Internet Trends031808

Slide 1: Internet Trends March 18, 2008 mary.meeker@ms.com / david.joseph@ms.com / anant.thaker@ms.com Morgan Stanley is currently acting as a financial advisor to Microsoft Corp. ("Microsoft") in relation to their proposed offer to acquire Yahoo! Inc. ("Yahoo!"), as announced on February 1, 2008. The proposed offer is subject to definitive documentation, due diligence, the consent of Yahoo! shareholders, required regulatory approvals and other customary closing conditions. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. Please refer to the notes at the end of the report. Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800- 624-2063 to request a copy of this research. This presentation can be found at www.morganstanley.com/techresearch. For analyst certification and other important disclosures, refer to the Disclosure Section.

Slide 2: Internet Trends • Usage Patterns • Social Networking • Widget-ization + Component-ization • Measurability + Transparency + Customer Satisfaction • Video • Monetization • Mobile • Emerging Markets • Recession 2

Slide 3: Changes in Usage Patterns 3

Slide 4: Consumers Leading Way – 58% CAGR in IP Traffic, 2005E-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 4 Source: Cisco Systems, Global IP Traffic Forecast and Methodology; Mobility segment (0.1% of traffic in 2007) not displayed

Slide 5: Consumer Information Technology – Advancing Faster Than Enterprise Fifteen years ago, enterprise technology was higher-quality than consumer technology. That's not true anymore. It used to be that you used enterprise technology because you wanted uptime, security and speed. None of those things are as good in enterprise software anymore [as they are in some consumer software]. Douglas Merrill Google Chief Information Officer, 3/18/08 5 Source: Interview with Vauhini Vara, ‘The Wall Street Journal’, 3/18/08

Slide 6: YouTube + Facebook Page Views > Yahoo! or Google – Massive Transition in Available Ad Units & Supply > Demand Alexa Global Traffic – Relative Page Views 10 Daily Page Views (%) 8 6 4 2 0 2002 2003 2004 2005 2006 2007 2008 6 Source: Alexa Global Traffic as of 3/12/08

Slide 7: Social Networking – Fast Growth + Low Penetration Worldwide Online Category Growth vs. Penetration Category Penetration (% of Online Users) Visitor Growth by Category (1/07-1/08) 7 Source: comScore ‘Digital World – State of the Internet’ 3/08

Slide 8: Social Networking – Significant Share Gains of Internet Traffic Alexa Global Traffic Rankings 2005 (1) 2008 (2) Rank Rank Web site Web site 1 yahoo.com 1 yahoo.com 2 msn.com 2 youtube.com 3 google.com 3 live.com 4 ebay.com 4 google.com 5 amazon.com 5 myspace.com 6 microsoft.com 6 facebook.com 7 myspace.com 7 msn.com 8 google.co.uk 8 hi5.com 9 aol.com 9 wikipedia.org 10 go.com 10 orkut.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). (1) Rankings as of 12/31/05, excludes Microsoft Passport; (2) Rankings as of 3/12/08 8 Source: Alexa Global Traffic Rankings, Morgan Stanley Research

Slide 9: Social Networking – Connectivity Changing…Is E-Mail Becoming Archaic? Worldwide Share of Connecting – Younger Users Via Social Online Time (1) Networks + Older Users Via E-Mail? (2) 6% 38% 14% 40% 37% 35% % of Total Minutes 8% 30% Category 23% didn’t exist 3 years ago 20% 16% 10% 16% 22% 0% All Other Yahoo! Mail Facebook Communications Social Connections Age 15-24 Age 44+ Shopping & Travel Entertainment & Leisure Work, Business & Education 9 Source: (1) comScore ‘Digital World – State of the Internet’ 3/08; (2) comScore global 1/08

Slide 10: Next Generation Assets – YouTube + Facebook + Skype + PayPal Users Y/Y Growth Comments #3 site in global minutes; 51% of users go to YouTube weekly or more; 50% watch all 258MM(1) videos to the end; ongoing copyright +94% challenges; 52% of 18-34 year-olds share videos with friends / colleagues often(1,3) #4 site in global minutes; 67MM+ active users; >50% of active users return daily; 20K 101MM(1) +305% applications + 95% of Facebook members have used at least one(1,4) $1.67 annualized revenue per registered user (+9% Y/Y) on peer-to-peer network; 1.6B 276MM(2) +61% Skype Out minutes (+10% Y/Y); 11.9B Skype- to-Skype minutes (+25% Y/Y)(2) Payment volume +35% Y/Y; On-eBay / off- eBay payment volume +17% / +66% Y/Y (to 57MM(2) +16% 44% of TPV); Average transaction size of $68.88 (+10% Y/Y)(2) 10 Source: (1) comScore global 1/08; (2) eBay CQ4, Morgan Stanley Research; (3) YouTube; (4) Facebook

Slide 11: Social Networking – Changing the Way People Think About ‘Presence’ 11

Slide 12: Internet + Personal Sources = Most Importance Sources of Information…Essence of a Social Network Internet – Importance as Source of Information 100% 80% 73% % of Users Age 17+ Responding 80% Important / Very Important 68% 63% 63% 60% 40% 20% 0% Internet Television Radio Newspaper Personal Source 12 Source: USC Annenberg School: Digital Future Report 2007

Slide 13: Facebook – Rapid User / Usage Growth • 101MM visitors +305% Y/Y (67MM+ active users), 20B minutes (#4 globally behind Yahoo!, Live, and YouTube), +363% Y/Y; 250K new registrations per day since 1/07; >50% of active users return daily (Facebook 3/08, comScore 1/08) • 55K+ regional / work-related / collegiate / high school networks (>50% outside of college); Fastest growing demographic is those 25+ years old; 85% market share of 4-year US universities (Facebook 3/08) • 14MM+ photos uploaded daily; 6MM+ active user groups on site (Facebook 3/08) • Top non-US active users: UK (8MM+), Canada (7MM+), Turkey, Australia, France, Sweden, Norway, Columbia, and South Africa (Facebook 3/08) Facebook Global Traffic 120 25 100 20 Total Unique Visitors (MM) Total Minutes (B) 80 15 60 10 40 5 20 0 0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Total Unique Visitors (MM) Total Minutes (B) 13 Source: comScore global 1/08, Facebook 3/08, Morgan Stanley Research

Slide 14: Facebook – Top Applications • In 5/07, Facebook opened its platform to third-party developers, allowing anyone to create widgets for use on Facebook pages • 20K applications, 859MM installations, 34MM usages per day since APIs opened – may be unprecedented ramp (adonomics.com 3/08) • Early to understand that individuals had the ability to innovate faster than it could, while users would govern quality / value as they customized their profiles Application Company Installs (% Active Users) Super Wall RockYou! 28MM (8%) Top Friends Slide 26MM (7%) FunWall Slide 25MM (9%) SuperPoke! Slide 21MM (2%) Flixster Movies 20MM (3%) RockYou! Likeness 16MM (2%) (1) Facebook Video 16MM RockYou! Hug Me 13MM (2%) iLike iLike 12MM (3%) (2) N/A Quizzes 12MM (1%) 14 (1) Active user data unavailable; (2) E. Diep / J. Winterhalter; Source: adonomics.com 3/12/08

Slide 15: Facebook – Why is it Growing Faster than MySpace? • Facebook offers a social network that is both standardized + self-controlled / flexible – a highly personalized first-stop portal for online connectivity – users can program their pages with growing number of drag-and-drop applications (aka widgets) • Users like the ability to express themselves + connect with friends in a protected environment where they know / trust people in their network + don’t feel exploited / spammed by intrusive ads Less instrusive ads Personalized ? News Feed Cleaner UI ‘Friends’ section more prominent Personalized ad platform ? 15 Source: MySpace, Facebook

Slide 16: Facebook – ‘Presence’ Via Mobiles 24x7 16 Source: Facebook; C. Messina on flickr

Slide 17: Facebook Ads – Monetizing Word of Mouth / Conversations Facebook prompt… User restaurant rating entered …Appears on Facebook Becoming a ‘fan’ profile / News Feed appears on News / Mini-Feed 17 Source: Facebook, New York Times

Slide 18: Music – Monetizing Word of Mouth Radiohead Nine Inch Nails • Ghosts I-IV online release – 800K • In Rainbows ‘pay what you want’ online transactions + $1.6MM sales in first week (1) release – higher profit to the band than traditional record? Global Downloads (2) Paid 38% Free 62% $9 $8.05 Average $ Spent $6.00 $6 $4.64 $3.23 $2.26 $3 $1.68 $0 Global US Non-US Paid downloads All downloads 18 Source: (1) Billboard 3/14/07, screenshots from Nine Inch Nails website; (2) comScore study 11/5/07, screenshots from Radiohead website

Slide 19: Widget-ization + Component-ization of Web – Users in Control of What They Want When They Want It 19

Slide 20: Not Your Father’s ‘Widget’ A Web widget can be best described as a mini application that can add functionality to your web page, blog, social profile, etc. If you find a widget that you like, you simply copy and paste some code and add it to the HTML of your web page. Photo galleries, news, videos, advertising, mp3 players and pregnancy countdown tickers! You name it, there is probably a widget that does it. David Lenehan, ReadWriteWeb Yahoo! – Weather Channel – Amazon.com – Finance for iPhone Rock You – Forecast for iGoogle ‘Giver’ for Facebook ‘Super Wall’ for Facebook 20 Source: ReadWriteWeb, RockYou!, Yahoo!, Weather Channel, Google, Amazon.com, Facebook

Slide 21: iGoogle + Yahoo! Mobile Add a tab + customize 3rd party widgets Search ‘gadgets’ in Yahoo! Go 3.0 Gmail Weather Movie Maps showtimes News Wikipedia YouTube videos 21 Source: Google, Yahoo!

Slide 22: The BBC! – @ www.bbc.com + Facebook + YouTube… 22 Source: BBC

Slide 23: In Recession, Measurability + Transparency + Customer Satisfaction May Be More Important Than Ever 23

Slide 24: Personalization + Targeting Improvements – Driving Material Revenue Amazon.com recommendation engine: Google ads: Leveraging data Improvements in relevance What other What other customers are customers thinking are buying What other customers are doing What other customers are saying 24 Source: Amazon.com, Google

Slide 25: Google Zeitgeist – Predictive Power of Data Fastest Rising (global) Fast Gainers by Quarter - 2007 Fastest Rising (US) 1. iphone 1. iphone 2. badoo 2. webkinz 3. facebook 3. tmz 4. dailymotion 4. transformers 5. webkinz 5. youtube 6. youtube 6. club penguin 7. ebuddy 7. myspace 8. second life 8. heroes 9. hi5 9. facebook 10. club penguin 10. anna nicole smith 25 Source: Google Year-End Zeitgeist, 2007

Slide 26: Lots of Servers…Lots of Interactions…Lots of Data Google Data Center – The Dalles, Oregon 26 Source: The Financial Times 1/5/08

Slide 27: Search Impact – Still Early Stage & 66% Y/Y Google Query Growth (CQ4) % of New Online Customers for Online Retailers / Marketing Spend Mix (2005) % Customers acquired from source 50% 36% 29% 40% 30% 11% 20% 10% 7% 5% 3% 10% 3% 1% 0% ls s g ts ls s c s ne er tin m ea ffi lis ea og th ra gi tra ke ld ld al g O en og in ar rta at rta ic ct pr m C g an po po pe in te ne rg pp os al ia ew O gi on ho fil pr en N Af i ti -s o ch ad lt on ai ar Tr is Em Se r pa om C 27 Source: The State of Retailing Online 2006 (Forrester Research), comScore global 12/07, Morgan Stanley Research

Slide 28: Amazon.com – Continues to Gain Online + Offline Share Amazon.com vs. US Retail E-Commerce Sales(1) 45% 40% Key Y/Y Growth Metrics – C2007 35% CQ1 CQ2 CQ3 CQ4 30% ~23ppts Y/Y Growth Revenue 32% 35% 41% 42% 25% Active Customers 15 17 17 19 20% TTM Revenue / Active 12 13 15 17 15% Customer 10% Units 23 25 32 33 5% 0% CQ1:02 CQ1:03 CQ1:04 CQ1:05 CQ1:06 CQ1:07 US Adjusted Retail E-Commerce Sales Amazon.com North America Revenue (1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; 28 Source: Amazon.com (CQ4:07), US Dept. of Commerce (CQ4:07), Morgan Stanley Research

Slide 29: While Only 13% of Top 15 Online Retailers are Internet Pure-Plays, Biggest $ Grower = Amazon.com 2006 2006 Online Global 2006 Online Global Sales Rank Company Sales (US$MM) Y/Y Growth as % of Total Sales 1 Amazon.com $10,710 26% 100% 2 Staples 4,900 29 27 3 Office Depot 4,300 13 29 4 Dell 3,965 * 6 7 5 HP Home & Home Office 3,055 * 8 3 6 OfficeMax 2,849 * 11 32 7 Sears Holdings 2,376 * 10 4 8 CDW 2,001 13 29 9 SonyStyle.com 1,690 * 4 0.5 10 Newegg.com 1,500 15 100 11 Best Buy 1,425 * 12 4 12 J.C. Penney 1,300 25 7 13 Wal-Mart 1,260 * 20 0.4 14 QVC 1,257 24 18 15 Apple Computer 1,136 * 39 6 29 * Denotes ‘Internet Retailer’ estimate; Source: Internet Retailer Report (2006)

Slide 30: Video 30

Slide 31: Ongoing Traction of Online Video • YouTube - 258MM unique global visitors, +94% Y/Y, 25B minutes, +146% Y/Y ; other (1) video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU… • YouTube accounted for 56% of unique US video viewers + 33% of videos watched (2) online in 1/08 YouTube Global Traffic 300 30 250 25 Total Unique Visitors (MM) Total Minutes (B) 200 20 150 15 100 10 50 5 0 0 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Total Unique Visitors (MM) Total Minutes (B) 31 Source: (1) comScore global 1/08; (2) comScore Video Metrix (US) 1/08, Morgan Stanley Research

Slide 32: YouTube Content – Pro, Semi-Pro, Amateur + Combos Most Viewed Videos Most Viewed Channels 32 Source: Google, YouTube 2/08

Slide 33: YouTube – The New Portal(s)? • ‘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. There should be ways to monetize the litigation away… News & Politics - Most Viewed Sports - Most Viewed 33 Source: Google, YouTube 3/08

Slide 34: Online Content – Coming from Anywhere / Anytime, BTW, Try to Find Dan Aykroyd’s ‘Bass-O-Matic’ Online... There's a sea change occurring in creative circles these days - or maybe it could be called an identity crisis. What does is mean when the star-studded Golden Globes ceremony gets cancelled because the Writers Guild of America wants a share of Internet revenue? When one of the top spots of 2007 was filmed by an amateur for $27.00? When an obscure Colorado blender company - Blendtec - can create a viral sensation without even hiring an agency? Joseph Crump Avenue A | Razorfish Executive Creative Director 34 Source: Avenue A | Razorfish 2008 Digital Outlook Report, YouTube

Slide 35: TV + Internet + Mobile (CBS) – Complimentary Platforms 2007 Football Season 2007 Football Season Thursday CBS Television Kickoff NFL CBSSports.com Sundays Patriots vs. CBS Mobile Colts • Plasma Screen TV – HD Quality Event • PC Screen – Fantasy, Stats, and Injury Reports • Mobile Screen – Highlights, Scores 35 35 Source: CBS Sports Interactive

Slide 36: Monetization 36

Slide 37: US Internet Ad Spend = $288 Per Home vs. $818 for Newspapers? 2007 Advertising Ad Spending / Spending ($B) Medium Y/Y Growth Household ($) Households (MM) Direct Telephone $110 7% 107 $1,032 Promotions 116 5 115 1,011 Newspapers 46 -7 56 818 Classifieds 15 -14 56 260 Direct Mail 61 4 114 532 Broadcast TV 44 -5 112 390 Cable TV 27 6 80 327 Internet / Online 21 26 71 288 Radio 20 -3 113 172 Yellow Pages 16 1 114 141 Outdoor 7 7 114 63 Total $469 3% $4,774 Average 47 477 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. 37 Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research

Slide 38: Google + Yahoo! = ~61% of US Online Ad Revenue, Other Players Would Have Grown ~14% Y/Y in CQ4:07 but Grew ~20% Owing to Google / Yahoo! Affiliate Assist US Online Ad Revenue Mix 3,000 42% 39% 2,500 US Ad Revenue ($MM) 42% 37% 2,000 1,500 19% 21% 1,000 500 0 CQ4:06 CQ4:07 Google, US Gross Ad Revenue (1) Yahoo!, US Gross Ad Revenue (2) Others (3) Source: (1) Google, Morgan Stanley Research (calculated as reported gross ad revenue multiplied by US % share of gross revenue) (2) Yahoo!, Morgan Stanley Research (calculated as gross Marketing Services revenue multiplied by US % share of gross revenue); (3) Internet Advertising Bureau (IAB) / PriceWaterhouseCoopers (PWC) Internet Advertising Revenue Reports (calculated as difference between total IAB US ad revenue and sum of Google, Yahoo! gross ad revenue), Morgan Stanley Research. Assuming that 38 TAC of Google and Yahoo! was included in others total, this segment would have been up ~20% Y/Y

Slide 39: Google + Yahoo! Share Significant Portion of Revenue with Partners + Affiliates • Google generated $4.8B in gross ad revenue in CQ4; it PAID OUT $1.4B to 1,000s of partners like AOL, Ask Jeeves, EarthLink, + HowStuffWorks(1) • Yahoo! generated $1.6B in gross ad revenue in CQ4; it PAID OUT $429MM to 1,000s of partners like CNN, ESPN, + The Wall Street Journal (2) Source: (1) Google gross Advertising revenue, Morgan Stanley Research; (2) Yahoo! gross Marketing Services revenue, Morgan Stanley Research; (3) Internet Advertising Bureau (IAB) / PriceWaterhouseCoopers (PWC) Internet Advertising Revenue Reports (calculated as difference between total IAB US ad revenue and sum of 39 Google, Yahoo! gross ad revenue), Morgan Stanley Research

Slide 40: Ad Inventory Monetization – Upside Potential Though Lots of ‘New’ Inventory (Social Networking + Video) to Process Unique Users Total Pages Total Minutes CQ3E Annualized (000s) Viewed (MM) (MM) Global Ad Rev. per User $42.62 (1) Total Internet 791,288 5,867,641 3,545,500 Y/Y Growth 10% 9% 11% 19% $21.16 (2) Google 561,202 461,014 221,693 Y/Y Growth 21% 75% 114% 34% Yahoo! (3) $8.85 (2) 478,686 316,576 334,766 Y/Y Growth -1% -8% 2% 17% Time Warner 270,623 64,304 128,208 $7.98 Y/Y Growth 21% -7% -16% -7% Microsoft 528,848 236,826 458,433 $3.68 Y/Y Growth 5% 5% 9% 25% MySpace 106,620 150,841 52,288 $2.99 Y/Y Growth 38% 45% 50% 85% eBay 243,790 85,689 54,037 $0.87 Y/Y Growth 2% -16% -2% 64% YouTube 205,596 62,322 61,566 $0.72 Y/Y Growth 185% 346% 333% -- Source: (1) ZenithOptimedia C2007E, 10/07; (2) Denotes net revenue estimates (ex-TAC); (3) Yahoo! reported 477MM unique users (+14% Y/Y) at the end of CQ3, excl. Yahoo! Japan. We use comScore global data for consistent comparisons across companies. Note: comScore data is based on ages 15+; 40 comScore global 9/07, ZenithOptimedia, Google, Yahoo!, Time Warner, Microsoft, eBay, Morgan Stanley Research

Slide 41: Advertising Age US Internet Advertising – Companies With >$50MM in Spending, 2006 Advertiser 2006 ($MM) 2005 ($MM) Y/Y Growth Comments -#4 behind Network TV, Newspaper & Radio AT&T $169 $58 189% -Shift to Internet from Newspapers. -#3 behind Cable TV & Magazines Dell 138 159 (13) -Shift to Cable TV, Network TV & Magazines from Internet. -#6 behind Network TV, Cable TV, Newspapers, Magazines & Radio Walt Disney 133 91 47