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    Morgan Stanley Internet Trends - Presentation Transcript

    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.
    2. Internet Trends • Usage Patterns • Social Networking • Widget-ization + Component-ization • Measurability + Transparency + Customer Satisfaction • Video • Monetization • Mobile • Emerging Markets • Recession 2
    3. Changes in Usage Patterns 3
    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
    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
    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
    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
    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
    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
    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
    11. Social Networking – Changing the Way People Think About ‘Presence’ 11
    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
    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
    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
    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
    16. Facebook – ‘Presence’ Via Mobiles 24x7 16 Source: Facebook; C. Messina on flickr
    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
    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
    19. Widget-ization + Component-ization of Web – Users in Control of What They Want When They Want It 19
    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
    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!
    22. The BBC! – @ www.bbc.com + Facebook + YouTube… 22 Source: BBC
    23. In Recession, Measurability + Transparency + Customer Satisfaction May Be More Important Than Ever 23
    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
    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
    26. Lots of Servers…Lots of Interactions…Lots of Data Google Data Center – The Dalles, Oregon 26 Source: The Financial Times 1/5/08
    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
    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
    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)
    30. Video 30
    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
    32. YouTube Content – Pro, Semi-Pro, Amateur + Combos Most Viewed Videos Most Viewed Channels 32 Source: Google, YouTube 2/08
    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
    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
    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
    36. Monetization 36
    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 ($2B). Households may use multiple advertising mediums. 37 Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research
    38. Google + Yahoo! = ~61% of US Online Ad Revenue, Other Players Would Have Grown ~14% Y/Y in CQ4:07 but Grew ~20% Owing to Google / Yahoo! Affiliate Assist US Online Ad Revenue Mix 3,000 42% 39% 2,500 US Ad Revenue ($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
    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
    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
    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 -Shift from Newspapers & Network TV to Internet. -#5 behind Newspapers, Network TV, Cable TV & Radio Verizon 124 144 (14) -Shift from Newspapers to Internet. -#5 behind Network TV, Magazines, Cable TV & Newspapers General Motors 118 103 15 -Shift from Newspapers & Cable TV to Internet. -#5 behind Network TV, Magazines, Cable TV & Newspapers Ford Motor 99 55 80 -Shift from Newspapers to Internet. -#6 behind Network TV, Cable TV, Magazines, Newspapers & Radio Time Warner 91 168 (46) -Shift from Internet to all others. -#2 behind Magazines Microsoft 82 103 (21) -Shift to Newspapers & Outdoor from Internet. -#4 behind Magazines, Network TV & Cable TV American Express 81 29 180 -Shift to Internet from magazines & network TV -#5 behind Network TV, Cable TV, Newspapers & Magazines Sony 74 44 66 -Shift from Newspapers & Magazines to Internet. -#4 behind Network TV, Cable TV & Magazines Wal-Mart 61 34 79 -Shift to Internet from Network TV. -#6 behind Network TV, Newspapers, Cable TV, Radio & Magazines General Electric 61 47 28 -Shift from Network TV to Internet. -#5 behind Network TV, Newspapers, Magazines & Cable TV Target 57 37 54 -Shift from Newspapers & Magazines to Internet. -#6 behind Network TV, Cable TV, Radio, Newspapers & Magazines News Corp 56 48 16 -Shift from Network TV, Radio & Magazines to Internet. -#4 behind Network TV, Magazines & cable TV Toyota Motor 56 33 67 -Shift to Internet from Cable TV & Magazines. -#5 behind Network TV, Cable TV, Magazines & Newspapers Procter & Gamble 54 34 61 -Shift from Cable TV & radio to Internet. -#3 behind Network TV & Cable TV Capital One Financial 53 33 61 -Shift to Internet from Network TV & Cable TV. Total $1,504 $1,221 23% 41 Source: Advertising Age, Morgan Stanley Research
    42. Mobile 42
    43. Rising Adoption of Newer Task-Driven Wireless-Enabled Devices Nintendo Wii Apple iPhone 20MM consoles since 11/06 launch 4MM units in < 200 days; browser – raised bar with motion sensors + market share already 50% > Windows playability Mobile – raised bar with ease-of-use + functionality Microsoft Xbox 360 3 Skype Phone 10MM Xbox Live members (+100% Opportunity to leverage large Skype Y/Y) since 11/02 launch – raised user base of 276MM (+61%Y/Y) + bar with online playability create a true web-enabled VoIP, social networking, digital presence phone Amazon.com Kindle Garmin + TomTom PND With free EV-DO + 100K books + 18MM+ units sold in C2007 (+125% newspaper / magazine / blog Y/Y) – lower price points + innovative subscriptions, can Amazon do with features such as spoken street names books what Apple with tunes? First have driven NA / Western Europe PND batch sold out in 5.5 hours… penetration of 11% in C2007 Source: Nintendo (CQ4), Microsoft, Amazon.com, Apple, 3, eBay (CQ4), 43 Garmin, TomTom, Net Applications 12/07, Morgan Stanley Research
    44. Notebooks Retrofitting to Cloud Via 3G – PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?! • Global cellular modem shipments projected to rise from 5MM in 2006E to 68MM+ in 2012E (CAGR of 53%). Primary drivers – rising proliferation of 3G networks + large notebook populations. (ABI Research, 5/07) • Global WiFi unit shipments estimated at 66MM in C2007E (Synergy Research Group) Source: ABI Research (Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); 44 Synergy Research Group (Access Points, Wireless Gateways / Routers, Wireless Client Adaptors, VoWLAN phones)
    45. Mobile – A New Computing Cycle • Mobile Internet represents a new computing cycle - Mainframe Minicomputer PC PC Internet Mobile Internet • Unlike past cycles, US is follower, not leader − 85% of mobile subscribers, 87% of mobile data subscribers in non-US markets (2007E); China is #1 in both • Uncharted / new sources of usage generated for / from Mobile Internet platform − Killer application(s) for mobile? Social Networking / Presence? Video? Location- Based Services? Browser? email? SMS? Music? Games? Search? Ringtones? Camera? Blogs? • Why now? 1) handsets becoming small functional computers; 2) cheaper / faster / more data; 3) more content − 450MM (48%) of handsets shipped (21% of base) Mobile Internet ready (can run Java or BREW applications…), 2006E − 2.9B subscribers with <2.5G (~50Kbps) network access; 311MM 3G subscribers have broadband-like services (browsing, full track music), 2007E − Mobile content improving steadily - consumers are spending billions on it 45 Source: Informa, Morgan Stanley Research
    46. 3 Skype Phone Launcher – ‘Presence’ is Key Chat Call Contacts 46 Source: 3, Skype
    47. i – NOT – A - Phone 47 Source: Apple
    48. iPod Touch + iPhone = Very Fast Ramp – Touch is Trojan Horse? Importance of WiFi? Cumulative Unit Shipments Cumulative Unit Shipments (000) 48 Source: Company reports, Morgan Stanley Research
    49. Global Mobile Awards 2008 Winners – Name That Company?! Best Mobile Handset or Device Best Mobile Game SonyEricsson: W910 Walkman Phone Cellufun: Call of the Pharaoh 3UK: 3 Skypephone - Highly Commended Glu Mobile: My Hangman Best Broadcast Commercial Best Mobile Music Service Safaricom: M-PESA 'Send Money Home' campaign Omnifone: MusicStation Best Mobile Advertising Best Mobile Video Service Crossmedia Avenue: AMF Pension – the MMS campaign mywaves: mywaves Best Use of Mobile for Social Best Mobile Social Networking Service & Economic Development BuzzCity: myGamma.com Grameenphone: CellBazaar Best Mobile Infotainment Portal for Best Network Quality Initiative News / Entertainment RAD Data Communications: LA-130 Cell Gateway - Cost- Yahoo! Connected Life: Yahoo! Go for Mobile 2.0 Effective HSPA Backhaul Best Mobile Enterprise Product or Service Best Service Delivery Platform Microsoft: Windows Mobile 6 Aepona: Aepona Telecom Web Services Platform Best Mobile Messaging Service Best Billing and Customer Solution Seven: System Seven 7.0 Bharti Airtel: mChek on Airtel – Mobile Payments Service The GSMA Chairman's Award Best Roaming Product or Service Sunil Bharti Mittal, Founder, Chairman & Group Syniverse Technologies: Syniverse Datanet CEO Bharti Enterprise 49 Source: GSM Association
    50. Broadband – Vendor / Seller Pays Mobile – User Pays…Make Up on Volume?! Top 10 Internet Companies - Revenue Composition Mobile Internet - Revenue Composition C2005 - $42B C2005E - $19B Payments Music & Video 3% (1) Personalization 4% Games 35% 10% Gambling Advertising 1% 36% Search / 411 Other Info & Commerce 16% Infotainment 61% Enterprise 24% Services 10% Source: Left Chart - Morgan Stanley Research estimates: includes revenue from Google, eBay, Yahoo!, Yahoo! Japan, Amazon.com, T-Online, InterActive, Time Warner (AOL only, ex-access), Microsoft (MSN only, ex-access), and Rakuten. CQ4:05 annualized revenue for Rakuten, and T-Online. Right Chart – Morgan Stanley Research estimates, Global Data. Informa (5/05), Ovum (5/05). Data excludes IVR. (1) Personalization includes ringtones, wallpapers, and screensavers. If SMS / MMS were added to Mobile Internet—it would add $55B to total revenue and would account for 74% of total revenue. 50
    51. Still Early in 3G+ Ramp But… 2009 Should Be Inflection Point @ ~20% of Subscribers Global 3G+ Penetration 4.5 30% % of Total Wireless Subscribers 4.0 25% 3.5 Subscribers (B) 3.0 20% 2.5 15% 2.0 1.5 10% 1.0 5% 0.5 0.0 0% 2005E 2006E 2007E 2008E 2009E 2010E 2.5G and Below Subscriptions 3G and Above Subscriptions % 3G and Above Penetration Note: 2.5G can be compared to ‘narrowband’ Internet access, while 3G can be compared to ‘broadband ’ Internet access. 2G: Analog & TDMA, cdmaONE, PDC, iDEN; 2.5G: GPRS/EDGE, CDMA 2000-1x; 3G: W-CDMA/HSDPA/HSUPA, CDMA 2000-1x-EV-DO/Rev A, TD-SCDMA 51 Source: iSuppli
    52. Wireless Data Revenue Ramping Nicely – +58% Y/Y @ AT&T, CQ4 • ~12% of devices are integrated devices, with ARPU >2x the 2G base • ~13% of devices are 3G, which drives 20% higher ARPU than 2G base Wireless Data Revenue 2.0 25% AT&T – CQ4 Wireless Data % of Wireless Service Revenue Wireless Data Revenue ($B) Y/Y Revenue Growth 1.6 20% • Internet access: >40% • Messaging: >50% 1.2 15% • E-mail: >60% 0.8 10% • Data access: >70% 0.4 5% • MediaBundle: >70% 0.0 0% CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 Wireless Data Revenue Data % of Wireless Service Revenue 52 Source: AT&T
    53. Asia / Europe Lead – Mobile Internet Adoption + Carrier Revenue, 2007E 1,600 30% 1,400 25% 25 Subscribers (MM) 1,200 20% 18% 1,000 20 800 15 600 10 400 5 200 0 Mobile Data as % of Revenue Mobile Subscribers Mobile Data Subscribers (leading carrier in region) Asia Pacific Europe ROW LatAm N. America Source: Informa, Company Reports. Includes SMS; (1) Leading carriers by wireless subscribers in Asia Pacific, 53 Europe, and North America are: China Mobile, Vodafone (Europe only), and AT&T, respectively.
    54. Emerging Markets 54
    55. Mobile Users 2x+ > Than Internet Users – N. America = 8% of Mobile / 16% of Internet Users Internet Users – 1.3B Mobile Subscribers – 3.3B C2007E (1) C2007E (2) N. America 8% N. America 16% Europe 29% LatAm Europe LatAm 8% 26% 11% ROW 7% Asia Pacific ROW 43% 12% Asia Pacific 40% 55 Source: (1) ITU, Euromonitor, Morgan Stanley Research; (2) Informa, Morgan Stanley Research
    56. TMT (Technology / Media / Telecom) Update = China / India / Russia / Brazil Gaining Ground 2004 2006 Relative Relative Rank Country Rank Country Weighting Weighting USA 9.0 USA 1 1 8.7 China 8.2 China 2 2 8.7 Japan 6.5 Japan 3 3 6.3 Germany 5.7 Germany 4 4 5.7 UK 5.5 India 5 5 5.5 India 5.3 UK 6 6 5.4 France 5.2 France 7 7 5.3 5.2 Brazil 8 Italy 8 5.3 S. Korea 5.1 Russia 9 9 5.3 Canada 5.1 Italy 10 10 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: nominal GDP per capita (current USD); telephone lines; cable subscribers; installed PCs; mobile phones in use; Internet users and credit/debit cards in use. For each economy, we calculate past / present / potential global market weightings across seven TMT metrics - we call this our relative weighting and we use it to measure / rank a country’s propensity for TMT products and services. We standardized each country’s position in the global market in each category and adjusted the values to reflect a positive scale. The relative ratings and ranks were determined by calculating an average of z-scores across categories. For example, in the United States in 2004, standardized and adjusted values of 6.4 in GDP per capita, 8.4 in telephone lines, 11.3 in installed PCs, 7.6 in mobile subscribers, 8.9 in cable subscribers, 10.7 in Internet users, and 9.6 in credit/debit cards produces a relative weighting of 9.0. 2010E relative weightings derived by assuming 2003-2004 growth CAGR for each category to 2010, and ensuring category penetrations were not exceeded. Note: Red indicates countries moving out of the top 10 TMT countries; Green indicates countries moving into the top 10 and highlights China / India 56 Source: Morgan Stanley Research
    57. China Led in TMT Users in Many Categories - 2006 Leader China Market Number China Rank Number China Rank Category Leader (000) (2006) (000) (2001) Population China 1,314,100 1 -- 1 GDP (PPP) per Capita Ireland $44,676 43 $7,722 45 Credit / Debit Cards China 1 -- 3 1,131,674 Mobile Subscriptions China 445,754 1 -- 1 Telephone Lines China 367,786 1 -- 2 Installed PCs USA 212,977 2 102,068 4 Internet Users USA 182,779 2 137,000 3 Cable / Satellite TV Subs. China 155,483 1 -- 1 57 Source: Morgan Stanley Research TMT database
    58. Leading TMT Markets by Category 2006 Growth Category Rate Market Size Mobile Subscribers 24% 2,693MM Internet Users 15 1,120MM Credit/Debit Cards in Use 11 4,881MM Installed PCs 8 818MM GDP per Capita (PPP) 7 $10,426 Telephone Lines 6 1,362MM Cable / Satellite TV Subscriptions 6 664MM Population 1 6,446MM 58 Source: Morgan Stanley Research TMT database
    59. Majority of Visitors To Top Global Web Sites = From Outside US Top Properties Worldwide 600 Global Unique Visitors (MM) 500 400 300 78% 72% 200 78% 76% 68% 56% 77% 64% 48% 100 77% 77% 0 e on ) ET e L o! e ft ay a (1 iv ub AO so pl di ho az ct eB CN Ap pe e uT ro ra Ya gl Am ic iki oo Yo te M W In G x Fo US Non-US 59 (1) Excludes YouTube; Source: comScore 1/08, Morgan Stanley Research
    60. China – Global Leader in Internet Users 210MM in 2007 – 16% of total vs. <1% in 1995 Geographic Distribution of Internet Users (MM) 1,320 390 490 620 723 850 975 1,120 40 74 182 275 117 100% 80% 60% 40% 20% 0% C1995E C1996E C1997E C1998E C1999E C2000E C2001E C2002E C2003E C2004E C2005E C2006E C2007E North America Europe Asia/Pacific China Latin America Rest of World 60 Source: Morgan Stanley Research, ITU, Euromonitor, CNNIC
    61. Internet Users – Top 15 Markets 2006 Internet Internet Users 2006 Users Worldwide Country (000s) Growth Penetration Share USA 182,779 3% 61% 16% 1 China 137,000 23 10 12 2 India 72,746 41 7 6 3 Japan 67,489 2 53 6 4 United Kingdom 43,752 6 72 4 5 Germany 40,039 6 49 4 6 Italy 35,370 9 61 3 7 South Korea 34,592 4 72 3 8 Brazil 34,174 23 18 3 9 Russia 32,841 40 23 3 10 Indonesia 32,744 45 15 3 11 France 31,520 11 51 3 12 Canada 22,304 5 68 2 13 Mexico 19,614 16 19 2 14 Spain 18,060 11 41 2 15 Total 1,119,949 61 Source: Morgan Stanley Research TMT database, ITU, Euromonitor
    62. Mobile Subscriptions – Top 15 Markets 2006 Mobile Mobile Subscriptions 2006 Subscriptions Worldwide Country (000s) Growth Penetration Share China 445,754 18% 34% 17% 1 USA 232,793 12 78 9 2 Russia 151,937 20 106 6 3 India 137,369 82 12 5 4 Brazil 100,661 17 54 4 5 Japan 94,936 5 74 4 6 Germany 81,242 9 99 3 7 Italy 77,605 11 133 3 8 United Kingdom 69,557 7 115 3 9 Indonesia 58,654 47 26 2 10 Mexico 56,765 22 55 2 11 Turkey 51,659 19 71 2 12 France 51,442 7 84 2 13 Pakistan 48,543 124 31 2 14 Spain 46,339 10 105 2 15 Total 2,693,087 62 Source: Morgan Stanley Research TMT database, Informa
    63. Recession 63
    64. Serious Risks / Challenges Posed by Competition + Recession… • Impact of US subprime woes / tightening credit / rising commodity prices / global unrest should not be underestimated – depth / duration may surprise on downside + revenue should become increasingly difficult to garner. Leading Internet companies will be stress-tested to prove competitive advantages vs. offline companies – measurability / transparency / customer satisfaction should assist. • Average GDP growth rate forecasts for 2008 have fallen to 1.1% from 3.0% in 6/07 – a 63% reduction in rate of growth. Average annual GDP growth over past decade = 3.1%. When first car of a moving train slows…the cars that trail follow… • US less relevant to global economy - US share of global GDP has declined steadily since 1999 from 22% of GDP to 19% in 2007 64 Source: Morgan Stanley Economics Research
    65. …Serious Risks / Challenges Posed by Competition + Recession • Courtesy of aggressive monetary / fiscal stimulus + support from overseas growth, Morgan Stanley economists believe US recession could be mild + short…but they are becoming increasingly pessimistic about pace of recovery into 2009 • Main culprits – deepening credit crunch + supply shock of higher energy and food prices + growing consumer caution…all in the face of declining household wealth • Aggressive Federal Reserve ease + significant pending fiscal stimulus may not offset credit crunch…consequently, policymakers are considering array of responses designed to alleviate burden on troubled homeowners + forestall or at least cushion economic downturn 65 Source: Morgan Stanley Economics Research
    66. US Payrolls Have Moved Into Recession Territory 90 400 Diffusion Index: Employees On Private Nonfarm Payrolls (% Rising, 3-month) (difference, 3-month moving average) 80 300 Private Nonfarm Payrolls 70 200 60 100 50 0 40 -100 30 -200 20 -300 10 -400 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Total private nonfarm payrolls, 3 month moving avg. of M/M change Diffusion index: employees on private nonfarm payrolls 66 Source: Morgan Stanley Economics Research
    67. Asia / China Gaining Share of Global GDP 35 29% 30 25 % of Global GDP 23% 22% 22% 19% 20 18% 16% 15 11% 10% 11% 10 7% 7% 7% 6% 6% 6% China 5 3% 3% 0 Asia ex- US EU-15 Other LatAm Emerging Japan Dollar bloc Japan Europe % GDP Share in 1999 % GDP Share in 2007E China GDP Share Note: Based on PPP, World GDP based on current prices. Per IMF definitions, ‘Dollar bloc’ includes Australia, Canada, New Zealand; 67 Source: IMF, Morgan Stanley Research
    68. Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley Dean Witter 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), Intuit (common stock), Microsoft (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 29, 2008, 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, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Yahoo!. As of February 29, 2008, 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, Intuit, Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Dice Holdings, Inc., GSI COMMERCE, Intuit, TechTarget, Inc.. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay, Google, Intuit, Microsoft, TechTarget, Inc.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from CNET, eBay, Microsoft. 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, CNET, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., 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: CNET, eBay, Google, Intuit, Microsoft. 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 & Co. Incorporated is a director of Microsoft, Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, TechTarget, Inc., Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. 68
    69. Disclosure Section STOCK RATINGS Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in 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 29, 2008) 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 and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, 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 to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC) Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category Overweight/Buy 1039 44% 322 45% 31% Equal-weight/Hold 974 41% 300 42% 31% Underweight/Sell 356 15% 100 13% 28% Total 2,369 722 69
    70. Disclosure Section 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. Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider \"more volatile\" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in Morgan Stanley Research are available at www.morganstanley.com/companycharts or from your local investment representative. You may also request this information by writing to Morgan Stanley at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. Other Important Disclosures Morgan Stanley produces a research product called a \"Tactical Idea.\" Views contained in a \"Tactical Idea\" on a particular stock may be contrary to the recommendations or views expressed in this or other research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. 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