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Economy Tech trends in 2009 by Mary Meeker (Morgan Stanley)

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Economy Tech trends in 2009 by Mary Meeker (Morgan Stanley) - Presentation Transcript

  1. Economy + Internet Trends March 20, 2009 mary.meeker@ms.com / collis.boyce@ms.com / mayuresh.masurekar@ms.com / liang.wu@ms.com Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
  2. Economy + Internet Trends Outline • Economy 1. Recession – a long time coming, how long will it last? 2. Advertising Spending – closely tied to GDP growth • Technology / Internet 1. Digital Consumer – Undermonetized social networks / video / VoIP driving powerful usage growth + material disruptions for traditional players that may accelerate in recession 2. Mobile – Innovation in wireless products / services accelerating 3. Emerging Markets – Pacing next wave of technology adoption 4. Cloud Computing – Access / storage need / virtualization driving change • Closing Thoughts 1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time… 2
  3. Economy Recession = Long time coming, how long will it last? Ten years of inflated growth to be followed by ____? Hope for six more tough months but plan for 3-5 years Advertising Spending = Closely tied to GDP growth. Challenges for Internet but likely not as draconian as 2000-2002 Commerce = Slowing but Amazon.com + iTunes data illustrate material online share gains from offline, recession / mobile should accelerate share gains 3
  4. 10 Years Ago – I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998 4 Source: YouTube.
  5. Roots of Economic Challenge? 10+ Years of Rising Home Ownership + Declining Interest / Savings Rates USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008 70% 20% June 2004: US home ownership = 73MM 68% 16% U.S. Interest Rate & Personal Savings Rate January 1993: HUD began promoting broader home ownership. US home U.S. Home Ownership Rate ownership = 62MM 66% 12% 64% 8% 62% 4% 60% 58% 0% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S. Home Ownership Rate U.S. Interest Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline U.S. Personal Savings Rate Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. All data as of 12/31/08. 5 Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.
  6. Market & Regulatory Pressure Made Home Buying More Accessible…1998 In addition to a buoyant economy, the overall housing industry owes its enduring vigor to innovations in mortgage finance that have helped not only expand homeownership opportunities, but also reduce market volatility. Under market and regulatory pressure to make home buying more accessible to low-income and minority households, financial institutions have revised their underwriting practices to make lending standards more flexible. In the process, they have developed several new products to enable more income- constrained and cash-strapped borrowers at the margin to qualify for mortgage loans. - 1998 State of the Nation’s Housing Report Note: Quoted in Gary Gorton’s NBER Working Paper Series “The Panic of 2007” (Working Paper 14358), p.5. 6 Source: Harvard University, Joint Center for Housing Studies, 1998.
  7. 10 Years of Rising Home Prices – Up ~2x at Peak USA Real Home Price & Building Cost Indexes, % Change 1965 - 2008 80% % Change From 1965 Level 60% 40% 20% 0% -20% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S. Real Home Price Index U.S. Real Building Cost Index 7 Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller.
  8. Systemic Leverage Helped Pace ‘Easy Money’ Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries 70% 400% U.S. Total Credit Market Debt as % of GDP 2008: 3.6x GDP & Foreign Ownership % of U.S. Treasuries, 1920 - 2008 60% 350% Foreign Ownership of U.S. Treasuries, 1933: 3.0x GDP 50% Total Debt as % of GDP % of Total Market Cap 300% 40% 250% 30% 200% 20% 150% 10% 0% 100% 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008 U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization Note: Foreign ownership of US treasuries data N/A before 1965. Source: Federal Reserve, Ben Wattenberg, The Statistical 8 History of the United States, From Colonial Times to the Present, Bridgewater, Morgan Stanley Research.
  9. Excessive Debt Levels = 2008 & 1933 Corporate Debt Much Lower on Relative Basis Now U.S. Total Credit Market Debt as % of GDP, 1929 – 2008 & Sector Share Breakdown 350% 1984 - 2008 % Share of Total Debt Net Increase 1933 2008 Amount ($T) 300% Government + GSE $14.4 24% 33% U.S. Credit Market Debt / GDP (%) Households 11.9 18 27 250% Corporates 8.8 51 22 GSE Financials 8.5 7 18 200% Financials 150% Government 100% Corporates 50% Households 0% 1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 Households Corporates Financials GSE Government Note: GSE (Government Sponsored Enterprises) debt includes various agency-backed mortgages; Source: Federal Reserve, Ben 9 Wattenberg, The Statistical History of the United States, From Colonial Times to the Present, Morgan Stanley Research.
  10. USA Debt Mix Shift – Mortgages / ABS / GSE Up to 23% of Debt vs. 7% 2 ½ Decades Ago 2008 1984 U.S. Total Debt: $53T U.S. Total Debt: $7T Total Mortgage / ABS / GSE Debt: $12T Total Mortgage / ABS / GSE Debt: $0.5T Mortgage Pools 9% ABS Issuers 8% Mortgage Pools – 4% Other ABS Issuers – 0% 20% GSE GSE – 3% Other – 22% 6% Household 26% Government 16% Government Household 25% Corporate 27% 19% Corporate 14% Note: Debt amounts are nominal, ABS is Asset Backed Security, GSE is Government Sponsored Enterprise. 10 Source: Federal Reserve, Morgan Stanley Research.
  11. USA Mortgage Delinquency @ Record High 7.88% USA Residential Mortgage Delinquency Rates, CQ1:98 – CQ4:08 20% Delinquency Rates (%) 15% 10% 5% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 All U.S. Mortgages Prime Mortgages Subprime Mortgages Note: National delinquency rate of 7.88% and Q/Q jump of 89 basis points in CQ4:08 are the highest since CQ1:1972, when data first became available; Average national mortgage delinquency rate from 1972-2007 is 4.70%; 11 Source: Mortgage Bankers Association.
  12. Unemployment Benefits At 38-Year High and Rising U.S. Unemployment Rates & Total Benefits Paid, 1971 - 2009 $6,000 12% $5,000 10% Real Benefits Paid ($MM) Unemployment Rates $4,000 8% $3,000 6% $2,000 4% $1,000 2% $0 0% 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Real Benefits Paid Unemployment Rate Note: Unemployment Insurance : Benefits Paid Through State Programs are inflation adjusted, but not seasonally adjusted, while 12 Civilian Unemployment Rates (16 yr+) are seasonally adjusted. Source: Bureau of Labor Statistics. Morgan Stanley Research.
  13. Michigan Unemployment @ 11.6%, Up Nearly 2x Y/Y USA @ 7.6%, On Way to California Level of 10.1%? U.S. State Unemployment Rates, 1/08 vs. 1/09 13% 1/09 National Average Jan-08 Jan-09 11.6% 11% 10.4% 10.3% 10.1% 9.9% 9.7% 9.4% 9.3% 9.2% 8.8% 8.7% 8.7% 8.6% 8.6% 9% Unemployment Rate 7.3% 7% 6.3% 6.1% 6.0% 5.9% 5.7% 5.7% 5.5% 5.3% 5.3% 5.3% 5.2% 5.0% 4.8% 5% 3% y a o n nd a ia a an a ia C ee i pp ck ad in an in hi go D rn rg s ig la ol ol O si tu es ev n di ifo re eo h Is ar ar to s en In ic O nn N si G al de ng C C M is K C Te th h ho hi M ut or as R So N W Note: 2/09 preliminary U.S. national unemployment rate was 8.1%. Source: Bureau of Labor Statistics. Morgan Stanley Research. 13
  14. Rising Unemployment Higher Mortgage Defaults… U.S. Residential Mortgage Delinquency Rates Initial Claims For Unemployment Insurance Y/Y Growth vs. Initial Claims For Unemployment Insurance 100% 40% Residential Mortgage Delinquency Rates Y/Y Growth Y/Y Growth, 1973 - 2008 80% 30% 60% 20% 40% 10% 20% 0% 0% -10% -20% -20% -40% 1973 1976 1980 1983 1987 1990 1994 1997 2001 2004 2008 U.S. Residential Mortgage Delinquency Rates Y/Y Growth U.S. Initial Claims For Unemployment Insurance Y/Y Growth Note: Both mortgage delinquency rates and initial claims for unemployment insurance are seasonally adjusted. 14 Source: Mortgage Bankers Association, Bureau of Labor Statistics, Morgan Stanley Research.
  15. …Higher Unemployment / Mortgage Defaults Rising Personal Bankruptcy Filings… U.S. Weekly Personal Bankruptcy Filings, Y/Y Growth, 2000 - 2009 150% 100% 50% 0% -50% -100% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Note: “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” went into effect on 10/17/05, causing anomalies in the Y/Y growth series from late 2005 through early 2007. Source: Lundquist Consulting, US Census, Administrative Office of the US 15 Courts, Morgan Stanley Research, Betsy Graseck, Cheryl Pate and Justin Kwong.
  16. … Consumer Confidence Falling Overall Consumer Spending Survey Results – 6/06 - 2/09 Would you say your overall spending over the next 90 days will be more than last year, less than last year, or the same as last year? – 60% survey respondents now saying they’ll spend less money 60% 2/09 Spending More Spending Less 61% 50% 40% 30% 20% 10% 0% Jun-06 Nov-06 Mar-07 Jun-07 Sep-07 Jan-08 Apr-08 Jul-08 Sep-08 Dec-08 Feb-09 16 Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 2/18/09.
  17. Average Consumer Wealth Destruction = ~25% Through CQ4:08 – 56%+ of USA Household Assets in Real Estate + Stocks USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances, % Change from CQ1:07 10% Credit Market Instruments Others 7% 0% 3% % Change from CQ1:07 -10% Deposits Real Estate 12% 38% -20% Pension -30% Reserves 22% Equities + Mutual Funds -40% 18% CQ1:07 CQ3:07 CQ1:08 CQ3:08 S&P/Case-Shiller Home Price Index S&P 500 Index Note: Median household income in 2007 was $50,233, per U.S. Census Bureau. 56% accounts only real estate + equities / mutual funds; many pension funds also invest in the U.S. equities market, thus actual exposure to these asset classes will likely be higher. The total value of all USA household’s real estate + equities + mutual funds + pension fund reserves declined 25% from the peak in CQ2:07; the Y/Y decline in CQ4:08 is -21%; the Y/Y decline of total household assets in CQ4:08 is -15%. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 17
  18. Difficult Retail Environment Abercrombie & Fitch Same-Store Sales UK Retail Same-Store Sales Y/Y % Change, 1/08 – 2/09 Y/Y % Change, 1/08 – 2/09 10% 10% 6% 5% 5% 3% Comparable Store Sales Y/Y % Change Comparable Store Sales Y/Y % Change 2% 2% 1% 0% 0% 0% 0% -1% -1%-1%-1% -2%-1% -2% -2% -2%-3% -3% -3% -5% -5% -7% -10% -10% -10% -11% -15% -15% -14% -20% -20% -20% -20% -25% -25% -24% -28% -30% -30% -30% Jan Mar May Jul Sep Nov Jan Jan Mar May Jul Sep Nov Jan Note: Same-store sales are sales in stores open more than one year. 18 Source: Abercrombie & Fitch, British Retail Consortium.
  19. Retail Sales + e-Commerce Growth Rates Slowing Adjusted Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 – CQ4:08 40% 30% 20% Y/Y Growth 10% 0% -10% CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 US Adjusted Retail E-Commerce Sales US Total Retail Sales Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; 19 Source: US Dept. of Commerce (CQ4:08), Morgan Stanley Research.
  20. Corporate Sales – Increasingly Below Plan Since CQ1:06 Overall Corporate Sales Survey Results, CQ1:01 – CQ4:08 How is your company doing with regard to meeting its sales plan revenue objectives for the current quarter? Are you coming in above plan, even, or below plan? 60% CQ4:08 CQ3:01 51% 50% Above Plan Below Plan 50% 40% 30% 20% 10% 0% CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1:07 CQ4:07 CQ3:08 20 Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08.
  21. Material Revenue Growth Declines – TMT Companies Intel + Nokia = Accelerating -20%+ Declines TMT Companies Revenue Y/Y Growth, CQ1:07 – CQ1:09E 75% 60% Y/Y Revenue Growth 45% 30% 15% 0% -15% -30% CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E Microsoft Intel Cisco Nokia Disney Viacom* News Corp Time Warner Yahoo! Google Amazon.com eBay AT&T Verizon Note: CQ1:09E figures based on FactSet consensus estimates; CQ4:08 for VIA is an estimate. 21 Source: Company data, FactSet, Morgan Stanley Media Research.
  22. Technology Revenue – So far, a 2001 Redux of 5 Flat / Down Sequential Quarters…Now 4…This Time, Secular Outlook Worse Global Technology Sector Revenue & Y/Y Growth, CQ1:98 – CQ4:08 35% 700 30% 600 Average Y/Y 25% Growth = 11% 500 20% Y/Y Growth Revenue ( $B) 15% 400 10% 300 5% 0% 200 -5% 100 -10% 0 -15% CQ1:98 CQ3:99 CQ1:01 CQ3:02 CQ1:04 CQ3:05 CQ1:07 CQ3:08 Revenue Y/Y Growth Note: Revenue and Y/Y Growth compiled from 570 publicly traded global technology companies. 22 Source: FactSet, Morgan Stanley Research.
  23. USA Manufacturing Contracting Rapidly – 12/08 PMI Index Lowest Level Since 1980, 2/09 PMI = 35.8 80 U.S. PMI (Purchasing Managers Index), 1/48 – 2/09 PMI > 50 = 70 Expansion 60-year Average = 52.7 60 ISM PMI Index (%) 50 40 Oct 2001 Feb 1991 PMI < 50 PMI=40.8 PMI=39.4 = May 1982 30 Contraction Dec 2008 PMI=35.5 PMI=32.9 20 99 02 05 08 90 93 96 66 69 72 75 78 81 84 87 60 63 57 48 51 54 19 19 20 20 20 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 Note: PMI is a composite index based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and employment environment. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that 23 the industry is contracting. Source: Institute for Supply Management (ISM), Morgan Stanley Research.
  24. -6.2% Q/Q USA GDP Growth in CQ4 / Consumer Spending Fell 4.3% Biggest Q/Q Decline in GDP / PCE Since CQ1:82 / CQ2:80 U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE) Q/Q % Change, 2005-2008 5% 3% Q/Q Growth Rates 1% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 -1% -3% -5% -7% U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth Note, Real GDP and real PCE are inflation- and seasonally adjusted; CQ4:08 data is preliminary, may differ from final reported #s. -6.2% Q/Q real GDP decline is the largest since CQ1:1982; -4.3% Q/Q real PCE decline is the largest since CQ2:1980. 24 Source: BEA, Morgan Stanley Research.
  25. Global GDP Growth Forecasts = Continued Trend of Downward Revisions Difference from IMF Forecasts, 1/09 11/08 IMF Forecasts Country / Region 2007 2008 2009E 2010E 2009E 2010E USA 2.0% 1.1% -1.6% 1.6% -0.9% 0.1% Euro zone 2.6 1.0 -2.0 0.2 -1.5 -0.7 UK 3.0 -2.8 0.2 -1.5 -0.9 0.7 China 13.0 9.0 -1.8 -1.5 6.7 8.0 -1.2 -0.3 India 9.3 7.3 5.1 6.5 -4.2 -3.2 Russia 8.1 6.2 -0.7 1.3 -1.2 -1.0 Brazil 5.7 5.8 1.8 3.5 Developed Markets(1) -1.7 -0.5 2.7 1.0 -2.0 1.1 Emerging Markets(2) -1.8 -1.2 8.3 6.3 3.3 5.0 World -1.7 -0.8 5.2 3.4 0.5 3.0 Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 1/09. Morgan Stanley Research. 25
  26. Stock Markets Stabilizing = Leading Indicator of Economic Growth Russia off 74% vs. 36-Month Peak, Oil -67% / China -63% / India -57% / Japan -56% / S&P500 -49% 2006 2007 2008 500 450 400 Indexed Value (base = 100) 350 300 250 200 150 100 50 0 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 S&P 500 NASDAQ Composite Index China Shanghai SE Composite India SENSEX Russia RTS Light Crude Oil - Continuous Contract Gold - Continuous Contract Japan Nikkei 225 26 Note: all indices start at a value of 100 on 3/17/06; data as of 3/18/09; Source: FactSet.
  27. S&P500 – Key Spending Sectors Have Taken Big Hits Total Mkt % Change Cap ($B) 2009 Peak to S&P Sector 3/18/2009 2007 2008 YTD Current (1) Market Cap Leaders Financials 825 -20% -52% -23% -71% JPMorgan, Wells Fargo Industrials 661 7 -40 -27 -58 GE, United Technologies Consumer Discretionary 618 -18 -38 -14 -54 McDonald's, Walt Disney Materials 229 14 -45 -9 -50 Monsanto, DuPont Information Technology 1,255 12 -43 -4 -46 Microsoft, IBM Telecom Services 281 -12 -34 -9 -44 AT&T, Verizon Energy 936 36 -37 -15 -42 Exxon, Chevron Utilities 294 6 -28 -14 -39 Exelon, Southern Health Care 1,065 1 -24 -11 -35 Johnson & Johnson, Pfizer Consumer Staples 998 10 -20 -14 -29 Wal-Mart, Procter & Gamble (2) 7,506 1% -37% -14% -49% S&P 500 Total Note: (1) % Change from S&P 500 peak on 10/9/07 to 3/18/09; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change. 27 Source: Bloomberg, Morgan Stanley Research.
  28. S&P500 Down 39% in 2008, 2nd Worst in 183 Year History – Bad Years Often Follow Good Years 2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 2006 1956 2004 1948 1988 1947 1986 1923 1979 1916 1972 1912 1971 2000 1911 1968 1990 1906 1965 1981 1902 1964 1977 1899 1959 1969 1896 1952 1962 1895 1949 1953 1894 1944 2003 1946 1891 1926 1999 1940 1889 1921 1998 1939 1887 1919 1996 1934 1881 1918 1983 1932 1877 1905 1982 2001 1929 1875 1904 1976 1973 1914 1874 1898 1967 1966 1913 1872 1897 1963 1997 1957 1903 1871 1892 1961 1995 1941 1890 1870 1886 1951 1991 1920 1887 1869 1878 1943 1989 1917 1883 1868 1864 1942 1985 1910 1882 1867 1858 1925 1980 1893 1876 1866 1855 1924 1975 1884 1861 1865 1850 1922 1955 1873 1860 1859 1849 1915 1950 2002 1854 1853 1856 1848 1909 1945 1974 1841 1851 1844 1847 1901 1938 1958 1954 2008 1930 1837 1845 1842 1838 1900 1936 1935 1933 -39% 1907 1831 1835 1840 1834 1880 1927 1928 1885 1857 1828 1833 1836 1832 1852 1908 1863 1879 1931 1937 1939 1825 1827 1826 1829 1846 1830 1843 1862 -50 to -40% -40 to -30% -30 to -20% -20 to -10% -10 to 0% 0 to 10% 10 to 20% 20 to 30% 30 to 40% 40 to 50% 50 to 60% Note: S&P 500 historical info from 1825 to 2007. 28 Source: Value Square Asset Management, Yale University.
  29. Current USA Bear Market – 3rd Worst in History Duration Still Relatively Short S&P 500 Peak-to-Trough Rank Magnitude (%) Duration Days Start Date End Date 1 -86% 704 1929 - Sep 16 1932 - Jul 8 2 -60 1,284 1937 - Mar 10 1942 - Apr 28 3 -55 497 2007 - Oct 9 TBD 4 -49 637 2000 - Mar 24 2002 - Oct 9 5 -49 459 1906 - Jan 19 1907 - Nov 15 6 -48 436 1973 - Jan 11 1974 - Oct 3 7 -46 602 1901 - Jun 17 1903 - Nov 9 8 -44 283 1919 - Nov 3 1920 - Dec 21 9 -40 268 1916 - Nov 21 1917 - Dec 19 10 -36 389 1966 - Nov 29 1970 - May 28 11 -34 71 1987 - Aug 25 1987 - Dec 4 12 -30 761 1946 - May 29 1949 - Jun 13 13 -29 1,178 1909 - Nov 19 1914 - Jul 30 14 -28 136 1961 - Dec 11 1962 - Jun 26 15 -27 430 1980 - Nov 28 1982 - Aug 12 29 Note: Current bear market is on-going, data as of 3/19/09, duration only includes trading days. Source: ISI.
  30. 5 Weeks in History – Financial Services Restructuring (~$3T in US Aggregate Sector Market Value 1/1/07…now $0.8T) Dow Jones Industrial Average, 9/8/08 – 10/14/08 September 7 September 14 September 16 September 22 September 25 September 29 October 3 October 14 11,600 Wells Fargo AIG Lehman MS / MUFG Fortis Leading JPM GSEs / 11,400 Acquires Nationalized Bankruptcy Investment Nationalized Banks Enter Acquires Washington Wachovia Preferred WaMu Plan 11,200 GS / B&B BofA Stock Berkshire Nationalized Acquires ML Purchase 11,000 $700Bn Dow Jones Industrial Average Investment Program TARP 10,800 10,600 UK Bank Bail Out 10,400 Santander / 10,200 Sovereign 10,000 9,800 9,600 9,400 9,200 9,000 8,800 (23%) 8,600 8,400 Europe United States Note: Aggregate sector market value is the combined market cap for all companies in the S&P500 financials index, $2.9T as of 1/1/08, $0.8T as of 3/18/09. 30 Source: Morgan Stanley IBD; Bloomberg.
  31. Credit Spreads @ 100-Year Extreme – Current Level Down From 12/08 Peak, But Still 250bps+ Higher Than Post-Depression Peaks Credit Spreads (to U.S. Treasury Securities), 1925 - 2009 Current (3/09) Level: 655 bps 600 Spread to Tsy (bps) 400 200 0 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 BBBs (to Tsy) AAA/AA (to Tsy) Source: Moody’s, Yield Book, Morgan Stanley Credit Strategy Research. 31
  32. Stock Market Volatility Implies High Uncertainty – VIX Index Down From All-Time High But Still High Chicago Board Options Exchange (CBOE) Volatility Index, 1990 - 2009 80 60 VIX Index Value (%) 40 20 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options. 32 Source: FactSet.
  33. When Does Vicious Cycle End? More Often Than Not, Peak Unemployment = Good Time to Invest S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008 10000 30% 25% 1000 S&P 500 Index Value (Log Scale) Unemployment Rate 20% 100 15% 10% 10 5% 1 0% 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Recessions Unemployment Peak S&P 500 Index Price Unemployment Rate Note: Unemployment rates from 1928–1943 are annual estimates from John Dunlop and Walter Galenson’s Labor in the Twentieth Century (1978); data unavailable between 1943-1948; Post 1948 unemployment data from BLS, peaks are: 9/49 - 7.9%; 9/54 - 6.1%; 7/58 - 7.5%; 5/61 – 7.1%; 8/71 - 6.1%; 5/75 - 9.0%; 11/82 - 10.8%; 6/92 - 7.8%; 7/03 - 6.3%. Latest data shows 2/09 unemployment rate at 8.1%, 270 basis points below 11/82 peak. 33 Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.
  34. Sequencing the Asset Recovery Process – High Quality Financials / USA Non-Cyclicals / IG Super Senior Should Lead the Way Recovery Phasing and Duration End Start High Quality Financials US Domestic Non-Cyclicals Investment Grade (IG) Super Senior Europe/Asia Non-Cyclicals IG Senior IG Equity Tranche CLO AAAs IG Cyclicals US High Yield IG Junior Mezz CMBX Ajs EU High Yield US Loans EU Loans Asia High Yield Note: The yellow bars represent the relative phasing in and out, as well as the duration of the recovery process for each asset class. For example, in our view, high quality financials will recover first, and Asia high yield will be among the last. IG is Investment Grade; CLO is Collateralized Loan Obligations; 34 Source: Gregory Peters, Sivan Mahadevan, Neil McLeish, Morgan Stanley Global Credit Strategy Research.
  35. Advertising Spending & GDP Growth = High Correlation of 81% U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007 20% 15% U.S. Ad Spend vs. GDP, Y/Y Growth 10% Median Y/Y Ad Spend Growth Rate = 5% 5% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 -5% 1991 Ad Growth = -2% 2001 Ad Growth = -12% -10% U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth 35 Source: Zenith Optimedia, IMF, Morgan Stanley Research.
  36. Simple Regression Analysis: 1) Ad spend growth 3x sensitivity of real GDP growth 2) If GDP flat in 2009E, ad spend could decline ~4% Y/Y U.S. Advertising Spending vs. Real GDP y = 3.0263x – 0.0394 1986 – 2007 R2 = 0.6553 20% y – ad spend growth x – real GDP growth 15% Ad Spend Y/Y Growth If real GDP Ad spend Y/Y growth Y/Y growth 10% is… could be… 5% 11% 4 8 5% 3 5 2 2 1 -1 0% 0 -4 -1% 0% 1% 2% 3% 4% 5% -1 -7 -2 -10 -5% -3 -13 Real GDP Y/Y Growth -4 -16 -5 -19 -10% U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) Note: R2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation. Source: Zenith Optimedia, IMF, Morgan Stanley Research. 36
  37. Online Ad Spending Bad News = From 2000 to 2002, USA Spending Fell 27% U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007 250% $25,000 $21,206 200% $20,000 U.S. Online Ad Spending ($MM) $16,879 150% Y/Y Growth Rate $15,000 $12,542 100% $9,475 $10,000 $8,225 50% $7,267 $7,134 $6,009 $4,621 $5,000 0% $1,921 $907 $267 $0 -50% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Internet Ad Spending Y/Y Growth Rate 37 Source: IAB, Morgan Stanley Research.
  38. Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs. Trend Line However, Q/Q Pattern Looks a Bit Like Early 2001 U.S. Online Advertising Spending & Y/Y Growth Rates, CQ1:96-CQ3:08 300% $6,000 U.S. Online Spending & Search Revenue ($MM) 250% $5,000 Total U.S. Online Spend Y/Y Growth 200% $4,000 150% $3,000 100% $2,000 50% $1,000 0% $0 -50% 3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 U.S. Online Ad Spending Spending on Search Y/Y Growth Online Ad Spend Polynomial Trendline 38 Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research.
  39. Technology / Internet 1) Digital Consumer – Our bet = At margin, consumers spend more – not less – time on Internet in difficult times – it’s a cheap / efficient / transparent thrill! Undermonetized social networks / video / VoIP driving powerful usage growth – opportunity for innovative marketers to capitalize on low CPMs 39
  40. Internet Becoming Necessity – Broadband Internet Last Thing to Go in Consumer Survey Economic Vulnerability Score 10 Economic Vulnerability Scores for Items of Discretionary Expenditure 9 10 = Most Vulnerable / 0 = Least Vulnerable 8 7.2 7.2 6.8 6.6 6.6 6.5 6.4 7 6.2 5.9 5.6 5.5 6 4.7 5 3.9 3.5 4 3 2 1 0 cs e g et lls es r gs s ks bs e s s on ea in ic ie m rn ni rt ca m ea in pu bl et w er Ph po ho tro te ga r am ot br sm e oc ve In or rs on ec ur ile fo & nd co gr G co nd bs he yo ph El ob s or ke ce ok ba or ot lu d le M to s an ee ni lo c bo ad te ie or ts ga f s, w or s ro e or s, en lf nt rie lin or ss or go B VD ra em re te d- ce or s au itu p, ,D ay le xe ov ac m hi oi st rn lid ic Fi pr iu rs ,t g, re us fu ho em im be re in to M ew th Ca on em Pr g t lo in ou N al m ay C ak on ng aw ub M rs oi cl ng Pe G lth oi ea G H Note: In 9/08, 8,000 consumers in the UK, France, Germany and Spain were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure. 10 = extremely likely to cut back; 0 = not at all likely to cut back. 40 Source: Execution Primary Research, quoted in UK Ofcom’s “The International Communications Market 2008” report, p. 39.
  41. Consumer IP Traffic Driving Growth – 46% IP Traffic CAGR, 2007 – 2012E Global Internet Traffic, by Type 2007-2012E 2006 – 2012E CAGR 50,000 Total Internet IP Traffic (Petabyte per month) 3% 40,000 Mobility 125% 30,000 74% Consumer 49% 20,000 75% 10,000 Business 35% 71% 62% 0 2006 2007 2008 2009E 2010E 2011E 2012E Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. 41
  42. YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share Global Minute Share, 6/06 – 1/09 12% % Share of Global Minutes 10% 8% 6% 4% 2% 0% 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 Yahoo.com Msn.com Google.com YouTube.com Facebook.com 42 Source: ComScore Global 1/09, Morgan Stanley Research.
  43. Undermonetized Internet Usage Growth Drivers – Video + Social Networking + VoIP + Payments Users Y/Y Growth Comments #2 site in global minutes; 6B views of online video in the US (Americans watched a total of 14B videos / 771MM hours online in 12/08); 363MM(1) #2 global search engine – search queries on +40% YouTube reached 10.8B in 1/09 (+45% Y/Y), surpassing Yahoo! sites with 9.0B searches (+2% Y/Y).(1,2,3,6) #4 site in global minutes; 175MM+ active users; 50%+ users outside of college; 52K+ 236MM(1) +135% applications + 95% of Facebook members have used at least one(1,4) If ‘carrier’ then #2 behind China Mobile; $1.43 annualized revenue per registered user (-14% 405MM(5) +47% Y/Y); 2.6B Skype Out minutes (+63% Y/Y); 21.0B Skype-to-Skype minutes (+72% Y/Y)(5) $16B total payment volume (TPV), +14% Y/Y, higher than eBay’s global gross merchandise 70MM(5) +23% volume; Off-eBay payment volume +35% Y/Y to 52% of TPV(5) Source: (1) comScore global 1/09; (2) comScore Video Metrix 12/08; (3) YouTube; (4) Facebook; 43 (5) eBay CQ4, (6) comScore qSearch global, 1/09. Morgan Stanley Research.
  44. Younger Generations Drive Online Usage Changes Online Gaming Blogs Social Networking Video / Music Knowledge Sharing (Sina Blog) Social Bookmarking Note: Selection based on (1) comScore’s reported global unique visitors & Y/Y growth for each website in 12/08; excluding sites with negative Y/Y growth, and (2) Alexa global traffic ranking. 44 Source: ComScore Global, 12/08, Alexa, Morgan Stanley Research.
  45. Next Generation Consumer Technology Ecosystems = Cheap / Efficient / Fun / Disruptive Time Since Y/Y Applications Applications Platform Inception Users Growth Available Downloaded Skype 5.5 Yrs 405MM -- -- 47% YouTube 3.9 Yrs 363MM 40% -- -- Facebook 4.9 Yrs 236MM 135% 52K+ 308MM+ iTunes Store 8.0 Yrs 75MM -- 10MM+ 6B+ 189MM+ * Nintendo Wii 2.2 Yrs 45MM 125% ~1K Apple Wireless Devices 1.6 Yrs 33MM 25K 800MM+ 265% 25K iPhone (2.5G + 3G) 1.6 Yrs 15MM 301% -- iPod Touch (Wi-Fi) 1.3 Yrs 13MM 239% 25K -- Amazon Kindle 1.1 Yrs -- -- 240K+ -- Note: * Nintendo Wii applications refer to game titles, downloads refer to game units sold. iTunes’ users only include paid-users; applications available / downloads refer to songs available / downloaded. Kindle’s 240k+ apps refer to book titles available. iPhone users are estimates by Katy Huberty, YouTube, Facebook users per comScore global 1/09; 45 Source: Amazon.com, Nintendo, YouTube, Facebook, Apple, Morgan Stanley Research.
  46. Video-Related IP Traffic Driving Growth – To 49% Consumer Internet Traffic in 2012E vs. 32% in 2008 Global Consumer Internet Traffic, by Segment 2007-2012 2006 – 2012E CAGR Total Consumer Internet Traffic (Petabyte per month) 20,000 Internet Video to TV 104% 17% 57% Internet Video to PC 15,000 44% Video Communications 31% 24% VoIP 13% 10,000 30% Gaming 30% 33% 5,000 P2P 31% 25% 37% Web, email, data 34% 44% 60% 0 2006 2007 2008 2009E 2010E 2011E 2012E Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008. 46
  47. YouTube USA IP Traffic > 2000 Total USA Internet Traffic Internet Traffic per Month 100,000 IP Traffic (Terabytes per month) 80,000 100,000 TB / Mo 60,000 (Global) 40,000 30,500 33,000 20,000 25,000 TB / Mo TB / Mo (USA) TB / Mo 0 USA Internet Backbone, YouTube, 5/08 China P2P Video 2000 Year End Streaming, 1/08 47 Note: Monthly traffic are estimates by Cisco. Source: Cisco, Approaching the Zettabyte Era, 6/08.
  48. Online Video – Traction High + Increasing (1) • YouTube - 363MM unique global visitors, +40% Y/Y, 48B minutes, +92% Y/Y ; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU… • YouTube = 68% of unique US video viewers + 43% of videos watched online + 30% (2) of total minutes YouTube Global Traffic 60 400 350 50 Total Unique Visitors (MM) 300 Total Minutes (B) 40 250 200 30 150 20 100 10 50 0 0 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Total Unique Visitors (MM) Total Minutes (B) 48 Source: (1) comScore global 1/09; (2) comScore Video Metrix (US) 1/09, Morgan Stanley Research
  49. YouTube – New Portal(s) = Video Distribution Channel + Social Network • ‘Organize the world’s information and make it universally accessible and useful’ – in the most effective way for high customer satisfaction – sort by most active / discussed / recent / responded / viewed / etc.. More / more content providers should get on board, after all, users are voting it’s what they want. • Monetize away litigation - with new ad formats + finger printing advances + revenue shares? News & Politics - Most Viewed Sports - Most Viewed 49 Source: Google, YouTube.
  50. Video Monetization – YouTube = <$1 Per User(1) – Paid Search / Click-to-Buy / Pre-Post-In Video Roll / Interactive Search for ‘iPhone 3G’… Like the music?... Creative / Interactive... …click to buy from …ads for ‘invisible shield’ iTunes / Amazon mp3 ‘Wario Land: Shake It’ video breaks YouTube’s UI 50 Note: (1) per year in 2008; average users per comScore global, revenue per our estimates. Source: YouTube.
  51. Hulu – Quickly up to 12% of YouTube’s U.S. Minutes(1) • Hulu – 6MM global unique visitors (+9x Y/Y), 121MM minutes (+18x Y/Y) in 1/09. • 7.7 minutes of average duration of videos viewed at Hulu, ~2x USA average • Content support from major networks (NBC, Fox, USA, Bravo, FX, SciFi, E!...) + film studios (Universal, 20th Century Fox, MGM, Sony, Lionsgate) 7,000 140 Hulu Global Traffic 6,000 120 Total Unique Visitors (000) 5,000 100 Total Minutes (MM) 4,000 80 3,000 60 2,000 40 1,000 20 0 0 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Total Unique Visitors (000) Total Minutes (MM) Note: (1) comScore Video Metrix (US only) utilizes a different methodology and reports that Hulu has 24% of YouTube’s US unique viewers & 12% of YouTube’s US minutes in 1/09. US average duration of online video was 3.5 minutes in 1/09. Global unique 51 visitors & minutes per comScore global, 1/09.
  52. Netflix Online Streaming – 1MM+ Subscribers in 6 Months Since Launch • 10MM+ offline subscribers as of 2/09, 1MM+ streaming subscribers / 1.5B+ streaming minutes since 9/08 launch. • 12K+ movie / TV show titles available for instant streaming to PCs / living room TVs via Xbox Live / Roku digital video box / LG & Samsung Blu-Ray players / TiVo • Streaming is free + unlimited for any member with an $8.99+ monthly plan Watch Movies Instantly on Your TV, via Xbox Live / TiVo / Roku 52 Source: Netflix.
  53. Social Networking – Significant Share Gains of Internet Traffic Alexa Global Traffic Rankings 2005 (1) 2009 (2) Rank Rank Web site Web site 1 1 yahoo.com google.com 2 2 msn.com yahoo.com 3 3 google.com youtube.com 4 4 ebay.com live.com 5 5 amazon.com facebook.com 6 6 microsoft.com msn.com 7 7 myspace.com wikipedia.org 8 8 google.co.uk blogger.com 9 9 aol.com myspace.com 10 10 go.com yahoo.co.jp 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 2/25/09 53 Source: Alexa Global Traffic Rankings, Morgan Stanley Research.
  54. Social Networking – Fast Growth + Low Penetration Global Internet Category Visitors Y/Y Growth & Penetration 100% World Wide Y/Y Visitor Growth = 10.4% Portals Search 80% Entertainment Penetration (% of Online Users) Retail E-mail Multimedia / Video 60% Business / Finance Instant Reference General Messanging News 40% Photos Travel Social Sports Online Gaming Networks Auto 20% 0% 0% 10% 20% 30% 40% 50% 60% Unique Visitors Y/Y Growth 54 Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08.
  55. The New Social Network = Personal Sources on 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 55 Source: USC Annenberg School: Digital Future Report 2007.
  56. Messaging by Generation – Text…Facebook Wall…Email…Phone…US Postal Service Kids (Zach 5 & Jackson 3 yrs.) Grandparents (Dom & Ida) Kids (Zach 5 & Jackson 3 yrs.) Grandparents (Dom & Ida) Hugs and Kisses Birthday card with $25 Hugs and Kisses Birthday card with $25 Brother (James -- High School) Brother (James High School) Mom (Victoria) Mom (Victoria) Text Message via Mobile Text Message via Mobile Phone call (45 minutes!!!) Phone call (45 minutes!!!) Birthday Boy (Tom Zawacki) Birthday Boy (Tom Zawacki) Happy Birthday from my Family Happy Birthday from my Family Brother (Rob -- College) Brother (Rob College) Wife (Melissa) Wife (Melissa) Wrote on my Facebook Wall Wrote on my Facebook Wall Funny email Funny email 56 Source: Tom Zawacki – CEO of Lemonade.
  57. Social Networking – Connectivity Changing…Is E-Mail Archaic? Worldwide Share of Connecting – Younger Users Via Social Online Time (1) Networks + Older Users Via E-Mail? (2) 6% 14% 50% 35% 42% % of Total Minutes 40% 8% Category 29% 30% didn’t exist 3 23% years ago 20% 12% 16% 10% 22% 0% All Other Yahoo! Mail Facebook Communications Social Connections Age 15-24 Age 45+ Shopping & Travel Entertainment & Leisure Work, Business & Education 57 Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 1/09.
  58. Facebook – Rapid User / Usage Growth • 236MM visitors, +135% Y/Y (175MM+ active users), 42B minutes (#4 globally behind Yahoo!, YouTube and Live), +110% Y/Y • Avg user has 120 facebook friends; 15MM+ users update their status daily; 3B+ minutes spent on Facebook every day (worldwide) • 850MM+ photos / 5MM+ videos uploaded each month; • 660K+ developers / entrepreneurs; 52K+ applications built to date; 140 new apps added per day; 95%+ members have used at least one app. 250 45 Facebook Global Traffic 40 Total Unique Visitors (MM) 200 35 Total Minutes (B) 30 150 25 20 100 15 10 50 5 0 0 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Total Unique Visitors (MM) Total Minutes (B) 58 Source: comScore global 1/09, Facebook 2/09, Morgan Stanley Research.
  59. Facebook - Connecting is Key Genres of Facebook’s 261 Most Used Applications Enhanced communication 26% 12% Comparing yourself with others 11% Playing social games 10% Profile enhancement 10% Categorizing friends 7% Sending gifts Media sharing 5% 5% Self expression 3% Playing with digital pet Playing games 3% 9% Other Note: Genre breakdown per O’Reilly Media’s analysis of the primary user goals of 261 of the most-used Facebook application. 59 Source: O’Reilly Media, Inc (March 2008 report), Morgan Stanley Research.
  60. Facebook – 15k+ Applications ‘Just For Fun’ / Top 40 Apps have 204MM+ Downloads Top 40 Apps' # of Apps # of Monthly Active w/ 1MM+ Category Applications % of Total Users (MM) MAUs Just For Fun 15,005 137 37 31% Games 4,496 78 25 9 Sports 4,020 4 0 8 Education 2,424 37 5 5 Utility 2,287 20 2 5 Music 1,918 11 13 4 Chat 1,865 16 3 4 Dating 1,840 52 13 4 Messaging 1,716 30 8 4 Photo 1,571 36 3 3 Video 1,532 47 4 3 Business 1,520 1 0 3 Events 1,493 23 5 3 alerts 1,313 27 7 3 5 1 Fashion 1,155 2 Food & Drink 1,056 8 1 2 Politics 976 22 7 2 Travel 873 7 2 2 Money 553 1 0 1 Mobile 482 7 1 1 Classified 468 0 0 1 File Sharing 303 1 0 1 Overall* 48,549 204 66 Note: Downloads refer to Monthly Active Users (MAU); Category breakdown per Facebook, one application can belong to multiple categories; Overall* statistics exclude these duplications; Facebook reports 52,000+ apps “built to date” while AppData reports 48,549 available as of 12/18/08. There are 17k ‘Just For Fun’ apps as of 2/26/09. Source: Facebook, AppData, Morgan Stanley Research. 60
  61. Facebook – Home Page for Next Generation – Customized / Current • Facebook rolled out cleaner / simpler design 7/20/08 aiming to provide easier navigation with separate tabs for Wall (updates), Info (background), Photo, and Boxes (applications). • Biggest change: Wall is now default tab, with full multimedia feeds integration – showing most recent and relevant info both about the user and by the user. Tabbed Browsing Integrating ‘Engagement Feeds into Ads’ – Thump Up the Wall to Recommend to Friends Picture / Video Updates on the Multimedia Third-party Wall Applications Now on Toolbar Online Chatting Function 61 Source: Facebook
  62. Social Networking – Facebook = $2 Per User(1) Opportunity to Get in Middle of Conversations Become a Fan of … Virtual Gift – $1 = One Wish …Friends Notified via News Feeds Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates. 62 Source: Facebook.
  63. Facebook Mobile – Explosive User + Usage Growth • 20MM+ mobile active users in CQ4:08, > 4x Y/Y. • Mobile facebook users on average 50% more active than non-mobile facebook users. • 1MM users commented on their friends’ status changes on mobile within the first 24 hours of this feature’s launch. 63 Source: Facebook presentation at Palm’s CES keynote.
  64. VoIP – Skype = #2 Global ‘Carrier’ + 8% of Cross-Border Calling Minutes Subscribers Y/Y Blended Y/Y Market Cap Rank Company Type Region (MM) Growth ARPU (US$) Growth ($B) 1 China Mobile Wireless China 450 22% $12 -8% $186 Skype (5) 2 Vodafone Wireless Europe 280 10 35 5 108 3 China Telecom Wireline China 210 -10 8 4 28 405MM 4 America Movil Wireless LatAm 173 18 11 -5 50 Registered 5 Telefonica Moviles Wireless Europe / LatAm 172 20 41 -6 91 Users 6 China Unicom Wireless China 133 13 6 -13 15 7 T-Mobile Wireless Europe / USA 127 8 21 -11 59 (+47% Y/Y) 8 Orange Wireless Europe 118 12 44 0 65 (1) China Unicom / Netcom 9 Wireline China 107 -4 10 30 15 10 Mobile Telesystem Wireless Europe 88 9 12 13 9 11 Bharti Airtel Wireless India 77 59 7 -15 25 12 AT&T Mobility Wireless USA 75 14 51 0 148 13 Telecom Italia Mobile Wireless Europe / LatAm 71 6 27 -4 27 14 Verizon Wireless Wireless USA 71 11 52 1 89 15 PT Telkom Wireless Asia 61 36 5 -20 11 (2) AT&T 16 Wireline USA 56 -10 80 3 148 17 NTT DoCoMo Wireless Japan 54 2 66 -11 76 18 Turkcell Wireless Europe 51 12 17 13 11 19 NTT Wireline Japan 44 -0 34 -0 68 20 Sprint / Nextel Wireless USA 42 -9 53 -5 7 21 BT (UK) Wireline Europe 38 -2 38 4 14 (2) Verizon Wireline USA 36 -10 85 3 89 22 (3) BSNL 23 Wireless India 36 24 7 -15 -- 24 Deutsche Telekom Wireline Europe 35 -6 29 -2 59 25 France Telecom Wireline Europe 33 -1 43 14 65 Total* 2.6B 10% $25 -1% $1,250B Wireless 2.1B 16 25 -3 977 Wireline 0.6B -7 28 5 486 Note: Subscribers / ARPU data as of CQ3:08. Market Cap as of 1/15/08. *total excludes duplicates (mkt val); (1) China Netcom merged with China Unicom in 11/08; (2) AT&T & Verizon’s wireline ARPU is revenue per RGU (revenue generating unit) and 64 include business lines; (3) BSNL is owned by the Indian government, thus with no market value. (5) Subscriber figure for Skype is registered user amount as of CQ4:08. Source: company reports, Morgan Stanley Research.
  65. Unified Communications For Consumers – Skype = Voice / Video / SMS On Your PC / Netbook / Cell Phone & More Skype on PC / Laptop Skype on Netbooks / Internet Tablets Skype on … Cordless Wi-Fi 3 SkypePhone Phone Phone Skype on Smartphones 65 Source: Skype / eBay.
  66. Unified Communication For Consumers – Google Voice Gives User One # + VoIP + Voicemail Transcription + SMS • Google Voice – Launched on 3/11/09, gives user a single telephone number, to which all calls to user’s home / office / cellphone can be forwarded • Voicemail transcription + SMS + future integration with Gmail • VoIP calls can be initiated if user calls his / her own Google Voice number 66 Source: Google.
  67. Online Content Consumption Mix in 5 Years? • Consumer or professional generated? 40% of USA consumers create entertainment (edit movies / music / photos...)(1) − • Consumer enhanced professional content? - Anchored with first-class pro content…augmented with first-class user-generated content that’s ranked / reviewed / ‘edited’…supplemented by all-comers user- generated content that’s ranked / reviewed…all presented in a holistic / widgeted way - Clean combo of = wsj.com + bbc.co.uk + digg + techmeme + youtube + nytimes.com/technology + allthingsd + facebook + twitter… 67 Note: (1) Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte.
  68. Consumers Expect – Wisdom of Crowds / Rankings / Searchability • Digg - 20MM unique visitors, +56% Y/Y, 44MM minutes, +74% Y/Y in 1/09 • User-driven editorial / selection of content (news, videos, images, etc.) through sharing / discovery / democratization – vs. traditional media determining front-page / lead stories • Users in control – search for preferred content + find what others deem relevant / interesting 68 Source: comScore global 1/09, Digg.com.
  69. Consumers Expect – Real-Time News / Opinions / Updates / Social Networking • Twitter – 6M global unique visitors, +4x Y/Y, 50MM minutes, +6x Y/Y in 1/09 • Real-time micro-blogging / social networking / search, each text entry (tweet) limited to 140 characters • Large ecosystem with complementary sites (twitpic, etc.) + 3rd-party applications on facebook / iPhone / Android… On Facebook… And On iPhone Follow / Blog On Twitter.com… Source: comScore global 1/09, Twitter.com, Morgan Stanley Research. 69
  70. Consumers Expect – Citizen Journalism • User-generated content (news, videos, images, etc.) uploaded directly to UReport site • Fox News selectively airs popular stories that have been vetted • Competitors: CNN’s iReport; MSNBC’s First Person Upload from anywhere – UReport iPhone app Searchability User rating / popularity 70 Source: Foxnews.com.
  71. Consumers Expect – Fun / Images / Insight from Others • Youniverse.com – 322K unique visitors, +204% Y/Y, 3MM minutes, +386% Y/Y in 12/08. • Finds one’s visual DNA by asking users to select pictures in response to a series of questions. • Social networking – ability to find other people who share your visual DNA. • Market Research – enables advertisers to mine user preference data; • In 9/08, Hotels.com launched a Youniverse Visualiser to find out customers’ preference of the trip to provide hotel recommendations. Find friends who share the visual DNA Find hotels via Hotels.com Visualiser Source: comScore global 12/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 71
  72. Consumers Expect – Location-Aware Social Networking • Loopt – shows users where friends are located and what they are doing via maps on their mobile phones / can share location updates, geo-tagged photos and comments with friends in their mobile address book or on online social networks, communities and blogs • Loopt Mix – opt-in discovery feature to help users connect with new people nearby who share common interests and affiliations • Available on 100+ handset models / 7 national carriers in the USA • Other location-based mobile social networking products include: Google Latitude, Joyity, Local, etc. See Friends’ Location Find Interesting Explore Places With Geo- on Your Map People Nearby tagged Photos / User Reviews 72 Source: Loopt, Morgan Stanley Research.
  73. Consumers Expect – Real-Time Video Streaming On Their Mobiles` • CBS Sports NCAA March Madness On Demand iPhone App • $4.99 to stream every NCAA March Madness game on demand • Live video streaming on Wi-Fi connection, live audio streaming on 3G / EDGE • Also features game recaps / video highlights on demand / bracket information / real-time scores / stats / headlines. March Madness Bracket Recaps / Live Scores / in Your Palm Information Highlights Stats Source: CBS Sports, Apple iTunes. 73
  74. Consumers Expect – Price Transparency…in <30 Seconds • Shop Savvy – Allows mobile (G1…) users to scan product barcodes and automatically retrieve best pricing information from web + local stores • For web results, user can go to site or email link to friends…for local results, user can see store locations / get directions / call stores • Additional functions include price alerts (notifies user when price is cheaper / hit user’s preset price target) / wish lists / search history • Won Google’s Android Developer Challenge; featured in T-Mobile G1 ads Step 1: Step 2: Step 3: Step 4: Tap Search Scan Barcode See Results Click to Buy Source: Big In Japan, Morgan Stanley Research. 74
  75. Consumers Expect – Personalization Footjoy.com – Myjoys Picturedoor.co.uk MMs.com – MyM&M’s Flip Mino HD Video Camera 75 Source: footjoy.com, theflip.com, picturedoor.co.uk, mymms.com
  76. Online Advertising – Google Share = 67% in CQ4:08 vs. 48% in CQ4:05 Global Online Advertising Revenue (1) $9,000 Global Online Advertising Revenue ($MM) $8,000 6% 7% $7,000 $6,000 20% $5,000 $4,000 10% 10% $3,000 33% 67% $2,000 48% $1,000 $0 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08 Google Yahoo! Microsoft AOL 76 (1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research
  77. Offline CPMs Materially Higher Than Online CPMs = Potential for Significant Dislocation / Arbitrage CPM Comparisons Broadcast TV Newspaper Cable TV Spot TV Internet Magazine Radio Out-of-Home CPM <$2 $6 $10 $14 $18 $22 $26 $30 >$34 77 Source: Media Dynamics, 6/08, Morgan Stanley Media Research.
  78. Online CPMs Challenge = Significant Ramp of ‘New’ Social Inventory CQ4 Annualized CQ4 Ad Revenue CQ4 Unique CQ4 Total Pages CQ4 Total Global Ad Revenue per 1,000 Users ('000) Viewed (MM) Minutes (MM) per User Page Views $50.07 (1) $1.86 (1) Total Internet 996,143 6,701,135 4,063,148 Y/Y Growth 23% 11% 10% -1% 9% (3) Google.com (2) $29.58 (3) 481,450 114,137 60,381 $28.05 Y/Y Growth 18% 1% 6% 3% 21% (3) $3.73 (3) Yahoo! 558,135 311,673 355,942 $8.33 Y/Y Growth 14% -1% 6% -12% 1% $4.68 (3) $1.12 (3) MySpace 122,338 127,360 55,591 Y/Y Growth 14% -10% 12% -18% 4% Microsoft 641,771 216,661 568,438 $4.14 $3.06 Y/Y Growth 20% -8% 18% -11% 16% AOL 269,705 80,232 117,919 $5.27 $4.42 (4) - - - - - Y/Y Growth YouTube 351,457 129,440 133,930 $0.68 $0.46 (5) Y/Y Growth 48% 62% 98% 1% -8% Note: (1) ZenithOptimedia C2008E, 12/08; (2) Assumes 90% of Google Sites excl. YouTube revenue is from Google.com; (3) Net revenue estimates (ex-TAC), Microsoft does not breakout TAC;( 4) comScore restated AOL metrics in 1/08; (5) Negative growth due to YouTube Page Views’ 62% Y/Y growth is much higher than our estimated revenue growth, youtube.com’s minutes 2x of google.com. (6) comScore adjusted their global Internet unique visitors estimates in 7/08, resulting in a higher- 78 than-normal users Y/Y growth and lower / flat ad revenue per user growth. Source: Morgan Stanley Research.
  79. Ad Supply > Ad Demand – Ad Impressions Growing Rapidly…CPMs Declining U.S. Banner Ad Impressions & CPM, U.S. Rich Media Impressions & CPM, CQ1:05-CQ2:08 CQ1:05-CQ2:08 40,000 $40 $3.50 1,000,000 900,000 35,000 $35 $3.00 800,000 30,000 $30 $2.50 700,000 Impressions (MM) Impressions (MM) 25,000 $25 600,000 $2.00 CPM CPM 20,000 $20 500,000 $1.50 400,000 15,000 $15 300,000 $1.00 10,000 $10 200,000 5,000 $5 $0.50 100,000 0 $0 0 $0.00 08 05 05 06 06 07 07 05 05 06 06 07 07 08 3/ 9/ 3/ 9/ 3/ 9/ 3/ 3/ 9/ 3/ 9/ 3/ 9/ 3/ Rich Media Impressions Rich Media CPM Banner Ads Impressions Banner Ads CPM Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research. 79
  80. Search Should Continue to Become More Important – 35% Y/Y Google Query Growth, 12/08 % of New Online Customers for Online Retailers / Marketing Spend Mix 40% % Customers acquired from source 35% 30% 30% 27% 18% 20% 13% 11% 9% 10% 7% 6% 7% 6% 5% 4% 4% 3% 4% 4% 2% 2% 2% 1% 1% 1% N/A N/A N/A 0% es g s s ts es g ls c s ds s s ne tin l in ffi m ea ea ke lis og sit sit ra tis tra ra ke gi ta ld ld al g eb r og en ng e in ps ar ve at ic ta rta nn rW ct pr ki C m an ee ad or on Ba po pe or e lp e rg Sw he ris w e in t os ia ew O na in et pa g ot fil pr ffl en ln N itio Af m on O o cia co ch lt ad n ai So ar tio Tr g Em in Se ra p st op gi Sh re o- C 2006 2007 80 Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 12/08, Morgan Stanley Research.
  81. Search = Dramatic Share Gains of Online Ad Spending U.S. Internet Advertising Mix 100% 14% 7% 12% U.S. Internet Ad Spend % Mix 80% 15% 10% 9% 60% 20% 40% 47% 52% 20% 15% 0% 2002 2003 2004 2005 2006 2007 Search Advertising Banner Ads Rich Media Classified Advertising E-mail and Other Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research. 81
  82. Paid Search Placement = Top ROI For Marketers 0% 10% 20% 30% 40% 50% 60% Paid Placement Organic SEO Email marketing TV advertising Print mag ads Direct mail Conferences and exhibitions Survey Question: PR Contextually targeted text ads Search KW graphical ads \"What are the top-three most- Web graphical display efficient forms of advertising Print newspaper or marketing you spend Affiliate mktg money on in terms of the Paid inclusion Radio ads return on investment (ROI) or Print yellow page return on ad spend (ROAS) Telemarketing that they yield?“ (ranked 1-3) Web rich media POS promo Paid listings on shopping dir Coupons Online yellow pages Other Source: Search Engine Marketing Professional Organization survey of SEM 82 agencies and advertisers, Nov 08-Jan 09. Global Results. N=317.
  83. Search Engine Marketing (SEM) = Taking Budgets Away From Other Advertising Forms 0% 5% 10% 15% 20% 25% 30% Print magazines advertising Direct mail Print newspaper advertising Web site development TV advertising Conferences and exhibitions Print yellow page advertising Survey Question: Radio advertising Email marketing \"From which marketing/IT Web graphical display advertising programs are you shifting Affiliate Marketing budget away and moving Public relations Online yellow page advertising it to your search Paid listings on shopping directories marketing programs?\" Web rich media advertising Coupons Telemarketing Point-of-sale promotions Out of Home Other Source: Search Engine Marketing Professional Organization survey of SEM 83 agencies and advertisers, Nov 08-Jan 09. Global Results. N=317.
  84. Video Search – Advertisers Showing Rising Interest Breakdown: Survey Question: If yes, how interested are you in the Would you be interested in following? (Scale of 1-5, 1=lowest, 5=highest) contextually targeted advertising attached to video search results? 0% 20% 40% 60% 80% 100% Survey Result: Video Based 7% 11% 27% 33% 22% 1 2 3 4 5 NO – 46% YES – 54% Text Based 7% 10% 29% 34% 20% Source: Search Engine Marketing Professional Organization survey of SEM 84 agencies and advertisers, Nov 08-Jan 09. Global Results. N=229.
  85. Performance-Based Advertising Gaining Share +20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue 60% U.S. Internet Ad Revenue Share by Pricing Model, 2000 - 2007 51% 47% % Share of Total Revenue 45% 41% 41% 37% 30% 21% 15% 12% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 Performance CPM Hybrid Search Revenue Share Note: Performance based advertising includes search, lead-generation, among others; Hybrid pricing model includes a mix of impression-based pricing plus cost-per-click, sale, lead / straight revenue share; 85 Source: IAB, Morgan Stanley Research.
  86. Advertisers = Willing to Bid More For Behavioral Targeting Survey Question: Survey Result: Are you willing to bid more for clicks based on behavioral NO – 25% information such as in-market consumers (i.e. consumers YES – 75% currently shopping for a specific product)? Source: Search Engine Marketing Professional Organization survey of SEM 86 agencies and advertisers, Nov 08-Jan 09. Global Results. N=229.
  87. E-Commerce - USA Online Penetration = 4-6% and Rising Categories’ Online Penetration of US Retail Market, 2007 >20% 10 - 20% <10% Computer products 45% Toys / video games 19% Home furnishings 9% Other event tickets 27% Baby products 19% Cosmetics / fragrances 9% Books 24% Consumer electronics 18% Sporting goods / apparel 8% Music / video 24% Office supplies 13% OTC meds / personal care 6% Gift cards / certificates 21% Flowers / cards 12% Appliances / tools 5% Jewelry 11% Pet supplies 4% Apparel / footwear 10% Auto / auto parts 2% Movie tickets 10% Food / beverage / grocery 1% Note: (1) Our proprietary adjusted e-Commerce sales & Census Bureau’s quarterly total retail sales data suggest ~4% penetration, Forrester claims 6%. 87 Source: The State of Retailing Online 2008 (Forrester Research).
  88. Amazon.com’s Recommendation Engine = Web’s Most Effective Search Engine + Advertiser? Amazon.com search + recommendation engine: Leveraging data New formats: Kindle What Amazon recommends What other customers are buying What other customers are thinking What other customers are saying 88 Source: Amazon.com, Google
  89. Amazon.com – Following Its Customers By Leading With Technology Amazon TextBuyIt • Search on any keyword (e.g. item name, author, artist, etc.) or ISBN / UPC code 1 2 3 Text search Reply with 1 Answer call to keywords to or 2 to buy an hear details + ‘AMAZON’ item from confirm order (262966) search results Amazon iPhone App w/ Amazon Remembers 89 Source: Amazon.com
  90. Amazon.com Should Continue to Gain Share High Customer Satisfaction / Recommendation Engine / Impressive Metrics Amazon.com Amazon.com vs. US Retail Key Operating Metrics E-Commerce Sales(1) 50% CQ1:08 CQ2:08 CQ3:08 CQ4:08 40% Revenue $4,135 $4,063 $4,264 $6,704 Y/Y Change 37% 41% 31% 18% 30% Active Customers 79 82 85 88 Y/Y Growth Y/Y Change 19% 18% 17% 16% 20% TTM Revenue per $202 $210 $215 $218 Active Customer Y/Y Change 17% 19% 18% 12% ~25ppts 10% Active Sellers ('000) 1,300 1,420 1,405 1,500 Y/Y Change 17% 18% 17% 18% 0% Total Units 196,135 190,113 202,566 308,606 Y/Y Change 31% 32% 30% 28% -10% Kindle Books CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 115 140 185 230 Available ('000) US Adjusted Retail E-Commerce Sales (All metrics in MMs, except for revenue per customer data and when noted) Amazon.com North America Revenue US Total Retail Sales (1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; 90 Source: Amazon.com (CQ4:08), US Dept. of Commerce (CQ4:08), Morgan Stanley Research.
  91. Technology / Internet 2) Mobile – Innovation in wireless products / services accelerating – changes should create + destroy significant wealth 91
  92. Mobile – New Computing Cycle With Wireless Game Changer Products with Extraordinary Ease-of-Use Nintendo Wii Apple iPhone / iPod Touch 45MM consoles sold since 11/06 30MM combined units sold (17MM launch (+125% Y/Y) – raised bar iPhone / 13MM iPod Touch) since with motion sensors + playability 6/07; 18K apps, 500MM+ downloads since 7/08; – raised bar with ease-of- use + functionality Sony PSP 3 Skype Phone 52MM units sold since 12/04 500K+ units in < 200 days. Leverage launch (+42% Y/Y) – raised bar large Skype / Facebook user base of with online playability + built-in 370MM (+51%Y/Y) / 200MM web browser (+116%Y/Y) + create a low-cost web- enabled VoIP, social networking, digital presence phone. INQ1 next with 50K+ preregistrations… Amazon.com Kindle Netbooks With free EV-DO + 240K titles + Estimated 12MM units shipped in newspaper / magazine / blog 2008; as many as 45MM could be subscriptions. Amazon may do with shipped in 2012E – low price points + books what Apple did with tunes. high mobility + wireless / 3G access Kindle accounts for ~12% of pioneering ‘Cloud Computing’ usage AMZN’s sales for titles available on model. Kindle Note: iPhone units sold includes ~2MM inventory-built units in CQ3:08; Netbook shipment estimates per Katy Huberty. 92 Source: Nintendo, Sony, Amazon.com, Apple, 3, Morgan Stanley Research.
  93. Key Mobile Internet Technologies Related to Networks / Devices / Services Hitting Critical Mass • Infrastructure – broadband Internet, WiFi, high-speed cellular + GPS networks… • Hardware – small / fast / cheap processors / storage / touch screens, GPS, motion sensors… • Software – optimized user interfaces, browsers, widgets, operating systems, digital stores, centralized billing… • Communication Tools – messaging (text / multimedia / chat / tweets…), social networking, VoIP, camera, interactive games… • Digital Content – optimized music, video, news, search, shopping, weather, maps… 93
  94. Notebooks Retrofitting to Cloud Via 3G – PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?! • Global cellular modem shipment exceeded 35MM in 2008 – ABI Research, 2/09 • 64% of new Austrian broadband subs used cellular modems, CQ2:07 • 70%+ 3G network coverage in US / Japan / UK / France / Italy / Germany in 2007 – UK Ofcom • 13MM cellular modem users in USA, CQ2:08E – Nielsen Mobile Note: Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); 3G networks include HSPA (Europe & Japan) and EV-DO Rev A (US), coverage is % of population in 2007. 94 Source: ABI Research, Informa, Ofcom, Nielsen Mobile.
  95. Global Mobile Subscribers > 2x Internet Users – Illustrates ‘Up Sell’ Opportunity • Global mobile subscribers exceed Internet users by > 2x • As mobile Internet usage penetration increases, we expect these figures to converge Internet Users – 1.4B Mobile Subscribers – 3.3B 2007 2007 North ROW America 13% 8% ROW North 6% America Latin Latin 18% America America 11% 10% Europe 25% Europe Asia / Asia / 24% Pacific Pacific 42% 43% 95 Note: ROW = Rest of World; Source: ITU, Morgan Stanley Research
  96. Japan Shows Way in Mobile Internet Usage – Mobile Nearly Matches PC Japan Internet Users by Access Device 100% 90% 83% 81% 81% % of Japan Internet Users 80% 73% 70% 58% 60% 50% 40% 40% 30% 20% 10% 0% 2002 2003 2004 2005 2006 2007 % using PC % using Mobile Source: Japan Ministry of Internal Affairs and Communication. 96
  97. Opera Mobile Web Browser = Strong Mobile Internet Growth - ~20MM Global Users, 7.6B Page Views (+325% Y/Y, Accelerating), 1/09 Global Opera Mini Browser Pages Transcoded per Month, 1/06 – 1/09 8,000 A full web experience + 50% faster − 7,000 Remote Server first pre- Total Pages Transcoded per Month (MM) processes requested web pages 6,000 − Web content is then compressed to reduce the 5,000 size of data transfer 4,000 − Fully-rendered web pages sent to your phone 3,000 − Advantage: full web rendering and faster 2,000 browsing on simpler phones 1,000 0 1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09 97 Source: Opera Software, Morgan Stanley Research.
  98. Western Europe + North America Hit 3G Penetration Inflection Point in 2007 – 2008, Global in 2010 3G* Enabled Handset & Penetration by Region, 2007 – 2013E 2007 2008 2009E 2010E 2011E 2012E 2013E (All connection numbers in 000s) Western Europe 80,558 153,064 255,379 355,360 430,425 487,109 528,030 3G Penetration 17% 31% 49% 67% 80% 88% 94% Japan 72,691 90,949 102,851 111,544 116,917 121,234 124,191 3G Penetration 72% 86% 93% 97% 98% 99% 99% North America 57,679 86,135 121,338 155,759 186,090 221,214 262,947 3G Penetration 21% 29% 39% 47% 54% 62% 71% Asia / Pacific (ex. Japan) 48,027 81,928 150,020 277,333 444,346 655,544 933,717 3G Penetration 4% 5% 8% 13% 18% 25% 33% Middle East & Africa 11,095 21,193 34,650 67,171 116,047 174,103 246,432 3G Penetration 2% 4% 6% 10% 16% 22% 30% Eastern Europe 5,980 15,042 33,120 58,151 94,173 137,913 186,896 3G Penetration 2% 4% 8% 13% 21% 31% 42% South & Central America 3,082 9,455 20,611 38,898 71,846 122,082 168,742 3G Penetration 1% 2% 5% 8% 15% 24% 32% Total 279,113 457,765 717,971 1,064,215 1,459,844 1,919,200 2,450,956 3G Penetration 8% 12% 16% 22% 29% 36% 44% Note: Regions ranked by 2008 absolute numbers of 3G-enabled devices in use. 3G* technologies include WCDMA, HSPA, TD- 98 SCDMA, 1xEV-DO, LTE and WiMax. Source: OVUM, Morgan Stanley Research.
  99. Apple Changed Mobile Game…With Impressive UI + 2.5G! i – NOT – A - Phone 99
  100. Apple iPhone 3G – Winning Consumers Via Simple + Useful Applications Catchy Tunes? Speak Mandarin? Lonely Planet Shazam will listen Mandarin and find the song Phrasebook will for you. say it for you. 100 Source: Apple.
  101. Apple iPhone – Digital Content Ecosystem Augmented by iTunes Store iTunes App Store on PC App Store on iPhone Source: Apple 101
  102. iTunes App Store – Rapid Ramp to 25K Apps, 74% Paid(1) iTunes App Store # of Apps, Paid vs. Free, 7/11/08 – 3/11/09 120% 25,000 Paid Apps Free Apps M/M Growth 100% 20,000 5,761 Total Apps Available 80% 15,000 M/M Growth 4,228 60% 10,000 2,994 40% 16,476 2,238 10,978 5,000 20% 1,480 7,110 1,036 5,009 747 3,442 2,256 410 1,476 173 787 391 0 0% At Launch 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 7 Month (07/11/08) Later Later Later Later Later Later Later Later (08/11/08) (09/11/08) (10/11/08) (11/11/08) (12/11/08) (01/11/09) (02/11/09) (03/11/09) Note: (1) Apple announced on 3/17 that there’re 25K+ apps, chart shows data through 3/11/09, when there were 22K apps available102 Source: Apple iTunes, Morgan Stanley Research.
  103. iTunes App Store – 14% Games, 12% Books, 11% Entertainment + 800MM Downloads (~13 per User) Average # of Paid Paid as % of Price of Category # of Apps % of Total Apps Category Total Paid Apps Games 3,326 2,001 $2.23 14% 60% Books 2,837 2,675 3.82 12 94 Entertainment 2,587 1,716 1.44 11 66 Utilities 2,067 1,474 2.66 9 71 Education 1,929 1,662 5.16 8 86 Lifestyle 1,404 1,023 2.21 6 73 Travel 1,258 1,064 5.09 5 85 Reference 1,177 905 6.52 5 77 Productivity 1,027 802 3.59 4 78 Sports 895 664 3.11 4 74 Music 838 559 3.90 4 67 Navigation 727 594 6.88 3 82 Healthcare & Fitness 704 577 2.94 3 82 Business 601 422 9.08 3 70 Photography 534 399 2.32 2 75 Finance 511 366 5.11 2 72 Social Networking 404 176 2.31 2 44 News 343 151 1.89 1 44 Medical 280 237 22.01 1 85 Weather 127 88 3.02 1 69 Total 23,576 17,555 $3.93 74% Note: Data as of 3/20/09, only showing apps available. Downloads per person assumes 50% are new downloads / 50% are update downloads. Apple announced that total apps / downloads reached 25K / 800MM as of 3/18. 103 Source: Apple iTunes, Morgan Stanley Research.
  104. Apple iPhone – Data Usage 6-10x Higher than Average USA Mobile Users App Downloads per iPhone 100x Higher than non-iPhones Mobile Content Consumption 100% Average U.S. Mobile Users iPhone Users 79% % of U.S. Mobile Subscribers 80% 70% 66% 66% 57% 60% 54% 40% 39% 38% 37% 40% 29% 20% 14% 10% 9% 9% 9% 8% 7% 5% 4% 3% 3% 0% l ch * ng s o ic ng s ng g ai es ew de de in us Em ar ki pi gi am nk ui Vi N M or Se op sa tG Ba G ng ile w es Sh eb et an si ob al tM N W e w on ur M in al ro an ta rs nl ci B st es O Pe So In R Note: KPCB iFund estimates 14MM total weekly app downloads for 12MM iPhone users, and 3MM weekly mobile app downloads on 250MM non-iPhones, thus translating into mobile application downloads 100x higher on iPhone. Source: 104 comScore M:Metrics, 8/08 Survey of U.S. mobile subscribers, *Games category per KPCB estimates.
  105. USA Mobile Carriers – Data ARPU Growth Offsetting Declining Voice ARPU Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08 $60 $50 $50 $49 $50 $47 $46 $46 $45 $44 $43 $43 $43 $41 $40 $40 $39 $40 $30 $20 $12 $12 $11 $10 $10 $9 $8 $8 $10 $7 $6 $6 $5 $5 $4 $3 $0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Voice ARPU Data ARPU Total Average ARPU 105 Source: Simon Flannery, Morgan Stanley Research.
  106. Global Wireless Data ARPU – Japan in Clear Lead, USA Catching Up Faster Than Others Data ARPU as Percentage of Total, CQ1:05 – CQ3:08 39% 39% 40% 37% 35% 33% 32% 31% 29% 29% 30% 28% Data ARPU as % of Total 28% 26% 26% 26% 26% 24% 22% 21% 20% 20% 18% 18% 16% 15% 13% 12% 11% 10% 10% 9% 7% 6% 0% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 USA (iPhone) Japan Western Europe Asia (ex. Japan) CQ3:08 Blended $51 ($95) ARPU (US$) : $54 $37 $5 - $37 Note: Western Europe is the weighted average of UK, Germany, Spain, Italy & France; Asia (ex. Japan) is the weighted avg of China, India, Indonesia, S. Korea, Thailand, Philippines, Malaysia and Singapore. Blended ARPU includes both pre-paid and contract plans. Asia (ex. Japan)’s blended ARPU ranges from $5 (Philippines), $10 (China), to $18 (Malaysia) and $37 (S. Korea). USA (iPhone) ARPU is contract only, per AT&T. Latin America data ARPU is ~13% of total in CQ3:08. Source: Morgan Stanley Research. 106
  107. Symbian Dominates Smartphones But Losing Share – Apple / RIM Gaining Ground Quarterly Worldwide Smartphone Sales by Operating System 40 35 Units Shipped (MM) 30 25 20 15 10 5 0 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 Symbian RIM Microsoft Apple Linux Palm Others CQ3:08 Dist.of Smartphone Sales 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 EMEA North America APAC ex. Japan Japan Latin America Source: Gartner. 107
  108. Technology / Internet 3) Emerging Markets – Pacing next wave of technology adoption – leading players in many emerging markets aren’t the usual suspects… 108
  109. Broadband + Mobile + Internet = Especially High Global Growers 2002 Y/Y 2007 Y/Y Global 2007 Net Category Growth Rate Growth Rate Market Size Additions Broadband Subscribers 78% 23% 349MM 64MM Mobile Subscribers 20 20 3,319MM 563MM Internet Users(1) 26 16 1,352MM 182MM Financial Cards(2) 12 11 8,016MM 804MM Installed PCs 12 8 900MM 66MM Cable / Satellite TV Subscriptions 8 6 761MM 40MM GDP per Capita 2 3 22K 1K Population 2 1 6,501MM 77MM Telephone Lines 5 -0 1,277MM -4MM Note: (1) Include mobile Internet users, based on ITU’s compilation of country reports, surveys and estimates; (2) Includes credit / debit / ATM / charge cards in circulation; Source: Morgan Stanley Research. 109
  110. Top 10 Emerging Markets = to Surpass Top 10 Developed Markets in Internet Users in 2008 Top 10 Emerging Markets vs. Top 10 Developed Markets – Internet Users 80% 700 70% 600 60% Internet Users (MM) 500 Y/Y Growth 50% 400 40% 300 30% 200 20% 100 10% 0 0% 2001 2002 2003 2004 2005 2006 2007 2008E Top 10 Emerging Markets Top 10 Developed Markets Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP. Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia; Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia; Source: IMF, ITU, Morgan Stanley Research. 110
  111. Top 10 Emerging Markets = 2x Top 10 Developed Markets in Mobile Subscribers in 2008 Top 10 Emerging Markets vs. Top 10 Developed Markets – Mobile Subscribers 1,800 60% 1,600 50% 1,400 Mobile Subs (MM) 1,200 40% Y/Y Growth 1,000 30% 800 600 20% 400 10% 200 0 0% 2001 2002 2003 2004 2005 2006 2007 2008E Top 10 Emerging Markets Top 10 Developed Markets Top 10 EM Y/Y Growth Top 10 DM Y/Y Growth Note: Emerging / developed markets as defined by IMF; Top 10 chosen based on largest GDP. Top 10 emerging markets: China, India, Russia, Brazil, Mexico, Turkey, Indonesia, Iran, Poland, and Saudi Arabia; Top 10 developed markets: U.S., Japan, Germany, U.K., France, Italy, Spain, Canada, South Korea, and Australia; Source: IMF, ITU, Morgan Stanley Research. 111
  112. TMT (Technology / Media / Telecom) Update = China #1 + Rest of BRIC Gaining Ground 2004 2007 Relative Relative Rank Country Rank Country Weighting Weighting 1 USA 9.0 China 1 8.9 2 China 8.2 USA 2 8.8 3 Japan 6.5 Japan 3 6.1 4 Germany 5.7 Germany 4 5.6 5 UK 5.5 India 5 5.6 6 India 5.3 UK 6 5.3 7 France 5.2 France 7 5.3 8 Italy 5.2 Russia 8 5.2 9 S. Korea 5.1 S. Korea 9 5.2 5.1 Brazil 10 Canada 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: GDP per capita (PPP), telephone lines, cable / satellite TV households, installed PCs, mobile subscribers, internet users, financial cards(1), and broadband subscribers. We do this for the 52 most important economies based on purchasing power / economic strength, as measured in terms of population / GDP per capita. We standardized each country’s position in the global market in each category and adjusted values to reflect a positive scale. The relative ratings and ranks were then determined by calculating an average of Z-scores across categories. For example, in the United States in 2007, standardized and adjusted values of 6.58 in GDP per capita, 7.57 in telephone lines, 10.79 in installed PCs, 7.30 in mobile subscribers, 8.55 in cable subscribers, 9.60 in Internet users, 10.91 in financial cards, and 9.45 in broadband subscribers, produces a relative weighting of 8.84. Note: Red indicates countries moving out of the top 10 TMT countries; Green indicates countries moving into the top 10 and highlights China / India 112 Source: Morgan Stanley Research
  113. Internet User Net Additions – China, Brazil, Pakistan, Columbia, India, Iran, Russia Impressive 2007 Net Internet Users Added 2007 Penetration Rank Country (000's) Y/Y Growth Level 1 China 73,000 53% 16% 2 United States 9,800 5 73 3 Brazil 7,400 17 26 4 Pakistan 5,500 46 11 5 Colombia 5,395 80 25 6 India 5,000 7 7 7 Iran 5,000 28 32 8 Russia 4,311 17 21 9 Germany 3,900 10 52 10 France 3,553 12 55 11 Vietnam 3,188 22 21 12 Canada 3,000 12 85 13 Egypt 2,620 44 12 14 Indonesia 2,424 23 6 15 United Kingdom 2,400 6 66 16 Mexico 2,248 11 22 17 Thailand 2,003 18 20 18 Nigeria 2,000 25 7 19 Poland 1,915 14 42 20 Venezuela 1,580 38 21 Note: Penetration is per person. Source: ITU, Morgan Stanley Research. 113
  114. Mobile Subscriber Net Additions – ‘Emerging’ Markets Providing Growth 2007 Net Mobile Subs 2007 Penetration Level(1) Rank Country Added (000's) Y/Y Growth 1 China 86,228 19% 41% 2 India 67,570 41 21 3 Pakistan 44,346 129 50 4 Brazil 21,062 21 64 5 Russia 19,326 13 120 6 Indonesia 18,032 28 36 7 United States 13,596 6 85 8 Iran 12,910 77 42 9 Egypt 12,046 67 41 10 Germany 11,499 13 118 11 Mexico 11,237 20 65 12 Thailand 10,654 26 78 13 Turkey 9,313 18 90 14 Argentina 8,891 28 103 15 Saudi Arabia 8,718 44 117 16 Vietnam 8,225 53 28 17 Nigeria 8,073 25 28 18 Philippines 7,306 17 57 19 Peru 6,645 76 55 20 Algeria 6,565 31 80 Note: (1) Penetration is per person; mobile subscribers include all active SIM card subscriptions; people in many countries outside of the US use more than one SIM cards on a regular basis, which may results in greater than 100% penetration levels. 114 Source: Morgan Stanley Research.
  115. Non-US Markets Lead Usage Penetration in Many Categories E-commerce: Online Gaming: Broadband: Mobile Payments + TV: Germany China S. Korea Japan Online Advertising: UK Social Networking: Microtransactions via SMS: Brazil / S. Korea Philippines 115 Source: Morgan Stanley Research
  116. Technology / Internet 4) Cloud Computing – Access + storage need + virtualization driving change 116
  117. Storage Growth +62% in 2007E – Consumer > Professional Demand Global Storage Sold Annually 120,000 100,000 80,000 Petabytes 60,000 40,000 20,000 0 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E Home Professional 117 Source: Seagate, Katy Huberty, Morgan Stanley Research
  118. Cloud Computing – Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model Amazon.com Salesforce.com 118 Source: Amazon.com, Salesforce.com, Morgan Stanley Research
  119. ‘A Giant Supercomputer’ – A Datacenter Behind the Cloud Google Data Center – The Dalles, Oregon 119 Source: Getty Images
  120. Google Zeitgeist – Predictive Power of Data Underutilized Trendsetters 2008 – Going Green Fastest Rising (global) Fastest Rising (US) 1. sarah palin 1. obama 2. beijing 2008 2. facebook 3. facebook login 3. att 4. tuenti 4. iphone 5. heath ledger 5. youtube 6. obama 6. fox news 7. nasza klasa 7. palin 8. wer kennt wen 8. beijing 2008 9. david cook 9. euro 2008 10. surf the channel 10. jonas brothers Politics – U.S. Presidential Election Economy – Layaway Makes a Comeback 120 Source: Google Year-End Zeitgeist, 2008.
  121. Amazon Web Services – Providing Cheap / Reliable Storage in Cloud • Simple Storage Service (S3) – Provides a simple web services interface that can be used to store (for as low as $0.12 per GB per mo.) / retrieve any amount of data, at any time, from anywhere. 29B+ objects stored by the end of CQ3, +32% Q/Q. • Elastic Compute Cloud (EC2) – Provides resizable compute capacity in the cloud, with users paying only for capacity they actually use (starting $0.10 / instance-hour). Amazon Web Services 16% 450 400 Total Registered Developers (000) 14% 350 12% 300 Q/Q Growth 10% 250 8% 200 6% 150 4% 100 2% 50 0 0% CQ2:05 CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 Total Registered Developers (000) Q/Q Growth 121 Source: Amazon.
  122. Closing Thoughts 1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time 122
  123. 2% of Public Tech Companies Create 100% of Wealth* – A Look at Some of Biggest Winners of Our Day Great Simple, Active, Management Insane Big Annuity Huge Focused Missionary Team, Constant Customer Gross -Like Strong (1) Market Mission Founders Culture Improvement Focus Margin Model Board Apple X X X X XX X 34 X X Cisco X X O X X X 65 X X Dell X X X X X X 18 X X eBay X X X X X X 77 X X Google XX XX X X X X 83 X X Intel X X X X X X 56 X X Microsoft X X X X X X 79 XX X Yahoo! X X X X X X 81 X X Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! 123 Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’
  124. Top 15 Global Internet Companies Global Top Internet Companies by Market Value (US$ in Millions, except per share data, as of 3/19/09) 3/19/09 Market C2008 Total Return % 52-Week Rank Company Region Price (US$) Value ($MM) Revenue ($MM) 2006 2007 2008 2009 YTD High Low 1 Google US $324 $102,288 $21,796 11% 50% -56% 5% $602 $247 2 Amazon.com US 69 29,414 19,166 -16 135 -45 34 92 35 3 Yahoo! US 14 18,836 7,209 -35 -9 -48 11 30 9 4 eBay US 12 15,345 8,541 -30 10 -58 -15 33 10 5 Yahoo! Japan Japan 251 14,188 2,633 -48 13 -10 -38 548 229 6 Softbank Japan 13 13,158 27,891 -54 6 -14 -28 21 7 7 Activision US 10 12,915 3,026 25 72 -42 14 19 8 8 Tencent China 7 11,964 998* 233 113 -15 3 9 4 9 Baidu China 173 5,920 469 79 246 -67 32 383 101 10 Rakuten Japan 464 5,802 2,757 -52 6 28 -26 672 414 11 Electronic Arts US 18 5,699 4,480 -4 16 -73 11 55 14 12 Alibaba China 1 5,034 439* -- -- -80 38 2 0 13 NHN Korea 101 4,583 1,658* 38 97 -57 -2 252 59 14 NetEase China 22 2,772 424 33 1 17 1 27 15 15 Expedia US 7 2,121 2,937 -12 51 -74 -10 26 6 Note: * denotes Morgan Stanley estimate; ~60% of Softbank’s C2008 revenue was coming from their mobile operator business. 124 Source: FactSet; Morgan Stanley Research. Data as of 3/19/09.
  125. Old Media (TV) / New Media (Internet + Mobile) – Complementary 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 Source: CBS Sports Interactive. 125
  126. Younger Generation (18-41) – Spend Most Time on Internet / Cell Phone vs. Other Media % of Media Consumption Younger Generation Seniors (Age 18 - 41) (Age 63+) Newspaper - 3% Magazine - 4% Video Game Newspaper Internet - 6% - 13% - 12% Magazine - 8% Internet - 25% Video Game Movie - 11% - 2% Movie - 8% TV - 38% Radio - 14% Radio - 13% TV - 22% Cell Phone - 15% Cell Phone - 13% Total Hours of Media Usage Per Week: Total Hours of Media Usage Per Week: 49 Hours 37 Hours Note: Data per Forrester Research’s 2007 North American Technographics Consumer Benchmark Survey; Age 18-41 data is the average of age 18-27 & 28-41. Source: Forrester Research. 126
  127. Media Time Spent vs. Ad Spend Out of Whack – Internet / Mobile (upside…) vs. Newspaper / Magazine / TV (downside…) % of Time Spent in Media vs. % of Advertising Spending, USA 2008E 35% 32% 32% % of Total Media Consumption Time 30% or Advertising Spending 25% 25% 20% 20% 17% 15% 13% 9% 10% 8% 7% 6% 6% 5% <1% 0% TV Internet Radio Mobile Newspaper Magazine Phone Time Spent Ad Spend Note: Time spent data per Forrester Research, ad spend data per Nielsen Media Research, mobile medium ad spending is Morgan Stanley’s estimate. Source: Nielsen Media Research, Forrester, Morgan Stanley Research. 127
  128. Internet Advertising – Lots of Ad Share to Gain $288 Per Home for Internet vs. $818 for Newspapers Implies Upside 2007 Advertising Ad Spending / Spending ($B) Household ($) Medium Households (MM) $1,032 107 $110 Direct Telephone 1,011 115 116 Promotions 818 56 46 Newspapers 260 56 15 Classifieds 532 114 61 Direct Mail 390 112 44 Broadcast TV 327 80 27 Cable TV 288 71 21 Internet / Online 172 113 20 Radio 141 114 16 Yellow Pages Outdoor 63 114 7 Total $469 $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. 128 Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research.
  129. Offline Advertising Revenue Declines Accelerating – Newspaper Redux? Traditional Media Ad Revenue Y/Y Growth, CQ1:07 – CQ1:09E CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E 0% -3% -5% Ad Revenue Y/Y Change -10% -10% -15% -18% -20% -30% -30% Cable TV Network TV Local TV Print Newspaper Every time we have seen a recession, we have endured this panic… I recognize that we may never return to record levels, but we can recapture a large percentage of advertising that does return. - Rupert Murdoch, Chairman and CEO, News Corp. (2/5/09) Source: Newspaper Association of America, Morgan Stanley Media Research. Newspaper figures relate to the “print” portion of ad revenues. CQ4:08 / CQ1:09E Y/Y declines are Morgan Stanley estimates. 129
  130. Search = Still Lots of Share to Grab U.S. Internet Search Spending vs. Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007 $80,000 $70,348 $69,923 $68,402 $70,000 $67,115 $65,146 $63,265 $61,224 $60,890 $60,000 Ad Spend ($MM) $50,000 $40,000 $30,000 $20,000 $12,282 $9,430 $10,000 $6,910 $4,113 $2,133 $889 $299 $122 $0 2000 2001 2002 2003 2004 2005 2006 2007 Internet Search Combined Classified, Yellow Pages & Newspaper Source: IAB, search spending adjusted by our estimates; Classified, Yellow Pages & Newspaper spending per MS Media team. 130 Morgan Stanley Research.
  131. USA Online Ad Spend + E-Commerce Penetration – Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back! U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007 12% 12% 10% 10% 20-yr Average Y/Y Growth 20-yr Average Total Ad 8% 8% Spending & Retail Sales Y/Y Growth = 5% % of Total 6% 6% 4% 4% 2% 2% 0% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Online Ad Spending as % of Total Ad Spending (1) (2) U.S. Adjusted E-Commerce as % of Total Retail Sales Note: (1) We use IAB and ZenithOptimedia data to estimate U.S., online ad spend as % of total ad spend; (2) E-Commerce sales adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; e-commerce data unavailable before 2000. 20-yr average from 1987-2007. 131 Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research
  132. Largest USA Advertisers Under Spend on Internet Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average 2007 2007 Total Ad Internet Ad Internet % of Total (2) Rank Company Industry Spending ($MM) Spending ($MM) 1 Consumer $5,230 $81 2% Procter & Gamble 2 Telecom 3,207 136 6 AT&T 3 Telecom 3,016 189 9 Verizon 4 Automotive 3,010 212 10 General Motors 5 Media 2,962 98 6 Time Warner 6 Automotive 2,525 164 10 Ford 7 Healthcare 2,457 29 2 GlaxoSmithKline 8 Consumer 2,409 49 3 Johnson & Johnson 9 Media 2,293 141 10 Walt Disney 10 Consumer 2,246 47 5 Unilever 11 Telecom 1,903 71 5 Sprint Nextel 12 Conglomerate 1,791 79 7 General Electric 13 Automotive 1,758 57 5 Toyota 14 Automotive 1,739 53 5 Chrysler 15 Technology 1,737 72 7 Sony 16 Consumer 1,632 12 2 L'Oreal 17 Retail 1,628 23 3 Sears 18 Consumer 1,508 36 3 Kraft Foods 19 Financial 1,491 72 18 Bank of America 20 Automotive 1,423 34 4 Nissan Note: (1) 8% is the average of the top 100 US ad spenders in 2007, per Ad Age. Data via TNS, which excludes search revenue. We use IAB and ZenithOptimedia data to estimate that in the U.S., online ad spend (including search) = ~12% of total ad spend; (2) Percentage of total measured advertising spending, which is smaller than the total ad spending figures provided. 132 Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research
  133. Key to Progress = Learning to Speak Different Languages and Walk Miles in Moccasins – Google / P&G Employee Swap • P&G employees were surprised during a Tide brand meeting when a Google job-swapper didn't realize Tide's signature orange-colored packaging is a key part of the brand's image. • Google employee caused a stir when she showed P&G staffers some Google data indicating online searches for word \"coupons\" are up ~50% over past 12 months. • When P&G unveiled an ambitious promotion for the Pampers brand, the Google team was stunned to learn that Pampers hadn't invited any \"motherhood\" bloggers -- women who run popular Web sites about child-rearing -- to attend the press conference. P&G’s ‘The Talking Stain’ Campaign Engages YouTube Viewers 133 Source: The Wall Street Journal 11/28/08, Advertising Age, P&G.
  134. While CPMs / CPCs May be Under Near-Term Pressure, If Targeting / ROI Continue to Improve (as they should) There Should Be Long-Term Upside Estimated CPMs Source: Yahoo! Investor Presentation, 3/08. 134
  135. History Proves That Ads Follow Eyeballs, It Just Takes Time 1996 – Morgan Stanley Global Estimates in ‘The Internet Advertising Report’ 2007 – We’re @ Internet Users: 1.35B(1) Online Ad Revenue: $41B(2) Ad Revenue per User: $30(3) Note: (1) ITU, Morgan Stanley Research estimate, comScore reports a lower number for global unique visitors due to their sampling method; (2) ZenithOptimedia; (3) Using comScore’s #s, global online ad revenue per unique user would have been ~$53; Source: ITU, ZenithOptimedia, Morgan Stanley Research. 135
  136. We are Undergoing the Greatest Media Transformation in History 136
  137. Amazon.com = Greatest Advertiser / Agency of Past Decade? • Online advertising underperforms relative to potential – 76% of USA consumers find Internet ads more intrusive than print ads, 64% pay more attention to print ads than those online, per Deloitte. • Amazon.com turns intrusive ads into useful / desirable information Demo: Step 1: Show your interests in a camera Step 2: Amazon.com returns with ‘ads’ for compatible lens / battery / memory card, etc. Source: Deloitte, Amazon.com. 137
  138. Advertising Age – Best Campaigns 1900-2000 – Most Fertile Decades = 1950-1980 25% 20% % of Top 100 Ads 15% 10% 5% 0% 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s Source: Advertising Age, Wikipedia Note: 2 ads before 1900 are included in 1900s decade. 138 Alka-Seltzer ads are included in 1960s decade.
  139. These Campaigns Were Really / Really Awesome – They Sold Lots of Product Rank Company Commercial Ad Agency Year 1 Volkswagen Think Small Doyle Dane Bernbach 1959 2 Coca-Cola The pause that refreshes D'Arcy Co. 1929 3 Marlboro The Marlboro Man Leo Burnett Co. 1955 4 Nike Just do it Wieden & Kennedy 1988 5 McDonald's You deserve a break today Needham, Harper & Steers 1971 6 DeBeers A diamond is forever N.W. Ayer & Son 1948 7 Absolut Vodka The Absolut Bottle TBWA 1981 8 Miller Lite Beer Tastes great, less filling McCann-Erickson Worldwide 1974 9 Clairol Does she...or doesn't she? Foote, Cone & Belding 1957 10 Avis We try harder Doyle Dane Bernbach 1963 11 Federal Express Fast talker Ally & Gargano 1982 12 Apple Computer 1984 Chiat/Day 1984 13 Alka-Seltzer Various ads Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene 1960s, 1970s 14 Pepsi-Cola Pepsi-Cola hits the spot Newell-Emmett Co. 1940s 15 Maxwell House Good to the last drop Ogilvy, Benson & Mather 1959 16 Ivory Soap 99 and 44/100% Pure Proctor & Gamble Co. 1882 17 American Express Do you know me? Ogilvy & Mather 1975 18 U.S. Army Be all that you can be N.W. Ayer & Son 1981 19 Anacin Fast, fast, fast relief Ted Bates & Co. 1952 20 Rolling Stone Perception. Reality. Fallon McElligott Rice 1985 21 Pepsi-Cola The Pepsi generation Batton, Barton, Durstine & Osborn 1964 22 Hathaway Shirts The man in the Hathaway shirt Hewitt, Ogilvy, Benson & Mather 1951 23 Burma-Shave Roadside signs in verse Allen Odell 1925 24 Burger King Have it your way BBDO 1973 25 Campbell Soup Mmm mm good BBDO 1930s Source: Advertising Age. 139
  140. We are Undergoing the Greatest Media Transformation in History Where is the great creative? Great creative sells great products. Great creative (in a new medium) for great products helps create great companies. 140
  141. Great Internet Creative – The Time is Now… • When the going gets tough, the tough get going. - Joe Kennedy (1888-1969) • Necessity is the mother of invention. - Plato (~400BC) • Speed up in a slowdown. - Google (2008) 141
  142. The Internet – What Would William Bernbach or Leo Burnett Do? • Rules are what the artist breaks; the memorable never emerged from a formula. - William Bernbach (1911-1982) • Just do it. - Wieden & Kennedy (1988) 142
  143. Disclosure Section The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, \"Morgan Stanley\"). For important disclosures, stock price charts and rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst, strategist, or research associate (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Mary Meeker - Amazon.com (common stock), eBay (common stock), Yahoo! (common stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard (\"GICS,\" which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of February 27, 2009, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Amazon.com, eBay, Google, GSI COMMERCE, WebMD Health Corp., Yahoo!. As of February 27, 2009, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Amazon.com, eBay, GSI COMMERCE. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Dice Holdings, Inc., eBay, Google, GSI COMMERCE. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from eBay, Google. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Amazon.com, Dice Holdings, Inc., eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: eBay, Google. The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. An employee or director of Morgan Stanley is a director of Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, Dice Holdings, Inc., drugstore.com, eBay, Google, GSI COMMERCE, TechTarget, Inc., WebMD Health Corp., Yahoo!. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. 143
  144. Disclosure Section STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of February 28, 2009) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not- Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Investment Banking Clients (IBC) Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category Overweight/Buy 714 32% 216 38% 30% Equal-weight/Hold 1003 44% 246 43% 25% Not-Rated/Hold 33 1.5% 9 1.6% 27.3% Underweight/Sell 507 22% 100 18% 20% Total 2,257 571 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. 144
  145. Disclosure Section Analyst Stock Ratings Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated/Hold (NA or NAV). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Please note that NA or NAV may also be used to designate stocks where a rating is not currently available for policy reasons. For the current list of Not-Rated/Hold stocks as counted above in the Global Stock Ratings Distribution Table, please email morganstanley.research@morganstanley.com. 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. 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. 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. 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. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities/instruments discussed in Morgan Stanley Research 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 Morgan Stanley Research may not be suitable for all investors, and certain investors may not be eligible to purchase or participate in some or all of them. Morgan Stanley Research is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. The \"Important US Regulatory Disclosures on Subject Companies\" section in Morgan Stanley Research lists all companies mentioned where Morgan Stanley owns 1% or more of a class of common securities of the companies. For all other companies mentioned in Morgan Stanley Research, Morgan Stanley may have an investment of less than 1% in securities or derivatives of securities of companies and may trade them in ways different from those discussed in Morgan Stanley Research. 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