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Global Technology and Internet Trends report presented April, 2006.

Global Technology and Internet Trends report presented April, 2006.

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Global Internet Trends, 2006 Global Internet Trends, 2006 Presentation Transcript

  • 1 Global Internet Trends 04/07/06 mary.meeker@morganstanley.com brian.pitz@morganstanley.com brian.fitzgerald@morganstanley.com richard.ji@morganstanley.com 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. For analyst certification and other important disclosures, refer to the Disclosure Section
  • 2 Internet Trends – Many Things to Worry About… 1) Plethora of emerging opportunities can create near-term costs 2) Increasingly competitive landscape (intramural and other) can drive uncertainty 3) Infrastructure builds can increase costs 4) Rapid growth of mobile Internet can create transitions 5) Rapid growth of emerging markets can create challenges 6) Rising competition for talent can increase costs 7) Regulatory intervention can slow momentum 8) Impact of high oil prices plus on-going threats from likes of terrorism and pandemics can create uncertainties
  • 3 Internet Trends – Many Things to Be Excited About! 1) Secular shift to IP-based digital media has tremendous momentum 2) Broadband penetration remains low 3) Online advertising spending relative to usage remains low 4) Online vs. offline commerce penetration remains low 5) Usage growth of digital content (broadband and mobile) remains robust 6) Monetization of broadband and wireless content / usage remains low 7) Global Internet usage growth (including mobile) remains healthy 8) Internet leaders have garnered significant audience / competitive advantage over the years 9) 2007 could be a year of leverage
  • 4 Hierarchy of Needs? Self- actualization Esteem Belonging Safety Physiological Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate. 1943 - Maslow 2006 - ? ;) Internet / Mobile Phone Shelter Food / Water
  • 5 Outline 1) Public Internet Companies 2) Communications Hubs? 3) Global 4) Broadband 5) Mobile 6) VoIP 7) Video 8) Local 9) Finding 10) Emerging Trends 11) Emerging Companies 12) Closing Thoughts 13) Appendix
  • 6 1 Public Internet Companies
  • 7 Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006). US Companies = 82% of Global Market Value… Company U.S. Market Cap ($B) Y/Y Change In Mkt Cap C2005 Rev ($MM) Y/Y Change In Rev C2005 Op Inc ($MM) C2005 Op Margin Microsoft $281,510 3% $39,788 8% $16,642 42% Google 97,820 106 6,139 92 2,129 35 AOL Time Warner 78,544 (2) 43,652 4 7,502 17 eBay 53,190 4 4,552 39 1,442 32 Yahoo! 43,119 (2) 3,696 43 1,160 31 Electronic Arts 15,656 (25) 2,862 (10) 351 12 Amazon.com 15,055 6 8,490 23 465 5 E*Trade 10,210 114 2,548 22 636 25 InterActiveCorp 9,944 (37) 5,754 (7) 345 6 Intuit 9,157 12 2,038 9 524 26 Monster.com 5,901 62 987 17 176 18 VeriSign 5,643 (22) 1,609 38 225 14 NAVTEQ 4,458 12 497 26 134 27 CheckFree 4,299 15 758 25 72 10 WebMD 3,652 32 169 26 27 16 Activision 3,480 7 1,484 9 41 3 CNET 1,954 47 353 21 41 12 ValueClick 1,629 66 304 80 79 21 aQuantive 1,587 137 308 95 61 20 THQ Interactive 1,549 33 -- -- -- -- WebEx Communications 1,457 48 -- -- -- -- Netflix 1,374 176 688 36 11 2 RealNetworks 1,327 34 325 22 (17) (5) RSA Security 1,251 6 -- -- -- -- TakeTwo Interactive 1,160 (38) 1,203 7 40 3 Internet Security Systems 1,072 12 330 14 57 17
  • 8 …US Companies = 82% of Global Market Value… Company Europe Market Cap ($B) Y/Y Change In Mkt Cap C2005 Rev ($MM) Y/Y Change In Rev C2005 Op Inc ($MM) C2005 Op Margin Japan T-Online International AG $11,517 (14%) $2,730 0% $471 17% Thomson Multimedia 4,643 (38) 6,727 (38) 532 8 TPI 3,991 18 768 (7) 226 29 Eniro 1,983 7 607 (18) 128 21 Seat Pagine Gialle 1,968 2 809 0 (141) (17) Freenet.De Ag 1,577 1 845 32 -- -- Kudelski 1,490 (22) -- -- -- -- Tiscali 1,168 (20) 874 (40) (87) (10) Yahoo! Japan $38,029 1% $1,099 0% $562 51% Softbank Corp 27,785 95 7,809 0 (237) (3) Nintendo 18,443 26 4,808 0 1,041 22 Rakuten 9,903 (10) 1,099 147 295 27 Konami 3,292 17 2,432 0 263 11 Cyber Communications 1,935 198 225 0 9 4 Koei 1,457 13 263 0 88 34 Cyber Agent 1,315 16 381 57 23 6 Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006).
  • 9 …US Companies = 82% of Global Market Value Company China Market Cap ($B) Y/Y Change In Mkt Cap C2005 Rev ($MM) Y/Y Change In Rev C2005 Op Inc ($MM) C2005 Op Margin S. Korea Hong Kong Netease $2,811 95% -- -- -- -- Sina.com 1,313 (19) -- -- -- -- CTrip 1,269 89 $65 60% $27 42% Tom Online 1,098 83 123 0 31 26 Tencent Holdings $2,367 99% $138 0% $54 39% NHN Corp $4,052 185% $253 0% $66 26% Ncsoft Corp. 1,265 (17) 280 0 94 34 Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech Investor Interest Model) with >$1B market cap (as of 3/13/2006).
  • 10 Rest of World 34% US 66% 1970 Rest of World 53% US 47% Powerful Non-US Market Capitalization Growth Source: AXA. Projected data for C2030E calculated using the rate of growth of market capitalization for Rest of World and USA since 1970. 2001 Rest of World 73% US 27% 2030E
  • 11 US Maintains Dominance in Global Tech Company Market Capitalization Source: Morgan Stanley Technology Research. Region N. America Japan Asia Europe Total 63% 17 11 9 100% $2,455B 665B 421B 361B $3,902B -1% 3 39 -5 3% % Total Market Value Market Value (12/31/05) Y/Y Change
  • 12 0% 20% 40% 60% 80% 100% 1998 1999 2000 2001 2002 2003 2004 2005 GeographicDistributionofTechnologyEquity andEquity-LinkedTransactionVolume($B) U.S. Europe Asia Japan $34 $109 $35 $58 $63 $55$181 $67 Source: SDC, Dealogic, Morgan Stanley; 01/31/06 Non-US Markets Gaining Share of Technology Financings 2005 US – 38% Asia – 33% Europe – 20% Japan – 9%
  • 13 Leading Global TMT Companies Source: 2004 data from Morgan Stanley Research TMT database. Orange represents absolute market size within a given country; company market share listed below. For ISPs, the company market shares refer to share of the ISP market, while the user numbers refer to Internet users. *Shipment units. USA 184MM 99MM 204MM 171MM 141MM 171MM users 5.8MM 878MM Pop. 294MM EchoStar - 11% Gateway - 6% NetZero/Juno - 6% China 283MM 128MM 42MM 335MM 85MM 335MM users 3.3MM 685MM Pop. 1,300MM Tongfang - 8% Japan 78MM 21MM 54MM 85MM 49MM 85MM users 7MM 645MM Pop. 128MM ACCA Networks - 10% Japan Telecom - 7% Germany 57MM 26MM 39MM 68MM 30MM 68MM users 3.1MM 96MM Pop. 83MM HP - 11% UK 33MM 15MM 26MM 54MM 30MM 54MM users 0.55MM 142MM Pop. 60MM RBS/NatWest - 16% HSBC Bank - 6% Cable SubscriptionsTelephone Lines Installed PCs Verizon - 36% Comcast - 22% Dell - 35% Citibank - 13% Bank One - 10%SBC Comm. - 31% DirecTV - 14% HP - 19% Verizon - 25% Cingular - 27% Motorola - 35% AOL/RoadRunner - 27% SBC - 38% Sprint PCS - 12% Samsung - 16% Bell South - 18% LG - 17% Comcast - 8% Verizon - 31% MBNA - 8% Qwest - 9% Time Warner - 11% Apple - 5% T-Mobile - 10% Nokia - 14% SBC Yahoo! - 6% Qwest - 9% Bank of America - 8% BellSouth - 14% Sprint - 5% Cox - 6% Lenovo - 5% Nextel - 8% Kyocera - 4% EarthLink - 5% JPMorganChase - 6% China Telecom - 60% Shanghai Cable Lenovo - 26% China Mobile - 64% Noka - 26% China Telecom - 15% ChinaNet Ind. & Comm. Bank of China Netcom - 36% Tianjin Cable Founder Elec.- 12% China Unicom - 36% Motorola - 10% China Unicom - 14% China Netcom of China - 20% China TieTong - 4% Beijing Cable Samsung - 9% China Netcom - 10% GBNet Bank of China - 18% Dell - 7% Bird - 8% China Unicom Agr. Bank of China - 14% IBM - 5% TCL - 6% China Const. Bank - 10% NTT Sky Perfect - 15% NEC - 20% NTT DoCoMo - 56% NEC - 17% @nifty - 14% NTT Regional - 43% Sumitomo Mitsui - 16% KDDI Jupiter Telecom - 8% Fujitsu - 19% KDDI (au) - 22% Panasonic - 14% SoftbankBB - 13% BB Technologies - 25% UC Card - 15% Japan Telecom Dell - 11% Vodafone - 17% Sharp - 13% NTT (OCN) - 12% Nippon Shinpan - 14% Toshiba - 8% TU-KA - 4% Sanyo - 12% NEC (biglobe) - 11% e-Access - 10% Credit Saison - 12% IBM - 7% Fujitsu - 11% KDDI (dion) - 8% UFJ Card - 9% Deutsche Telecom - 89% Kabel Deustch. - 38% Fujitsu Siemens - 21% T-Mobile - 40% Nokia - 33% T-Online - 53% Deutsche Telecom Bank. Berlin - 7% Arcor Ish (Kabel NRW) - 16% Vodafone D2 - 36% Samsung - 16% freenet.de Citibank - 6% Mobilcom Premiere World - 13% Acer - 10% E-Plus - 13% Motorola - 13% AOL Barclaycard - 6% Kabel Baden Wurt. - 9% Medion - 10% O2 - 11% Siemens - 9% Tiscalie Commerzbank - 5% EWT (UPC) - 8% Dell - 9% Sony Ericsson - 8% KarstadtQuele Bank - 4% BT Barclays Bank - 18%BT - 83% Sky Digital - 48% Dell - 29% O2 - 25% Acer - 5% Nokia - 33% Freeserve - 9% NTL/Telewest - 13% Freeview - 30% HP - 16% T-Mobile - 24% Orange - 23% MBNA - 6%NEC/Packard Bell - 5% Vodafone - 23% Motorola - 13% BT/Genie - 6% Co-operative Bank - 4%Toshiba - 5% Mobile Subscriptions Sony Ericsson - 8% LineOne - 5% Siemens - 9% AOL - 5% Samsung - 16% World Online - 6% Credit / Debit Cards DSLInternet Service Providers (ISPs) Mobile Handsets* NTL/Telewest - 22%
  • 14 2 Communications Hubs?
  • 15 • Convergence is happening (~10% of Yahoo! IM sessions end in phone call). Opportunities exist for non-mobile players to leverage existing subscribers. • Who has the most valuable customer base as transition occurs? Who will have it when it is over? Email Providers Yahoo! Mail Unique Visitors (1) (233MM) MSN Hotmail Active Accounts (2) (230MM) Google GMail Unique Visitors (1) (54MM) IM / VoIP Services MSN Messenger Active Accounts (2) (205MM) Yahoo! Messenger Unique Visitors (1) (79MM) Skype / eBay Registered Users (2) (75MM) AOL Instant Messenger Unique Visitors (1) (45MM) ICQ Unique Visitors (1) (34MM) Google Talk Unique Visitors (1) (4MM) Internet Sites Yahoo! Unique Visitors (1) (471MM) Google (1) Unique Visitors (1) (451MM) MSN Unique Visitors (1) (428MM) eBay Unique Visitors (1) (241MM) Amazon.com Active Customers (2) (52MM) MySpace.com Unique Visitors (1) (46MM) AOL Subscribers (2) (26MM) Search Engines Google Search Unique Visitors (1) (395MM) Yahoo! Search Unique Visitors (1) (243MM) (1) Source: Global Unique Visitors, comScore Media Metrix (1/06). (2) Source: Company Reports, as of CQ4:05 for eBay, Microsoft, as of CQ3:05 for others. AOL subscribers based on sum of US and Europe AOL-branded subscribers. Payments PayPal / eBay Accounts (2) (96MM) Next Generation Communications Hubs?
  • 16 Significant Infrastructure Builds Source: Company filings, Morgan Stanley Research. Figures exclude capital expenditures from acquired companies. (1) C2003 includes $125.1MM purchase of additional office space. E = Morgan Stanley Research estimates. C2004 $319 80% $246 109% $293 (20%) $89 94% Google Y/Y Yahoo! Y/Y eBay (1) Y/Y Amazon.com Y/Y C2003 $177 375% $117 128% $365 163% $46 17% C2005 $838 163% $409 66% $338 16% $203 128% (US$ in Millions) Capital Expenditures
  • 17 3 Global
  • 18 Strong PC Unit Growth Driven Boosted by Internet & Consumer Demand… Source: IDC and Morgan Stanley Research – R. Runkle, K. Huberty Note: Enterprise includes large enterprises and the government vertical. SMB stands for Small Medium Business. Global Estimated PC Shipments by Segment (PC Unit Shipment Data in Millions) Total Units Y/Y Growth Enterprise SMB Consumer CQ1:04 42 17% 29% 34 37 CQ2:04 40 15% 32% 34 33 CQ3:04 45 13% 32% 33 35 CQ4:04 52 15% 28% 33 39 CQ1:05 47 13% 28% 34 37 CQ2:05 47 18% 30% 34 35 CQ3:05 53 17% 30% 33 37 CQ4:05 60 16% 27% 33 40 C2004 179 16% 30% 34 36 C2005 208 16% 29% 34 38
  • 19 Leading TMT Markets by Category 6,2881Population 1,1984Telephone Lines $19,1686GDP per Capita 4599Cable TV Subscriptions 3,5679Credit/Debit Cards in Use 69611Installed PCs 1,58914Mobile Phones in Use 901MM18%Internet Users Market Size (MM) 2004 Growth RateCategory Source: Morgan Stanley Research; GDP figures from IMF, shown in current USD. Note: Data include totals for 50 countries in our TMT database, updated for 12/2004; GDP updated for 12/2005.
  • 20 Morgan Stanley TMT Market Sizing Methodology… We measure 2004 market sizes / growth rates for 8 core TMT-related metrics: 1) Population 2) Nominal GDP per Capita 3) Telephone Lines 4) Cable Subscriptions 5) Installed PCs 6) Mobile Phones in Use 7) Internet Users 8) Credit/Debit Cards We do this for the 50 most important economies, as measured in terms of population size, land mass, and GDP per capita.
  • 21 …Morgan Stanley TMT Market Sizing Methodology We measure market sizes and growth rates for core TMT metrics: nominal GDP per capita (USD, current); telephone lines; cable subscribers; installed PCs; mobile phones in use; Internet users and credit/debit cards in use. We do this for the 50 most important economies based on purchasing power / economic strength, as measured in terms of population size, land mass and GDP per capita. We standardized each country’s position in the global market in each category and adjusted values to reflect a positive scale. The relative ratings and ranks were then determined by calculating an average of Z-scores across categories. For each country, we calculate past / present / potential global market weightings across seven TMT metrics - we call this our relative weighting - we use it to measure / rank a country’s propensity for TMT products and services. Sample Calculation: Computing the relative weighting for US Telephone Lines and then the overall US relative weighting: 8.453.4 47,742 23,495183,688 5Z X =+= − =+−= − weightingrelativescore σ μ Following from this, the overall US relative weighting calculation (across the seven TMT categories) for the US is 9.16, derived by the equation: [6.4+8.4+11.3+7.6+8.9+10.7+9.6] / 7 = 9.0
  • 22 Rank Country Relative Weighting 2004 Rank Country Relative Weighting 1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10 USA China Japan Germany United Kingdom India France Italy South Korea Canada 9.0 8.2 6.5 5.7 5.5 5.3 5.2 5.2 5.1 5.1 China USA India Japan Germany United Kingdom Russia France Brazil South Korea 8.7 7.7 7.0 5.9 5.3 5.2 5.2 5.1 5.1 5.0 2010E 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 do this for the 50 most important economies based on purchasing power/economic strength, as measured in terms of population size, land mass and GDP per capita. 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, 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. China / India / Russia Likely to Continue to Make Impressive TMT Gains Source: Morgan Stanley Research. Red indicates countries moving out of the top 10 TMT countries; green indicates countries moving into the top 10. GDP figures from IMF, shown in constant USD
  • 23 Internet Users by Region Source: Morgan Stanley Internet Research 65547Latin America5 10312236Europe2 6268224North America3 14% 11 24% 3-Year CAGR 901MM 87 308MM Internet Users C2004 TOTAL GLOBAL Rest of World Asia Pacific Region 1.3B 120 588MM Internet Users C2007E 4 1 Rank Asia Pacific Should Lead World in Internet User Growth
  • 24 China = Most Internet + Mobile Users Engineering Grads 4:1 vs. US + Capital Flowing TMT Category Mobile Phones Cable TV Subscriptions Telephone Lines Internet Users Installed PCs Source: Morgan Stanley Research Global Ranking Units (MM) 2004 Growth 1 1 1 2 4 335 128 283 94 42 25% 16 14 18 17
  • 25 2004 - Top TMT Countries Country 2004 Relative Weighting Population (MM) GDP per Capita Telephone Lines (MM) Installed PCs (MM) Mobile Phones in Use (MM) Cable TV Subscriptions (MM) Internet Users (MM) Credit/Debit Cards in Use (MM) 1 USA 9.0 294 $39,935 184 204 171 99 202 878 2 China 8.1 1,300 1,272 283 42 335 128 94 685 3 Japan 6.5 128 36,596 78 54 85 21 73 645 4 Germany 5.7 83 33,390 57 39 68 26 46 96 5 United Kingdom 5.5 60 35,548 33 26 54 15 35 142 6 India 5.3 1,087 622 47 13 40 49 39 38 7 France 5.2 62 32,911 34 23 42 8 25 30 8 Italy 5.2 58 29,014 27 15 54 3 29 55 9 South Korea 5.1 48 14,151 25 27 37 13 32 66 10 Canada 5.1 32 31,134 20 16 15 10 22 62 11 Brazil 5.0 176 3,325 42 19 49 2 18 175 12 Spain 5.0 41 25,320 18 10 37 3 13 95 13 Russia 5.0 142 4,087 38 19 58 10 22 24 14 Netherlands 5.0 16 37,326 10 8 14 6 11 30 15 Norway 5.0 5 54,600 3 3 4 1 3 7
  • 26 N. America - 36% of Internet Users in 2000E; 20% in 2007E 0% 20% 40% 60% 80% 100% 2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E North America Europe Asia/Pacific Rest of World Latin America Geographic Distribution of Internet Users (MM) Source: Morgan Stanley Research. 379 482 610 761 901 1,039 1,191 1,343
  • 27 4 Broadband
  • 28 Global Broadband – In / Entering Adoption Sweet Spot Source: Morgan Stanley Research. 0 10 20 30 40 50 60 70 80 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E USResidentialBroadbandHouseholds (MM) 0% 10% 20% 30% 40% 50% 60% US Residential Broadband Households % of Total US Households Broadband Ramp in 25-30% Penetration Sweet Spot…
  • 29 Global Broadband Trends Broadband Data by Region, CQ4:05 Source: Morgan Stanley Research, Nick Sebrell, Paul Marsch, Richard Bilotti, Simon Flannery, Mitchell Kim. (1) Cable modem, DSL or FTTH deployments; In terms of broadband-users, we roughly estimate 2.0+ users per Internet subscription (2) Broadband subscriptions per household; data based on 2004 households from Morgan Stanley’s TMT database. Using subscriber-to-user multiplier, user penetration would be higher. 414527Latin America5 251204360Europe2 321002950North America3 418MM 44 140MM Users(1) 17% 38 11% Penetration(2) 209MM 22 70MM Subscribers(1) TOTAL GLOBAL Japan Asia Pacific (ex. Japan) Region 42% 23 58% Y/Y Growth 4 1 Rank
  • 30 5 Mobile
  • 31 Mobile to the Max?! Blackberry – Protect Your Skull While You Destroy Your Thumbs (Click to launch video clip)
  • 32 Asia Pacific 41% Europe 19% ROW 18% N. America 11% South America 11% Mobile Subscribers – 2B C2005E (2) Source: Morgan Stanley Research and Morgan Stanley Communications Equipment Research - Scott Coleman, John Marchetti. Asia Pacific 36% Europe 24% ROW 12% N. America 23% South America 5% Internet Users – 1B C2005E (1) Mobile Users 2x > Than Internet Users – N. America = 11% of Mobile / 23% of Internet Users
  • 33 Source: Euromonitor, CNNIC, World Bank, Morgan Stanley Internet Research (July 2005) Mobile Users Internet Users Mobile Phone to Installed PCs Country (MM) (MM) Internet User Ratio (MM) China 363 100 3.6:1 53 US 177 211 0.8:1 207 Japan 88 78 1.1:1 55 Germany 69 51 1.4:1 39 UK 54 37 1.5:1 26 Italy 54 32 1.7:1 16 S. Korea 37 32 1.2:1 27 Mobile Leads Internet in Most Markets
  • 34 Global Mobile – Should Enter Adoption Sweet Spot in 2006 / 2007+ Source: Morgan Stanley Telecom Research Scott Coleman, John Marchetti. 0 200 400 600 800 1,000 1,200 1,400 1,600 2005E 2006E 2007E 2008E 2009E Subscribers(MM) 0% 10% 20% 30% 40% 50% 60% %ofTotalWirelessSubscribers 2.5G Subscribers 3G Subscribers % 2.5G Penetration % 3G Penetration Global 2.5G / 3G Penetration 2.5G Ramp in 25- 30% Penetration Sweet Spot…
  • 35 Mobile – Next Internet Opportunity • Networked personal computer (thanks to broadband adoption) still has lots of evolutionary running room • In 5th major computing cycle - Mobile Internet • If past is prologue, Mobile Internet will likely be bigger (based on aggregate wealth creation) and have more reach (based on global users) than cycles that have come before it • ~2B global mobile phones in use > ~1B Internet users in 2005 • $19B in global Mobile Internet premium services revenue comparable to Internet advertising revenue in 2005 Source: Morgan Stanley Research.
  • 36 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 − 89% of mobile subscribers, 93% of Mobile Internet users in non-US markets; China is #1 • Uncharted / new sources of usage generated for / from Mobile Internet platform − What will be the dominant killer application for the mobile consumer? E-mail? SMS? Ringtones? Games? Search? Blogs? Location-Based Services? • Why now? 1) handsets becoming small functional computers; 2) cheaper / faster / more data; 3) more content − 334MM (48%) of handsets shipped (18% of base) Mobile Internet ready (can run Java or BREW applications…), 2005E − 374MM subscribers (20%) with 2.5G (~50Kbps) or 3G (~300Kbps) network access; 61MM 3G subscribers (3%) have broadband-like services (browsing, full track music) − Mobile content improving steadily - consumers are spending billions on it
  • 37 Global Data Tell Story… 2.1B Mobiles 3.5x number of PCs, growing at 20% Y/Y vs. 12% for PCs $1 Trillion Mobile carrier revenue was $600B+ (and rising) of the $1T+ telecom market in 2004 (Yankee 11/04) Asia & Europe 10x US Asia / Pacific + Europe have 7x mobile subscribers (Morgan Stanley), 10x mobile data users than N. America (Informa 5/05) China China Mobile - $2.8B mobile data revenue (+103% Y/Y, CH1:05), 20% of total revenue (vs. 7% average for US carriers) $171MM China Mobile ring back revenue, +961% Y/Y; #1 song had 5MM mobile downloads, comparable to #1 CD album Wireless VoIP 75MM Skype users as of 12/05 – fastest product ramp ever? – dual mode WiFi / GSM handsets shipping now MVNOs MVNOs taking off worldwide, Virgin Mobile USA (3MM subscribers) buys voice / data transport from Sprint
  • 38 …Global Data Tell Story Cameras 75% of cameras shipped (300MM) to be in mobile phones in 2005E (ex. disposables, Mobile Imaging Report 2005) $50B+ Messaging 1.1T SMSs sent with $50B in revenue in 2004 (Informa 5/05); more emails sent in Japan via mobile phone than PC (DoCoMo 2005) $3B Music $3B annualized ringtone sales (Informa 5/05) - vs. 1B cumulative iTunes songs sales (1/06); 50x more full track music & ringtones downloads done via mobile than PC in Japan Content VeriSign’s Jamba exceeded $530MM (+194% Y/Y) in 2005 revenue Games $1.8B to be spent on mobile gaming in 2005E, up 42% Y/Y (MS Research) Commerce 3MM+ NTT DoCoMo wallet phone users (CQ1:05) used pre-paid technology on mobile phones to complete transactions Mobile community leader SMS.ac exceeds 40MM users (6/05)Community
  • 39 Business Leaders Tell Story Mobile phones are more than a billion smart computers we can’t ignore that may create a software spiral like that of PC over the next 10 years. - Paul Otellini, Intel CEO We really believe we are on the cusp of a whole new era of mobile computing. - Steve Ballmer, Microsoft CEO This is much bigger than what we saw 10 years ago [with the PC Internet]. - Jonathan Sacks, MFORMA CEO Most people’s first computing experience will be via a cell phone. - Eric Rudder, SVP, Technical Strategy, Microsoft
  • 40 Mobile Internet Is Here – $19B+ Revenue (+23% Y/Y in 2005E) Mobile Internet with $19B in 2005E revenue is already as big as online advertising but with smaller wealth creation Transport (1) Voice Data Handsets (2) Mobile Internet Premium Services (3) Online Advertising (4) 2005E 2009E CAGR $529 55 124 19 $19 $559 61 102 45 $46 1% 2 (5) 24 25% • Transport growth hurt declining prices / slowing subscriber growth • Handset revenue growth decelerating hurt by declining ASPs not offset by volume growth • Mobile Internet premium services expected to grow steadily, in-line with online advertising … biggest threat to forecast could come from mobile content piracy (1) Informa (5/05). (2) Frost & Sullivan (5/05). (3) Source: Morgan Stanley Research, total market. (4) Source: PriceWaterhouseCoopers (6/05). Global Revenue (US$ in Billions)
  • 41 Broadband vs. Mobile Internet Revenue Composition 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. CQ3:05 annualized revenue for Rakuten, and T-Online. Right Chart – Morgan Stanley Research estimates, Global Data. Informa (5/05), Ovum (5/05). (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. Mobile Internet - Revenue Composition C2005E - $19B Enterprise Services 10% Search / 411 16% Other Info & Infotainment 24% Games 10% Music & Video 4% Gambling 1% Personalization (1) 35% Commerce 61% Payments 3% Advertising 36% Top 10 Internet Companies - Revenue Composition C2005 - $42B Broadband vs. Mobile Internet Revenue Composition [ask vlad Broadband – Vendor / Seller Pays Mobile – User Pays…Make Up on Volume?!
  • 42 Type of content users expect to access within 12 months Games / Ringtones / Music - Most Popular Source: LogicaCMG 6/05. * includes screen savers. ** includes movie previews 83811Full feature films 107725Video clips** 13131656Multimedia images* 13101229Sports clips 23151531News 28131555Music 25272073Ring tones 30%11%15%49%Games South America (%) North America (%) Europe (%) Asia Pacific (%)
  • 43 0 100 200 300 400 500 600 700 800 900 Mobile Subscribers Mobile Internet Users Subscribers(MM) Asia Pacific Europe North America South America Africa / Middle East 20% 12% 7% 5 10 15 20 25 Mobile Data as % of Revenue (leading carrier in region) Asia / Europe Lead – Mobile Internet Adoption + Carrier Revenue Source: Informa 5/05. Mobile Internet user defined as someone who regularly uses data (including SMS) a minimum of once per week, whether for internet browsing or regular push services to their terminal. For right chart, leading carriers by wireless subscribers in Asia Pacific, Europe, and North America are China Mobile, Vodafone, and Cingular, respectively.
  • 44 Complexity of Mobile Internet • Simple ecosystem • Microsoft Windows operating system and Intel x86 architecture create standardized development platform for applications and content PC Internet Mobile Internet • Complex ecosystem • Different handsets support different network standards (CDMA, GSM, HSDPA) • Handset replacement cycle time shrinking from 26 to 18 months (1) • Fragmented, proprietary operating system landscape (Java, Brew) • Multiple processor architectures (TI, Samsung, Intel) (1) Source: Frost & Sullivan (2005).
  • 45 Melon Unlimited MP3 Downloads KRW4,500/mo ($4.60/mo) Cizle Movie Preview, Reservation and VOD viewing GXG Mobile Games KRW14,000/mo ($14.30/mo) Korea Mobile Broadband Sets Standard
  • 46 China Internet Companies – Diversified Revenue Mix Source: Morgan Stanley Research, company data. Based on CQ3:05 earnings results for Baidu, Shanda, NetEase, SINA, Tom Online, Tencent, Sohu, The9, Linktone, KongZhong, 51job, Ctrip, and Hurray. Companies selected based on market capitalization as of 2/13/06. Gaming 27% Advertising 28% MVAS 31% Others 14% Revenue Composition - Top 13 China Internet Companies CQ3 Annualized - $2B
  • 47 Mobile Internet Food Chain – US Example 2 billion people globally with mobile devices buy mobile content from 2 primary sources… Wireless Carriers Portals, Websites, Media …who in turn may obtain content from content providers… …with the help of billing / payment processors / infrastructure providers Source: Motricity, Morgan Stanley Research.
  • 48 Off-Portal Sales Have Grown Share, at Margin Source: qPass Customer Data (1/06). Non-operator = 3rd party mobile content vendor, such as Jamster. On-portal = content purchased via non- operator’s WAP site or Web site. Off-portal = not sanctioned by the operator or available via the operator’s deck of content. qPass’ Global Non-Operator Storefront Sales • While most content transactions in US are consummated on carrier portal, we are likely to see value of this screen real estate reduced, as users navigate directly to content, but expanded / independent mobile payment systems are key. Similar trends played out on Internet, with homepage advertising for large sites.
  • 49 But Off-Portal Distribution Varies by Geography Source: Yankee Group (2004), as quoted by qPass (4/05) http://www.qpass.com/connections/april2005/offportal.html. “Off-Portal” Revenue Share in Europe and the US • In Europe, where carriers partner with a greater number of content providers with their transparent billing systems, 70% of revenue is generated off-portal • In US, where access to transparent billing by content providers is limited and where content provision is not generally enabled off-portal, 30% of revenue is generated off-portal 0 10 20 30 40 50 60 70 80% 2004 2005 2006 2007 2008 EU US
  • 50 Mobile Content Value Chain – Fighting Over End-User Wallet Share • As content becomes richer, content owners may gain leverage / revenue share over time • Shift to real tones from polyphonic ringtones may potentially squeeze middlemen, increasing content owner / label share • Carriers, who possess extensive customer relationships (including billing) and distribution channels, are also likely to demand higher share of pie and fight to protect ‘walled garden’ fees • In US, carriers make ~20-30% for on-portal content, and potentially make less from off-portal content, per qPass • However, owing to differences in platform (on-portal vs. off-portal), content (polyphonic ringtone, mastertone ringtone, game), and service level (billing, customer service, marketing), carrier fees can vary from 5-40% Source: Morgan Stanley Research and qPass (2005).
  • 51 Walled Garden – Different Philosophies 1) Cingular If a customer wants to do it [access content off Cingular’s deck], we need a darn good reason to block them. [Cingular services] should win on their merits, we want to be very open. - Jim Ryan, VP Cingular Data Cingular allows access to any web site, and more notably allows content downloads from any source, even those that bypass Cingular billing 2) Verizon Wireless Verizon is very particular and careful [about the content it selects], we are not interested in opening that up. – Jim Straight, VP Verizon Wireless Data Verizon Wireless recently moved to block access to any website except those accessible via Verizon’s deck; content downloads allowed only using Verizon billing and from Verizon deck 3) China Mobile China Mobile retains significant control over what content is offered, but is moving toward a more open and flexible walled garden approach: service providers choose to keep 85%, 70% or 50% of revenues depending on what level of service they want from China Mobile: 1) billing, 2) customer service, 3) marketing
  • 52 Leading Global Wireless / Wireline Carriers – Skype / eBay = #8 Company Region Subscribers (MM) Market Cap ($B) China Mobile Vodafone (1) China Unicom Telefonica Moviles America Movil T-Mobile Orange NTT Cingular SBC (2) Verizon (2) NTT DoCoMo Verizon Wireless Sprint / Nextel Telecom Italia Mobile (1) China Europe / Japan China Europe / LatAm LatAm Europe / USA Europe Japan USA USA USA Japan USA USA Europe / LatAm 247 171 121 90 93 87 84 56 54 49 49 50 51 47 44 $94 131 11 46 59 71 59 66 NA 92 95 67 NA 71 52 Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery. Note: Subscriber data based on most recent quarter. (1) As of CQ3:05. (2) Subscribers given as access lines. Total switched access lines do not include DSL. (3) Subscriber figure for Skype is registered user amount as of CQ4:05. Y/Y Growth 21% 13 15 26 53 12 16 (6) 10 (6) (7) 5 17 18 19 Type Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireline Wireline Wireless Wireless Wireless Wireless Skype (3) 75MM Registered Users (+277% Y/Y) Average Growth: 12%
  • 53 Leading Global Wireless / Wireline Carriers – ARPU Splits Company ARPU Voice ARPU Data ARPUType Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery. Note: Data from CQ4:05. Vodafone estimated on UK, Spain, Germany, Italy and UK average. For Telefonica Moviles and Telecom Italia Mobile, only domestic operations considered. Orange estimated on UK and France averages. Verizon and AT&T do not break out ARPU for wireline segments. Sprint / Nextel NTT DoCoMo T-Mobile Cingular Verizon Wireless Telefonica Moviles Orange Vodafone Telecom Italia Mobile NTT America Movil China Mobile China Unicom AT&T Verizon Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireless Wireline Wireless Wireless Wireless Wireline Wireline % Revenue from Voice % Revenue from Data $62 59 52 49 49 40 38 37 35 23 15 10 6 -- -- $56 43 47 44 45 34 -- 30 29 -- 14 8 5 -- -- $6 16 5 5 4 6 -- 7 6 -- 1 2 1 -- -- 90% 74 83 90 90 86 -- 82 74 -- 90 80 86 -- -- 10% 26 17 10 10 14 -- 18 16 -- 10 20 14 -- --
  • 54 China Mobile (the Company) – Mobile Internet Ecosystem • 247MM mobile subscribers (+21% Y/Y, C2005) • $6B in data revenue (+59% Y/Y to 21% of revenue, C2005) - components include SMS & MMS ($3B in 2005), IVR, WAP and color Ringtones • Mobile music is gaining momentum, color Ringtones downloaded 300MM+ times in C2005 • Creation of powerful MVAS ecosystem - 80-85% revenue share with Mobile Internet companies (such as Tom Online) • 70%+ of content for China Mobile is purchased off deck (vs. <20% for US market, per qPass) Source: Morgan Stanley Research, China Mobile.
  • 55 Mobile Internet Market Opportunities • Converged devices / services • Music • Video • New Media Devices • Games & Gambling • Paid Content • Messaging • Location-Based Services • Cameras • Community • Search • Advertising • Payments • Enterprise Productivity • Telematics • Battery Life • Other Connected Devices • Enabling Platforms & Infrastructure Services • Browsers on Mobile Devices
  • 56 Ten First Pass Mobile Internet Predictions What’s going: 10. Expensive transport – VoIP & competition puts $600B transport business at risk 9. Microsoft monopoly – Linux has shot at mobile. MSFT has <1% share 8. Walled garden – cracking already. Emerging payment systems may assist 7. World wide wait – by 2006, 100MM+ subs w/ fast 3G, 500MM+ 2.5G 6. Hit content / media / studios / artists without mobile strategies What’s coming soon: 5. Mobile search, then mobile advertising – $3B market for 411 is good start 4. Smash hit IM / email / community / photo sharing applications 3. Yahoo! or Google of Mobile – may not be YHOO / GOOG or a carrier What’s coming later (5+ years to mass market): 2. Digital phone, in part, displaces analog wallet, keys & ID 1. Batteries that last and last – powered by motion, fuel cells …
  • 57 Digital Paid-For Content – Developed on Mobile; Developing on Internet iTunes Music + Video + Lost Desperate Housewives + Jamster See Jamster Ad for content Text message short code in ad for content Crazy Frog Ringtone + Spy Hunter Game Mobile Internet Broadband Internet 1 credit in 9 credit plan for $5.99 / month 1 credit in 2 credit plan for $5.99 / month $1.99 per video U2, Vertigo Song $0.99 per song
  • 58 Watch These Phones As Users Develop Co-Dependent Relationships With These Remote Control Devices Barcode readers in phones can simply read product barcodes and automatically display order forms on the screen—and even make payments. Denso Wave Barcode Reader in DoCoMo Phone Samsung 7 Megapixel Phone Camera resolution higher than most existing digital cameras. Sling Box Watch / control your TV remotely. Slingbox enables you to watch your TV from wherever you are by turning virtually any Internet-connected PC into your personal TV. Whether you’re in another room or in another country, you have access to TV.
  • 59 iPod Nano • 4GB in < 1.5 cubic inches! Storage is Game Changer
  • 60 Assume You Are On Candid Camera! • Mass market adoption of camera and video phones may open up new markets (Google’s Blogger.com and upload.video.google.com) with potential for financial reward for citizen journalist / photographer… • Check Out Korea: What allowed operators to see a return on investment on their EV-DO [3G] networks was not other content, but subscribers' own content. Content that was made by people and exchanged with others has been incredibly popular. – Hyeon Lee, VP Samsung
  • 61 Mobile GPS – Keep on Trackin’ + + = Mapping services that know where you are Vendor offering Location-Based Coupons • Opt-in location-based coupons / advertising provide similar degree of engagement with consumers, on personalized / local / day-parted levels • About 10% of global handsets are GPS-enabled today, up from 1% in 1999(1) (1) Source: Always On and American Tech Research.
  • 62 Benefits of Recommendation Engines • A recommendation engine is an application which suggests items for users to view based on user settings and past behavior/purchases – ‘users who liked this item also liked this item…’ • One popular variant is Amazon.com’s recommendation engine, which creates suggestions based on purchase histories of other customers with similar tastes • Increased page views • Greater site stickiness • Higher Sales! Benefits of Recommendation Engines:
  • 63 User programs content on PC Abbreviated version of content syncs wirelessly with mobile device Server Mobile-PC as New Client-Server Model Client
  • 64 6 VoIP
  • 65 75MM as of 12/05 (1) Source: Company Data, Morgan Stanley Research. Skype Registered Users (1) Skype (VoIP) = Fastest Growing Product Ever? 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 1 4 7 10 13 16 19 22 25 28 Months Since Inception
  • 66 Pay Per Call – Compelling Conversion Rates Step 1: Search for “Refinance” Step 2: Enter your Phone number Step 3: Wait for a call Step 4: Speak live with vendor Source: Google.
  • 67 7 Video
  • 68 Rapid P2P Growth (Mostly Video) is Stressing Internet & is Undermonetized • Peer-to-Peer (P2P) traffic was 60% (and rising) of Internet traffic in 2004, with BitTorrent accounting for 30% of traffic, per CacheLogic • “P2P affects Quality of Service (QoS) for ALL subscribers” (1) (1) Source: CacheLogic “P2P in 2005,” (9/05). Internet Protocol Trends (1) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Email FTP Other P2P Web
  • 69 (1) Source: CacheLogic “P2P in 2005,” (9/05). Mix of file formats by volume of traffic generated over 4 main P2P networks: BitTorrent, eDonkey, FastTrack, and Gnutella. Weighted by volume of traffic on each network. • Video is P2P bandwidth hog Video 62%Audio 11% Other 27% Video Dominates P2P File Format Mix on 4 Major P2P Networks (1)
  • 70 Source: Cisco (12/05) Video could drive difference between growth trajectories Video Should Help Drive Internet Infrastructure Growth Web Traffic + Video 300-500% Y/Y Growth Web Traffic alone 100% Y/Y Growth Internet CapacityRequirements 2005 2015
  • 71 1. 2/04 – BBC launches private demo of Internet Media Player (iMP) allowing users to watch TV shows 24 hours after their initial scheduling date 2. 10/05 – Disney / ABC and Apple to offer episodes of popular shows like Lost and Desperate Housewives available ad-free via iTunes for $1.99 apiece 3. 10/05 – 1MM+ videos, priced at $1.99 each, downloaded from Apple’s iTunes site in less than 20 days 4. 11/05 – Comcast / CBS and DirectTV / NBC to offer on-demand TV shows for $0.99 5. 11/05 – Cisco to acquire Scientific Atlanta for $7B to prepare for demands of online video; expecting network traffic increases of 4-6x annually, instead of 2x gains seen in US and Europe, driven by video consumption requirements 6. 11/05 – Time Warner to stream episodes for free (supported by 2-minute blocks of 15-30-second commercials) in Jan 2006. Initial run limited to 30 series (Wonder Woman, Growing Pains, Kung Fu…) but TWX plans to expand to 100+ series and 300+ episodes per month 7. 11/05 – NBC Nightly News to air its entire broadcast on the Internet -- NBC Nightly News Netcast with Brian Williams will be available for free beginning at 10PM EST 8. 12/05 – NBA to digitize 60+ years of footage and post on NBA.com, beginning in 2006, with a searchable database that will include players involved and exact locations on court 9. 12/05 – CBS will offer NCAA basketball March Madness games for free in 2006, on streaming ad-supported basis 10. 12/05 – CBS offers free streaming video of 2 comedy programs Two and a Half Men and How I Met Your Mother this Yahoo! during the week of 12/27 11. 12/05 – AOL / Google to collaborate to showcase AOL’s premium video service within Google Video 12. 1/06 – Google to offer for-pay video over Internet from likes of CBS and NBA 13. 1/06 – DirectTV / FOX to offer on-demand TV shows for $0.99 and pre-air shows for $2.99 14. 3/06 – Cingular to offer on-demand video service for 3G mobile phones for $20 a month Online Video – P2P2 = Peer-to-Peer PLUS Pay-to-Play
  • 72 Online Video – It’s Findable, Should Be Tagged / Easy to Search!
  • 73 Google Video – Short On-Demand Attention Spans Rule?! http://video.google.comStart Here: Other Popular Video Sites Premium Content User-Generated Content Popular Videos For-Pay Videos
  • 74 8 Local
  • 75 Local Should Be Substantive Market Source: The Kelsey Group (3/2006). • 20% of US explicit searches local in nature; 40% of US implicit searches are local • Global local search market (Internet Yellow Pages, Geo-targeted search, Wireless) generated $3.4B in revenue in 2005E (+33% Y/Y), of this, US local search was $1B (+54% Y/Y) • US Yellow Pages off-line market of $15B (+1% Y/Y)
  • 76 Mobile May Help Drive Local Growth Google Local for Mobile Yahoo! Go
  • 77 9 Finding
  • 78 SFO - Will There Be a Difference Between Advertising / Marketing / Selling? Search for “TiVo” Obtain Find
  • 79 Google gives advertisers / vendors a toolset / dashboard to manage / measure customer acquisition through sponsored search Google = On Demand Customer Acquisition Tool
  • 80 0 10 20 30 40 50 CQ1:04E CQ2:04E CQ3:04E CQ4:04E CQ1:05E CQ2:05E CQ3:05E CQ4:05E GlobalQueryVolume(B) Google Yahoo! MSN Other Search Source: comScore Global qSearch and MediaMetrix. Traffic is defined as page views. Internet is a Distribution Channel – Search is Key Front-End 7% of global Internet traffic was derived from search while 65% of global users used search in CQ4, per comScore 22B 27B 30B 34B 37B 41B 40B 43B
  • 81 (1) Source: Ad revenue totals from IAB/PriceWaterhouseCoopers Interactive Advertising reports. (2) Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue. (3) Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue. (4) Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up 20% Y/Y. SFO – Importance of Google / Yahoo! & Affiliates… 0 200 400 600 800 1,000 1,200 1,400 CQ3:04E CQ3:05E USAdRevenue($MM) Google, US Gross Ad Revenue (2) Yahoo!, US Gross Ad Revenue (2) Others (3) 22% 25% 30% 27% US Online Ad Revenue Mix (1) 42% 53% Total US, +34% Y/Y •Google, +84% •Yahoo!, +44% •Others (4), +8% Y/Y
  • 82 …SFO – Importance of Google / Yahoo! & Affiliates • Google generated $1.9B in gross revenue in CQ4 it PAID OUT $629MM to thousands of partners like AOL, Ask Jeeves and EarthLink • Yahoo! generated $1.5B in gross revenue in CQ4 it PAID OUT an estimated $433MM to thousands of partners like MSN, ESPN and The Wall Street Journal
  • 83 Payments – PayPal Has Impressive Broadband Internet Leadership With ~100MM Accounts. Mobile? Source: Morgan Stanley Research. 0 20 40 60 80 100 120 CQ1:04 CQ2:04 CQ3:04 CQ4:04 CQ1:05 CQ2:05 CQ3:05 CQ4:05 TotalPayPalAccounts(MM) 0 1 2 3 4 5 6 7 8 9 TotalPaymentVolume(B) Total Payment Volume (B) Total PayPal Accounts (MM)
  • 84 10 Emerging Trends
  • 85 Innovation / Network Effects Drive Usage Growth • Broadband • Mobile • User experience • Search • Personalization with more effective targeting • User-generated content (RSS, blogs, reviews, video, images, audio…) • Music • Payments • Short- and long-form video • Interactive entertainment • In-game Advertising • VoIP • Local • Pay per call • Digital Rights Management (DRM) • Ubiquitous connectivity
  • 86 11 Emerging Companies
  • 87 Mobile Internet – A New Client-Server World?Watch Where Global Younger Generation Goes Social NetworkingRingtone Downloads, Connecting Mobiles to Net Social Tagging Web OS Programs In-Game Advertising
  • 88 UGC / Personalization / Community are Key Yahoo! Movie Reviews eBay Feedback Ratings Social Networking / Tagging Google Video Search Tencent Instant Messaging (PC / Mobile) Blogs
  • 89 Representative Emerging Companies to Watch – Based on Data Trends Sources: Morgan Stanley Research, Alexa, comScore MediaMetrix. Note: Criteria for choosing companies based on the following variables: recent growth in Internet traffic, absolute Internet traffic, age of company, and presence on blogs and at conferences (1) Source: Cachelogic; (2) Source: comScore MediaMetrix; (3) Technorati; (4) Xfire. Company Market Data Points P2P File Sharing Accounted for 35% of all Internet traffic in 2004(1) Online Video Content 11MM uniques (1/06) vs. 327K (8/05) (2) Blog Search Engine Over 29MM blogs indexed (3) ; 11% of U.S. Internet users read blogs (3) IM for Gamers 348K uniques (1/06) vs. 185K uniques (8/05) (2) 10K new customers / day (4) Personalized Search Social Networking 7MM uniques (1/06) vs. 3MM uniques (8/05) (2) News Aggregator 2MM uniques (1/06) vs. 579K uniques (7/05) (2) Personalized Radio 2MM uniques (1/06) vs. 528K uniques (7/05) (2) 3MM uniques (1/06) vs. 1MM uniques (8/05) (2) Online Marketplace 10MM uniques (1/06) vs. 6MM uniques (7/05) (2)
  • 90 12 Closing Thoughts
  • 91 Internet Thesis 10-15% user growth 20-30% usage growth 30%+ monetization growth
  • 92 Huge Market Simple, Focused Mission Active, Missionary Founders Great Management Team, Culture Constant Improvement Insane Customer Focus Big Gross Margin Annuity -Like Model Strong Board X X X X XX X X X XX X X X X X X X Apple Cisco Dell eBay Google Intel Microsoft Yahoo! X O X X X X X X 28 68 19 82 89 61 82 87 X X X X X X XX X X X X X X X X X X X X X XX X X X X X X X X X X X X X X X X X X X A Look at Some of Biggest Winners of Our Day Source: Morgan Stanley Research (2005).
  • 93 13 Appendix
  • 94 1268,317Iran15 1269,330Egypt14 1270,589Turkey13 1082,786Germany12 1283,986Philippines11 21103,975Mexico10 20127,641Japan9 2-1142,362Russia8 23142,655Nigeria7 22150,109Pakistan6 31175,507Brazil5 41221,279Indonesia4 51293,819USA3 1721,086,529India2 21%1%1,300,024China1 ShareGrowth(000's)Country Worldwide2004Population 2004 Total 6,288,463 Population – Top 15 Markets
  • 95 Nominal GDP per Capita – Top 15 Markets 1331,13427,531Canada15 1332,91129,035France14 1333,39029,647Germany13 1533,86629,330Belgium12 1735,54830,273United Kingdom11 1435,66631,164Finland10 1536,24431,622Austria9 936,59633,705Japan8 1237,32633,199Netherlands7 1438,49333,678Sweden6 639,93537,708USA5 1444,80839,295Denmark4 1645,67539,532Ireland3 1149,30044,439Switzerland2 13%$54,600$48,325Norway1 Growth(US$)(US$)Country 2004CapitaCapita 2004 GDP Per2003 GDP Per Note: Morgan Stanley Research GDP per capita figures (current prices) from IMF.
  • 96 117717,280Mexico15 244218,234Spain14 227019,068Turkey13 263-119,943Canada12 251324,681South Korea11 246-126,720Italy10 356-233,374United Kingdom9 355034,223France8 327438,035Russia7 324341,568Brazil6 44747,188India5 569356,936Germany4 661277,790Japan3 1563-1183,688USA2 24%22%14%282,524China1 SharePenetrationGrowth(000's)Country WorldwideLine2004Lines TelephoneTelephone 2004 Total 1,198,245 Telephone Lines – Top 15 Markets Source: Morgan Stanley Research
  • 97 1944,134South Africa15 11214,810Argentina14 12225,094Taiwan13 11515,660Poland12 13906,334Netherlands11 21357,861France10 2749,927Russia9 232010,086Canada8 3261212,793South Korea7 325815,148United Kingdom6 5171021,165Japan5 631425,801Germany4 1151249,234India3 2234499,091USA2 28%10%16%128,000China1 SharePenetrationGrowth(000's)Country WorldwideCable2004Subscriptions Cable 2004 Total 459,236 Cable Subscriptions – Top 15 Markets Source: Morgan Stanley Research
  • 98 144510,232Taiwan15 260112,088Australia14 2122012,126Mexico13 212912,627India12 226815,218Italy11 249115,738Canada10 3111918,910Brazil9 3131918,935Russia8 337523,138France7 443425,964United Kingdom6 456227,041South Korea5 647139,252Germany4 631741,600China3 842453,569Japan2 29%69%3%203,677USA1 SharePenetrationGrowth(000's)Country WorldwidePC2004PCs Installed 2004 Total 696,212 Installed PCs – Top 15 Markets Source: Morgan Stanley Research
  • 99 2155532,130Indonesia15 2512132,919Thailand14 289336,625Spain13 2351536,862Mexico12 277137,164South Korea11 347540,323India10 367241,506France9 3281549,171Brazil8 390253,662United Kingdom7 394153,964Italy6 4403457,620Russia5 482368,121Germany4 567685,147Japan3 11588170,723USA2 21%26%25%334,820China1 SharePenetrationGrowth(000's)Country WorldwidePhones2004Phones In Use MobileMobile 2004 Total 1,588,805 Mobile Phones – Top 15 Markets Source: Morgan Stanley Research
  • 100 1123312,250Mexico15 1333713,440Spain14 2672913,611Australia13 2101617,945Brazil12 2682421,850Canada11 2164922,300Russia10 3401324,848France9 3502528,610Italy8 465531,600South Korea7 4591135,179United Kingdom6 445739,200India5 5561946,312Germany4 8571472,677Japan3 1071894,000China2 22%69%9%201,833USA1 SharePenetrationGrowth(000's)Country WorldwideUsers2004Users InternetInternet 2004 Total 900,981 Internet Users – Top 15 Markets Source: Morgan Stanley Research
  • 101 146938,100India15 1229746,400Australia14 1481049,700Mexico13 2782555,000Turkey12 2961355,400Italy11 2193361,700Canada10 2136565,900South Korea9 32301394,500Spain8 3115195,600Germany7 352131120,000Taiwan6 423611141,700United Kingdom5 510020175,000Brazil4 185053644,700Japan3 195310684,700China2 25%299%7%878,000USA1 SharePenetrationGrowth(000's)Country WorldwideCard2004Cards Credit / DebitCredit / Debit 2004 Total 3,566,655 Credit / Debit Cards – Top 15 Markets Source: Morgan Stanley Research
  • 102 Source: Morgan Stanley Telecom Research. Average Technology Speed US Players Common Data Applications WiMax 70 Mbps Various Stream. video, movie/MP3 downlds. Wi-Fi 35 Mbps + Various Stream. video, movie/MP3 downlds. Flarion 1.5 Mbps Nextel Stream. video, movie/MP3 downlds. HSDPA 400-700 Kbps + Cingular Stream. video, movie/MP3 downlds. EV-DO 300-500 Kbps VZW, Sprint PCS Stream. video, movie/MP3 downlds. UMTS 220-320 Kbps Cingular Stream. video, movie/MP3 downlds. WiDEN 100-130 Kbps Nextel MMS, Video conferencing EDGE 100-130 Kbps Cingular, T-Mobile Multimedia e-mail, Web infotainment CDMA1X 40-80 Kbps VZW, Sprint PCS Video-conferencing GPRS 30-40 Kbps AWE, Cingular, T-Mob E-mail and access to corporate data networks and the Internet CDMA 10-20 Kbps VZW, Sprint PCS SMS iDen 20 Kbps Nextel Two-way radio, Alphanumeric paging GSM 9.6 - 21 Kbps AWE, Cingular, T-Mob SMS TDMA 9.6 Kbps AWE, Cingular, T-Mob SMS/multimedia games 2GBeyond2.5G3G Mobile Network Speeds / Carriers / Uses
  • 103 Disclosure Section The information and opinions in this report were prepared by Morgan Stanley & Co. Incorporated and its affiliates (collectively, "Morgan Stanley"). 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: Brian Fitzgerald, Mary Meeker, Brian Pitz. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy This 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 in a company that he or she covers or recommends in this report: Mary Meeker - Intuit (common stock), Amazon.com (common stock), Yahoo! (common stock), Microsoft (common stock), eBay (common stock); Brian Pitz - Amazon.com (common stock), Yahoo! (common stock), priceline.com (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 28, 2006, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in this report: Amazon.com, CNET, eBay, Google, VeriSign, Yahoo!. As of March 31, 2006, 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 this report (including where guarantor of the securities): Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of Google, GSI COMMERCE. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign, Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from CNET, Intuit, Microsoft, priceline.com, VeriSign. 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 companies covered in this report: Amazon.com, CNET, drugstore.com, eBay, Google, GSI COMMERCE, Intuit, Microsoft, priceline.com, VeriSign, 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 companies covered in this report: CNET, eBay, Intuit, Microsoft, priceline.com, VeriSign. The research analysts, strategists, or research associates principally responsible for the preparation of this research report 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 and/or Morgan Stanley DW Inc. is a director of Microsoft, Yahoo!. Disclaimer
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  • 105 Unless otherwise specified, the time frame for price targets included in this report 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; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in this report 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 For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. The securities, instruments, or strategies discussed in this report may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. This report is not an offer to buy or sell or the solicitation of an offer to buy or sell any security or to participate in any particular trading strategy. The "Important US Regulatory Disclosures on Subject Companies" section lists all companies mentioned in this report where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in this report, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Employees of Morgan Stanley not involved in the preparation of this report may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report. Derivatives may be issued by Morgan Stanley or associated persons. Morgan Stanley & Co. Incorporated and its affiliate companies do business that relates to companies covered in its research reports, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in its research reports on a principal basis. With the exception of information regarding Morgan Stanley, reports prepared by Morgan Stanley research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company. Disclaimer
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