Research

117

Cloud Computing – Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model
Amazon.com Salesforce.com

Source: Amazon.com, Salesforce.com, Morgan Stanley Research

118

‘A Giant Supercomputer’ – A Datacenter Behind the Cloud
Google Data Center – The Dalles, Oregon

Source: Getty Images

119

Google Zeitgeist – Predictive Power of Data Underutilized
Fastest Rising (global)
1. 2. 3. 4. 5. 6. 7. 8. 9. sarah palin beijing 2008 facebook login tuenti heath ledger obama nasza klasa wer kennt wen euro 2008

Trendsetters 2008 – Going Green

Fastest Rising (US)
1. 2. 3. 4. 5. 6. 7. 8. 9. obama facebook att iphone youtube fox news palin beijing 2008 david cook

10. jonas brothers

10. surf the channel

Economy – Layaway Makes a Comeback

Politics – U.S. Presidential Election

Source: Google Year-End Zeitgeist, 2008.

120

Amazon Web Services – Providing Cheap / Reliable Storage in Cloud
• Simple Storage Service (S3) – Provides a simple web services interface that can be used to store (for as low as $0.12 per GB per mo.) / retrieve any amount of data, at any time, from anywhere. 29B+ objects stored by the end of CQ3, +32% Q/Q. • Elastic Compute Cloud (EC2) – Provides resizable compute capacity in the cloud, with users paying only for capacity they actually use (starting $0.10 / instance-hour).
450 Total Registered Developers (000) 400 350 300 250 8% 200 150 100 50 0 CQ2:05 CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 Total Registered Developers (000) Q/Q Growth
121

Amazon Web Services

16% 14% 12% 10% Q/Q Growth

6% 4% 2% 0%

Source: Amazon.

Closing Thoughts

1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time

122

2% of Public Tech Companies Create 100% of Wealth* –
A Look at Some of Biggest Winners of Our Day
Great Management Team, Constant Culture Improvement X X X X X X X X XX X X X X X X X

Huge Market Apple Cisco Dell eBay Google Intel Microsoft Yahoo! X X X X XX X X X

Simple, Focused Mission X X X X XX X X X

Active, Missionary Founders X O X X X X X X

Insane Customer Focus X X X X X X X X

Big Annuity Gross -Like Strong (1) Margin Model Board 34 65 18 77 83 56 79 81 X X X X X X XX X X X X X X X X X

Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’

123

Top 15 Global Internet Companies
Global Top Internet Companies by Market Value
(US$ in Millions, except per share data, as of 3/19/09)

3/19/09 Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Google Amazon.com Yahoo! eBay Yahoo! Japan Softbank Activision Tencent Baidu Rakuten Electronic Arts Alibaba NHN NetEase Expedia

Market

C2008 2006 11% -16 -35 -30 -48 -54 25 233 79 -52 -4 -38 33 -12

Total Return % 2007 50% 135 -9 10 13 6 72 113 246 6 16 -97 1 51 2008 -56% -45 -48 -58 -10 -14 -42 -15 -67 28 -73 -80 -57 17 -74 2009 YTD 5% 34 11 -15 -38 -28 14 3 32 -26 11 38 -2 1 -10

52-Week High $602 92 30 33 548 21 19 9 383 672 55 2 252 27 26 Low $247 35 9 10 229 7 8 4 101 414 14 0 59 15 6

Region Price (US$) Value ($MM) Revenue ($MM) US US US US Japan Japan US China China Japan US China Korea China US $324 69 14 12 251 13 10 7 173 464 18 1 101 22 7 $102,288 29,414 18,836 15,345 14,188 13,158 12,915 11,964 5,920 5,802 5,699 5,034 4,583 2,772 2,121 $21,796 19,166 7,209 8,541 2,633 27,891 3,026 998* 469 2,757 4,480 439* 1,658* 424 2,937

Note: * denotes Morgan Stanley estimate; ~60% of Softbank’s C2008 revenue was coming from their mobile operator business. Source: FactSet; Morgan Stanley Research. Data as of 3/19/09.

124

Old Media (TV) / New Media (Internet + Mobile) – Complementary Platforms
2007 Football Season
2007 Football Season

CBS Television CBSSports.com CBS Mobile

Thursday Kickoff Patriots vs. Colts

NFL Sundays

• • •

Plasma Screen TV – HD Quality Event PC Screen – Fantasy, Stats, and Injury Reports Mobile Screen – Highlights, Scores
Source: CBS Sports Interactive.

125

Younger Generation (18-41) – Spend Most Time on Internet / Cell Phone vs. Other Media
% of Media Consumption Younger Generation (Age 18 - 41)
Newspaper - 3% Magazine - 4% Video Game - 6% Internet - 25% Movie - 11% Radio - 14% TV - 22% Cell Phone - 15%
Cell Phone - 13% Radio - 13% Newspaper Internet - 13% - 12%

Seniors (Age 63+)

Magazine - 8% Video Game - 2%

Movie - 8%

TV - 38%

Total Hours of Media Usage Per Week: 49 Hours

Total Hours of Media Usage Per Week: 37 Hours

Note: Data per Forrester Research’s 2007 North American Technographics Consumer Benchmark Survey; Age 18-41 data is the average of age 18-27 & 28-41. Source: Forrester Research. 126

Media Time Spent vs. Ad Spend Out of Whack –
Internet / Mobile (upside…) vs. Newspaper / Magazine / TV (downside…)
% of Time Spent in Media vs. % of Advertising Spending, USA 2008E
35%
32% 32%

% of Total Media Consumption Time or Advertising Spending

30% 25% 20%
17% 25%

20%

15% 10% 5%
9%

13%

8%

7%

6% 6%

<1%

0% TV Internet Radio Mobile Phone Ad Spend Newspaper Magazine

Time Spent

Note: Time spent data per Forrester Research, ad spend data per Nielsen Media Research, mobile medium ad spending is Morgan Stanley’s estimate. Source: Nielsen Media Research, Forrester, Morgan Stanley Research. 127

Internet Advertising – Lots of Ad Share to Gain
$288 Per Home for Internet vs. $818 for Newspapers Implies Upside
Medium 2007 Advertising Spending ($B) Households (MM) Ad Spending / Household ($)

Direct Telephone Promotions Newspapers Classifieds Direct Mail Broadcast TV Cable TV Internet / Online Radio Yellow Pages Outdoor Total Average

$110 116 46 15 61 44 27 21 20 16 7 $469 47

107 115 56 56 114 112 80 71 113 114 114

$1,032 1,011 818 260 532 390 327 288 172 141 63 $4,774 477

Newspapers include Classifieds. Promotions ($116B) include: incentives ($30B), promotional products ($27B), point-ofpurchase ($19B), specialty printing ($9B), coupons ($7B), premiums ($7B), promotional licensing ($7B), promotional fulfillment ($6B), product sampling ($2B), and in-store marketing ($2B). Households may use multiple advertising mediums.

Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research.

128

Offline Advertising Revenue Declines Accelerating – Newspaper Redux?
Traditional Media Ad Revenue Y/Y Growth, CQ1:07 – CQ1:09E
CQ1:07 0% CQ3:07 CQ1:08 CQ3:08
-3%

CQ1:09E
-5%

Ad Revenue Y/Y Change

-10%

-10%
-18%

-15%

-20%
-30%

-30% Print Newspaper
Cable TV Network TV Local TV

Every time we have seen a recession, we have endured this panic… I recognize that we may never return to record levels, but we can recapture a large percentage of advertising that does return. - Rupert Murdoch, Chairman and CEO, News Corp. (2/5/09)
Source: Newspaper Association of America, Morgan Stanley Media Research. Newspaper figures relate to the “print” portion of ad revenues. CQ4:08 / CQ1:09E Y/Y declines are Morgan Stanley estimates.

129

Search = Still Lots of Share to Grab
$80,000 $70,000 $60,000 Ad Spend ($MM) $50,000 $40,000 $30,000 $20,000
$12,282

U.S. Internet Search Spending vs. Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007
$68,402 $61,224 $63,265 $60,890 $69,923 $67,115 $70,348 $65,146

$10,000
$122 $299 $889 $2,133 $4,113

$9,430 $6,910

$0 2000 2001 2002 Internet Search 2003 2004 2005 2006 Combined Classified, Yellow Pages & Newspaper 2007

Source: IAB, search spending adjusted by our estimates; Classified, Yellow Pages & Newspaper spending per MS Media team. Morgan Stanley Research.

130

USA Online Ad Spend + E-Commerce Penetration –
Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back!
12%

U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007

12%

10%

10%

8%

% of Total

20-yr Average Total Ad Spending & Retail Sales Y/Y Growth = 5%

8%

6%

6%

4%

4%

2%

2%

0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
(2)

0%
2005 2006 2007 U.S. Online Ad Spending as % of Total Ad Spending (1)
U.S. Adjusted E-Commerce as % of Total Retail Sales

Note: (1) We use IAB and ZenithOptimedia data to estimate U.S., online ad spend as % of total ad spend; (2) E-Commerce sales adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; e-commerce data unavailable before 2000. 20-yr average from 1987-2007. 131 Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research

20-yr Average Y/Y Growth

Largest USA Advertisers Under Spend on Internet
Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average
2007 Total Ad Spending ($MM) $5,230 3,207 3,016 3,010 2,962 2,525 2,457 2,409 2,293 2,246 1,903 1,791 1,758 1,739 1,737 1,632 1,628 1,508 1,491 1,423 2007 Internet Ad Spending ($MM) $81 136 189 212 98 164 29 49 141 47 71 79 57 53 72 12 23 36 72 34 Internet % of Total (2) 2% 6 9 10 6 10 2 3 10 5 5 7 5 5 7 2 3 3 18 4

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Company Procter & Gamble AT&T Verizon General Motors Time Warner Ford GlaxoSmithKline Johnson & Johnson Walt Disney Unilever Sprint Nextel General Electric Toyota Chrysler Sony L'Oreal Sears Kraft Foods Bank of America Nissan

Industry Consumer Telecom Telecom Automotive Media Automotive Healthcare Consumer Media Consumer Telecom Conglomerate Automotive Automotive Technology Consumer Retail Consumer Financial Automotive

Note: (1) 8% is the average of the top 100 US ad spenders in 2007, per Ad Age. Data via TNS, which excludes search revenue. We use IAB and ZenithOptimedia data to estimate that in the U.S., online ad spend (including search) = ~12% of total ad spend; (2) Percentage of total measured advertising spending, which is smaller than the total ad spending figures provided. 132 Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research

Key to Progress = Learning to Speak Different Languages and Walk Miles in Moccasins – Google / P&G Employee Swap
• P&G employees were surprised during a Tide brand meeting when a Google job-swapper didn't realize Tide's signature orange-colored packaging is a key part of the brand's image. • Google employee caused a stir when she showed P&G staffers some Google data indicating online searches for word "coupons" are up ~50% over past 12 months. • When P&G unveiled an ambitious promotion for the Pampers brand, the Google team was stunned to learn that Pampers hadn't invited any "motherhood" bloggers -- women who run popular Web sites about child-rearing -- to attend the press conference. P&G’s ‘The Talking Stain’ Campaign Engages YouTube Viewers

Source: The Wall Street Journal 11/28/08, Advertising Age, P&G.

133

While CPMs / CPCs May be Under Near-Term Pressure, If Targeting / ROI Continue to Improve (as they should) There Should Be Long-Term Upside
Estimated CPMs

Source: Yahoo! Investor Presentation, 3/08.

134

History Proves That Ads Follow Eyeballs, It Just Takes Time
1996 – Morgan Stanley Global Estimates in ‘The Internet Advertising Report’ 2007 – We’re @

Internet Users: 1.35B(1)

Online Ad Revenue: $41B(2)

Ad Revenue per User: $30(3)

Note: (1) ITU, Morgan Stanley Research estimate, comScore reports a lower number for global unique visitors due to their sampling method; (2) ZenithOptimedia; (3) Using comScore’s #s, global online ad revenue per unique user would have been ~$53; Source: ITU, ZenithOptimedia, Morgan Stanley Research. 135

We are Undergoing the Greatest Media Transformation in History

136

Amazon.com = Greatest Advertiser / Agency of Past Decade?
• Online advertising underperforms relative to potential – 76% of USA consumers find Internet ads more intrusive than print ads, 64% pay more attention to print ads than those online, per Deloitte. • Amazon.com turns intrusive ads into useful / desirable information
Demo: Step 1: Show your interests in a camera

Step 2: Amazon.com returns with ‘ads’ for compatible lens / battery / memory card, etc.

Source: Deloitte, Amazon.com.

137

Advertising Age – Best Campaigns 1900-2000 – Most Fertile Decades = 1950-1980
25%

20%

% of Top 100 Ads

15%

10%

5%

0% 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s

Source: Advertising Age, Wikipedia Note: 2 ads before 1900 are included in 1900s decade. Alka-Seltzer ads are included in 1960s decade.

138

These Campaigns Were Really / Really Awesome – They Sold Lots of Product
Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Volkswagen Coca-Cola Marlboro Nike McDonald's DeBeers Absolut Vodka Miller Lite Beer Clairol Avis Federal Express Apple Computer Alka-Seltzer Pepsi-Cola Maxwell House Ivory Soap American Express U.S. Army Anacin Rolling Stone Pepsi-Cola Hathaway Shirts Burma-Shave Burger King Campbell Soup Commercial Think Small The pause that refreshes The Marlboro Man Just do it You deserve a break today A diamond is forever The Absolut Bottle Tastes great, less filling Does she...or doesn't she? We try harder Fast talker 1984 Various ads Pepsi-Cola hits the spot Good to the last drop 99 and 44/100% Pure Do you know me? Be all that you can be Fast, fast, fast relief Perception. Reality. The Pepsi generation The man in the Hathaway shirt Roadside signs in verse Have it your way Mmm mm good Ad Agency Doyle Dane Bernbach D'Arcy Co. Leo Burnett Co. Wieden & Kennedy Needham, Harper & Steers N.W. Ayer & Son TBWA McCann-Erickson Worldwide Foote, Cone & Belding Doyle Dane Bernbach Ally & Gargano Chiat/Day Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene Newell-Emmett Co. Ogilvy, Benson & Mather Proctor & Gamble Co. Ogilvy & Mather N.W. Ayer & Son Ted Bates & Co. Fallon McElligott Rice Batton, Barton, Durstine & Osborn Hewitt, Ogilvy, Benson & Mather Allen Odell BBDO BBDO Year 1959 1929 1955 1988 1971 1948 1981 1974 1957 1963 1982 1984 1960s, 1970s 1940s 1959 1882 1975 1981 1952 1985 1964 1951 1925 1973 1930s
Source: Advertising Age.

139

We are Undergoing the Greatest Media Transformation in History

Where is the great creative? Great creative sells great products. Great creative (in a new medium) for great products helps create great companies.

140

Great Internet Creative – The Time is Now…

• When the going gets tough, the tough get going. - Joe Kennedy (1888-1969) • Necessity is the mother of invention. - Plato (~400BC) • Speed up in a slowdown. - Google (2008)

141

The Internet – What Would William Bernbach or Leo Burnett Do?

• Rules are what the artist breaks; the memorable never emerged from a formula. - William Bernbach (1911-1982) • Just do it. - Wieden & Kennedy (1988)

142

Disclosure Section
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA.

Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Global Research Conflict Management Policy
Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies.

Important US Regulatory Disclosures on Subject Companies
The following analyst, strategist, or research associate (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Mary Meeker - Amazon.com (common stock), eBay (common stock), Yahoo! (common stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of February 27, 2009, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Amazon.com, eBay, Google, GSI COMMERCE, WebMD Health Corp., Yahoo!. As of February 27, 2009, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Amazon.com, eBay, GSI COMMERCE. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Dice Holdings, Inc., eBay, Google, GSI COMMERCE. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from eBay, Google. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: eBay, Google. The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. An employee or director of Morgan Stanley is a director of Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, Dice Holdings, Inc., drugstore.com, eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

143

Disclosure Section
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.

Global Stock Ratings Distribution
(as of February 28, 2009)

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, NotRated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

Coverage Universe

Investment Banking Clients (IBC)

Stock Rating Category

Count

% of Total

Count

% of Total IBC

% of Rating Category

Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total

714 1003 33 507 2,257

32% 44% 1.5% 22%

216 246 9 100 571

38% 43% 1.6% 18%

30% 25% 27.3% 20%

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.

144

Disclosure Section
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. Not-Rated/Hold (NA or NAV). Currently the analyst does not have adequate conviction about the stock's total return relative to 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. Please note that NA or NAV may also be used to designate stocks where a rating is not currently available for policy reasons. For the current list of Not-Rated/Hold stocks as counted above in the Global Stock Ratings Distribution Table, please email morganstanley.research@morganstanley.com. 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 1218 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views
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