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Morganstanley Deck Covering ShopSavvy

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  • 1. 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.
  • 2. 2 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…
  • 3. 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
  • 4. 10 Years Ago – I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998 Source: YouTube. 4
  • 5. USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008 Roots of Economic Challenge? 10+ Years of Rising Home Ownership + Declining Interest / Savings Rates 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. 5 58% 60% 62% 64% 66% 68% 70% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S.HomeOwnershipRate 0% 4% 8% 12% 16% 20% U.S.InterestRate&PersonalSavingsRate U.S. Home Ownership Rate U.S. Interest Rate January 1993: HUD began promoting broader home ownership. US home ownership = 62MM June 2004: US home ownership = 73MM U.S. Home Ownership Rate 30-year (1965-1995) Trendline U.S. Personal Savings Rate
  • 6. 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 income- constrained and cash-strapped borrowers at the margin to qualify for mortgage loans. - 1998 State of the Nation’s Housing Report 6 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.
  • 7. 10 Years of Rising Home Prices – Up ~2x at Peak Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller. USA Real Home Price & Building Cost Indexes, % Change 1965 - 2008 7 -20% 0% 20% 40% 60% 80% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 %ChangeFrom1965Level U.S. Real Home Price Index U.S. Real Building Cost Index
  • 8. Systemic Leverage Helped Pace ‘Easy Money’ Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries 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. 8 100% 150% 200% 250% 300% 350% 400% 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008 TotalDebtas%ofGDP 0% 10% 20% 30% 40% 50% 60% 70% ForeignOwnershipofU.S.Treasuries, %ofTotalMarketCap U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization 1933: 3.0x GDP 2008: 3.6x GDP U.S. Total Credit Market Debt as % of GDP & Foreign Ownership % of U.S. Treasuries, 1920 - 2008
  • 9. Households Corporates Financials GSE Government 0% 50% 100% 150% 200% 250% 300% 350% 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 U.S.CreditMarketDebt/GDP(%) Households Corporates Financials GSE Government 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 Excessive Debt Levels = 2008 & 1933 Corporate Debt Much Lower on Relative Basis Now , Morgan Stanley Research. 9 U.S. Total Credit Market Debt as % of GDP, 1929 – 2008 & Sector Share Breakdown 1984 - 2008 Net Increase 1933 2008 Amount ($T) Government + GSE 24% 33% $14.4 Households 18 27 11.9 Corporates 51 22 8.8 Financials 7 18 8.5 % Share of Total Debt
  • 10. USA Debt Mix Shift – Mortgages / ABS / GSE Up to 23% of Debt vs. 7% 2 ½ Decades Ago Note: Debt amounts are nominal, ABS is Asset Backed Security, GSE is Government Sponsored Enterprise. Source: Federal Reserve, Morgan Stanley Research. 10 2008 U.S. Total Debt: $53T Total Mortgage / ABS / GSE Debt: $12T 1984 U.S. Total Debt: $7T Total Mortgage / ABS / GSE Debt: $0.5T Mortgage PoolsMortgage Pools 9%9% ABS IssuersABS Issuers 8%8% HouseholdHousehold 27%27% CorporateCorporate 14%14% GovernmentGovernment 16%16% OtherOther 20%20% GSEGSE 6%6% Mortgage PoolsMortgage Pools –– 4%4% ABS IssuersABS Issuers –– 0%0% OtherOther –– 22%22% CorporateCorporate 19%19% HouseholdHousehold 26%26% GovernmentGovernment 25%25% GSEGSE –– 3%3%
  • 11. USA Mortgage Delinquency @ Record High 7.88% USA Residential Mortgage Delinquency Rates, CQ1:98 – CQ4:08 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 0% 5% 10% 15% 20% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 DelinquencyRates(%) All U.S. Mortgages Prime Mortgages Subprime Mortgages
  • 12. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 RealBenefitsPaid($MM) 0% 2% 4% 6% 8% 10% 12% UnemploymentRates Real Benefits Paid Unemployment Rate Unemployment Benefits At 38-Year High and Rising U.S. Unemployment Rates & Total Benefits Paid, 1971 - 2009 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. 12
  • 13. Michigan Unemployment @ 11.6%, Up Nearly 2x Y/Y USA @ 7.6%, On Way to California Level of 10.1%? 7.3% 5.7% 6.3% 6.1% 5.3% 5.0% 5.3% 5.9% 4.8% 5.7% 6.0% 5.5% 5.3% 5.2% 11.6% 10.4% 10.3% 10.1% 9.9% 9.7% 9.4% 9.3% 9.2% 8.8% 8.7% 8.7% 8.6% 8.6% 3% 5% 7% 9% 11% 13% M ichigan South C arolina R hode Island C alifornia O regon N orth C arolina N evada W ashington D C Indiana O hioM ississippiK entuckyTennessee G eorgia UnemploymentRate Jan-08 Jan-09 Note: 2/09 preliminary U.S. national unemployment rate was 8.1%. Source: Bureau of Labor Statistics. Morgan Stanley Research. 13 U.S. State Unemployment Rates, 1/08 vs. 1/09 1/09 National Average
  • 14. -20% -10% 0% 10% 20% 30% 40% 1973 1976 1980 1983 1987 1990 1994 1997 2001 2004 2008 ResidentialMortgageDelinquencyRatesY/YGrowth -40% -20% 0% 20% 40% 60% 80% 100% InitialClaimsForUnemploymentInsuranceY/YGrowth U.S. Residential Mortgage Delinquency Rates Y/Y Growth U.S. Initial Claims For Unemployment Insurance Y/Y Growth Rising Unemployment Higher Mortgage Defaults… U.S. Residential Mortgage Delinquency Rates vs. Initial Claims For Unemployment Insurance Y/Y Growth, 1973 - 2008 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. 14
  • 15. -100% -50% 0% 50% 100% 150% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 …Higher Unemployment / Mortgage Defaults Rising Personal Bankruptcy Filings… U.S. Weekly Personal Bankruptcy Filings, Y/Y Growth, 2000 - 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
  • 16. 16 … Consumer Confidence Falling 0% 10% 20% 30% 40% 50% 60% Jun-06 Nov-06 Mar-07 Jun-07 Sep-07 Jan-08 Apr-08 Jul-08 Sep-08 Dec-08 Feb-09 Spending More Spending Less 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 2/09 61% Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 2/18/09.
  • 17. Average Consumer Wealth Destruction = ~25% Through CQ4:08 – 56%+ of USA Household Assets in Real Estate + Stocks Real EstateReal Estate 38%38% Equities +Equities + Mutual FundsMutual Funds 18%18% PensionPension ReservesReserves 22%22% DepositsDeposits 12%12% Credit MarketCredit Market InstrumentsInstruments 7%7% OthersOthers 3%3% USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances, % Change from CQ1:07 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 -40% -30% -20% -10% 0% 10% CQ1:07 CQ3:07 CQ1:08 CQ3:08 %ChangefromCQ1:07 S&P/Case-Shiller Home Price Index S&P 500 Index
  • 18. Difficult Retail Environment 0% -2% -10% 6% -1% -3% -7% -11% -14% -20% -28% -24% -20% -30% -30% -25% -20% -15% -10% -5% 0% 5% 10% Jan Mar May Jul Sep Nov Jan ComparableStoreSalesY/Y%Change Abercrombie & Fitch 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 3% 2% -2%-1% 2% 0% -1%-1%-1% -2%-3%-3% 1% -2% -30% -25% -20% -15% -10% -5% 0% 5% 10% Jan Mar May Jul Sep Nov Jan ComparableStoreSalesY/Y%Change UK Retail Same-Store Sales Y/Y % Change, 1/08 – 2/09
  • 19. Retail Sales + e-Commerce Growth Rates Slowing -10% 0% 10% 20% 30% 40% CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 Y/YGrowth US Adjusted Retail E-Commerce Sales US Total Retail Sales 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. 19 Adjusted Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 – CQ4:08
  • 20. 20 Corporate Sales – Increasingly Below Plan Since CQ1:06 0% 10% 20% 30% 40% 50% 60% CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1:07 CQ4:07 CQ3:08 Above Plan Below Plan Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08. CQ4:08 51% CQ3:01 50% 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?
  • 21. 21 Material Revenue Growth Declines – TMT Companies Intel + Nokia = Accelerating -20%+ Declines Note: CQ1:09E figures based on FactSet consensus estimates; CQ4:08 for VIA is an estimate. Source: Company data, FactSet, Morgan Stanley Media Research. -30% -15% 0% 15% 30% 45% 60% 75% CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E Y/YRevenueGrowth Microsoft Intel Cisco Nokia Disney Viacom* News Corp Time Warner Yahoo! Google Amazon.com eBay AT&T Verizon TMT Companies Revenue Y/Y Growth, CQ1:07 – CQ1:09E
  • 22. Technology Revenue – So far, a 2001 Redux of 5 Flat / Down Sequential Quarters…Now 4…This Time, Secular Outlook Worse 0 100 200 300 400 500 600 700 CQ1:98 CQ3:99 CQ1:01 CQ3:02 CQ1:04 CQ3:05 CQ1:07 CQ3:08 Revenue($B) -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Y/YGrowth Revenue Y/Y Growth Average Y/Y Growth = 11% Global Technology Sector Revenue & Y/Y Growth, CQ1:98 – CQ4:08 Note: Revenue and Y/Y Growth compiled from 570 publicly traded global technology companies. Source: FactSet, Morgan Stanley Research. 22
  • 23. 20 30 40 50 60 70 80 1948 1951 1954 1957 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 ISMPMIIndex(%) May 1982 PMI=35.5 Feb 1991 PMI=39.4 Dec 2008 PMI=32.9 Oct 2001 PMI=40.8 PMI > 50 = Expansion PMI < 50 = Contraction 60-year Average = 52.7 USA Manufacturing Contracting Rapidly – 12/08 PMI Index Lowest Level Since 1980, 2/09 PMI = 35.8 U.S. PMI (Purchasing Managers Index), 1/48 – 2/09 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
  • 24. -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 -7% -5% -3% -1% 1% 3% 5% Q/QGrowthRates U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 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. 24
  • 25. 25 Global GDP Growth Forecasts = Continued Trend of Downward Revisions Country / Region 2007 2008 2009E 2010E 2009E 2010E USA 2.0% 1.1% -1.6% 1.6% -0.9% 0.1% -1.5 -0.7 -1.5 -0.9 -1.8 -1.5 -1.2 -0.3 -4.2 -3.2 -1.2 -1.0 -1.7 -0.5 -1.8 -1.2 -1.7 -0.8 Euro zone 2.6 1.0 -2.0 0.2 UK 3.0 0.7 -2.8 0.2 China 13.0 9.0 6.7 8.0 India 9.3 7.3 5.1 6.5 Russia 8.1 6.2 -0.7 1.3 Brazil 5.7 5.8 1.8 3.5 Developed Markets(1) 2.7 1.0 -2.0 1.1 Emerging Markets(2) 8.3 6.3 3.3 5.0 World 5.2 3.4 0.5 3.0 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. IMF Forecasts, 1/09 Difference from 11/08 IMF Forecasts
  • 26. Note: all indices start at a value of 100 on 3/17/06; data as of 3/18/09; Source: FactSet. Stock Markets Stabilizing = Leading Indicator of Economic Growth Russia off 74% vs. 36-Month Peak, Oil -67% / China -63% / India -57% / Japan -56% / S&P500 -49% 26 0 50 100 150 200 250 300 350 400 450 500 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 IndexedValue(base=100) S&P 500 NASDAQ Composite Index China Shanghai SE Composite India SENSEX Russia RTS Light Crude Oil - Continuous Contract Gold - Continuous Contract Japan Nikkei 225 2006 20082007
  • 27. 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. S&P500 – Key Spending Sectors Have Taken Big Hits 27 Total Mkt Cap ($B) 2009 Peak to S&P Sector 3/18/2009 2007 2008 YTD Current (1) Market Cap Leaders Financials 825 -20% -52% -23% -71% JPMorgan, Wells Fargo Industrials 661 7 -40 -27 -58 GE, United Technologies Consumer Discretionary 618 -18 -38 -14 -54 McDonald's, Walt Disney Materials 229 14 -45 -9 -50 Monsanto, DuPont Information Technology 1,255 12 -43 -4 -46 Microsoft, IBM Telecom Services 281 -12 -34 -9 -44 AT&T, Verizon Energy 936 36 -37 -15 -42 Exxon, Chevron Utilities 294 6 -28 -14 -39 Exelon, Southern Health Care 1,065 1 -24 -11 -35 Johnson & Johnson, Pfizer Consumer Staples 998 10 -20 -14 -29 Wal-Mart, Procter & Gamble S&P 500 Total (2) 7,506 1% -37% -14% -49% % Change
  • 28. 2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 2006 1956 2004 1948 1988 1947 1986 1923 1979 1916 1972 1912 1971 2000 1911 1968 1990 1906 1965 1981 1902 1964 1977 1899 1959 1969 1896 1952 1962 1895 1949 1953 1894 1944 2003 1946 1891 1926 1999 1940 1889 1921 1998 1939 1887 1919 1996 1934 1881 1918 1983 1932 1877 1905 1982 2001 1929 1875 1904 1976 1973 1914 1874 1898 1967 1966 1913 1872 1897 1963 1997 1957 1903 1871 1892 1961 1995 1941 1890 1870 1886 1951 1991 1920 1887 1869 1878 1943 1989 1917 1883 1868 1864 1942 1985 1910 1882 1867 1858 1925 1980 1893 1876 1866 1855 1924 1975 1884 1861 1865 1850 1922 1955 1873 1860 1859 1849 1915 1950 2002 1854 1853 1856 1848 1909 1945 1974 1841 1851 1844 1847 1901 1938 1958 1954 1930 1837 1845 1842 1838 1900 1936 1935 1933 1907 1831 1835 1840 1834 1880 1927 1928 1885 1857 1828 1833 1836 1832 1852 1908 1863 1879 1931 1937 1939 1825 1827 1826 1829 1846 1830 1843 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% 2008 -39% S&P500 Down 39% in 2008, 2nd Worst in 183 Year History – Bad Years Often Follow Good Years Note: S&P 500 historical info from 1825 to 2007. Source: Value Square Asset Management, Yale University. 28
  • 29. Current USA Bear Market – 3rd Worst in History Duration Still Relatively Short Note: Current bear market is on-going, data as of 3/19/09, duration only includes trading days. Source: ISI. 29 S&P 500 Rank Peak-to-Trough Magnitude (%) Duration Days Start Date End Date 1 -86% 704 1929 - Sep 16 1932 - Jul 8 2 -60 1,284 1937 - Mar 10 1942 - Apr 28 3 -55 497 2007 - Oct 9 TBD 4 -49 637 2000 - Mar 24 2002 - Oct 9 5 -49 459 1906 - Jan 19 1907 - Nov 15 6 -48 436 1973 - Jan 11 1974 - Oct 3 7 -46 602 1901 - Jun 17 1903 - Nov 9 8 -44 283 1919 - Nov 3 1920 - Dec 21 9 -40 268 1916 - Nov 21 1917 - Dec 19 10 -36 389 1966 - Nov 29 1970 - May 28 11 -34 71 1987 - Aug 25 1987 - Dec 4 12 -30 761 1946 - May 29 1949 - Jun 13 13 -29 1,178 1909 - Nov 19 1914 - Jul 30 14 -28 136 1961 - Dec 11 1962 - Jun 26 15 -27 430 1980 - Nov 28 1982 - Aug 12
  • 30. GSEs / Washington Plan Lehman Bankruptcy AIG Nationalized MS / MUFG Investment JPM Acquires WaMu Wells Fargo Acquires Wachovia Fortis Nationalized Leading Banks Enter Preferred Stock Purchase Program BofA Acquires ML GS / Berkshire Investment $700Bn TARP B&B Nationalized Santander / Sovereign UK Bank Bail Out September 7 September 14 September 16 September 22 September 25 October 3September 29 October 14 EuropeUnited States (23%) 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 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 8,400 8,600 8,800 9,000 9,200 9,400 9,600 9,800 10,000 10,200 10,400 10,600 10,800 11,000 11,200 11,400 11,600 DowJonesIndustrialAverage
  • 31. Credit Spreads @ 100-Year Extreme – Current Level Down From 12/08 Peak, But Still 250bps+ Higher Than Post-Depression Peaks 0 200 400 600 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 SpreadtoTsy(bps) BBBs (to Tsy) AAA/AA (to Tsy) Current (3/09) Level: 655 bps 31Source: Moody’s, Yield Book, Morgan Stanley Credit Strategy Research. Credit Spreads (to U.S. Treasury Securities), 1925 - 2009
  • 32. 0 20 40 60 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 VIXIndexValue(%) 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 Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options. Source: FactSet. 32
  • 33. When Does Vicious Cycle End? More Often Than Not, Peak Unemployment = Good Time to Invest 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. 33 S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008 1 10 100 1000 10000 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 S&P500IndexValue(LogScale) 0% 5% 10% 15% 20% 25% 30% UnemploymentRate S&P 500 Index Price Unemployment RateRecessions Unemployment Peak
  • 34. Sequencing the Asset Recovery Process – High Quality Financials / USA Non-Cyclicals / IG Super Senior Should Lead the Way 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 Recovery Phasing and Duration Start End 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
  • 35. -10% -5% 0% 5% 10% 15% 20% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 U.S.AdSpendvs.GDP,Y/YGrowth U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007 1991 Ad Growth = -2% Median Y/Y Ad Spend Growth Rate = 5% 2001 Ad Growth = -12% Source: Zenith Optimedia, IMF, Morgan Stanley Research. 35 Advertising Spending & GDP Growth = High Correlation of 81%
  • 36. 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 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. 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 36 -10% -5% 0% 5% 10% 15% 20% -1% 0% 1% 2% 3% 4% 5% Real GDP Y/Y Growth AdSpendY/YGrowth U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) If real GDP Ad spend Y/Y growth Y/Y growth is… could be… 5% 11% 4 8 3 5 2 2 1 -1 0 -4 -1 -7 -2 -10 -3 -13 -4 -16 -5 -19
  • 37. $267 $907 $1,921 $4,621 $8,225 $7,134 $6,009 $7,267 $9,475 $12,542 $16,879 $21,206 $0 $5,000 $10,000 $15,000 $20,000 $25,000 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S.OnlineAdSpending($MM) -50% 0% 50% 100% 150% 200% 250% Y/YGrowthRate U.S. Internet Ad Spending Y/Y Growth Rate Source: IAB, Morgan Stanley Research. 37 U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007 Online Ad Spending Bad News = From 2000 to 2002, USA Spending Fell 27%
  • 38. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 U.S.OnlineSpending&SearchRevenue($MM) -50% 0% 50% 100% 150% 200% 250% 300% TotalU.S.OnlineSpendY/YGrowth U.S. Online Ad Spending Spending on Search Y/Y Growth Online Ad Spend Polynomial Trendline 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 Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research. 38
  • 39. 39 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 Technology / Internet
  • 40. Internet Becoming Necessity – Broadband Internet Last Thing to Go in Consumer Survey 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 0 1 2 3 4 5 6 7 8 9 10 N ew furniture orfloorcoverings G am bling G oing outto restaurants,clubs orpubsElectronics M usic,DVD s,books & gam es M aking im provem ents to yourhom e H ealth club m em bership,golforothersports G oing aw ay on holidays orw eekend breaks Prem ium ororganice groceries C lothing,accessories orfootw ear M obile Phone PersonalCare,toileteries and cosm etics Fixed-line telephone calls B roadband Internet EconomicVulnerabilityScore Economic Vulnerability Scores for Items of Discretionary Expenditure 10 = Most Vulnerable / 0 = Least Vulnerable 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. 40
  • 41. Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. Consumer IP Traffic Driving Growth – 46% IP Traffic CAGR, 2007 – 2012E 0 10,000 20,000 30,000 40,000 50,000 2006 2007 2008 2009E 2010E 2011E 2012E TotalInternetIPTraffic(Petabytepermonth) Mobility Consumer Business 2007-2012E CAGR 125% 49% 35% Global Internet Traffic, by Type 2006 – 2012E 71%71% 75%75% 74%74% 62%62% 3%3% 41
  • 42. 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 Source: ComScore Global 1/09, Morgan Stanley Research. 42 0% 2% 4% 6% 8% 10% 12% 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 %ShareofGlobalMinutes Yahoo.com Msn.com Google.com YouTube.com Facebook.com
  • 43. 43 Users Y/Y Growth Comments 363MM(1) +40% #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) 236MM(1) +135% #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) 405MM(5) +47% 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) 70MM(5) +23% $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) 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. Undermonetized Internet Usage Growth Drivers – Video + Social Networking + VoIP + Payments
  • 44. Younger Generations Drive Online Usage Changes 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 Social NetworkingBlogs (Sina Blog) Video / Music Online Gaming Knowledge Sharing Social Bookmarking
  • 45. Next Generation Consumer Technology Ecosystems = Cheap / Efficient / Fun / Disruptive 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. * Time Since Y/Y Applications Applications Platform Inception Users Growth Available Downloaded Skype 5.5 Yrs 405MM 47% -- -- YouTube 3.9 Yrs 363MM 40% -- -- Facebook 4.9 Yrs 236MM 135% 52K+ 308MM+ iTunes Store 8.0 Yrs 75MM -- 10MM+ 6B+ Nintendo Wii 2.2 Yrs 45MM 125% ~1K 189MM+ Apple Wireless Devices 1.6 Yrs 33MM 265% 25K 800MM+ iPhone (2.5G + 3G) 1.6 Yrs 15MM 301% 25K -- iPod Touch (Wi-Fi) 1.3 Yrs 13MM 239% 25K -- Amazon Kindle 1.1 Yrs -- -- 240K+ -- 45
  • 46. Video-Related IP Traffic Driving Growth – To 49% Consumer Internet Traffic in 2012E vs. 32% in 2008 Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. 0 5,000 10,000 15,000 20,000 2006 2007 2008 2009E 2010E 2011E 2012E TotalConsumerInternetTraffic(Petabytepermonth) Internet Video to TV Internet Video to PC Video Communications VoIP Gaming P2P Web, email, data 2007-2012 CAGR 104% 57% 44% 24% 30% 31% 34% Global Consumer Internet Traffic, by Segment 2006 – 2012E 44%44% 37%37% 33%33% 60%60% 25%25% 30%30% 13%13% 31%31% 17%17% 46
  • 47. 0 20,000 40,000 60,000 80,000 100,000 USA Internet Backbone, 2000 Year End YouTube, 5/08 China P2P Video Streaming, 1/08 IPTraffic(Terabytespermonth) (USA)(USA) (Global)(Global) 25,00025,000 TB / MoTB / Mo 33,00033,000 TB / MoTB / Mo 30,50030,500 TB / MoTB / Mo 100,000100,000 TB / MoTB / Mo Internet Traffic per Month Note: Monthly traffic are estimates by Cisco. Source: Cisco, Approaching the Zettabyte Era, 6/08. YouTube USA IP Traffic > 2000 Total USA Internet Traffic 47
  • 48. 48 • YouTube - 363MM unique global visitors, +40% Y/Y, 48B minutes, +92% Y/Y (1) ; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU… • YouTube = 68% of unique US video viewers + 43% of videos watched online + 30% of total minutes (2) 0 50 100 150 200 250 300 350 400 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 TotalUniqueVisitors(MM) 0 10 20 30 40 50 60 TotalMinutes(B) Total Unique Visitors (MM) Total Minutes (B) YouTube Global Traffic Source: (1) comScore global 1/09; (2) comScore Video Metrix (US) 1/09, Morgan Stanley Research Online Video – Traction High + Increasing
  • 49. 49 YouTube – New Portal(s) = Video Distribution Channel + Social Network Source: Google, YouTube. News & Politics - Most Viewed • ‘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? Sports - Most Viewed
  • 50. Video Monetization – YouTube = <$1 Per User(1) – Paid Search / Click-to-Buy / Pre-Post-In Video Roll / Interactive Note: (1) per year in 2008; average users per comScore global, revenue per our estimates. Source: YouTube. 50 Search for ‘iPhone 3G’… …ads for ‘invisible shield’ Creative / Interactive... ‘Wario Land: Shake It’ video breaks YouTube’s UI Like the music?... …click to buy from iTunes / Amazon mp3
  • 51. 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) 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 TotalUniqueVisitors(000) 0 20 40 60 80 100 120 140 TotalMinutes(MM) Total Unique Visitors (000) Total Minutes (MM) Hulu Global Traffic 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. 51
  • 52. 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 Source: Netflix. 52 Watch Movies Instantly on Your TV, via Xbox Live / TiVo / Roku
  • 53. 53 Social Networking – Significant Share Gains of Internet Traffic Rank Web site 2005 (1) 1 2 3 4 5 6 7 8 9 10 yahoo.com msn.com google.com ebay.com amazon.com microsoft.com myspace.com google.co.uk aol.com go.com Traffic rank is based on three months of aggregated historical traffic data from Alexa Toolbar users and is a combined measure of page views / users (geometric mean of the two quantities averaged over time). Rank Web site 2009 (2) 1 2 3 4 5 6 7 8 9 10 google.com yahoo.com youtube.com live.com facebook.com msn.com wikipedia.org blogger.com myspace.com yahoo.co.jp Alexa Global Traffic Rankings (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.
  • 54. Social Networking – Fast Growth + Low Penetration Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08. Global Internet Category Visitors Y/Y Growth & Penetration 54 0% 20% 40% 60% 80% 100% 0% 10% 20% 30% 40% 50% 60% Unique Visitors Y/Y Growth Penetration(%ofOnlineUsers) Social Networks Photos Online Gaming Reference Sports Auto Travel Instant MessangingGeneral News Business / Finance Multimedia / Video E-mailRetail Entertainment Search Portals World Wide Y/Y Visitor Growth = 10.4%
  • 55. 55Source: USC Annenberg School: Digital Future Report 2007. 0% 20% 40% 60% 80% 100% Internet Television Radio Newspaper Personal Source %ofUsersAge17+Responding Important/VeryImportant Importance as Source of Information 73%80% 68% 63% 63% The New Social Network = Personal Sources on Internet
  • 56. Messaging by Generation – Text…Facebook Wall…Email…Phone…US Postal Service 56 Brother (Rob - College) Wrote on my Facebook Wall Brother (Rob - College) Wrote on my Facebook Wall Wife (Melissa) Funny email Wife (Melissa) Funny email Brother (James - High School) Text Message via Mobile Brother (James - High School) Text Message via Mobile Mom (Victoria) Phone call (45 minutes!!!) Mom (Victoria) Phone call (45 minutes!!!) Grandparents (Dom & Ida) Birthday card with $25 Grandparents (Dom & Ida) Birthday card with $25 Kids (Zach 5 & Jackson 3 yrs.) Hugs and Kisses Kids (Zach 5 & Jackson 3 yrs.) Hugs and Kisses Birthday Boy (Tom Zawacki) Happy Birthday from my Family Birthday Boy (Tom Zawacki) Happy Birthday from my Family Source: Tom Zawacki – CEO of Lemonade.
  • 57. 57 6% 14% 8% 22% 35% 16% All Other Communications Social Connections Shopping & Travel Entertainment & Leisure Work, Business & Education Worldwide Share of Online Time (1) Category didn’t exist 3 years ago 12% 29% 42% 23% 0% 10% 20% 30% 40% 50% Yahoo! Mail Facebook %ofTotalMinutes Age 15-24 Age 45+ Connecting – Younger Users Via Social Networks + Older Users Via E-Mail? (2) Social Networking – Connectivity Changing…Is E-Mail Archaic? Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 1/09.
  • 58. 58 Facebook – Rapid User / Usage Growth 0 50 100 150 200 250 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 TotalUniqueVisitors(MM) 0 5 10 15 20 25 30 35 40 45 TotalMinutes(B) Total Unique Visitors (MM) Total Minutes (B) Facebook Global Traffic Source: comScore global 1/09, Facebook 2/09, Morgan Stanley Research. • 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.
  • 59. 59 Facebook - Connecting is Key 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. Genres of Facebook’s 261 Most Used Applications 9% 3% 3% 5% 5% 7% 10% 10% 11% 12% 26% Other Playing games Playing with digital pet Self expression Media sharing Sending gifts Categorizing friends Profile enhancement Playing social games Comparing yourself with others Enhanced communication
  • 60. Top 40 Apps' # of Apps # of Monthly Active w/ 1MM+ Category Applications % of Total Users (MM) MAUs Just For Fun 15,005 31% 137 37 Games 4,496 9 78 25 Sports 4,020 8 4 0 Education 2,424 5 37 5 Utility 2,287 5 20 2 Music 1,918 4 11 13 Chat 1,865 4 16 3 Dating 1,840 4 52 13 Messaging 1,716 4 30 8 Photo 1,571 3 36 3 Video 1,532 3 47 4 Business 1,520 3 1 0 Events 1,493 3 23 5 alerts 1,313 3 27 7 Fashion 1,155 2 5 1 Food & Drink 1,056 2 8 1 Politics 976 2 22 7 Travel 873 2 7 2 Money 553 1 1 0 Mobile 482 1 7 1 Classified 468 1 0 0 File Sharing 303 1 1 0 Overall* 48,549 204 66 Facebook – 15k+ Applications ‘Just For Fun’ / Top 40 Apps have 204MM+ Downloads 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
  • 61. 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 Picture / Video Updates on the Multimedia Wall Third-party Applications Now on Toolbar Online Chatting Function Source: Facebook 61 ‘Engagement Ads’ – Thump Up to Recommend to Friends
  • 62. 62 Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates. Source: Facebook. Social Networking – Facebook = $2 Per User(1) Opportunity to Get in Middle of Conversations Virtual Gift – $1 = One Wish …Friends Notified via News Feeds Become a Fan of …
  • 63. Facebook Mobile – Explosive User + Usage Growth • 20MM+ mobile active users in CQ4:08, > 4x Y/Y. • Mobile facebook users on average 50% more active than non-mobile facebook users. • 1MM users commented on their friends’ status changes on mobile within the first 24 hours of this feature’s launch. Source: Facebook presentation at Palm’s CES keynote. 63
  • 64. Note: Subscribers / ARPU data as of CQ3:08. Market Cap as of 1/15/08. *total excludes duplicates (mkt val); (1) China Netcom merged with China Unicom in 11/08; (2) AT&T & Verizon’s wireline ARPU is revenue per RGU (revenue generating unit) and include business lines; (3) BSNL is owned by the Indian government, thus with no market value. (5) Subscriber figure for Skype is registered user amount as of CQ4:08. Source: company reports, Morgan Stanley Research. Subscribers Y/Y Blended Y/Y Market Cap Rank Company Type Region (MM) Growth ARPU (US$) Growth ($B) 1 China Mobile Wireless China 450 22% $12 -8% $186 2 Vodafone Wireless Europe 280 10 35 5 108 3 China Telecom Wireline China 210 -10 8 4 28 4 America Movil Wireless LatAm 173 18 11 -5 50 5 Telefonica Moviles Wireless Europe / LatAm 172 20 41 -6 91 6 China Unicom Wireless China 133 13 6 -13 15 7 T-Mobile Wireless Europe / USA 127 8 21 -11 59 8 Orange Wireless Europe 118 12 44 0 65 9 China Unicom / Netcom (1) Wireline China 107 -4 10 30 15 10 Mobile Telesystem Wireless Europe 88 9 12 13 9 11 Bharti Airtel Wireless India 77 59 7 -15 25 12 AT&T Mobility Wireless USA 75 14 51 0 148 13 Telecom Italia Mobile Wireless Europe / LatAm 71 6 27 -4 27 14 Verizon Wireless Wireless USA 71 11 52 1 89 15 PT Telkom Wireless Asia 61 36 5 -20 11 16 AT&T (2) Wireline USA 56 -10 80 3 148 17 NTT DoCoMo Wireless Japan 54 2 66 -11 76 18 Turkcell Wireless Europe 51 12 17 13 11 19 NTT Wireline Japan 44 -0 34 -0 68 20 Sprint / Nextel Wireless USA 42 -9 53 -5 7 21 BT (UK) Wireline Europe 38 -2 38 4 14 22 Verizon (2) Wireline USA 36 -10 85 3 89 23 BSNL (3) Wireless India 36 24 7 -15 -- 24 Deutsche Telekom Wireline Europe 35 -6 29 -2 59 25 France Telecom Wireline Europe 33 -1 43 14 65 Total* 2.6B 10% $25 -1% $1,250B Wireless 2.1B 16 25 -3 977 Wireline 0.6B -7 28 5 486 Skype (5) 405MM Registered Users (+47% Y/Y) VoIP – Skype = #2 Global ‘Carrier’ + 8% of Cross-Border Calling Minutes 64
  • 65. Unified Communications For Consumers – Skype = Voice / Video / SMS On Your PC / Netbook / Cell Phone & More Skype on PC / Laptop Skype on Smartphones Skype on Netbooks / Internet Tablets Skype on … 3 SkypePhone Cordless Phone Wi-Fi Phone Source: Skype / eBay. 65
  • 66. 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
  • 67. 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 user- generated 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… 67Note: (1) Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte.
  • 68. • 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 Consumers Expect – Wisdom of Crowds / Rankings / Searchability 68Source: comScore global 1/09, Digg.com.
  • 69. Consumers Expect – Real-Time News / Opinions / Updates / Social Networking Follow / Blog On Twitter.com… On Facebook… • 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… Source: comScore global 1/09, Twitter.com, Morgan Stanley Research. 69 And On iPhone
  • 70. 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 Source: Foxnews.com. 70 Searchability User rating / popularity Upload from anywhere – UReport iPhone app
  • 71. Consumers Expect – Fun / Images / Insight from Others Find friends who share the visual DNA Find hotels via Hotels.com Visualiser • 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. Source: comScore global 12/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 71
  • 72. • 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 on Your Map Find Interesting People Nearby Explore Places With Geo- tagged Photos / User Reviews Consumers Expect – Location-Aware Social Networking Source: Loopt, Morgan Stanley Research. 72
  • 73. Consumers Expect – Real-Time Video Streaming On Their Mobiles` March Madness in Your Palm • 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. Source: CBS Sports, Apple iTunes. 73 Bracket Information Recaps / Highlights Live Scores / Stats
  • 74. Consumers Expect – Price Transparency…in <30 Seconds Step 1: Tap Search • 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 Source: Big In Japan, Morgan Stanley Research. 74 Step 2: Scan Barcode Step 3: See Results Step 4: Click to Buy
  • 75. 75 Consumers Expect – Personalization Flip Mino HD Video Camera Footjoy.com – Myjoys Picturedoor.co.uk Source: footjoy.com, theflip.com, picturedoor.co.uk, mymms.com MMs.com – MyM&M’s
  • 76. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 GlobalOnlineAdvertisingRevenue($MM) Google Yahoo! Microsoft AOL Global Online Advertising Revenue (1) 48%48% 33%33% 10%10% 7%7% 20%20% 67%67% 6%6% 10%10% Online Advertising – Google Share = 67% in CQ4:08 vs. 48% in CQ4:05 (1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research 76
  • 77. Offline CPMs Materially Higher Than Online CPMs = Potential for Significant Dislocation / Arbitrage CPM Comparisons Source: Media Dynamics, 6/08, Morgan Stanley Media Research. 77 Broadcast TV Newspaper Cable TV Spot TV Internet Magazine Radio Out-of-Home CPM <$2 $6 $10 $14 $18 $22 $26 $30 >$34
  • 78. 78 Online CPMs Challenge = Significant Ramp of ‘New’ Social Inventory 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 higher- than-normal users Y/Y growth and lower / flat ad revenue per user growth. Source: Morgan Stanley Research. CQ4 Annualized CQ4 Ad Revenue CQ4 Unique CQ4 Total Pages CQ4 Total Global Ad Revenue per 1,000 Users ('000) Viewed (MM) Minutes (MM) per User Page Views Total Internet 996,143 6,701,135 4,063,148 $50.07 (1) $1.86 (1) Y/Y Growth 23% 11% 10% -1% 9% Google.com (2) 481,450 114,137 60,381 $28.05 (3) $29.58 (3) Y/Y Growth 18% 1% 6% 3% 21% Yahoo! 558,135 311,673 355,942 $8.33 (3) $3.73 (3) Y/Y Growth 14% -1% 6% -12% 1% MySpace 122,338 127,360 55,591 $4.68 (3) $1.12 (3) Y/Y Growth 14% -10% 12% -18% 4% Microsoft 641,771 216,661 568,438 $4.14 $3.06 Y/Y Growth 20% -8% 18% -11% 16% AOL 269,705 80,232 117,919 $5.27 $4.42 Y/Y Growth (4) - - - - - YouTube 351,457 129,440 133,930 $0.68 $0.46 Y/Y Growth 48% 62% 98% 1% -8% (5)
  • 79. 79 0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000 3/05 9/05 3/06 9/06 3/07 9/07 3/08 Impressions(MM) $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50 CPM Banner Ads Impressions Banner Ads CPM 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 3/05 9/05 3/06 9/06 3/07 9/07 3/08 Impressions(MM) $0 $5 $10 $15 $20 $25 $30 $35 $40 CPM Rich Media Impressions Rich Media CPM Ad Supply > Ad Demand – Ad Impressions Growing Rapidly…CPMs Declining Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research. U.S. Banner Ad Impressions & CPM, CQ1:05-CQ2:08 U.S. Rich Media Impressions & CPM, CQ1:05-CQ2:08
  • 80. 80Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 12/08, Morgan Stanley Research. 6% 4% 35% 1% 1% 1% 27% 30% 9% 6% 13% 4% 11% 4% 2% 7% 7% 18% 4%5% 2% 3% 2% 0% 10% 20% 30% 40% Search engine m arketingO rganic traffic Affiliate program s Em ailto prospecting lists Shopping com parison engines C atalogs N ew portaldeals O ffline advertising Bannerads TraditionalportaldealsSweepstakes Socialnetw orking sites C o-registration on otherW eb sites 2006 2007 N/AN/A %Customersacquiredfromsource % of New Online Customers for Online Retailers / Marketing Spend Mix N/A Search Should Continue to Become More Important – 35% Y/Y Google Query Growth, 12/08
  • 81. 0% 20% 40% 60% 80% 100% 2002 2003 2004 2005 2006 2007 U.S.InternetAdSpend%Mix Search Advertising Banner Ads Rich Media Classified Advertising E-mail and Other U.S. Internet Advertising Mix 52%52% 20%20% 10%10% 12%12% 7%7% 15%15% 14%14% 15%15% 9%9% 47%47% Search = Dramatic Share Gains of Online Ad Spending Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research. 81
  • 82. Paid Search Placement = Top ROI For Marketers 0% 10% 20% 30% 40% 50% 60% 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 Survey Question: "What are the top-three most- efficient 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
  • 83. Search Engine Marketing (SEM) = Taking Budgets Away From Other Advertising Forms 0% 5% 10% 15% 20% 25% 30% 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 Survey Question: "From which marketing/IT programs are you shifting budget away and moving it to your search marketing programs?" Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=317. 83
  • 84. Video Search – Advertisers Showing Rising Interest YESYES –– 54%54% NONO –– 46%46% Survey Question: Would you be interested in contextually targeted advertising attached to video search results? Survey Result: Breakdown: If yes, how interested are you in the following? (Scale of 1-5, 1=lowest, 5=highest) 7% 7% 11% 10% 27% 29% 33% 34% 22% 20% 0% 20% 40% 60% 80% 100% Video Based Text Based 1 2 3 4 5 Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229. 84
  • 85. U.S. Internet Ad Revenue Share by Pricing Model, 2000 - 2007 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 Performance-Based Advertising Gaining Share +20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue 10% 12% 21% 37% 41% 41% 47% 51% 0% 15% 30% 45% 60% 2000 2001 2002 2003 2004 2005 2006 2007 %ShareofTotalRevenue Performance CPM Hybrid Search Revenue Share
  • 86. Advertisers = Willing to Bid More For Behavioral Targeting Survey Question: 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)? Survey Result: YESYES –– 75%75% NONO –– 25%25% Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229. 86
  • 87. 87 E-Commerce - USA Online Penetration = 4-6% and Rising 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). Categories’ Online Penetration of US Retail Market, 2007 1%Food / beverage / grocery10%Movie tickets 2%Auto / auto parts10%Apparel / footwear 4%Pet supplies11%Jewelry 5%Appliances / tools12%Flowers / cards21%Gift cards / certificates 6%OTC meds / personal care13%Office supplies24%Music / video 8%Sporting goods / apparel18%Consumer electronics24%Books 9%Cosmetics / fragrances19%Baby products27%Other event tickets 9%Home furnishings19%Toys / video games45%Computer products >20% 10 - 20% <10%
  • 88. 88 Amazon.com’s Recommendation Engine = Web’s Most Effective Search Engine + Advertiser? Source: Amazon.com, Google Amazon.com search + recommendation engine: Leveraging data What other customers are thinking What other customers are saying What other customers are buying New formats: Kindle What Amazon recommends
  • 89. 89 Amazon.com – Following Its Customers By Leading With Technology Source: Amazon.com • Search on any keyword (e.g. item name, author, artist, etc.) or ISBN / UPC code Amazon TextBuyIt 1 2 Text search keywords to ‘AMAZON’ (262966) 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
  • 90. 90 -10% 0% 10% 20% 30% 40% 50% CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 Y/YGrowth US Adjusted Retail E-Commerce Sales Amazon.com North America Revenue US Total Retail Sales Amazon.com vs. US Retail E-Commerce Sales (1) ~25ppts (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. Amazon.com Key Operating Metrics Amazon.com Should Continue to Gain Share High Customer Satisfaction / Recommendation Engine / Impressive Metrics CQ1:08 CQ2:08 CQ3:08 CQ4:08 Revenue $4,135 $4,063 $4,264 $6,704 Y/Y Change 37% 41% 31% 18% Active Customers 79 82 85 88 Y/Y Change 19% 18% 17% 16% TTM Revenue per Active Customer $202 $210 $215 $218 Y/Y Change 17% 19% 18% 12% Active Sellers ('000) 1,300 1,420 1,405 1,500 Y/Y Change 17% 18% 17% 18% Total Units 196,135 190,113 202,566 308,606 Y/Y Change 31% 32% 30% 28% Kindle Books Available ('000) 115 140 185 230 (All metrics in MMs, except for revenue per customer data and when noted)
  • 91. 91 2) Mobile – Innovation in wireless products / services accelerating – changes should create + destroy significant wealth Technology / Internet
  • 92. 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-of- use + 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 web- enabled 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. 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. Mobile – New Computing Cycle With Wireless Game Changer Products with Extraordinary Ease-of-Use 92
  • 93. 93 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…
  • 94. 94 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.
  • 95. Europe 25% North America 8% ROW 13% Latin America 11% Asia / Pacific 43% Note: ROW = Rest of World; Source: ITU, Morgan Stanley Research Mobile Subscribers – 3.3B 2007 Internet Users – 1.4B 2007 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 Europe 24% North America 18% ROW 6% Latin America 10% Asia / Pacific 42% 95
  • 96. Japan Internet Users by Access Device 40% 58% 73% 81% 81% 83% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2002 2003 2004 2005 2006 2007 %ofJapanInternetUsers % using PC % using Mobile Source: Japan Ministry of Internal Affairs and Communication. 96 Japan Shows Way in Mobile Internet Usage – Mobile Nearly Matches PC
  • 97. 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09 TotalPagesTranscodedperMonth(MM) Source: Opera Software, Morgan Stanley Research. Global Opera Mini Browser Pages Transcoded per Month, 1/06 – 1/09 Opera Mobile Web Browser = Strong Mobile Internet Growth - ~20MM Global Users, 7.6B Page Views (+325% Y/Y, Accelerating), 1/09 − Remote Server first pre- processes requested web pages − 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 A full web experience + 50% faster 97
  • 98. (All connection numbers in 000s) 2007 2008 2009E 2010E 2011E 2012E 2013E Western Europe 80,558 153,064 255,379 355,360 430,425 487,109 528,030 3G Penetration 17% 31% 49% 67% 80% 88% 94% Japan 72,691 90,949 102,851 111,544 116,917 121,234 124,191 3G Penetration 72% 86% 93% 97% 98% 99% 99% North America 57,679 86,135 121,338 155,759 186,090 221,214 262,947 3G Penetration 21% 29% 39% 47% 54% 62% 71% Asia / Pacific (ex. Japan) 48,027 81,928 150,020 277,333 444,346 655,544 933,717 3G Penetration 4% 5% 8% 13% 18% 25% 33% Middle East & Africa 11,095 21,193 34,650 67,171 116,047 174,103 246,432 3G Penetration 2% 4% 6% 10% 16% 22% 30% Eastern Europe 5,980 15,042 33,120 58,151 94,173 137,913 186,896 3G Penetration 2% 4% 8% 13% 21% 31% 42% South & Central America 3,082 9,455 20,611 38,898 71,846 122,082 168,742 3G Penetration 1% 2% 5% 8% 15% 24% 32% Total 279,113 457,765 717,971 1,064,215 1,459,844 1,919,200 2,450,956 3G Penetration 8% 12% 16% 22% 29% 36% 44% Western Europe + North America Hit 3G Penetration Inflection Point in 2007 – 2008, Global in 2010 3G* Enabled Handset & Penetration by Region, 2007 – 2013E Note: Regions ranked by 2008 absolute numbers of 3G-enabled devices in use. 3G* technologies include WCDMA, HSPA, TD- SCDMA, 1xEV-DO, LTE and WiMax. Source: OVUM, Morgan Stanley Research. 98
  • 99. 99 Apple Changed Mobile Game…With Impressive UI + 2.5G! i – NOT – A - Phone
  • 100. Apple iPhone 3G – Winning Consumers Via Simple + Useful Applications Speak Mandarin? Lonely Planet Mandarin Phrasebook will say it for you. Catchy Tunes? Shazam will listen and find the song for you. Source: Apple. 100
  • 101. Apple iPhone – Digital Content Ecosystem Augmented by iTunes Store iTunes App Store on PC App Store on iPhone Source: Apple 101
  • 102. 391 787 1,476 2,256 3,442 5,009 7,110 10,978 16,476 173 410 747 1,036 1,480 2,238 2,994 4,228 5,761 0 5,000 10,000 15,000 20,000 25,000 At Launch (07/11/08) 1 Month Later (08/11/08) 2 Month Later (09/11/08) 3 Month Later (10/11/08) 4 Month Later (11/11/08) 5 Month Later (12/11/08) 6 Month Later (01/11/09) 7 Month Later (02/11/09) 7 Month Later (03/11/09) TotalAppsAvailable 0% 20% 40% 60% 80% 100% 120% M/MGrowth Paid Apps Free Apps M/M Growth iTunes App Store – Rapid Ramp to 25K Apps, 74% Paid(1) iTunes App Store # of Apps, Paid vs. Free, 7/11/08 – 3/11/09 Note: (1) Apple announced on 3/17 that there’re 25K+ apps, chart shows data through 3/11/09, when there were 22K apps available Source: Apple iTunes, Morgan Stanley Research. 102
  • 103. iTunes App Store – 14% Games, 12% Books, 11% Entertainment + 800MM Downloads (~13 per User) 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. 103 # of Apps % of Total # of Paid Apps Paid as % of Category Total Average Price of Paid Apps Games 3,326 14% 2,001 60% $2.23 Books 2,837 12 2,675 94 3.82 Entertainment 2,587 11 1,716 66 1.44 Utilities 2,067 9 1,474 71 2.66 Education 1,929 8 1,662 86 5.16 Lifestyle 1,404 6 1,023 73 2.21 Travel 1,258 5 1,064 85 5.09 Reference 1,177 5 905 77 6.52 Productivity 1,027 4 802 78 3.59 Sports 895 4 664 74 3.11 Music 838 4 559 67 3.90 Navigation 727 3 594 82 6.88 Healthcare & Fitness 704 3 577 82 2.94 Business 601 3 422 70 9.08 Photography 534 2 399 75 2.32 Finance 511 2 366 72 5.11 Social Networking 404 2 176 44 2.31 News 343 1 151 44 1.89 Medical 280 1 237 85 22.01 Weather 127 1 88 69 3.02 Total 23,576 17,555 74% $3.93 Category
  • 104. Apple iPhone – Data Usage 6-10x Higher than Average USA Mobile Users App Downloads per iPhone 100x Higher than non-iPhones 14% 9% 10% 8% 9% 7% 5% 9% 4% 3% 3% 79% 70% 66% 66% 57% 54% 40% 39% 38% 37% 29% 0% 20% 40% 60% 80% 100% Em ail G am es*W eb Search M usic B row sing N ew s SocialN etw orking R estaurantG uides InstantM essaging PersonalBankingM obile Video O nline Shopping %ofU.S.MobileSubscribers Average U.S. Mobile Users iPhone Users 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. Mobile Content Consumption 104
  • 105. USA Mobile Carriers – Data ARPU Growth Offsetting Declining Voice ARPU $50 $50 $49 $47 $46 $45 $46 $44 $43 $43 $43 $41 $40 $40 $39 $3 $4 $5 $5 $6 $6 $7 $8 $8 $9 $10 $10 $11 $12 $12 $0 $10 $20 $30 $40 $50 $60 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Voice ARPU Data ARPU Total Average ARPU Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08 Source: Simon Flannery, Morgan Stanley Research. 105
  • 106. Global Wireless Data ARPU – Japan in Clear Lead, USA Catching Up Faster Than Others Data ARPU as Percentage of Total, CQ1:05 – CQ3:08 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 26% 26% 26% 26% 28% 28% 29% 29% 31% 32% 33% 35% 37% 39% 39% 6% 7% 9% 10% 11% 12% 13% 15% 16% 18% 18% 20% 21% 22% 24% 0% 10% 20% 30% 40% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 DataARPUas%ofTotal Japan Western Europe Asia (ex. Japan) USA $54 CQ3:08 Blended ARPU (US$) : $5 - $37$37 $51 ($95) (iPhone)
  • 107. Quarterly Worldwide Smartphone Sales by Operating System 0 5 10 15 20 25 30 35 40 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 UnitsShipped(MM) Symbian RIM Microsoft Apple Linux Palm Others Source: Gartner. 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 EMEA North America APAC ex. Japan Japan Latin America CQ3:08Dist.ofSmartphoneSales Symbian Dominates Smartphones But Losing Share – Apple / RIM Gaining Ground 107
  • 108. 108 Technology / Internet 3) Emerging Markets – Pacing next wave of technology adoption – leading players in many emerging markets aren’t the usual suspects…
  • 109. Broadband + Mobile + Internet = Especially High Global Growers 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 2002 Y/Y 2007 Y/Y Global 2007 Net Category Growth Rate Growth Rate Market Size Additions Broadband Subscribers 78% 23% 349MM 64MM Mobile Subscribers 20 20 3,319MM 563MM Internet Users(1) 26 16 1,352MM 182MM Financial Cards(2) 12 11 8,016MM 804MM Installed PCs 12 8 900MM 66MM Cable / Satellite TV Subscriptions 8 6 761MM 40MM GDP per Capita 2 3 22K 1K Population 2 1 6,501MM 77MM Telephone Lines 5 -0 1,277MM -4MM
  • 110. 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 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. 0 100 200 300 400 500 600 700 2001 2002 2003 2004 2005 2006 2007 2008E InternetUsers(MM) 0% 10% 20% 30% 40% 50% 60% 70% 80% Y/YGrowth Top 10 Emerging Markets Top 10 Developed Markets Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth 110
  • 111. 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 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. 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2001 2002 2003 2004 2005 2006 2007 2008E MobileSubs(MM) 0% 10% 20% 30% 40% 50% 60% Y/YGrowth Top 10 Emerging Markets Top 10 Developed Markets Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth 111
  • 112. 112 Rank Country Relative Weighting 2004 Rank Country Relative Weighting 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 USA China Japan Germany UK India France Italy S. Korea Canada 9.0 8.2 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1 China USA Japan Germany India UK France Russia S. Korea Brazil 2007 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 TMT (Technology / Media / Telecom) Update = China #1 + Rest of BRIC Gaining Ground 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.
  • 113. Internet User Net Additions – China, Brazil, Pakistan, Columbia, India, Iran, Russia Impressive Note: Penetration is per person. Source: ITU, Morgan Stanley Research. 113 2007 Net Internet Users Added 2007 Penetration Rank Country (000's) Y/Y Growth Level 1 China 73,000 53% 16% 2 United States 9,800 5 73 3 Brazil 7,400 17 26 4 Pakistan 5,500 46 11 5 Colombia 5,395 80 25 6 India 5,000 7 7 7 Iran 5,000 28 32 8 Russia 4,311 17 21 9 Germany 3,900 10 52 10 France 3,553 12 55 11 Vietnam 3,188 22 21 12 Canada 3,000 12 85 13 Egypt 2,620 44 12 14 Indonesia 2,424 23 6 15 United Kingdom 2,400 6 66 16 Mexico 2,248 11 22 17 Thailand 2,003 18 20 18 Nigeria 2,000 25 7 19 Poland 1,915 14 42 20 Venezuela 1,580 38 21
  • 114. 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. Mobile Subscriber Net Additions – ‘Emerging’ Markets Providing Growth 2007 Net Mobile Subs 2007 Penetration Rank Country Added (000's) Y/Y Growth Level(1) 1 China 86,228 19% 41% 2 India 67,570 41 21 3 Pakistan 44,346 129 50 4 Brazil 21,062 21 64 5 Russia 19,326 13 120 6 Indonesia 18,032 28 36 7 United States 13,596 6 85 8 Iran 12,910 77 42 9 Egypt 12,046 67 41 10 Germany 11,499 13 118 11 Mexico 11,237 20 65 12 Thailand 10,654 26 78 13 Turkey 9,313 18 90 14 Argentina 8,891 28 103 15 Saudi Arabia 8,718 44 117 16 Vietnam 8,225 53 28 17 Nigeria 8,073 25 28 18 Philippines 7,306 17 57 19 Peru 6,645 76 55 20 Algeria 6,565 31 80 114
  • 115. Non-US Markets Lead Usage Penetration in Many Categories Source: Morgan Stanley Research Social Networking: Brazil / S. Korea E-commerce: Germany Mobile Payments + TV: Japan Broadband: S. Korea Online Gaming: China Microtransactions via SMS: Philippines Online Advertising: UK 115
  • 116. 116 4) Cloud Computing – Access + storage need + virtualization driving change Technology / Internet
  • 117. 117 Storage Growth +62% in 2007E – Consumer > Professional Demand Source: Seagate, Katy Huberty, Morgan Stanley Research 0 20,000 40,000 60,000 80,000 100,000 120,000 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E Petabytes Home Professional Global Storage Sold Annually
  • 118. Cloud Computing – Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model Amazon.com Salesforce.com 118Source: Amazon.com, Salesforce.com, Morgan Stanley Research
  • 119. 119119Source: Getty Images Google Data Center – The Dalles, Oregon ‘A Giant Supercomputer’ – A Datacenter Behind the Cloud
  • 120. 120 1. sarah palin 2. beijing 2008 3. facebook login 4. tuenti 5. heath ledger 6. obama 7. nasza klasa 8. wer kennt wen 9. euro 2008 10. jonas brothers Google Zeitgeist – Predictive Power of Data Underutilized 1. obama 2. facebook 3. att 4. iphone 5. youtube 6. fox news 7. palin 8. beijing 2008 9. david cook 10. surf the channel Fastest Rising (US) Economy – Layaway Makes a Comeback Trendsetters 2008 – Going Green Source: Google Year-End Zeitgeist, 2008. Fastest Rising (global) Politics – U.S. Presidential Election
  • 121. 121 Amazon Web Services – Providing Cheap / Reliable Storage in Cloud 0 50 100 150 200 250 300 350 400 450 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 TotalRegisteredDevelopers(000) 0% 2% 4% 6% 8% 10% 12% 14% 16% Q/QGrowth Total Registered Developers (000) Q/Q Growth Amazon Web Services • 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 $0.10 / instance-hour). Source: Amazon.
  • 122. 122 Closing Thoughts 1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time
  • 123. Huge Market Active, Missionary Founders Great Management Team, Culture Constant Improvement Insane Customer Focus Big Gross Margin (1) Annuity -Like Model Strong Board Simple, Focused Mission X X X X XX X X X XX X X X X X X X X O X X X X X X 34 65 18 77 83 56 79 81 Apple Cisco Dell eBay Google Intel Microsoft Yahoo! X X X X X X XX X X X X X X X X X X X X X XX X X X X X X X X X X X X X X X X X X X 2% of Public Tech Companies Create 100% of Wealth* – A Look at Some of Biggest Winners of Our Day Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’ 123
  • 124. Top 15 Global Internet Companies (US$ in Millions, except per share data, as of 3/19/09) 3/19/09 Market C2008 Total Return % 52-Week Rank Company Region Price (US$) Value ($MM) Revenue ($MM) 2006 2007 2008 2009 YTD High Low 1 Google US $324 $102,288 $21,796 11% 50% -56% 5% $602 $247 2 Amazon.com US 69 29,414 19,166 -16 135 -45 34 92 35 3 Yahoo! US 14 18,836 7,209 -35 -9 -48 11 30 9 4 eBay US 12 15,345 8,541 -30 10 -58 -15 33 10 5 Yahoo! Japan Japan 251 14,188 2,633 -48 13 -10 -38 548 229 6 Softbank Japan 13 13,158 27,891 -54 6 -14 -28 21 7 7 Activision US 10 12,915 3,026 25 72 -42 14 19 8 8 Tencent China 7 11,964 998* 233 113 -15 3 9 4 9 Baidu China 173 5,920 469 79 246 -67 32 383 101 10 Rakuten Japan 464 5,802 2,757 -52 6 28 -26 672 414 11 Electronic Arts US 18 5,699 4,480 -4 16 -73 11 55 14 12 Alibaba China 1 5,034 439* -- -- -80 38 2 0 13 NHN Korea 101 4,583 1,658* 38 97 -57 -2 252 59 14 NetEase China 22 2,772 424 33 1 17 1 27 15 15 Expedia US 7 2,121 2,937 -12 51 -74 -10 26 6 Global Top Internet Companies by Market Value 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
  • 125. 125 CBS Television CBSSports.com CBS Mobile 2007 Football Season • Plasma Screen TV – HD Quality Event • PC Screen – Fantasy, Stats, and Injury Reports • Mobile Screen – Highlights, Scores Thursday Kickoff Patriots vs. Colts NFL Sundays Old Media (TV) / New Media (Internet + Mobile) – Complementary Platforms 2007 Football Season Source: CBS Sports Interactive.
  • 126. Younger Generation (18-41) – Spend Most Time on Internet / Cell Phone vs. Other Media % of Media Consumption Seniors (Age 63+) Younger Generation (Age 18 - 41) 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. Newspaper - 3% Magazine - 4% Video Game - 6% Movie - 11% Cell Phone - 15% Radio - 14% Internet - 25% TV - 22% Newspaper - 13% Magazine - 8% Video Game - 2% Movie - 8% TV - 38% Internet - 12% Radio - 13% Cell Phone - 13% 126
  • 127. 32% 25% 17% 13% 7% 6% 32% 8% 9% 20% 6% 0% 5% 10% 15% 20% 25% 30% 35% TV Internet Radio Mobile Phone Newspaper Magazine %ofTotalMediaConsumptionTime orAdvertisingSpending Time Spent Ad Spend % of Time Spent in Media vs. % of Advertising Spending, USA 2008E <1% Media Time Spent vs. Ad Spend Out of Whack – Internet / Mobile (upside…) vs. Newspaper / Magazine / TV (downside…) 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
  • 128. 128 Newspapers include Classifieds. Promotions ($116B) include: incentives ($30B), promotional products ($27B), point-of- purchase ($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. Direct Telephone Promotions Newspapers Classifieds Direct Mail Broadcast TV Cable TV Internet / Online Radio Yellow Pages Outdoor $110 116 46 15 61 44 27 21 20 16 7 107 115 56 56 114 112 80 71 113 114 114 $1,032 1,011 818 260 532 390 327 288 172 141 63 2007 Advertising Spending ($B) Households (MM) Ad Spending / Household ($)Medium Total Average $469 47 $4,774 477 Internet Advertising – Lots of Ad Share to Gain $288 Per Home for Internet vs. $818 for Newspapers Implies Upside Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research. 128
  • 129. 129 Offline Advertising Revenue Declines Accelerating – Newspaper Redux? Every time we have seen a recession, we have endured this panic… I recognize that we may 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. 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) Cable TV Network TV Local TV --3%3% --10%10% --18%18% --5%5% -30% -20% -10% 0% CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E AdRevenueY/YChange Print Newspaper --15%15% --30%30% Traditional Media Ad Revenue Y/Y Growth, CQ1:07 – CQ1:09E
  • 130. Search = Still Lots of Share to Grab U.S. Internet Search Spending vs. Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007 $122 $299 $889 $2,133 $4,113 $6,910 $9,430 $12,282 $68,402 $61,224 $60,890 $63,265 $67,115 $69,923 $65,146 $70,348 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 2000 2001 2002 2003 2004 2005 2006 2007 AdSpend($MM) Internet Search Combined Classified, Yellow Pages & Newspaper Source: IAB, search spending adjusted by our estimates; Classified, Yellow Pages & Newspaper spending per MS Media team. Morgan Stanley Research. 130
  • 131. 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. Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research 131 0% 2% 4% 6% 8% 10% 12% 0% 2% 4% 6% 8% 10% 12% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Online Ad Spending as % of Total Ad Spending U.S. Adjusted E-Commerce as % of Total Retail Sales (1) (2) U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007 %ofTotal 20-yrAverageY/YGrowth 20-yr Average Total Ad Spending & Retail Sales Y/Y Growth = 5% USA Online Ad Spend + E-Commerce Penetration – Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back!
  • 132. 2007 2007 Total Ad Internet Ad Internet Rank Company Industry Spending ($MM) Spending ($MM) % of Total (2) 1 Procter & Gamble Consumer $5,230 $81 2% 2 AT&T Telecom 3,207 136 6 3 Verizon Telecom 3,016 189 9 4 General Motors Automotive 3,010 212 10 5 Time Warner Media 2,962 98 6 6 Ford Automotive 2,525 164 10 7 GlaxoSmithKline Healthcare 2,457 29 2 8 Johnson & Johnson Consumer 2,409 49 3 9 Walt Disney Media 2,293 141 10 10 Unilever Consumer 2,246 47 5 11 Sprint Nextel Telecom 1,903 71 5 12 General Electric Conglomerate 1,791 79 7 13 Toyota Automotive 1,758 57 5 14 Chrysler Automotive 1,739 53 5 15 Sony Technology 1,737 72 7 16 L'Oreal Consumer 1,632 12 2 17 Sears Retail 1,628 23 3 18 Kraft Foods Consumer 1,508 36 3 19 Bank of America Financial 1,491 72 18 20 Nissan Automotive 1,423 34 4 Largest USA Advertisers Under Spend on Internet Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average 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. Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research 132
  • 133. 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
  • 134. 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
  • 135. 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
  • 136. We are Undergoing the Greatest Media Transformation in History 136
  • 137. Amazon.com = Greatest Advertiser / Agency of Past Decade? 137 • 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.
  • 138. Source: Advertising Age, Wikipedia Note: 2 ads before 1900 are included in 1900s decade. Alka-Seltzer ads are included in 1960s decade. 138 0% 5% 10% 15% 20% 25% 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s %ofTop100Ads Advertising Age – Best Campaigns 1900-2000 – Most Fertile Decades = 1950-1980
  • 139. Source: Advertising Age. 139 These Campaigns Were Really / Really Awesome – They Sold Lots of Product Rank Company Commercial Ad Agency Year 1 Volkswagen Think Small Doyle Dane Bernbach 1959 2 Coca-Cola The pause that refreshes D'Arcy Co. 1929 3 Marlboro The Marlboro Man Leo Burnett Co. 1955 4 Nike Just do it Wieden & Kennedy 1988 5 McDonald's You deserve a break today Needham, Harper & Steers 1971 6 DeBeers A diamond is forever N.W. Ayer & Son 1948 7 Absolut Vodka The Absolut Bottle TBWA 1981 8 Miller Lite Beer Tastes great, less filling McCann-Erickson Worldwide 1974 9 Clairol Does she...or doesn't she? Foote, Cone & Belding 1957 10 Avis We try harder Doyle Dane Bernbach 1963 11 Federal Express Fast talker Ally & Gargano 1982 12 Apple Computer 1984 Chiat/Day 1984 13 Alka-Seltzer Various ads Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene 1960s, 1970s 14 Pepsi-Cola Pepsi-Cola hits the spot Newell-Emmett Co. 1940s 15 Maxwell House Good to the last drop Ogilvy, Benson & Mather 1959 16 Ivory Soap 99 and 44/100% Pure Proctor & Gamble Co. 1882 17 American Express Do you know me? Ogilvy & Mather 1975 18 U.S. Army Be all that you can be N.W. Ayer & Son 1981 19 Anacin Fast, fast, fast relief Ted Bates & Co. 1952 20 Rolling Stone Perception. Reality. Fallon McElligott Rice 1985 21 Pepsi-Cola The Pepsi generation Batton, Barton, Durstine & Osborn 1964 22 Hathaway Shirts The man in the Hathaway shirt Hewitt, Ogilvy, Benson & Mather 1951 23 Burma-Shave Roadside signs in verse Allen Odell 1925 24 Burger King Have it your way BBDO 1973 25 Campbell Soup Mmm mm good BBDO 1930s
  • 140. 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
  • 141. 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
  • 142. 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
  • 143. 143 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. Disclosure Section
  • 144. 144 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, Not- Rated 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. Disclosure Section Coverage Universe Investment Banking Clients (IBC) Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category Overweight/Buy 714 32% 216 38% 30% Equal-weight/Hold 1003 44% 246 43% 25% Not-Rated/Hold 33 1.5% 9 1.6% 27.3% Underweight/Sell 507 22% 100 18% 20% Total 2,257 571 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.
  • 145. 145 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. 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