Economy / Internet Trends
                                                                  December 19, 2008



         ...
Outline
•   Economy
    1. Recession – a long time coming, how long will it last?
    2. Advertising Spending – closely ti...
Economy




1) Recession – a long time coming, how long will it last?
  Ten years of inflated growth to be followed by ___...
10 Years Ago –
I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998




                                ...
Roots of Economic Challenge?
10+ Years of Rising Home Ownership + Declining Interest / Savings Rates

                    ...
Market & Regulatory Pressure Made Home Buying
            More Accessible…1998

  In addition to a buoyant economy, the ov...
10 Years of Rising Home Prices – Up ~2x

                                   USA Real Home Price & Building Cost Indexes, %...
Systemic Leverage Helped Pace ‘Easy Money’
        Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasur...
USA Debt Mix Shift –
                  Mortgages / ABS / Financials Up

               1984                               ...
USA Mortgage Delinquency @ Record High 6.99%

                                        USA Mortgage Delinquency Rates, CQ1:...
-0.5% Q/Q USA GDP Growth in CQ3 / Consumer Spending Fell 3.7%
              Biggest Q/Q Decline Since 1980 – October < Sep...
Discouraging Monthly Trends –
                                      Amplified by Internet-Driven Information Transparency?...
Global GDP Growth Forecasts =
                        Downward / Decelerating Bias
                                       ...
USA Manufacturing Contracting Rapidly –
                     Lowest Level (and Declining) Since 1982 for PMI Index

      ...
Unemployment Rising Rapidly But 110 Basis Points Below Previous Peaks
                                      More Often Tha...
Stock Market = Leading Indicator of Economic Growth
Russia off 73% vs. 12-Month Peak, Oil -71% / China -63% / India -52% /...
S&P500 –
                      Key Spending Sectors Have Taken Big Hits

                         Total Mkt               ...
S&P500 Down 40-50% 2x in 183 Year History – 2008 / 1931
                                          Bad Years Often Follow G...
5 Weeks in History – Financial Services Restructuring
                                                         (~$3T in US...
Consumer Wealth Destruction = ~15% –
        56%+ of USA Household Assets in Real Estate + Stocks

USA Household Asset Bre...
Extraordinary Market Volatility = Treacherous Investment Environment
                                     Good News = Vola...
Economy




                   2) Advertising Spending –
closely tied to GDP growth…challenges for Internet but likely
   ...
Retail Sales Growth Rates Slowing

                                            Retail Sales vs. Adjusted E-Commerce Sales
...
Advertising Growth Rates Slowing

                                         U.S. Advertising Spending by Medium, Y/Y % Chan...
Advertising Spending & GDP Growth =
                                                        High Correlation of 81%
      ...
Simple Regression Analysis:
                                     1) Ad spend growth 3x sensitivity of real GDP growth
    ...
Online Ad Spending Bad News =
                                           From 2000 to 2002, USA Spending Fell 27%

       ...
Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs.
                                                   Trend L...
Intel – Technology Spending Proxy
                          Revised CQ4E Guidance Implies -16% Y/Y, Worst Since CQ4:01
   ...
Financial Services – Revenue Back to 10 Year Ago Levels
                           For Now, CQ3E of -13% Y/Y Well Below +7...
USA Corporate Sales Quickly Falling Behind Forecasts

           Overall Corporate Sales Survey Results, CQ1:01 – CQ4:08

...
Consumer Spending Trending Lower

                 Overall Consumer Spending Results – 6/06 - 12/08

  Would you say your ...
Obama Presidency – USA in Need of a Forced Upgrade,
                There’s No Time Like a Crisis to Make Changes

       ...
Technology / Internet




                        1) Digital Consumer –
Our bet = At margin, consumers spend more – not le...
Discretionary Spending –
                                           Broadband Internet Among Last Things to Go
           ...
Consumer Surpassed Business IP Traffic in 2008E –
              58% IP Traffic CAGR, 2005-2011E

                         ...
YouTube + Facebook Gained ~600 Basis Points of Relative
 Share in Past 2+ Years While Yahoo! + MSN Lost Share

           ...
Undermonetized Internet Usage Growth Drivers –
 Video + Social Networking + VoIP + Payments
          Users      Y/Y Growt...
Next Generation Platforms =
                Easy-to-Use + Applications + Users

                         Time Since       ...
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
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Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
Mary Meeker Economy & Internet Trends Dec/19/2008
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Transcript of "Mary Meeker Economy & Internet Trends Dec/19/2008"

  1. 1. Economy / Internet Trends December 19, 2008 mary.meeker@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. 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 2. Mobile – Innovation in wireless products / services accelerating 3. Emerging Markets – Pacing next wave of technology adoption 4. Cloud Computing – Access / storage need / virtualization driving change • Closing Thoughts 1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time… 2
  3. 3. Economy 1) Recession – a long time coming, how long will it last? Ten years of inflated growth to be followed by ____? Hope for 1 tough year but plan for 5? 3
  4. 4. 10 Years Ago – I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998 Source: YouTube. 4
  5. 5. Roots of Economic Challenge? 10+ Years of Rising Home Ownership + Declining Interest / Savings Rates USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008 70% June 2004: US home ownership = 73MM 20% 68% 16% U.S. Interest Rate & Personal Savings Rate U.S. Home Ownership Rate 66% January 1993: HUD began promoting broader home ownership. US home ownership = 62MM 12% 64% 8% 62% 4% 60% 58% 0% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 U.S. Home Ownership Rate U.S. Interest Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline U.S. Personal Savings Rate Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. 5 Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.
  6. 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 Note: Quoted in Gary Gorton’s NBER Working Paper Series “The Panic of 2007” (Working Paper 14358), p.5. Source: Harvard University, Joint Center for Housing Studies, 1998. 6
  7. 7. 10 Years of Rising Home Prices – Up ~2x USA Real Home Price & Building Cost Indexes, % Change 1965 - 2007 90% 80% 70% 60% % Change From 1965 Level 50% 40% 30% 20% 10% 0% -10% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S. Real Home Price Index U.S. Real Building Cost Index Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller. 7
  8. 8. Systemic Leverage Helped Pace ‘Easy Money’ Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries 400% U.S. Total Credit Market Debt as % of GDP 70% & Foreign Ownership % of U.S. Treasuries, 2008: 3.6x GDP 1920 - 2008 60% 350% Foreign Ownership of U.S. Treasuries, 1931: 2.7x GDP 50% Total Debt as % of GDP % of Total Market Cap 300% 40% 250% 30% 200% 20% 150% 10% 100% 0% 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008 U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization Note: Foreign ownership of US treasuries data N/A before 1965. Source: Federal Reserve Board, Ned Davis Research, Bridgewater, Morgan Stanley Research. 8
  9. 9. USA Debt Mix Shift – Mortgages / ABS / Financials Up 1984 2008 U.S. Total Debt: $7T U.S. Total Debt: $52T Total Financial Debt: $1T Total Financial Debt: $17T Mortgage Pools 9% ABS Issuers Other 8% Mortgage Pools – 4% 11% ABS Issuers – 0% Other – 15% Other Financial Government 10% 15% Household Other Financial 26% 15% Government 25% Corporate 14% Corporate 19% Household 27% Note: Other financial debt include those issued by commercial banks, insurance companies, broker-dealers, Government Sponsored Enterprises (GSEs), REITs, Savings & Loans institutions, credit unions, and finance companies, etc. Debt amounts 9 are nominal, ABS is Asset Backed Security. 2008 data as of CQ3. Source: Federal Reserve, Morgan Stanley Research.
  10. 10. USA Mortgage Delinquency @ Record High 6.99% USA Mortgage Delinquency Rates, CQ1:98 – CQ3:08 20% 15% Delinquency Rates (%) 10% 5% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 All U.S. Mortgages Prime Mortgages Subprime Mortgages Note: National delinquency rate of 6.99% in CQ3:08 is 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. 10
  11. 11. -0.5% Q/Q USA GDP Growth in CQ3 / Consumer Spending Fell 3.7% Biggest Q/Q Decline Since 1980 – October < September < August < July U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE) Q/Q % Change, 2005-2008 6% 5% 4% 3% Q/Q Growth Rates 2% 1% 0% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 -1% -2% -3% -4% U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth Note, Real GDP and real PCE are inflation- and seasonally adjusted. CQ3:08 data is preliminary, may differ from final reported #s. 11 Source: BEA, Morgan Stanley Research.
  12. 12. Discouraging Monthly Trends – Amplified by Internet-Driven Information Transparency? Abercrombie & Fitch Same-Store Sales UK Retail Same-Store Sales Y/Y % Change, 1/08 – 11/08 Y/Y % Change, 1/08 – 11/08 10% 10% 6% 5% 5% 3% Comparable Store Sales Y/Y % Change Comparable Store Sales Y/Y % Change 2% 2% 0% 0% 0% 0% -1% -2% -1% -1% -1% -1% -2% -2% -3% -5% -3% -5% -7% -10% -10% -10% -11% -15% -14% -15% -20% -20% -20% -25% -25% -30% -28% -30% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Note: Same-store sales are sales in stores open more than one year. Source: Abercrombie & Fitch, British Retail Consortium. 12
  13. 13. Global GDP Growth Forecasts = Downward / Decelerating Bias Difference from IMF Forecasts, 11/08 10/08 IMF Forecasts Country / Region 2006 2007 2008E 2009E 2008E 2009E USA 2.8% 2.0% 1.4% -0.7% -0.1% -0.8% Euro zone 2.8 2.6 1.2 -0.5 -0.1 -0.7 UK 2.8 3.0 0.8 -1.3 -0.2 -1.2 China 11.6 11.9 9.7 8.5 -0.1 -0.8 India 9.8 9.3 7.8 6.3 -0.1 -0.6 Russia 7.4 8.1 6.8 3.5 -0.2 -2.0 Brazil 3.8 5.4 5.2 3.0 -- -0.5 Developed Markets(1) 3.0 2.6 1.4 -0.3 -0.1 -0.8 Emerging Markets(2) 7.9 8.0 6.6 5.1 -0.3 -1.0 World 5.1 5.0 3.7 2.2 -0.2 -0.8 Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 11/08. Morgan Stanley Research. 13
  14. 14. USA Manufacturing Contracting Rapidly – Lowest Level (and Declining) Since 1982 for PMI Index 80 U.S. PMI (Purchasing Mangers Index), 1/48 – 11/08 PMI > 50 = 70 Expansion 60-year Average = 52.8 60 ISM PMI Index (%) 50 40 Oct 2001 Feb 1991 PMI < 50 PMI=40.8 PMI=39.4 Nov 2008 = May 1982 30 PMI=36.2 Contraction PMI=35.5 20 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 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. 14
  15. 15. Unemployment Rising Rapidly But 110 Basis Points Below Previous Peaks More Often Than Not, Peak Unemployment = Good Time to Invest S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008 10000 30% 25% 1000 S&P 500 Index Value (Log Scale) Unemployment Rate 20% 100 15% 10% 10 5% 1 0% 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Recessions S&P 500 Index Price Unemployment Rate Unemployment Peak Note: Unemployment rates from 1928–1943 are annual estimates from John Dunlop and Walter Galenson’s Labor in the Twentieth Century (1978); data unavailable between 1943-1948; Post 1948 unemployment data from BLS, peaks are: 9/49 - 7.9%; 9/54 - 6.1%; 7/58 - 7.5%; 5/61 – 7.1%; 8/71 - 6.1%; 5/75 - 9.0%; 11/82 - 10.8%; 6/92 - 7.8%; 7/03 - 6.3%. 15 Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.
  16. 16. Stock Market = Leading Indicator of Economic Growth Russia off 73% vs. 12-Month Peak, Oil -71% / China -63% / India -52% / Japan -45% / S&P500 -41% 600 2006 2007 2008 500 Indexed Value (base = 100) 400 300 200 100 0 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 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 Note: all indices start at a value of 100 on 12/16/05; data as of 12/18/08; Source: FactSet. 16
  17. 17. S&P500 – Key Spending Sectors Have Taken Big Hits Total Mkt % Change Cap ($B) 2008 Peak to S&P Sector 12/18/08 2006 2007 YTD Current (1) Market Cap Leaders Financials 1,061 16% -20% -53% -62% JPMorgan, Wells Fargo Consumer Discretionary 686 9 -18 -38 -49 McDonald's, Walt Disney Materials 242 10 14 -44 -47 Monsanto, DuPont Industrials 846 8 7 -42 -47 GE, United Technologies Information Technology 1,242 11 12 -44 -46 Microsoft, IBM Telecom Services 293 32 -12 -36 -42 AT&T, Verizon Energy 1,026 14 36 -39 -36 Exxon, Chevron Utilities 317 17 6 -31 -34 Exelon, Southern Health Care 1,153 1 1 -26 -29 Johnson & Johnson, Pfizer Consumer Staples 1,121 8 10 -21 -20 Wal-Mart, Procter & Gamble (2) S&P 500 Total 7,987 11% 1% -39% -43% Note: (1) % Change from S&P 500 peak on 10/9/07 to 12/18/08; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change. Source: Bloomberg, Morgan Stanley Research. 17
  18. 18. S&P500 Down 40-50% 2x in 183 Year History – 2008 / 1931 Bad Years Often Follow Good Years 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 2008 1873 1860 1859 1849 1915 1950 YTD 2002 1854 1853 1856 1848 1909 1945 1974 1841 1851 1844 1847 1901 1938 1958 1954 -40% 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% Note: S&P 500 2008 YTD performance as of 12/18/2008, S&P 500 historical info from 1825 to 2007. 18 Source: Value Square Asset Management, Yale University.
  19. 19. 5 Weeks in History – Financial Services Restructuring (~$3T in US Aggregate Sector Market Value 1/1/07…now ~$1T) Dow Jones Industrial Average, 9/8/08 – 10/14/08 September 7 September 14 September 16 September 22 September 25 September 29 October 3 October 14 11,600 GSEs / Lehman AIG MS / MUFG JPM Fortis Wells Fargo Leading 11,400 Bankruptcy Nationalized Investment Acquires Nationalized Acquires Banks Enter Washington 11,200 Plan WaMu Wachovia Preferred BofA GS / B&B Stock 11,000 Acquires ML Berkshire Nationalized $700Bn Purchase Investment Dow Jones Industrial Average TARP Program 10,800 10,600 UK Bank Bail 10,400 Out 10,200 Santander / Sovereign 10,000 9,800 9,600 9,400 9,200 9,000 8,800 (23%) 8,600 8,400 United States Europe Note: Aggregate sector market value is the combined market cap for all companies in the S&P500 financials index, $2.9T as of 1/1/08, $1.2T as of 12/8/08. 19 Source: Morgan Stanley IBD; Bloomberg.
  20. 20. Consumer Wealth Destruction = ~15% – 56%+ of USA Household Assets in Real Estate + Stocks USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances, % Change from CQ1:07 10% Credit Market Instruments 7% Others 0% 3% % Change from CQ1:07 Deposits -10% 12% Real Estate 38% -20% Pension Reserves -30% 22% Equities + Mutual Funds 18% -40% CQ1:07 CQ3:07 CQ1:08 CQ3:08 S&P/Case-Shiller Home Price Index S&P 500 Index Note: Median household income in 2007 was $50,233, per U.S. Census Bureau. 56% accounts only real estate + equities / mutual funds; many pension funds also invest in the U.S. equities market, thus actual exposure to these asset classes will likely be higher. Wealth destruction of approx. 15% is calculated by multiplying the asset allocation of real estate & equities / mutual funds with respective market indices’ declines from CQ1:07 – 2008 YTD. Asset allocation % is 2007 average. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 20
  21. 21. Extraordinary Market Volatility = Treacherous Investment Environment Good News = Volatility Has Begun to Decline Chicago Board Options Exchange (CBOE) Volatility Index, 1990 - 2008 80 70 60 VIX Index Value (%) 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options. Source: Morgan Stanley IBD; Bloomberg. 21
  22. 22. Economy 2) Advertising Spending – closely tied to GDP growth…challenges for Internet but likely not as draconian as 2000-2002? 22
  23. 23. Retail Sales Growth Rates Slowing Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 – CQ3:08 40% 30% Y/Y Growth 20% 10% 0% CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 US Adjusted Retail E-Commerce Sales US Total Retail Sales Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: US Dept. of Commerce (CQ3:08), Morgan Stanley Research. 23
  24. 24. Advertising Growth Rates Slowing U.S. Advertising Spending by Medium, Y/Y % Change 25% 20% 15% 10% Y/Y Growth Rate 5% 0% -5% -10% -15% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Overall Cable+Broadcast TV Magazines Newspapers Internet* Outdoor Radio *Note: Internet is adjusted to include search ad spending - TNS excludes search revenue from Internet ad spending, thus unadjusted data may under-report online ad spending / growth. Source: TNS, IAB, Morgan Stanley Research. 24
  25. 25. Advertising Spending & GDP Growth = High Correlation of 81% U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007 20% 15% U.S. Ad Spend vs. GDP, Y/Y Growth 10% Median Y/Y Ad Spend Growth Rate = 5% 5% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 -5% 1991 Ad Growth = -2% 2001 Ad Growth = -12% -10% U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth Source: Zenith Optimedia, IMF, Morgan Stanley Research. 25
  26. 26. Simple Regression Analysis: 1) Ad spend growth 3x sensitivity of real GDP growth 2) If GDP flat in 2009E, ad spend could decline ~4% Y/Y U.S. Advertising Spending vs. Real GDP y = 3.0263x – 0.0394 20% 1986 – 2007 R2 = 0.6553 y – ad spend growth x – real GDP growth 15% Ad Spend Y/Y Growth If real GDP Ad spend Y/Y growth Y/Y growth 10% is… could be… 5% 11% 4 8 5% 3 5 2 2 1 -1 0% 0 -4 -1% 0% 1% 2% 3% 4% 5% -1 -7 -2 -10 -5% -3 -13 Real GDP Y/Y Growth -4 -16 -5 -19 -10% U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) 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. 26
  27. 27. Online Ad Spending Bad News = From 2000 to 2002, USA Spending Fell 27% $25,000 U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007 250% $21,206 200% $20,000 U.S. Online Ad Spending ($MM) $16,879 150% Y/Y Growth Rate $15,000 $12,542 100% $10,000 $9,475 $8,225 $7,134 $7,267 50% $6,009 $4,621 $5,000 0% $1,921 $907 $267 $0 -50% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Internet Ad Spending Y/Y Growth Rate Source: IAB, Morgan Stanley Research. 27
  28. 28. Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs. Trend Line However, Q/Q Pattern Looks a Bit Like Early 2001 U.S. Online Advertising Spending & Y/Y Growth Rates, CQ1:96-CQ3:08 $6,000 300% U.S. Online Spending & Search Revenue ($MM) 250% $5,000 Total U.S. Online Spend Y/Y Growth 200% $4,000 150% $3,000 100% $2,000 50% $1,000 0% $0 -50% 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. Online Ad Spending Spending on Search Y/Y Growth Online Ad Spend Polynomial Trendline Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research. 28
  29. 29. Intel – Technology Spending Proxy Revised CQ4E Guidance Implies -16% Y/Y, Worst Since CQ4:01 -12% Q/Q in Seasonally Strong CQ4, Worst in History? $12,000 Intel Revenue & Y/Y Growth Rate, CQ1:97 – CQ4:08E 40% 30% $10,000 Average Y/Y Growth = 6% 20% $8,000 Revenue ($MM) Y/Y Growth 10% $6,000 0% $4,000 -10% $2,000 -20% $0 -30% CQ4:08E CQ1:97 CQ3:97 CQ1:98 CQ3:98 CQ1:99 CQ3:99 CQ1:00 CQ3:00 CQ1:01 CQ3:01 CQ1:02 CQ3:02 CQ1:03 CQ3:03 CQ1:04 CQ3:04 CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 Revenue Y/Y Growth Note: CQ4:08E based on the midpoint of company’s revised guidance on 11/12/08. Source: Intel, FactSet. 29
  30. 30. Financial Services – Revenue Back to 10 Year Ago Levels For Now, CQ3E of -13% Y/Y Well Below +7% 20-yr Average $350,000 Revenue & Y/Y Growth Rate for S&P500 Financial Services Companies 50% $300,000 40% 20-yr Average 30% $250,000 Y/Y Growth = 7% 20% Revenue ($MM) Y/Y Growth $200,000 10% $150,000 0% $100,000 -10% $50,000 -20% $0 -30% 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 Revenue Y/Y Growth Note: S&P500 has 84 financial services companies as of 12/9/08. CQ3:08E are FactSet mean estimates. Source: FactSet. 30
  31. 31. USA Corporate Sales Quickly Falling Behind Forecasts Overall Corporate Sales Survey Results, CQ1:01 – CQ4:08 How is your company doing with regard to meeting its sales plan revenue objectives for the current quarter? Are you coming in above plan, even, or below plan? 60% CQ3:01 CQ4:08 50% Above Plan Below Plan 51% 50% 40% 30% 20% 10% 0% CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1:07 CQ4:07 CQ3:08 Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08 31
  32. 32. Consumer Spending Trending Lower Overall Consumer Spending Results – 6/06 - 12/08 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% Spending More Spending Less 12/08 50% 60% 40% 30% 20% 10% 0% Jun- Aug- Nov- Jan- Mar- May- Jun- Aug- Sep- Nov- Jan- Feb- Apr- May- Jul- Aug- Sep- Nov- Dec- 06 06 06 07 07 07 07 07 07 07 08 08 08 08 08 08 08 08 08 Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 12/11/08. 32
  33. 33. Obama Presidency – USA in Need of a Forced Upgrade, There’s No Time Like a Crisis to Make Changes Economic Recovery Policy Proposals • Transportation / Infrastructure (~$225B) – Create millions of jobs via single largest new investment in our national infrastructure since creation of federal highway system in 1950s. • Technology / Internet (~$100B) – Renew America’s information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how we’ll strengthen America’s competitiveness in the world. • Manufacturing / Clean Tech (~$100B) – Extend funding to manufacturing innovators; Advance next generation of bio-fuels & infrastructure / accelerate commercialization of plug-in hybrids, etc. • Hospital / Health Care (~$10B) – Ensure hospitals are connected to each other through Internet / make sure every doctor’s office and hospital is using cutting edge technology and electronic medical records. • Public / School Buildings (~$70B) – Make public and school buildings more energy-efficient by replacing old heating systems and installing efficient light bulbs / put new computers in classrooms. Source: Change.gov, WSJ.com. 33
  34. 34. Technology / Internet 1) Digital Consumer – Our bet = At margin, consumers spend more – not less – time on Internet in difficult times – it’s a cheap / efficient / transparent thrill! Undermonetized social networks / video / VoIP driving powerful usage growth – opportunity for innovative marketers to capitalize on low CPMs 34
  35. 35. Discretionary Spending – Broadband Internet Among Last Things to Go Economic Vulnerability Score 10 Economic Vulnerability Scores for Items of Discretionary Expenditure 9 10 = Most Vulnerable / 0 = Least Vulnerable 8 7.2 7.2 6.8 6.6 6.6 6.5 7 6.4 6.2 5.9 5.6 6 5.5 5 4.7 3.9 4 3.5 3 2 1 0 s e g et lls es r gs ks s bs e s ic s on ea in ic ie m rn rt ca m on ea in pu bl et w er Ph ho po te ga r am ot tr br sm e oc ve In or rs on ec ur ile fo & co nd gr G co nd s he yo El ph ob s or ub ke ce ok ba or ot d le M to s cl an ee ni lo bo ad te ie or ts ga f s, w or s ro e or s, en lf nt rie lin or ss or go B VD ra em re te d- ce or s au itu p, ,D ay le xe ov ac m hi st oi rn lid ic Fi pr iu rs ,t re g, us fu ho em im be re in to M ew th Ca on em g Pr t lo in ou N al m ay C ak on ng aw ub M rs oi cl ng Pe G lth oi ea G H 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. 35
  36. 36. Consumer Surpassed Business IP Traffic in 2008E – 58% IP Traffic CAGR, 2005-2011E Global IP Traffic 30,000,000 25,000,000 IP Traffic (TB / month) 20,000,000 Consumer IP traffic 15,000,000 surpasses Business 10,000,000 5,000,000 0 2005E 2006E 2007E 2008E 2009E 2010E 2011E Total Consumer Business Source: Cisco Systems, Global IP Traffic Forecast and Methodology; Mobility segment (0.1% of traffic in 2007) not displayed 36
  37. 37. YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share Global Minute Share, 6/06 – 10/08 14% 12% % Share of Global Minutes 10% 8% 6% 4% 2% 0% 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 Yahoo.com Msn.com Google.com YouTube.com Facebook.com Source: ComScore Global 10/08, Morgan Stanley Research. 37
  38. 38. Undermonetized Internet Usage Growth Drivers – Video + Social Networking + VoIP + Payments Users Y/Y Growth Comments #3 site in global minutes; 5B views of online video in the US (Americans watched a total of 12.6B videos / 591MM hours online in 9/08); 344MM(1) +50% #2 global search engine – search queries on YouTube reached 9.2B in 8/08 (+123% Y/Y), surpassing Yahoo! sites with 8.5B searches (+2% Y/Y).(1,2,3,6) #5 site in global minutes; 140MM+ active users; 50%+ users outside of college; 52K+ 182MM(1) +112% applications + 95% of Facebook members have used at least one(1,4) If ‘carrier’ then #2 behind China Mobile; $1.55 annualized revenue per registered user (-3% 370MM(5) +51% Y/Y); 2.2B Skype Out minutes (+54% Y/Y); 16.0B Skype-to-Skype minutes (+63% Y/Y)(5) $15B total payment volume (TPV), +28% Y/Y, higher than eBay’s global gross merchandise 65MM(5) +19% volume; Off-eBay payment volume +49% Y/Y to 51% of TPV(5) Source: (1) comScore global 10/08; (2) comScore Video Metrix 8/08; (3) YouTube; (4) Facebook; (5) eBay CQ3, (6) comScore qSearch, 8/08. Morgan Stanley Research. 38
  39. 39. Next Generation Platforms = Easy-to-Use + Applications + Users Time Since Y/Y Applications Applications Platform Inception Users Growth Available Downloaded Facebook 4.8 Yrs 182MM 112% 48K+ 308MM+ Apple Wireless Devices 1.5 Yrs 30MM 244% 100K+ 300MM+ iPhone (2.5G + 3G) 1.5 Yrs 14MM 291% 100K+ -- iPod Touch (Wi-Fi) 1 Yr 16MM 210% 100K+ -- YouTube 3.8 Yrs 344MM 50% -- -- Amazon Kindle 1 Yr -- -- 200K+ -- Note: Kindle’s 200k+ apps refer to book titles available, ~12% of sales of these books were on Kindle. iPhone user estimates exclude channel inventory + duplicates from iPhone 2.5 G users who upgraded to 3G, Y/Y growth from CQ4:07 to CQ4:08E; YouTube, Facebook users per comScore global 10/08, Y/Y growth from 10/07 – 10/08. Facebook application downloads are cumulative monthly active users for the 200 most-used applications, per AppData (as of 12/18/08). Source: Amazon, Apple, AppData, Facebook, Youtube, Morgan Stanley Research. 39
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