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Morgan Stanley Meeker Technology Trends Dec 2008

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    Morgan Stanley Meeker Technology Trends Dec 2008 - Presentation Transcript

    1. Economy / Internet Trends December 19, 2008 mary.meeker@ms.com / liang.wu@ms.com Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
    2. Outline • Economy 1. Recession – a long time coming, how long will it last? 2. Advertising Spending – closely tied to GDP growth • Technology / Internet 1. Digital Consumer – Undermonetized social networks / video / VoIP driving powerful usage growth 2. Mobile – Innovation in wireless products / services accelerating 3. Emerging Markets – Pacing next wave of technology adoption 4. Cloud Computing – Access / storage need / virtualization driving change • Closing Thoughts 1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time… 2
    3. Economy 1) Recession – a long time coming, how long will it last? Ten years of inflated growth to be followed by ____? Hope for 1 tough year but plan for 5? 3
    4. 10 Years Ago – I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998 Source: YouTube. 4
    5. Roots of Economic Challenge? 10+ Years of Rising Home Ownership + Declining Interest / Savings Rates USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008 70% June 2004: US home ownership = 73MM 20% 68% 16% U.S. Interest Rate & Personal Savings Rate U.S. Home Ownership Rate 66% January 1993: HUD began promoting broader home ownership. US home ownership = 62MM 12% 64% 8% 62% 4% 60% 58% 0% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 U.S. Home Ownership Rate U.S. Interest Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline U.S. Personal Savings Rate Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. 5 Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research.
    6. Market & Regulatory Pressure Made Home Buying More Accessible…1998 In addition to a buoyant economy, the overall housing industry owes its enduring vigor to innovations in mortgage finance that have helped not only expand homeownership opportunities, but also reduce market volatility. Under market and regulatory pressure to make home buying more accessible to low-income and minority households, financial institutions have revised their underwriting practices to make lending standards more flexible. In the process, they have developed several new products to enable more income- constrained and cash-strapped borrowers at the margin to qualify for mortgage loans. - 1998 State of the Nation’s Housing Report Note: Quoted in Gary Gorton’s NBER Working Paper Series “The Panic of 2007” (Working Paper 14358), p.5. Source: Harvard University, Joint Center for Housing Studies, 1998. 6
    7. 10 Years of Rising Home Prices – Up ~2x USA Real Home Price & Building Cost Indexes, % Change 1965 - 2007 90% 80% 70% 60% % Change From 1965 Level 50% 40% 30% 20% 10% 0% -10% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S. Real Home Price Index U.S. Real Building Cost Index Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller. 7
    8. Systemic Leverage Helped Pace ‘Easy Money’ Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries 400% U.S. Total Credit Market Debt as % of GDP 70% & Foreign Ownership % of U.S. Treasuries, 2008: 3.6x GDP 1920 - 2008 60% 350% Foreign Ownership of U.S. Treasuries, 1931: 2.7x GDP 50% Total Debt as % of GDP % of Total Market Cap 300% 40% 250% 30% 200% 20% 150% 10% 100% 0% 1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008 U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization Note: Foreign ownership of US treasuries data N/A before 1965. Source: Federal Reserve Board, Ned Davis Research, Bridgewater, Morgan Stanley Research. 8
    9. USA Debt Mix Shift – Mortgages / ABS / Financials Up 1984 2008 U.S. Total Debt: $7T U.S. Total Debt: $52T Total Financial Debt: $1T Total Financial Debt: $17T Mortgage Pools 9% ABS Issuers Other 8% Mortgage Pools – 4% 11% ABS Issuers – 0% Other – 15% Other Financial Government 10% 15% Household Other Financial 26% 15% Government 25% Corporate 14% Corporate 19% Household 27% Note: Other financial debt include those issued by commercial banks, insurance companies, broker-dealers, Government Sponsored Enterprises (GSEs), REITs, Savings & Loans institutions, credit unions, and finance companies, etc. Debt amounts 9 are nominal, ABS is Asset Backed Security. 2008 data as of CQ3. Source: Federal Reserve, Morgan Stanley Research.
    10. USA Mortgage Delinquency @ Record High 6.99% USA Mortgage Delinquency Rates, CQ1:98 – CQ3:08 20% 15% Delinquency Rates (%) 10% 5% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 All U.S. Mortgages Prime Mortgages Subprime Mortgages Note: National delinquency rate of 6.99% in CQ3:08 is the highest since CQ1:1972, when data first became available; Average national mortgage delinquency rate from 1972-2007 is 4.70%; Source: Mortgage Bankers Association. 10
    11. -0.5% Q/Q USA GDP Growth in CQ3 / Consumer Spending Fell 3.7% Biggest Q/Q Decline Since 1980 – October < September < August < July U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE) Q/Q % Change, 2005-2008 6% 5% 4% 3% Q/Q Growth Rates 2% 1% 0% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 -1% -2% -3% -4% U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth Note, Real GDP and real PCE are inflation- and seasonally adjusted. CQ3:08 data is preliminary, may differ from final reported #s. 11 Source: BEA, Morgan Stanley Research.
    12. Discouraging Monthly Trends – Amplified by Internet-Driven Information Transparency? Abercrombie & Fitch Same-Store Sales UK Retail Same-Store Sales Y/Y % Change, 1/08 – 11/08 Y/Y % Change, 1/08 – 11/08 10% 10% 6% 5% 5% 3% Comparable Store Sales Y/Y % Change Comparable Store Sales Y/Y % Change 2% 2% 0% 0% 0% 0% -1% -2% -1% -1% -1% -1% -2% -2% -3% -5% -3% -5% -7% -10% -10% -10% -11% -15% -14% -15% -20% -20% -20% -25% -25% -30% -28% -30% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Note: Same-store sales are sales in stores open more than one year. Source: Abercrombie & Fitch, British Retail Consortium. 12
    13. Global GDP Growth Forecasts = Downward / Decelerating Bias Difference from IMF Forecasts, 11/08 10/08 IMF Forecasts Country / Region 2006 2007 2008E 2009E 2008E 2009E USA 2.8% 2.0% 1.4% -0.7% -0.1% -0.8% Euro zone 2.8 2.6 1.2 -0.5 -0.1 -0.7 UK 2.8 3.0 0.8 -1.3 -0.2 -1.2 China 11.6 11.9 9.7 8.5 -0.1 -0.8 India 9.8 9.3 7.8 6.3 -0.1 -0.6 Russia 7.4 8.1 6.8 3.5 -0.2 -2.0 Brazil 3.8 5.4 5.2 3.0 -- -0.5 Developed Markets(1) 3.0 2.6 1.4 -0.3 -0.1 -0.8 Emerging Markets(2) 7.9 8.0 6.6 5.1 -0.3 -1.0 World 5.1 5.0 3.7 2.2 -0.2 -0.8 Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 11/08. Morgan Stanley Research. 13
    14. USA Manufacturing Contracting Rapidly – Lowest Level (and Declining) Since 1982 for PMI Index 80 U.S. PMI (Purchasing Mangers Index), 1/48 – 11/08 PMI > 50 = 70 Expansion 60-year Average = 52.8 60 ISM PMI Index (%) 50 40 Oct 2001 Feb 1991 PMI < 50 PMI=40.8 PMI=39.4 Nov 2008 = May 1982 30 PMI=36.2 Contraction PMI=35.5 20 48 51 54 57 60 63 66 69 72 75 78 81 84 87 90 93 96 99 02 05 08 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 Note: PMI is a composite index based on five major indicators including: new orders, inventory levels, production, supplier deliveries, and employment environment. A PMI index over 50 indicates that manufacturing is expanding while anything below 50 means that the industry is contracting. Source: Institute for Supply Management (ISM), Morgan Stanley Research. 14
    15. Unemployment Rising Rapidly But 110 Basis Points Below Previous Peaks More Often Than Not, Peak Unemployment = Good Time to Invest S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008 10000 30% 25% 1000 S&P 500 Index Value (Log Scale) Unemployment Rate 20% 100 15% 10% 10 5% 1 0% 1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 Recessions S&P 500 Index Price Unemployment Rate Unemployment Peak Note: Unemployment rates from 1928–1943 are annual estimates from John Dunlop and Walter Galenson’s Labor in the Twentieth Century (1978); data unavailable between 1943-1948; Post 1948 unemployment data from BLS, peaks are: 9/49 - 7.9%; 9/54 - 6.1%; 7/58 - 7.5%; 5/61 – 7.1%; 8/71 - 6.1%; 5/75 - 9.0%; 11/82 - 10.8%; 6/92 - 7.8%; 7/03 - 6.3%. 15 Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.
    16. Stock Market = Leading Indicator of Economic Growth Russia off 73% vs. 12-Month Peak, Oil -71% / China -63% / India -52% / Japan -45% / S&P500 -41% 600 2006 2007 2008 500 Indexed Value (base = 100) 400 300 200 100 0 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 S&P 500 NASDAQ Composite Index China Shanghai SE Composite India SENSEX Russia RTS Light Crude Oil - Continuous Contract Gold - Continuous Contract Japan Nikkei 225 Note: all indices start at a value of 100 on 12/16/05; data as of 12/18/08; Source: FactSet. 16
    17. S&P500 – Key Spending Sectors Have Taken Big Hits Total Mkt % Change Cap ($B) 2008 Peak to S&P Sector 12/18/08 2006 2007 YTD Current (1) Market Cap Leaders Financials 1,061 16% -20% -53% -62% JPMorgan, Wells Fargo Consumer Discretionary 686 9 -18 -38 -49 McDonald's, Walt Disney Materials 242 10 14 -44 -47 Monsanto, DuPont Industrials 846 8 7 -42 -47 GE, United Technologies Information Technology 1,242 11 12 -44 -46 Microsoft, IBM Telecom Services 293 32 -12 -36 -42 AT&T, Verizon Energy 1,026 14 36 -39 -36 Exxon, Chevron Utilities 317 17 6 -31 -34 Exelon, Southern Health Care 1,153 1 1 -26 -29 Johnson & Johnson, Pfizer Consumer Staples 1,121 8 10 -21 -20 Wal-Mart, Procter & Gamble (2) S&P 500 Total 7,987 11% 1% -39% -43% Note: (1) % Change from S&P 500 peak on 10/9/07 to 12/18/08; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change. Source: Bloomberg, Morgan Stanley Research. 17
    18. S&P500 Down 40-50% 2x in 183 Year History – 2008 / 1931 Bad Years Often Follow Good Years 2007 2005 1994 1993 1992 1987 1984 1978 1970 1960 2006 1956 2004 1948 1988 1947 1986 1923 1979 1916 1972 1912 1971 2000 1911 1968 1990 1906 1965 1981 1902 1964 1977 1899 1959 1969 1896 1952 1962 1895 1949 1953 1894 1944 2003 1946 1891 1926 1999 1940 1889 1921 1998 1939 1887 1919 1996 1934 1881 1918 1983 1932 1877 1905 1982 2001 1929 1875 1904 1976 1973 1914 1874 1898 1967 1966 1913 1872 1897 1963 1997 1957 1903 1871 1892 1961 1995 1941 1890 1870 1886 1951 1991 1920 1887 1869 1878 1943 1989 1917 1883 1868 1864 1942 1985 1910 1882 1867 1858 1925 1980 1893 1876 1866 1855 1924 1975 1884 1861 1865 1850 1922 1955 2008 1873 1860 1859 1849 1915 1950 YTD 2002 1854 1853 1856 1848 1909 1945 1974 1841 1851 1844 1847 1901 1938 1958 1954 -40% 1930 1837 1845 1842 1838 1900 1936 1935 1933 1907 1831 1835 1840 1834 1880 1927 1928 1885 1857 1828 1833 1836 1832 1852 1908 1863 1879 1931 1937 1939 1825 1827 1826 1829 1846 1830 1843 1862 -50 to -40% -40 to -30% -30 to -20% -20 to -10% -10 to 0% 0 to 10% 10 to 20% 20 to 30% 30 to 40% 40 to 50% 50 to 60% Note: S&P 500 2008 YTD performance as of 12/18/2008, S&P 500 historical info from 1825 to 2007. 18 Source: Value Square Asset Management, Yale University.
    19. 5 Weeks in History – Financial Services Restructuring (~$3T in US Aggregate Sector Market Value 1/1/07…now ~$1T) Dow Jones Industrial Average, 9/8/08 – 10/14/08 September 7 September 14 September 16 September 22 September 25 September 29 October 3 October 14 11,600 GSEs / Lehman AIG MS / MUFG JPM Fortis Wells Fargo Leading 11,400 Bankruptcy Nationalized Investment Acquires Nationalized Acquires Banks Enter Washington 11,200 Plan WaMu Wachovia Preferred BofA GS / B&B Stock 11,000 Acquires ML Berkshire Nationalized $700Bn Purchase Investment Dow Jones Industrial Average TARP Program 10,800 10,600 UK Bank Bail 10,400 Out 10,200 Santander / Sovereign 10,000 9,800 9,600 9,400 9,200 9,000 8,800 (23%) 8,600 8,400 United States Europe Note: Aggregate sector market value is the combined market cap for all companies in the S&P500 financials index, $2.9T as of 1/1/08, $1.2T as of 12/8/08. 19 Source: Morgan Stanley IBD; Bloomberg.
    20. Consumer Wealth Destruction = ~15% – 56%+ of USA Household Assets in Real Estate + Stocks USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances, % Change from CQ1:07 10% Credit Market Instruments 7% Others 0% 3% % Change from CQ1:07 Deposits -10% 12% Real Estate 38% -20% Pension Reserves -30% 22% Equities + Mutual Funds 18% -40% CQ1:07 CQ3:07 CQ1:08 CQ3:08 S&P/Case-Shiller Home Price Index S&P 500 Index Note: Median household income in 2007 was $50,233, per U.S. Census Bureau. 56% accounts only real estate + equities / mutual funds; many pension funds also invest in the U.S. equities market, thus actual exposure to these asset classes will likely be higher. Wealth destruction of approx. 15% is calculated by multiplying the asset allocation of real estate & equities / mutual funds with respective market indices’ declines from CQ1:07 – 2008 YTD. Asset allocation % is 2007 average. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 20
    21. Extraordinary Market Volatility = Treacherous Investment Environment Good News = Volatility Has Begun to Decline Chicago Board Options Exchange (CBOE) Volatility Index, 1990 - 2008 80 70 60 VIX Index Value (%) 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options. Source: Morgan Stanley IBD; Bloomberg. 21
    22. Economy 2) Advertising Spending – closely tied to GDP growth…challenges for Internet but likely not as draconian as 2000-2002? 22
    23. Retail Sales Growth Rates Slowing Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 – CQ3:08 40% 30% Y/Y Growth 20% 10% 0% CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 US Adjusted Retail E-Commerce Sales US Total Retail Sales Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: US Dept. of Commerce (CQ3:08), Morgan Stanley Research. 23
    24. Advertising Growth Rates Slowing U.S. Advertising Spending by Medium, Y/Y % Change 25% 20% 15% 10% Y/Y Growth Rate 5% 0% -5% -10% -15% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Overall Cable+Broadcast TV Magazines Newspapers Internet* Outdoor Radio *Note: Internet is adjusted to include search ad spending - TNS excludes search revenue from Internet ad spending, thus unadjusted data may under-report online ad spending / growth. Source: TNS, IAB, Morgan Stanley Research. 24
    25. Advertising Spending & GDP Growth = High Correlation of 81% U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007 20% 15% U.S. Ad Spend vs. GDP, Y/Y Growth 10% Median Y/Y Ad Spend Growth Rate = 5% 5% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 -5% 1991 Ad Growth = -2% 2001 Ad Growth = -12% -10% U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth Source: Zenith Optimedia, IMF, Morgan Stanley Research. 25
    26. Simple Regression Analysis: 1) Ad spend growth 3x sensitivity of real GDP growth 2) If GDP flat in 2009E, ad spend could decline ~4% Y/Y U.S. Advertising Spending vs. Real GDP y = 3.0263x – 0.0394 20% 1986 – 2007 R2 = 0.6553 y – ad spend growth x – real GDP growth 15% Ad Spend Y/Y Growth If real GDP Ad spend Y/Y growth Y/Y growth 10% is… could be… 5% 11% 4 8 5% 3 5 2 2 1 -1 0% 0 -4 -1% 0% 1% 2% 3% 4% 5% -1 -7 -2 -10 -5% -3 -13 Real GDP Y/Y Growth -4 -16 -5 -19 -10% U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) Note: R2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation. Source: Zenith Optimedia, IMF, Morgan Stanley Research. 26
    27. Online Ad Spending Bad News = From 2000 to 2002, USA Spending Fell 27% $25,000 U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007 250% $21,206 200% $20,000 U.S. Online Ad Spending ($MM) $16,879 150% Y/Y Growth Rate $15,000 $12,542 100% $10,000 $9,475 $8,225 $7,134 $7,267 50% $6,009 $4,621 $5,000 0% $1,921 $907 $267 $0 -50% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Internet Ad Spending Y/Y Growth Rate Source: IAB, Morgan Stanley Research. 27
    28. Online Ad Spending Good News = Now, Less Ad ‘Over Spending’ vs. Trend Line However, Q/Q Pattern Looks a Bit Like Early 2001 U.S. Online Advertising Spending & Y/Y Growth Rates, CQ1:96-CQ3:08 $6,000 300% U.S. Online Spending & Search Revenue ($MM) 250% $5,000 Total U.S. Online Spend Y/Y Growth 200% $4,000 150% $3,000 100% $2,000 50% $1,000 0% $0 -50% 3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 U.S. Online Ad Spending Spending on Search Y/Y Growth Online Ad Spend Polynomial Trendline Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research. 28
    29. Intel – Technology Spending Proxy Revised CQ4E Guidance Implies -16% Y/Y, Worst Since CQ4:01 -12% Q/Q in Seasonally Strong CQ4, Worst in History? $12,000 Intel Revenue & Y/Y Growth Rate, CQ1:97 – CQ4:08E 40% 30% $10,000 Average Y/Y Growth = 6% 20% $8,000 Revenue ($MM) Y/Y Growth 10% $6,000 0% $4,000 -10% $2,000 -20% $0 -30% CQ4:08E CQ1:97 CQ3:97 CQ1:98 CQ3:98 CQ1:99 CQ3:99 CQ1:00 CQ3:00 CQ1:01 CQ3:01 CQ1:02 CQ3:02 CQ1:03 CQ3:03 CQ1:04 CQ3:04 CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 Revenue Y/Y Growth Note: CQ4:08E based on the midpoint of company’s revised guidance on 11/12/08. Source: Intel, FactSet. 29
    30. Financial Services – Revenue Back to 10 Year Ago Levels For Now, CQ3E of -13% Y/Y Well Below +7% 20-yr Average $350,000 Revenue & Y/Y Growth Rate for S&P500 Financial Services Companies 50% $300,000 40% 20-yr Average 30% $250,000 Y/Y Growth = 7% 20% Revenue ($MM) Y/Y Growth $200,000 10% $150,000 0% $100,000 -10% $50,000 -20% $0 -30% 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 Revenue Y/Y Growth Note: S&P500 has 84 financial services companies as of 12/9/08. CQ3:08E are FactSet mean estimates. Source: FactSet. 30
    31. USA Corporate Sales Quickly Falling Behind Forecasts Overall Corporate Sales Survey Results, CQ1:01 – CQ4:08 How is your company doing with regard to meeting its sales plan revenue objectives for the current quarter? Are you coming in above plan, even, or below plan? 60% CQ3:01 CQ4:08 50% Above Plan Below Plan 51% 50% 40% 30% 20% 10% 0% CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1:07 CQ4:07 CQ3:08 Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08 31
    32. Consumer Spending Trending Lower Overall Consumer Spending Results – 6/06 - 12/08 Would you say your overall spending over the next 90 days will be more than last year, less than last year, or the same as last year? 60% Spending More Spending Less 12/08 50% 60% 40% 30% 20% 10% 0% Jun- Aug- Nov- Jan- Mar- May- Jun- Aug- Sep- Nov- Jan- Feb- Apr- May- Jul- Aug- Sep- Nov- Dec- 06 06 06 07 07 07 07 07 07 07 08 08 08 08 08 08 08 08 08 Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 12/11/08. 32
    33. Obama Presidency – USA in Need of a Forced Upgrade, There’s No Time Like a Crisis to Make Changes Economic Recovery Policy Proposals • Transportation / Infrastructure (~$225B) – Create millions of jobs via single largest new investment in our national infrastructure since creation of federal highway system in 1950s. • Technology / Internet (~$100B) – Renew America’s information superhighway. It is unacceptable that the United States ranks 15th in the world in broadband adoption. Here, in the country that invented the Internet, every child should have the chance to get online, and they’ll get that chance when I’m President – because that’s how we’ll strengthen America’s competitiveness in the world. • Manufacturing / Clean Tech (~$100B) – Extend funding to manufacturing innovators; Advance next generation of bio-fuels & infrastructure / accelerate commercialization of plug-in hybrids, etc. • Hospital / Health Care (~$10B) – Ensure hospitals are connected to each other through Internet / make sure every doctor’s office and hospital is using cutting edge technology and electronic medical records. • Public / School Buildings (~$70B) – Make public and school buildings more energy-efficient by replacing old heating systems and installing efficient light bulbs / put new computers in classrooms. Source: Change.gov, WSJ.com. 33
    34. Technology / Internet 1) Digital Consumer – Our bet = At margin, consumers spend more – not less – time on Internet in difficult times – it’s a cheap / efficient / transparent thrill! Undermonetized social networks / video / VoIP driving powerful usage growth – opportunity for innovative marketers to capitalize on low CPMs 34
    35. Discretionary Spending – Broadband Internet Among Last Things to Go Economic Vulnerability Score 10 Economic Vulnerability Scores for Items of Discretionary Expenditure 9 10 = Most Vulnerable / 0 = Least Vulnerable 8 7.2 7.2 6.8 6.6 6.6 6.5 7 6.4 6.2 5.9 5.6 6 5.5 5 4.7 3.9 4 3.5 3 2 1 0 s e g et lls es r gs ks s bs e s ic s on ea in ic ie m rn rt ca m on ea in pu bl et w er Ph ho po te ga r am ot tr br sm e oc ve In or rs on ec ur ile fo & co nd gr G co nd s he yo El ph ob s or ub ke ce ok ba or ot d le M to s cl an ee ni lo bo ad te ie or ts ga f s, w or s ro e or s, en lf nt rie lin or ss or go B VD ra em re te d- ce or s au itu p, ,D ay le xe ov ac m hi st oi rn lid ic Fi pr iu rs ,t re g, us fu ho em im be re in to M ew th Ca on em g Pr t lo in ou N al m ay C ak on ng aw ub M rs oi cl ng Pe G lth oi ea G H Note: In 9/08, 8,000 consumers in the UK, France, Germany and Spain were asked to provide a score to assess the likelihood that they would cut back on a particular area of expenditure. 10 = extremely likely to cut back; 0 = not at all likely to cut back. Source: Execution Primary Research, quoted in UK Ofcom’s “The International Communications Market 2008” report, p. 39. 35
    36. Consumer Surpassed Business IP Traffic in 2008E – 58% IP Traffic CAGR, 2005-2011E Global IP Traffic 30,000,000 25,000,000 IP Traffic (TB / month) 20,000,000 Consumer IP traffic 15,000,000 surpasses Business 10,000,000 5,000,000 0 2005E 2006E 2007E 2008E 2009E 2010E 2011E Total Consumer Business Source: Cisco Systems, Global IP Traffic Forecast and Methodology; Mobility segment (0.1% of traffic in 2007) not displayed 36
    37. YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share Global Minute Share, 6/06 – 10/08 14% 12% % Share of Global Minutes 10% 8% 6% 4% 2% 0% 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 Yahoo.com Msn.com Google.com YouTube.com Facebook.com Source: ComScore Global 10/08, Morgan Stanley Research. 37
    38. Undermonetized Internet Usage Growth Drivers – Video + Social Networking + VoIP + Payments Users Y/Y Growth Comments #3 site in global minutes; 5B views of online video in the US (Americans watched a total of 12.6B videos / 591MM hours online in 9/08); 344MM(1) +50% #2 global search engine – search queries on YouTube reached 9.2B in 8/08 (+123% Y/Y), surpassing Yahoo! sites with 8.5B searches (+2% Y/Y).(1,2,3,6) #5 site in global minutes; 140MM+ active users; 50%+ users outside of college; 52K+ 182MM(1) +112% applications + 95% of Facebook members have used at least one(1,4) If ‘carrier’ then #2 behind China Mobile; $1.55 annualized revenue per registered user (-3% 370MM(5) +51% Y/Y); 2.2B Skype Out minutes (+54% Y/Y); 16.0B Skype-to-Skype minutes (+63% Y/Y)(5) $15B total payment volume (TPV), +28% Y/Y, higher than eBay’s global gross merchandise 65MM(5) +19% volume; Off-eBay payment volume +49% Y/Y to 51% of TPV(5) Source: (1) comScore global 10/08; (2) comScore Video Metrix 8/08; (3) YouTube; (4) Facebook; (5) eBay CQ3, (6) comScore qSearch, 8/08. Morgan Stanley Research. 38
    39. Next Generation Platforms = Easy-to-Use + Applications + Users Time Since Y/Y Applications Applications Platform Inception Users Growth Available Downloaded Facebook 4.8 Yrs 182MM 112% 48K+ 308MM+ Apple Wireless Devices 1.5 Yrs 30MM 244% 100K+ 300MM+ iPhone (2.5G + 3G) 1.5 Yrs 14MM 291% 100K+ -- iPod Touch (Wi-Fi) 1 Yr 16MM 210% 100K+ -- YouTube 3.8 Yrs 344MM 50% -- -- Amazon Kindle 1 Yr -- -- 200K+ -- Note: Kindle’s 200k+ apps refer to book titles available, ~12% of sales of these books were on Kindle. iPhone user estimates exclude channel inventory + duplicates from iPhone 2.5 G users who upgraded to 3G, Y/Y growth from CQ4:07 to CQ4:08E; YouTube, Facebook users per comScore global 10/08, Y/Y growth from 10/07 – 10/08. Facebook application downloads are cumulative monthly active users for the 200 most-used applications, per AppData (as of 12/18/08). Source: Amazon, Apple, AppData, Facebook, Youtube, Morgan Stanley Research. 39
    40. Younger Generations Drive Online Usage Changes Blogs Social Networking Video / Music Online Gaming (Sina Blog) Knowledge Sharing Social Bookmarking Note: Selection based on (1) comScore’s reported global unique visitors for each website in 9/08; excluding sites with negative Y/Y growth, and (2) Alexa global traffic ranking. Source: ComScore Global, 9/08, Alexa, Morgan Stanley Research. 40
    41. Online Video – Traction High + Increasing (1) • YouTube - 344MM unique global visitors, +50% Y/Y, 43B minutes, +99% Y/Y ; other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU… • YouTube = 63% of unique US video viewers + 39% of videos watched online + 34% (2) of total minutes YouTube Global Traffic 350 45 40 300 Total Unique Visitors (MM) 35 250 Total Minutes (B) 30 200 25 150 20 15 100 10 50 5 0 0 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Total Unique Visitors (MM) Total Minutes (B) Source: (1) comScore global 10/08; (2) comScore Video Metrix (US) 9/08, Morgan Stanley Research 41
    42. Hulu – Quickly up to 2% of YouTube’s Global Visitors(1) • Hulu – 6.1MM global unique visitors (+74% M/M), 111MM minutes (+95% M/M) in 10/08. • 11.6 minutes of average duration of videos viewed at Hulu, ~4x USA average • Content support from major networks (NBC, Fox, USA, Bravo, FX, SciFi, E!...) + film studios (Universal, 20th Century Fox, MGM, Sony, Lionsgate) 7,000 120 Hulu Global Traffic 6,000 100 Total Unique Visitors (000) 5,000 Total Minutes (MM) 80 4,000 60 3,000 40 2,000 20 1,000 0 0 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 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 & 22% of YouTube’s US minutes in 10/08. US average duration of online video was 3.0 minutes in 10/08. Global unique visitors & minutes per comScore global, 10/08. 42
    43. 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 Source: Google, YouTube 11/08 43
    44. Consumers Expect – Wisdom of Crowds / Rankings / Searchability • Digg - 16MM unique visitors, +31% Y/Y, 28MM minutes, +13% Y/Y in 10/08 • 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 Source: comScore global 10/08, Digg.com. 44
    45. Consumers Expect – Fun / Images / Insight from Others • Youniverse.com – 670K unique visitors, +182% Y/Y, 7MM minutes, +134% Y/Y in 10/08. • 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 10/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 45
    46. Consumers Expect – Personalization Footjoy.com – Myjoys Picturedoor.co.uk Nike.com – NikeiD MMs.com – MyM&M’s Source: footjoy.com, nike.com, picturedoor.co.uk, mymms.com 46
    47. 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 Source: Foxnews.com. 47
    48. Online Content Consumption Mix in 5 Years? • Consumer or professional generated? − 40% of USA consumers create entertainment (edit movies / music / photos...) • Consumer enhanced professional content? Note: Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte. 48
    49. 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... …ads for ‘invisible shield’ …click to buy from iTunes / Amazon mp3 ‘Wario Land: Shake It’ video breaks YouTube’s UI Note: (1) per year in 2007; average users per comScore global, revenue per our estimates. Source: YouTube 10/08. 49
    50. Social Networking – Significant Share Gains of Internet Traffic Alexa Global Traffic Rankings 2005 (1) 2008 (2) Rank Web site Rank Web site 1 yahoo.com 1 yahoo.com 2 msn.com 2 google.com 3 google.com 3 youtube.com 4 ebay.com 4 live.com 5 amazon.com 5 facebook.com 6 microsoft.com 6 msn.com 7 myspace.com 7 myspace.com 8 google.co.uk 8 wikipedia.org 9 aol.com 9 blogger.com 10 go.com 10 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 12/18/08 Source: Alexa Global Traffic Rankings, Morgan Stanley Research. 50
    51. Social Networking – Fast Growth + Low Penetration Global Internet Category Visitors Y/Y Growth & Penetration 100% World Wide Visitor Growth = 10.4% Portals Search 80% Entertainment Penetration (% of Online Users) Retail E-mail Multimedia 60% Business / Finance Instant General Reference Messengers News 40% Travel Photos Sports Online Gaming Social Networks Auto 20% 0% 0% 10% 20% 30% 40% 50% 60% Unique Visitors Y/Y Growth Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08. 51
    52. 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 Source: USC Annenberg School: Digital Future Report 2007. 52
    53. Messaging by Generation – Text…Facebook Wall…Email…Phone…US Postal Service Kids (Zach 5 & Jackson 3 yrs.) Kids (Zach 5 & Jackson 3 yrs.) Grandparents (Dom & Ida) Grandparents (Dom & Ida) Hugs and Kisses Hugs and Kisses Birthday card with $25 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 Source: Tom Zawacki – CEO of Lemonade. 53
    54. 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% 40% 38% 35% 35% % of Total Minutes 8% 30% Category 22% didn’t exist 3 years ago 20% 14% 10% 16% 22% 0% All Other Yahoo! Mail Facebook Communications Social Connections Age 15-24 Age 45+ Shopping & Travel Entertainment & Leisure Work, Business & Education Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 8/08. 54
    55. Facebook – Rapid User / Usage Growth • 182MM visitors, +112% Y/Y (140MM+ active users), 34B minutes (#4 globally behind Yahoo!, Live and YouTube), +79% Y/Y • Avg user has 100 facebook friends; 13MM+ users update their status daily; 2.6B minutes spent on Facebook every day (worldwide) • 10B+ photos uploaded to the site; 700MM+ photos / 4MM+ 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. 200 40 Facebook Global Traffic 180 35 Total Unique Visitors (MM) 160 30 Total Minutes (B) 140 25 120 100 20 80 15 60 10 40 5 20 0 0 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Total Unique Visitors (MM) Total Minutes (B) Source: comScore global 10/08, Facebook 11/08, Morgan Stanley Research. 55
    56. Facebook - Connecting is Key Genres of Facebook’s 261 Most Used Applications Enhanced communication 26% Comparing yourself with others 12% Playing social games 11% Profile enhancement 10% Categorizing friends 10% Sending gifts 7% Media sharing 5% Self expression 5% Playing with digital pet 3% Playing games 3% Other 9% Note: Genre breakdown per O’Reilly Media’s analysis of the primary user goals of 261 of the most-used Facebook application. Source: O’Reilly Media, Inc (March 2008 report), Morgan Stanley Research. 56
    57. Facebook – 48K+ Applications – 48% = Fun / Games / Sports Top 40 Apps' # of Apps # of Monthly Active w/ 1MM+ Category Applications % of Total Users (MM) MAUs Just For Fun 15,005 31% 137 37 Games 4,496 9 78 25 Sports 4,020 8 4 0 Education 2,424 5 37 5 Utility 2,287 5 20 2 Music 1,918 4 11 13 Chat 1,865 4 16 3 Dating 1,840 4 52 13 Messaging 1,716 4 30 8 Photo 1,571 3 36 3 Video 1,532 3 47 4 Business 1,520 3 1 0 Events 1,493 3 23 5 alerts 1,313 3 27 7 Fashion 1,155 2 5 1 Food & Drink 1,056 2 8 1 Politics 976 2 22 7 Travel 873 2 7 2 Money 553 1 1 0 Mobile 482 1 7 1 Classified 468 1 0 0 File Sharing 303 1 1 0 Overall* 48,549 204 66 Note: Category breakdown per Facebook, one application can belong to multiple categories; Overall* statistics eliminate these duplications; Facebook reports 52,000+ apps “built to date” while AppData reports 48,549 available as of 12/18/08. Source: Facebook, AppData, Morgan Stanley Research. 57
    58. 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 Feeds into ‘Engagement the Wall Ads’ – Thump Up to Recommend to Friends Picture / Video Updates on the Third-party Multimedia Applications Wall Now on Toolbar Online Chatting Function Source: Facebook 58
    59. Social Networking – Facebook = $2 Per User(1) Opportunity to Get in Middle of Conversations Become a Fan of … Virtual Gift – $1 = One Wish …Friends Notified via News Feeds Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates. Source: Facebook. 59
    60. VoIP – Skype = #2 Global Wireless / Wireline Carrier Subscribers Y/Y Market Cap(4) Company Type Region (MM) Growth ($B) China Mobile (1) Wireless China 415 25% $199 Vodafone (2) Wireless Europe / Japan 269 16 110 China Telecom (1) Wireline China 215 (4) 34 183 54 Skype (5) Telefonica Moviles Wireless Europe / LatAm 98 165 2 370MM Registered Users America Movil Wireless LatAm 68 (+51% Y/Y) China Unicom (3) Wireless China 128 13 37 T-Mobile Wireless Europe / USA 125 4 60 Orange Wireless Europe 114 11 67 China Unicom (3) Wireline China 109 (6) 13 AT&T Wireless Wireless USA 73 15 155 Telecom Italia Mobile Wireless Europe / LatAm 70 11 18 Verizon Wireless Wireless USA 69 11 82 Bharti Airtel Wireless India 69 62 30 AT&T Wireline USA 59 (8) 155 NTT DoCoMo Wireless Japan 54 1 63 NTT Wireline Japan 45 (9) 54 Sprint / Nextel Wireless USA 43 (6) 12 Verizon Wireline USA 38 10 82 Average Growth: 11% Source: Company Reports, Morgan Stanley Telecom Research. Note: (1) Subscriber data based on CQ2:08; (2) Subscribers given as access lines, excluding DSL. (3) China Netcom officially merged into China Unicom on 10/15/08, China Unicom wireless sold all CDMA business to China Telecom; (4) Market Cap data as of 10/14/08; (5) Subscriber figure for Skype is registered user amount as of CQ3:08. 60
    61. Online Advertising – Google Share = 67% in CQ3:08 vs. 46% in CQ3:05 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% $3,000 10% 67% $2,000 34% $1,000 46% $0 CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 Google Yahoo! Microsoft AOL (1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research 61
    62. Google + Yahoo! = ~63% of US Online Ad Revenue - ‘Others’ Grew ~10% (vs. ~6%) Owing to Google / Yahoo! Affiliate Assist, CQ3:08 US Online Ad Revenue Mix 3,000 44% 2,500 42% 37% US Ad Revenue ($MM) 38% 2,000 1,500 19% 20% 1,000 500 0 CQ3:07 CQ3:08 Google, US Gross Ad Revenue (1) Yahoo!, US Gross Ad Revenue (2) Others (3) Source: (1) Google, Morgan Stanley Research (calculated as reported gross ad revenue multiplied by US % share of gross revenue) (2) Yahoo!, Morgan Stanley Research (calculated as gross Marketing Services revenue multiplied by US % share of gross revenue); (3) Internet Advertising Bureau (IAB) / PriceWaterhouseCoopers (PWC) Internet Advertising Revenue Reports (calculated as difference between total IAB US ad revenue and sum of Google, Yahoo! gross ad revenue), Morgan Stanley Research. Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up ~10% Y/Y 62
    63. Google + Yahoo! Share Significant Portion of Revenue with Partners + Affiliates • Google generated $5.5B in gross ad revenue in CQ3:08; it PAID OUT $1.5B (28%) to thousands of partners like AOL, Ask Jeeves, EarthLink, + HowStuffWorks(1) • Yahoo! generated $1.6B in gross ad revenue in CQ3:08; it PAID OUT $461MM (30%) to partners like CNN, ESPN, + The Wall Street Journal (2) Source: (1) Google gross Advertising revenue, Morgan Stanley Research; (2) Yahoo! gross Marketing Services revenue, Morgan Stanley Research. 63
    64. Search Should Continue to Become More Important – 34% Y/Y Google Query Growth (CQ3:08) % of New Online Customers for Online Retailers / Marketing Spend Mix 40% % Customers acquired from source 35% 30% 30% 27% 20% 18% 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 ls s ts es g ls c s s s s ne tin sin ffi m ad ea ea ke lis og sit sit tra ra ke gi ta r ti ld ld al g er eb og en ng in ps ar ve at ic ta rta nn rW ct ki pr C an m ee ad or on Ba po pe or te lp ne rg Sw he ris w e os ia ew O na in gi et pa ot fil pr ffl en ln N itio Af m on O o cia co ch lt ad n ai So ar tio Tr ng Em Se ra pi st op gi Sh re o- C 2006 2007 Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 9/08, Morgan Stanley Research. 64
    65. 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; Source: IAB, Morgan Stanley Research 65
    66. 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 66
    67. Search = Still Lots of Share to Grab U.S. Internet Search Spending vs. Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007 $80,000 $69,923 $70,348 $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 $889 $2,133 $122 $299 $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. Morgan Stanley Research. 67
    68. CPMs – Search vs. Banner vs. Rich Media $40 2005-2008E CAGR $34 $31 Search vs. Display Effective CPM $30 8% $30 $28 $25 $26 $22 $20 $18 -19% $10 $3 $2 $2 $1 -19% $0 2005 2006 2007 2008E Search Banner Ads Rich Media Note: (1) Search effectiveness here measured by dividing the total search advertising revenue by total search ads impressions (000); (2) Banner Ad / Rich Media CPM calculated as total banner / rich media advertising revenue divided by total impressions (000). Source: Morgan Stanley Research. 68
    69. Near term: Ad Supply > Ad Demand – Ad Impressions Growing Rapidly…CPMs Declining U.S. Banner Ad Impressions & CPM, U.S. Rich Media Impressions & CPM, 2005-2007 2005-2007 1,000,000 $3.50 35,000 $40 900,000 $35 $3.00 30,000 800,000 $30 700,000 $2.50 25,000 Impressions (MM) Impressions (MM) $25 600,000 20,000 $2.00 CPM CPM 500,000 $20 $1.50 15,000 400,000 $15 300,000 $1.00 10,000 $10 200,000 $0.50 5,000 $5 100,000 0 $0.00 0 $0 05 05 06 06 07 07 05 05 06 06 07 07 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ 3/ 9/ Banner Ads Impressions Banner Ads CPM Rich Media Impressions Rich Media CPM Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research. 69
    70. Search = CPC Trend - Up / Down / Sideways? Google Cost Per Click, 2005 - 2008 $0.60 $0.54 $0.53 $0.53 $0.51 $0.50 $0.48 $0.49 $0.46 $0.44 $0.43 $0.44 $0.44 $0.45 $0.42 $0.40 $0.41 $0.40 $0.30 $0.20 $0.10 $0.00 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 Search Cost Per Click Source: Google, Morgan Stanley Research 70
    71. 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%. Source: The State of Retailing Online 2008 (Forrester Research). 71
    72. Amazon.com’s Recommendation Engine = Web’s Most 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 Source: Amazon.com, Google 72
    73. Amazon.com Should Continue to Gain Share High Customer Satisfaction / Recommendation Engine / Impressive Metrics Amazon.com vs. US Retail Amazon.com 45% (1) E-Commerce Sales Key Operating Metrics 40% CQ4:07 CQ1:08 CQ2:08 CQ3:08 35% Revenue $5,673 $4,135 $4,063 $4,264 30% Y/Y Growth 42% 37% 41% 31% Y/Y Growth 25% Active Customers 76 79 82 85 20% Y/Y Growth 19% 19% 18% 17% ~24ppts TTM Revenue per $195 $202 $210 $215 15% Active Customer Y/Y Growth 17% 17% 19% 18% 10% Total Units 241 196 190 203 5% Y/Y Growth 33% 31% 32% 30% 0% (All metrics in MMs, except for TTM Revenue per Active Customer) CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08 US Adjusted Retail E-Commerce Sales 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; Source: Amazon.com (CQ3:08), US Dept. of Commerce (CQ3:08), Morgan Stanley Research. 73
    74. 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 Application - Amazon Remembers* * Note: Amazon.com utilizes its Mechanical Turk to try to match the product with the picture you sent. These “Mechanical Turks” are not Amazon employees or any artificial intelligence, but ordinary folks around the world. Once product is matched, you can access the findings on both your iPhone and Amazon.com. Source: Amazon.com. 74
    75. Technology / Internet 2) Mobile – Innovation in wireless products / services accelerating – changes should create + destroy significant wealth 75
    76. Mobile – A New Computing Cycle With Game Changer Products with Extraordinary Ease-of-Use Nintendo Wii Apple iPhone 3G 30MM consoles since 11/06 launch 1MM units sold in three days; 300MM – raised bar with motion sensors + apps downloaded since 7/11/08 playability launch; mobile browser market share already 50% > Windows Mobile – raised bar with ease-of-use + functionality Microsoft Xbox 360 3 Skype Phone 12MM Xbox Live members (+100% 500K+ units in < 200 days. Leverage Y/Y) since 11/02 launch – raised large Skype / Facebook user base of bar with online playability 370MM (+51%Y/Y) / 161MM (+119%Y/Y) + create a low-cost web- enabled VoIP, social networking, digital presence phone. Now INQ1… Amazon.com Kindle Netbooks (Asus Eee PC) With free EV-DO + 200K titles + Estimated 5.2MM units will be shipped newspaper / magazine / blog in 2008; as much as 50MM could be subscriptions. Amazon may do with shipped in 2012, per Gartner – low books what Apple did with tunes. price points + high mobility + wireless / Kindle accounts for 12% of 3G access pioneering ‘Cloud AMZN’s sales for titles available on Computing’ usage model. Kindle Source: Nintendo (CQ2:08), Microsoft, Amazon.com, Apple, TechCrunch estimates, eBay (CQ3), Gartner, Morgan Stanley Research. 76
    77. Notebooks Retrofitting to Cloud Via 3G – PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?! • 64% of new Austrian broadband subs used cellular modems, CQ2:07 • Global cellular modem to rise from 5MM in 2006E to 68MM+ shipments in 2012E (53% CAGR) – ABI Research, 5/07 • 13MM cellular modem users in USA, CQ2:08E – Nielsen Mobile • 66MM global WiFi unit shipments, C2007E - Synergy Research Note: Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); Source: ABI Research, Informa, Nielsen Mobile, Synergy Research. 77
    78. Opera Mobile Web Browser Shows Mobile Internet Growth - ~21MM Users (+311% Y/Y), 5B+ Page Views (+326% Y/Y), 10/08 A full web experience + 50% faster Pages transcoded per month (Bn) 5 − Remote Server first pre- processes requested web 4 pages − Web content is then compressed to reduce the 3 size of data transfer − Fully-rendered web pages 2 sent to your phone − Advantage: full web rendering 1 and faster browsing on simpler phones Mar Sep Jun Mar Oct 2006 2007 2008 Source: Opera Software, Morgan Stanley Research. 78
    79. VeriSign Mobile Message Shows Mobile Internet Growth – ~58B Messages (+142% Y/Y), CQ3:08 70 Global Mobile Messages Delivered by VeriSign, CQ1:07 – CQ3:08 60 58.3 Messages Delivered by VeriSign (Bn) 52.1 50 43.3 40 32.4 30 25.6 21.1 20 17.1 10 0 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 Note: Mobile messages include both text and multimedia messages. Source: VeriSign Mobile Messaging Index Report. 79
    80. Mobile Internet Evolving at Uniquely Fast Clip Date Important Announcements in the Mobile Industry 12/05/08 3 UK launches INQ1, the world's first social networking phone, with 50,000 pre-registration 10/01/08 AT&T announces reorganization to better align broadband, TV and mobile services for consumers. 10/01/08 Apple drops the non-disclosure agreement (NDA) for iPhone application developers. 9/30/08 Nokia to acquire leading consumer email and instant messaging provider OZ Communications. 9/29/08 Nokia’s Chief Technology Officer Bob Iannucci resigns. 9/28/08 Motorola to build a 350-person Android team. 9/24/08 Google, T-Mobile and HTC launch G1, the first phone based on Google’s Android open mobile platform. 8/04/08 Motorola hires Qualcomm’s Sanjay Jha as co-chief executive to oversee the mobile devices division. 7/23/08 Nokia, Qualcomm settle patent dispute. 7/11/08 Apple and AT&T launch iPhone 3G in the U.S. 6/24/08 Nokia acquires Symbian Limited and establishes the Symbian Foundation. 5/12/08 RIM introduces the BlackBerry Bold smartphone. 5/12/08 RIM, RBC and Thomson Reuters to anchor a $150MM BlackBerry Partner Fund focused on developing mobile applications. 5/08/08 Apple, KPCB launches $100MM iFund venture capital pool to support iPhone / iPod Touch application development. Source: Nokia, AT&T, Apple, Motorola, Google, T-Mobile, RIM, 3 UK, as of 12/12/08. Morgan Stanley Research. 80
    81. Still Early in 3G+ Ramp But… 2010 Should Be Inflection Point @ ~22% of Subscribers Global 3G+ Penetration 5 50% % of Total Wireless Subscribers 4 40% Subscribers (B) 3 30% 2 20% 1 10% 0 0% 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2.5G and Below Subscriptions 3G and Above Subscriptions % 3G and Above Penetration Note: 2.5G can be compared to ‘narrowband’ Internet access, while 3G can be compared to ‘broadband ’ Internet access. Source: Ovum, Morgan Stanley Research. 81
    82. Japan Shows Way in Mobile Internet Usage – Mobile Nearly Matches PC Japan Internet Users by Access Device 100% 90% 81% 83% 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. 82
    83. Apple Changed Mobile Game…With Impressive UI + 2.5G! i – NOT – A - Phone Source: Apple 83
    84. Apple iPhone 3G – Winning Consumers Via Simple + Useful Applications Catchy Tunes? Speak Mandarin? Shazam will listen Lonely Planet and find the song Mandarin for you. Phrasebook will say it for you. Source: Apple. 84
    85. 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 85% 80% 74% % of U.S. Mobile Subscribers 70% 59% 60% 50% 40% 31% 20% 13% 7% 9% 6% 4% 5% 0% Browsing Music Games Web Search Social Mobile News Networking Video 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: M:Metrics, 1/08 Survey of U.S. mobile subscribers, n= 31,389, Games category per KPCB estimates. 85
    86. Stunning Growth in iPhone Applications Since 7/08 Launch – ~10K Apps, 34% = Games / Entertainment, 300MM Downloads (~10 per User) Paid as % of Average # of Paid Category Price of Paid Category # of Apps % of Total Apps Total Apps Games 2224 23% 1756 79% $2.24 Entertainment 1054 11 784 74 1.64 Utilities 974 10 708 73 3.08 Education 716 7 654 91 5.59 Book 499 5 459 92 2.11 Productivity 491 5 374 76 3.92 Lifestyle 490 5 362 74 3.05 Reference 429 4 360 84 7.27 Travel 408 4 310 76 7.88 Healthcare & Fitness 342 4 284 83 3.14 Music 316 3 233 74 5.13 Sports 298 3 185 62 4.65 Navigation 269 3 209 78 5.88 Business 261 3 191 73 11.07 Finance 248 3 187 75 7.99 Photography 189 2 136 72 2.67 Social Networking 170 2 59 35 3.07 News 136 1 60 44 2.06 Medical 83 1 71 86 35.40 Weather 48 0 33 69 5.02 Total 9645 7415 77% $4.15 Note: Data as of 11/30/08. ~10 downloads per user include iPod Touch users. Source: Apple iTunes, Morgan Stanley Research. 86
    87. INQ1 – World’s First Social Phone + 50K Registered Potential Users Before Launch • Full Facebook integration with phone’s contacts / messages / notification system • Seamless Skype integration (free Skype-to-Skype calls over 3’s network) + full web browser based on WebKit (the rendering engine behind iPhone and Android’s browser) + doubles as a 3G modem • Preloaded with Google apps / YouTube link / eBay tracker / MySpace / 3Music Store, etc. • Free on contract (from £15 / month) / £79.99 on Pay-As-You-Go. Windows Live Facebook Skype ‘Live Contacts Book’ Messenger Note: 50K people registered an interest in the INQ1 phone prior to official launch in 11/08, these are not pre-orders. Source: Three, Morgan Stanley Research. 87
    88. USA Mobile Carriers – Data ARPU Growth Offsetting Declining Voice ARPU $70 Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08 $60 $50 $50 $49 $50 $47 $46 $45 $46 $44 $43 $43 $43 $41 $40 $40 $39 $40 $30 $20 $12 $12 $10 $11 $9 $10 $10 $8 $8 $6 $6 $7 $5 $5 $3 $4 $0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 Voice ARPU Data ARPU Total Average ARPU Source: Simon Flannery, Morgan Stanley Research. 88
    89. Global Wireless Data ARPU – Japan in Clear Lead, USA Catching Up Faster Than Others Data ARPU as Percentage of Total, CQ1:05 – CQ3:08 39% 39% 40% 37% 35% 33% 31% 32% 29% 29% 30% 28% Data ARPU as % of Total 28% 26% 26% 26% 26% 24% 22% 21% 20% 20% 18% 18% 16% 15% 13% 12% 11% 10% 10% 9% 6% 7% 0% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 Japan Western Europe Asia (ex. Japan) USA (iPhone) CQ3:08 Blended ARPU (US$) : $54 $37 $5 - $37 $51 ($95) 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. 89
    90. Symbian Dominates Smartphones But Losing Share – USA Could Gain Lead in Mobile Internet Innovation? 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. 90
    91. Technology / Internet 3) Emerging Markets – Pacing next wave of technology adoption – leading players in many emerging markets aren’t the usual suspects… 91
    92. 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 (1) Internet Users 26 16 1,352MM 182MM (2) Financial Cards 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. 92
    93. 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 700 80% 600 70% 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. 93
    94. TMT (Technology / Media / Telecom) Update = China #1 + Rest of BRIC Gaining Ground 2004 2007 Relative Relative Rank Country Weighting Rank Country Weighting 1 USA 9.0 1 China 8.9 2 China 8.2 2 USA 8.8 3 Japan 6.5 3 Japan 6.1 4 Germany 5.7 4 Germany 5.6 5 UK 5.5 5 India 5.6 6 India 5.3 6 UK 5.3 7 France 5.2 7 France 5.3 8 Italy 5.2 8 Russia 5.2 9 S. Korea 5.1 9 S. Korea 5.2 10 Canada 5.1 10 Brazil 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 Source: Morgan Stanley Research 94
    95. 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. 95
    96. Mobile Subscriber Net Additions – Pakistan = 226% more than USA, Indonesia = 33% more than USA, Iran just 5% less than USA 2007 Net Mobile Subs 2007 Penetration Rank Country Added (000's) Y/Y Growth Level(1) 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. 96 Source: Morgan Stanley Research.
    97. 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 Source: Morgan Stanley Research 97
    98. A Scary Thing Happened on the Way to the Forum – Rampant Piracy in Most Emerging Markets Packaged Software - Piracy Rate by Region, 2007 Central / Eastern Europe Russia – 73% 68% Latin America Brazil – 59% 65% Middle East / Africa 60% Asia-Pacific China – 82% / India – 69% 59% Western Europe 33% North America 21% 0% 10% 20% 30% 40% 50% 60% 70% 80% Piracy Rate Note: per BSA (Business Software Alliance) and IDC Global Software Piracy Study, which covers piracy of all packaged software that runs on personal computers, the study excludes types of software that run on servers or mainframes or software sold as a service. Source: BSA. 98
    99. Technology / Internet 4) Cloud Computing – Access + storage need + virtualization driving change 99
    100. 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 Source: Seagate, Katy Huberty, Morgan Stanley Research 100
    101. Cloud Computing – Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model Amazon.com Salesforce.com Source: Amazon.com, Salesforce.com, Morgan Stanley Research 101
    102. ‘A Giant Supercomputer’ – Datacenter Behind the Cloud Google Data Center – The Dalles, Oregon Source: Getty Images 102
    103. Google Zeitgeist – Predictive Power of Data Underutilized Fastest Rising (global) Trendsetters 2008 – Going Green 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. euro 2008 9. david cook 10. jonas brothers 10. surf the channel Economy – Layaway Makes a Comeback Politics – U.S. Presidential Election Source: Google Year-End Zeitgeist, 2008. 103
    104. 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 $0.10 / instance-hour). 450 Amazon Web Services 16% 400 Total Registered Developers (000) 14% 350 12% 300 Q/Q Growth 10% 250 8% 200 6% 150 4% 100 50 2% 0 0% CQ2:05 CQ3:05 CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 Total Registered Developers (000) Q/Q Growth Source: Amazon. 104
    105. Closing Thoughts 1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time 105
    106. 2% of Public Tech Companies Create 100% of Wealth* – A Look at Some of Biggest Winners of Our Day Great Simple, Active, Management Insane Big Annuity Huge Focused Missionary Team, Constant Customer Gross -Like Strong (1) Market Mission Founders Culture Improvement Focus Margin Model Board Apple X X X X XX X 34 X X Cisco X X O X X X 65 X X Dell X X X X X X 18 X X eBay X X X X X X 77 X X Google XX XX X X X X 83 X X Intel X X X X X X 56 X X Microsoft X X X X X X 79 XX X Yahoo! X X X X X X 81 X X Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’ 106
    107. Top 15 Global Internet Companies Global Top Internet Companies by Market Value (US$ in Millions, except per share data, as of 12/18/08) 12/18/2008 Market C2007A Total Return % 52-Week Rank Company Region Price (US$) Value ($MM) Revenue ($MM) 2005 2006 2007 2008 YTD High Low 1 Google US $310 $97,610 $16,594 115% 11% 50% (55%) $716 $247 2 Yahoo! Japan Japan 390 23,096 2,625 36 (37) 11 (12) 548 257 3 Amazon.com US 52 22,307 14,835 6 (16) 135 (44) 97 35 4 eBay US 15 19,797 7,672 (26) (30) 10 (56) 35 11 5 Yahoo! US 13 18,119 6,969 4 (35) (9) (45) 30 9 6 Softbank Japan 17 17,997 27,817 174 (48) 7 (14) 22 7 7 Activision US 9 12,442 1,395 21 25 72 (38) 19 9 8 Tencent China 7 11,891 523 91 240 116 (8) 9 4 9 Rakuten Japan 572 7,480 1,912 (11) (47) 7 17 642 373 10 Electronic Arts US 17 5,412 3,665 (15) (4) 16 (71) 60 16 11 NHN Korea 97 4,685 1,079 231 38 97 (60) 277 59 12 Baidu China 131 4,224 239 -- 79 246 (66) 418 101 13 Alibaba China 1 3,748 296 -- -- -- (79) 4 0 14 NetEase China 21 2,574 303 6 33 1 10 27 15 15 Expedia US 8 2,387 2,665 -- (12) 51 (74) 33 6 Note: ~60% of Softbank’s C2007A revenue was coming from their mobile business. Source: FactSet; Morgan Stanley Research. Data as of 12/18/08. 107
    108. Old Media (TV) / New Media (Internet + Mobile) – Complementary Platforms 2007 Football Season 2007 Football Season Thursday CBS Television Kickoff NFL CBSSports.com Sundays CBS Mobile Patriots vs. Colts • Plasma Screen TV – HD Quality Event • PC Screen – Fantasy, Stats, and Injury Reports • Mobile Screen – Highlights, Scores Source: CBS Sports Interactive. 108
    109. Every Generation or So – A Politician Leverages a New Medium Especially Well 1935, FDR, Radio 1960, JFK, TV 2007 / 2008, All Presidential Candidates, Internet 109
    110. Barack Obama = USA President Elect – Without Internet + Complementary Platforms? Social Networking - Facebook Video – YouTube Channel Mobile – iPhone App Source: Facebook, YouTube, BarackObama.com. 110
    111. Younger Generation (18-41) – Spend Most Time on Internet 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. 111
    112. Media Time Spent vs. Ad Spend Out of Whack – Internet (upside…) vs. Newspaper / Magazine / TV (downside…) % of Time Spent in Media vs. % of Advertising Spending 40% 37% 35% % of Total Media Consumption Time 32% 30% 29% or Advertising Spending 25% 20% 20% 19% 15% 10% 9% 8% 8% 7% 6% 5% 0% TV Internet Radio Newspaper Magaine Time Spent Ad Spend Note: Data per Nielsen Media Research’s Custom Survey; Due to different survey agencies / methodologies / category breakdowns, time spent or ad spend % data may not match previous slides – use for directional purpose only. Source: Nielsen Media Research. 112
    113. Newspaper Advertising Revenue Down 18% Y/Y, CQ3 U.S. Newspaper Advertising Revenue, Y/Y % Change 40% 30% 20% Y/Y % Change 10% 0% -10% -20% -30% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 National Retail Classified Total Print Total Online Total Source: Newspaper Association of America. 113
    114. Internet Advertising – Lots of Ad Share to Gain $288 Per Home for Internet vs. $818 for Newspapers Implies Upside 2007 Advertising Ad Spending / Medium Spending ($B) Households (MM) Household ($) Direct Telephone $110 107 $1,032 Promotions 116 115 1,011 Newspapers 46 56 818 Classifieds 15 56 260 Direct Mail 61 114 532 Broadcast TV 44 112 390 Cable TV 27 80 327 Internet / Online 21 71 288 Radio 20 113 172 Yellow Pages 16 114 141 Outdoor 7 114 63 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 ($2B). Households may use multiple advertising mediums. Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research. 114
    115. USA Online Ad Spend + E-Commerce Penetration – Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back! 12% U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007 12% 10% 10% 20-yr Average Y/Y Growth 8% 20-yr Average Total Ad 8% Spending & Retail Sales Y/Y Growth = 5% % of Total 6% 6% 4% 4% 2% 2% 0% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 U.S. Online Ad Spending as % of Total Ad Spending (1) (2) U.S. Adjusted E-Commerce as % of Total Retail Sales Note: (1) We use IAB and ZenithOptimedia data to estimate U.S., online ad spend as % of total ad spend; (2) E-Commerce sales adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; e-commerce data unavailable before 2000. 20-yr average from 1987-2007. 115 Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research
    116. Largest USA Advertisers Under Spend on Internet Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average 2007 2007 Total Ad Internet Ad Internet Rank Company Industry Spending ($MM) Spending ($MM) % of Total (2) 1 Procter & Gamble Consumer $5,230 $81 2% 2 AT&T Telecom 3,207 136 6 3 Verizon Telecom 3,016 189 9 4 General Motors Automotive 3,010 212 10 5 Time Warner Media 2,962 98 6 6 Ford Automotive 2,525 164 10 7 GlaxoSmithKline Healthcare 2,457 29 2 8 Johnson & Johnson Consumer 2,409 49 3 9 Walt Disney Media 2,293 141 10 10 Unilever Consumer 2,246 47 5 11 Sprint Nextel Telecom 1,903 71 5 12 General Electric Conglomerate 1,791 79 7 13 Toyota Automotive 1,758 57 5 14 Chrysler Automotive 1,739 53 5 15 Sony Technology 1,737 72 7 16 L'Oreal Consumer 1,632 12 2 17 Sears Retail 1,628 23 3 18 Kraft Foods Consumer 1,508 36 3 19 Bank of America Financial 1,491 72 18 20 Nissan Automotive 1,423 34 4 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. 116 Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research
    117. 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 Source: The Wall Street Journal 11/28/08, Advertising Age, P&G. 117
    118. 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. 118
    119. 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. 119
    120. We are Undergoing the Greatest Media Transformation in History 120
    121. 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. 121
    122. 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. Alka-Seltzer ads are included in 1960s decade. 122
    123. 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. 123
    124. 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. 124
    125. 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) 125
    126. 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) 126
    127. 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 November 28, 2008, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Amazon.com, eBay, Google, GSI COMMERCE, Yahoo!. As of November 28, 2008, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Amazon.com, eBay, GSI COMMERCE, Yahoo!. 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, 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. 127
    128. 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 November 30, 2008) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, 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 838 36% 254 40% 30% Equal-weight/Hold 1037 44% 282 45% 27% Not-Rated/Hold 32 1.4% 8 1.3% 25.0% Underweight/Sell 427 18% 90 14% 21% Total 2,334 634 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. 128
    129. 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. Employees of Morgan Stanley not involved in the preparation of Morgan Stanley Research may have investments in securities or derivatives of securities of companies mentioned and may trade them in ways different from those discussed in Morgan Stanley Research. Derivatives may be issued by Morgan Stanley or associated persons Morgan Stanley and its affiliate companies do business that relates to companies/instruments covered in Morgan Stanley Research, including market making and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. With the exception of information regarding Morgan Stanley, research prepared by Morgan Stanley Research personnel are based on public information. Morgan Stanley makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in Morgan Stanley Research change apart from when we intend to discontinue research coverage of a subject company. Facts and views presented in Morgan Stanley Research have not been reviewed by, and may not reflect information known to, professionals in other Morgan Stanley business areas, including investment banking personnel. Morgan Stanley Research personnel conduct site visits from time to time but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. The value of and income from your investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in your securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Unless otherwise stated, the cover page provides the closing price on the primary exchange for the subject company's securities/instruments. 129
    130. Disclosure Section To our readers in Taiwan: Information on securities/instruments that trade in Taiwan is distributed by Morgan Stanley Taiwan Limited (\"MSTL\"). Such information is for your reference only. Information on any securities/instruments issued by a company owned by the government of or incorporated in the PRC and listed in on the Stock Exchange of Hong Kong (\"SEHK\"), namely the H-shares, including the component company stocks of the Stock Exchange of Hong Kong (\"SEHK\")'s Hang Seng China Enterprise Index; or any securities/instruments issued by a company that is 30% or more directly- or indirectly-owned by the government of or a company incorporated in the PRC and traded on an exchange in Hong Kong or Macau, namely SEHK's Red Chip shares, including the component company of the SEHK's China-affiliated Corp Index is distributed only to Taiwan Securities Investment Trust Enterprises (\"SITE\"). The reader should independently evaluate the investment risks and is solely responsible for their investment decisions. Morgan Stanley Research may not be distributed to the public media or quoted or used by the public media without the express written consent of Morgan Stanley. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation or a solicitation to trade in such securities/instruments. MSTL may not execute transactions for clients in these securities/instruments. To our readers in Hong Kong: Information is distributed in Hong Kong by and on behalf of, and is attributable to, Morgan Stanley Asia Limited as part of its regulated activities in Hong Kong. If you have any queries concerning Morgan Stanley Research, please contact our Hong Kong sales representatives. Morgan Stanley Research is disseminated in Japan by Morgan Stanley Japan Securities Co., Ltd.; in Hong Kong by Morgan Stanley Asia Limited (which accepts responsibility for its contents); in Singapore by Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore, which accepts responsibility for its contents; in Australia by Morgan Stanley Australia Limited A.B.N. 67 003 734 576, holder of Australian financial services licence No. 233742, which accepts responsibility for its contents; in Korea by Morgan Stanley & Co International plc, Seoul Branch; in India by Morgan Stanley India Company Private Limited; in Canada by Morgan Stanley Canada Limited, which has approved of, and has agreed to take responsibility for, the contents of Morgan Stanley Research in Canada; in Germany by Morgan Stanley Bank AG, Frankfurt am Main, regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin); in Spain by Morgan Stanley, S.V., S.A., a Morgan Stanley group company, which is supervised by the Spanish Securities Markets Commission (CNMV) and states that Morgan Stanley Research has been written and distributed in accordance with the rules of conduct applicable to financial research as established under Spanish regulations; in the United States by Morgan Stanley & Co. Incorporated, which accepts responsibility for its contents. Morgan Stanley & Co. International plc, authorized and regulated by Financial Services Authority, disseminates in the UK research that it has prepared, and approves solely for the purposes of section 21 of the Financial Services and Markets Act 2000, research which has been prepared by any of its affiliates. Private U.K. investors should obtain the advice of their Morgan Stanley & Co. International plc representative about the investments concerned. In Australia, Morgan Stanley Research, and any access to it, is intended only for \"wholesale clients\" within the meaning of the Australian Corporations Act. RMB Morgan Stanley (Proprietary) Limited is a member of the JSE Limited and regulated by the Financial Services Board in South Africa. RMB Morgan Stanley (Proprietary) Limited is a joint venture owned equally by Morgan Stanley International Holdings Inc. and RMB Investment Advisory (Proprietary) Limited, which is wholly owned by FirstRand Limited. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (DIFC Branch), regulated by the Dubai Financial Services Authority (the DFSA), and is directed at wholesale customers only, as defined by the DFSA. This research will only be made available to a wholesale customer who we are satisfied meets the regulatory criteria to be a client. The information in Morgan Stanley Research is being communicated by Morgan Stanley & Co. International plc (QFC Branch), regulated by the Qatar Financial Centre Regulatory Authority (the QFCRA), and is directed at business customers and market counterparties only and is not intended for Retail Customers as defined by the QFCRA. As required by the Capital Markets Board of Turkey, investment information, comments and recommendations stated here, are not within the scope of investment advisory activity. Investment advisory service is provided in accordance with a contract of engagement on investment advisory concluded between brokerage houses, portfolio management companies, non-deposit banks and clients. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences. For this reason, to make an investment decision by relying solely to this information stated here may not bring about outcomes that fit your expectations. The trademarks and service marks contained in Morgan Stanley Research are the property of their respective owners. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Global Industry Classification Standard (\"GICS\") was developed by and is the exclusive property of MSCI and S&P. Morgan Stanley Research, or any portion hereof may not be reprinted, sold or redistributed without the written consent of Morgan Stanley. Morgan Stanley Research is disseminated and available primarily electronically, and, in some cases, in printed form. Additional information on recommended securities/instruments is available on request. 130
    131. Disclosure Section © 2008 Morgan Stanley 131

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