WedBush Newsletter 6/20/11


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Social Media is changing the world to a far larger degree than Wall Street currently appreciates. We refer to the emerging Social Internet as The Second Internet. We believe that for the foreseeable future, the news flow on the Second Internet will be highly positive.

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WedBush Newsletter 6/20/11

  1. 1. June 20, 2011 The Second Internet Social Media is changing the world to a far larger degree than Wall Street currently appreciates. We refer to the emerging Social Internet as The Second Internet. We believe that for the foreseeable future, the news flow on the Second Internet will be highly positive. IN THIS ISSUE:  The Week In Facebook  Reports of Facebook Member Loss in U.S. Don’t Tell the Full Story  Photo Tool Innovated… Privacy Concerns Raised  Facebook’s Project Spartan Reportedly Looks To Bypass iPhone App Store  P&G Opens Six More Brand Stores on Facebook  Guest Post by Reggie Bradford, CEO Vitrue: How Brands Are Successfully Increasing Engagement on Facebook & Twitter  The Week In Twitter  Twitter Poised To Get Massive Boost From iOS 5 Integration  The Week In Social Media Data  comScore Report Shows Social Media Is Fastest Growing Mobile Category  Traffic Surges Worldwide Across Second Internet Including Tumblr & HuffPo  Merchant Circle Survey Highlights Effectiveness of Social Media and Daily Deals  The Week In Social Gaming  Zynga’s “Empires & Allies” Is Its 2nd Fastest Grower Ever  The Week in Private Shares ─ Facebook up 4% to 33.75 ($84B) as IPO Talk Swirls  The Second Internet Image of the Week PUBLISHED BY: Lou Kerner To Subscribe to this free publication: @loukerner (212) 668-9874 Wedbush Securities • 1000 Wilshire Blvd., Los Angeles, CA 90017 • (213) 688-8000 • Member NYSE/FINRA/SIPC • The information herein is only for Accredited Investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors.Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. Please see page 24 of this reportfor analyst certification and important disclosure information.
  2. 2. THE WEEK IN FACEBOOKReports of Facebook “Jumping the Shark” Are PrematureA recent article in InsideFacebook, a well-regarded industry blog, stated that Facebook lost almost six million U.S. users in May. Thatstory was picked up by multiple media sources including The Wall Street Journal and BusinessInsider, which asked ‘Has FacebookJumped the Shark?’ We believe this narrative to be misleading.Since Facebook doesn’t release monthly user figures, companies like InsideFacebook utilize data provided by Facebook’s impreciseadvertising tools. Among other anomalies, the tool doesn’t include mobile usage, which is soaring for Facebook. Facing questionsabout its initial story, InsideFacebook looked at alternative measurement sources, all of which revealed growth in monthly unique users:Figure 1: Four of Five Traffic Sources Showed Facebook Users Increasing in MaySource: InsideFacebookWe’ve taken a closer look at data compiled by the advertising tool as well, dissecting the data in several different time periods.While the advertising data does indicate that Facebook lost U.S. users in May, we note that other factors─particularly seasonality─canalso impact month-to-month figures (social networking slows down April/May as it gets warm outside and students focus on finals andschool ends). We further note that the same advertising data showed a gain of close to one million users for the first two weeks ofJune, so looking at all various sources of data, the widely reported story appears to be the much-ado-about thing. If we go out sixmonths, Canada remains the only Top 20 country with negative user growth (according to the numbers from the advertising app): 2
  3. 3. Figure 2: Facebook Users, Top 20 Countries Last 6 MonthsSource: SocialbakersWe also point out that user engagement for Facebook continues to grow at a very healthy clip around the world. According to Alexa,global page views per user per day are up almost 40% in just the last three months. The rising engagement is positive, as engagedusers are becoming more immersed in the platform:Figure 3: Facebook Daily Pageviews per User Are Increasing SignificantlySource: Alexa 3
  4. 4. Facebook’s high engagement was further confirmed in a recently released PewResearch study which showed that over 50% ofFacebook users visited the site at least once a day (versus 6% for LinkedIn users):Figure 4: Facebook Used Much More Frequently Than Alternative NetworksSource: PewResearchWe believe that Facebook will continue to add new functionality (e.g. Deals), introduce significant enhancements to existing features(e.g. photo tagging, as chronicled below), and will increasingly optimize the mobile experience, all of which should improveengagement, usage and monetization.As such, we remain steadfast in our belief that Facebook is increasingly a utility, like the water company, no longer sexy, but ofincreasing value to the majority of people on the planet.The following recently updated chart highlights how Facebook is the dominant social network in most of the world:Figure 5: World Map of Social Networks, June 2011Source: Vincenzo Cosenza 4
  5. 5. Facebook Photo Innovations Drive Engagement….and Privacy ConcernsFacebook Photos remain one of the most popular and rapidly growing features on Facebook, with more than six billion new photosbeing added each month, Facebook is closing in on surpassing 100 billion photos uploaded:Figure 6: Facebook Users Are Uploading Over 6 Billion Photos per MonthSource: Company data, Wedbush Securities, Inc.Facebook has worked continuously to upgrade the Photos application. A notable upgrade occurred last December, when Facebookrolled out face recognition technology for tagging photos to North American users. Although more than 100 million tags a day werealready being added to photos, Facebook wanted to facilitate an improved tagging experience, in order to increase tagging, which is agreat driver of user engagement. Following the enhancement, when a member uploaded a photo, tags were suggested to the memberbased on facial recognition of the member’s roster of friends. Members could accept (or decline) the suggested tags. Facebook hopedto alleviate privacy concerns by enabling members to opt out of the program.Figure 7: Facebook’s Photo Recognition Tool Suggests TagsSource: Facebook 5
  6. 6. Facebook recently announced that they had rolled out the facial recognition service to “most countries” around the world, using thesame “opt-out” feature, which meant members were automatically opted in. While most users have embraced the feature (Facebookhas indicated it has received almost no user complaints), the press and governments around the world have raised privacy concerns.High profile actions, include a complaint being filed with the FTC, European Union privacy watchdogs launching a probe, and theConnecticut Attorney General requesting a meeting with the company.Like the firestorm that brewed when Facebook first introduced the News Feed in 2006, and then died down as users recognized theenormous value of the newsfeed, we believe that Facebook’s facial recognition feature will weather the storm.The tagging tool is just one aspect of Facebook advancing photo functionality. TechCrunch reported that Facebook is in the process ofcreating its own photo sharing app to compete with popular photo sharing apps, such as Instagram (which has exceeded over 5 millionusers in just 8 months ago and added another 100,000 users this weekend alone).Figure 8: Mock-Ups of Facebook’s Upcoming Photo AppSource: Facebook via TechCrunchFacebook’s Project Spartan Reportedly Looks To Enable Browser Based iPhone AppLast week, TechCrunch also broke news of Facebook’s “Project Spartan,” potentially Facebook’s biggest endeavor into mobile to date.With Project Spartan, Facebook appears to be attempting to bypass Apple’s App Store by enabling smartphone users the ability to useFacebook applications directly from within their mobile browsers.To facilitate this experience, Facebook is utilizing HTML5, a programming language that displays rich content within browsersregardless of which platform they are using. By leveraging HTML5, Facebook will enable members to simply point their browser to theFacebook website, at which point they could access a drop down window with various apps that can then be launched within aFacebook “wrapper,” thus enabling Facebook functionality. 6
  7. 7. The report claims that 80 developers are already programming for the platform, including Zynga and the Huffington Post. A keycomponent to Project Spartan will be integrating Facebook Credits into the platform. Once operational, Facebook would be able to sellpopular apps such as Zynga’s Farmville directly without passing users through Apple’s App Store (and their 30 percent revenue sharewhich contributes to Apple expecting nearly $3 billion in revenue this year). Additionally, if successful, this project could provide amajor boost for smaller mobile-app developers as well who have long struggled to meet the differing standards of platforms such as iOSand Android.While it is uncertain if Facebook users would widely adopt a mobile browser experience that is a departure from the ingrained behaviorof navigating native apps, even if Facebook can make a small dent in Apple’s app revenues, the payoff could be significant given theglobal mobile app store revenue is expected to reach $40 billion in 2014.Figure 9: App Spending ($, millions)Source: GartnerP&G To Open Six New Facebook StoresProctor & Gamble has been an early mover on Facebook, opening its Pampers store on Facebook in March 2010. P&G followed thatup in July 2010, opening up an Amazon-powered store on a UK Fan Page for MaxFactor. In September 2010, P&G partnered withAmazon again to open another store on Facebook which sold 29 different brands (from Always to Zest).Last week, P&G continued its Facebook Commerce foray by announcing it was opening Facebook stores for Tide, Gillette, Olay, Gain,CoverGirl, Luvs and Febreze. In this go-round, the stores will not be powered by Amazon, but instead by PFSWeb, an e-commerceoutsourcing specialist. P&G also said other retailers might sell P&G products on Facebook pages as well (there is speculation thatWalmart is interested). Explaining the motivation for the latest rollout, P&G referenced multiple benefits unique to the Facebookplatform, including customer insight gained from analyzing how customers are interacting with their brands, and improved convenienceas P&G CEO noted, “We want to maximize our sales through retailers but we also want to be where the consumer wants to shop.”Figure 10: Proctor & Gamble Bringing Brands to FacebookSource: Facebook 7
  8. 8. Vitrue, a SaaS-based social marketing platform, is handling the Facebook management for many of the P&G brands amongst hundredsof other brands and agencies across 47 countries and over 4,000 Facebook and Twitter accounts.Below, Virtrue’s CEO, Reggie Bradford discusses the data his company sees that shows improving engagement. Impressions per postare rising significantly as brands are successfully acquiring and retaining fans. Not only are brand posts being seen, as brands improvethe quality of the content they are posting, fans are increasingly commenting on to interacting with and liking to redistribute theadvertisers messaging:How Brands Are Successfully Increasing Engagement on Facebook and TwitterBy Reggie Bradford, CEO & Founder of Vitrue  Social media is having a profound and lasting effect on modern communications. Everything ─ including all media ─ is now social. Weare social beings by nature, so today’s rise of social networks is natural. Social platforms like Facebook and Twitter have completelyupended the traditional marketing-communications paradigm. Brands have recognized the importance of social and responded bycreating vibrant and engaging social communities.Between January 2010 and May 2011, the Fans (our clients’ collective fan base) managed by the Vitrue SRM platform has grown by anaverage of 23% per month and an impressive 3,494% overall. We are now managing more than 720 million fans across over 4,000streams.on Facebook and Twitter. The Vitrue Publisher (component of the Vitrue SRM platform) published 744 posts in January 2010to this network, and today we publish more than 30,000 per month.Analyzing data across this base shows significantly increasing engagement and activity:Facebook post impressions have grown from 15,171,509 in April 2010 to 14,488,576,168 in May 2011, representing a 64% averagemonthly growth and a 100,872% overall increase. This data indicates that what brands are posting is increasingly being viewed byFacebook users:Figure 11: Posts Impressions Per Page Are Up Over 6XSource: Vitrue 8
  9. 9. Comments on advertisers’ posts have also grown significantly, going from 11,783 in January 2010 to 717,598 in May 2011,representing a 27% average per month growth and an overall 6,090% increase. On a per page basis, commenting has increased twoand half times from Q2 2010 to Q1 2011:Figure 12: Comments per Page Are Up Over 2.5XSource: Company data, Wedbush Securities, Inc.Facebook post “Likes” have grown from 16,904 in January 2010 to 3,144,186 in May 2011, representing a 36% average monthlygrowth or a 18,600% overall increase. On a per-page basis, likes have increased over five times from Q2 2010 to Q1 2011:Figure 13: Likes Per Page Are Up Over 5.5XSource: Company data, Wedbush Securities, Inc.For brand marketers, the potential for social to build brand awareness, brand loyalty, drive product and create new consumers islimitless. But smart marketers have approached the medium with a solid strategy and measureable goals, carefully weaving social intotheir overall marketing plan.Overall, there are a few key similarities we believe form the base for successful social marketing:  Create true “communities” where your brand can feed your fans’ passions;  Publish rich and engaging content that is truly relevant, localized and valuable;  Apply “ask, listen and learn” principles;  Think creatively and with customer-centric principles in mind; and  Understand the differences between Facebook, Twitter and other platforms and how to approach each differently for success. 9
  10. 10. Here are five brands that we think are doing it right. (We’ve limited the brands to five and noted only a few key tactics for brevitypurposes. But there are many more strong examples): 1. Apple: Apple’s iTunes Facebook Page now reaches 15 million fans and is growing daily. The Page gives Apple’s passionate fans a community with which to discuss music, preview new tunes and featured artists, enjoy fans-only promotions, and receive exclusive content. Apple’s publishing frequency and quality content like videos, polls, exclusives, and promotions, drives sampling, sharing and purchasing. Apple, like many other brands, also has different Twitter handles for its products— @AppStore, @iTunesMovies, @iTunesMusic and @iTunesTV—so they can hyper-target content based on fans’ preferences. Apple’s iTunesMusic account now has more than a million followers. 2. American Express: American Express is utilizing both Facebook and Twitter in very smart, strategic and consumer-focused ways. Most recently, American Express updated its long-running Membership Awards for American Express to serve as “social currency.” A great brand phrase to own and a great way to let consumers redeem digital and social rewards—a practice in which they are increasingly participating. The newly created “Points” Tab on its Facebook page also promotes further community sharing around deals, specials, using your points and social currency. Additionally, the Tab incorporates its popular Twitter feed. The brand has also been running a national advertising campaign, focusing on real-life Tweets from consumers enjoying the “social currency” awards. Its groundbreaking “Small Business Saturday” program created the first-ever holiday dedicated to the support of small businesses by encouraging consumers to frequent local businesses. The program offered companies an ad credit and consumers a $25 gift card. At the time, it was one of the fastest growing Pages on Facebook and helped drive small business revenue by 27%. Today the Page is averaging more than 2,200 likes and 400 comments per post! Its also does a great job of using its small business forum blog to create compelling content that is not solely focused on the American Express brand. Additionally, the brand utilizes Twitter effectively to communicate, respond and monitor its follower’s questions, statements and feedback. 3. MTV: MTV has done many things right when it comes to social, and the network’s Facebook strategy for its shows is brilliant. MTV creates Pages for each of its individual shows, creating hyper-targeted communities for each, based on show demographics and interests. MTV does pre-promotional Facebook buzz to create awareness, interest and fans even before a show’s debut. By creating hyper-targeted communities, MTV can really drill down and offer relevant content based on what each community/fan wants. MTV has a myriad of offerings and audiences and these Facebook communities cut through clutter and speak directly to their audiences. Fans of “Jersey Shore” don’t necessarily want information on “MADE.” So MTV delivers what each fan wants. And it is delivering content across MTV’s diverse “cultural” interests, providing rich and engaging content on everything from fashion to shows to gossip. These passionate communities translate into ratings and a strong consumer following on and off social. And that is essential for a network. 4. McDonald’s: The Golden Arches truly gets “social segmentation” and applies it to the fullest on Facebook. Social segmentation allows a brand to examine its entire consumer base and communicate differently to specific “silo” audiences within the base. After all, not all of McDonald’s 8 million plus fans want the same thing, right? The fast food giant consistently delivers rich and engaging content, including “Wall Apps” that receive 3x the engagement as Tab content. And McDonald’s can also localize its content to more than 6,000 different zip codes delivering geo-targeted information. So a McDonald’s fan in Atlanta could receive locally relevant and different content than a Boston resident, from specific menu items to individual store events and promotions. McDonald’s plans to step it up with “Like” buttons and open graph functionality across the web. McDonald’s also utilizes Twitter effectively to message followers with special promotions, health/nutritional information, celebrity Tweets and much more. 5. NBA: The NBA has led sports leagues in social popularity from the beginning, currently boasting 9.6 million Facebook fans and 2.6 million followers. (Incidentally, the NBA has been the perennial sports league in our Vitrue 100 rankings year after year.) Not only does the league boast impressive social figures but so do its teams and players: the Lakers have 9.1 million fans; Shaq has almost 4 million Twitter followers. But amassing fans and delivering engaging, rich and valuable content are two different things. The NBA seems to have mastered both. The league has done a tremendous job of connecting in real- time with its fans and allowing for that connection to happen not only through the league but through the teams and players. The NBA has a more open social policy in regards to its teams and players participating on social. The league understands the fans desire to connect directly with players and leverages that for the brand’s overall success. Shaq recently announced his retirement on Twitter. It gave it WOM that no ESPN SportsCenter story could have provided. And the league leverages that for its fans and brand every day. The NBA strives to make the hard-court action and news occur in real-time with their fans across the social realm. In addition to rich video content and insider news, they also frequently poll their fans asking what they’d like to receive. The NBA understood early on that sports can and does thrive socially…especially around the digital water cooler. 10
  11. 11. iOS 5 Integration Should Drive Significant Additional Users and Usage for TwitterApple announced the integration of Twitter into iOS 5 at its Worldwide Developer Conference (WWDC.) last week. This means that allnew Apple devices with iOS 5 (iPhone, iPad, iPod Touch) will now allow a single Twitter sign-in and enable tweeting from any Appleapp (e.g. camera, photos, contacts, YouTube, etc) as well as from the any application that leverages the single sign-in capability. Theadded ability to add location from any Tweet is also a cool feature.Just as Facebook Connect encourages many more registrations and log-ins at websites off Facebook as it expedites those activities,having a Twitter sign-in for iOS apps will have a similar impact and undoubtedly will encourage many iOS 5 users who are not alreadyTwitter members to join the service. Given the increased number of Twitter members, and the increased ease of tweeting, Twitteractivity from the iOS platform will grow dramatically.The Apple-Twitter partnership is also great news for iOS app developers who will benefit from the increased number of registrations,log-ins, and improved user data. For example, knowing an app users’ Twitter friends, apps will better enable their users to connect withtheir friends, giving the apps more utility and make them stickier.An obvious question is why Apple chose Twitter over the far more ubiquitous Facebook for the sign on capability. In addition to moreusers, Facebook has significantly more information on the users, meaning a tie up with Facebook would have yielded more utility for theiPhone ecosystem. First, it’s possible that Facebook Connect will be integrated at some point down the road. But more likely is thatboth Apple and Facebook wanted to retain control in any partnership, making a deal impossible. That appears to be the reason whythe Apple Ping/Facebook Connect relationship never materialized. In addition, Facebook’s close relationship with Microsoft/WindowsPhone 7/Bing does not improve the odds for any Facebook/Apple tie-up.Finally, given the significant benefit to app developers, we expect Google’s Android will need to respond with its own single sign-insolution for apps. It’s hard to imagine they’ll choose Facebook, given how fiercely the two companies are competing with each other atthe moment. While Google could choose Twitter, it’s also possible Apple asked for exclusivity, at least for a period of time.Figure 14: Twitter iOS IntegrationSource: Apple 11
  12. 12. comScore Report Highlights Growing Use of Social Media Via MobilecomScore’s latest report showed that social media usage on mobile devices grew by 46% year over year, with over 60 million usersnow accessing social media via their phone at least once a month:Figure 15: Social Networking Mobile Usage SurgingSource: comScoreIn addition, as the data above reveals, the number of people accessing social media almost every day increased by more than 50% andnow represents more than half of users who do access social media via their cell phone. As one would expect, Facebook drives 86%of the category minutes. An average Facebook user spends 269 minutes on Facebook mobile. As the graph below reveals, whilesocial networking was the third largest usage category tracked by comScore, it was the fastest growing of the top 10 categories.Figure 16: Social Networking Mobile Usage SurgingSource: comScore 12
  13. 13. Traffic Surges Worldwide Across Second Internet OutletsAs we have previously discussed, the Second Internet (the Social Internet) includes companies in a variety of genres that are scalingrapidly, and we believe will come to dominate their respective verticals.Figure 17: Subset of Second Internet Companies Genre Offline 1st Internet  2nd Internet News NBC News Huffington Post Q&A Encyclopedia Britannica Yahoo Answers Quora Gaming (Casual) Electronic Arts MiniClip Zynga Gaming (Hard Core) Dungeons & Dragons Blizzard (World of Warcraft) Kabam Shoes & Accessories DSW Zappos ShoeDazzle Work Productivity Microsoft Office Google Docs Jive Software Sports News Sports Illustrated SB Nation Writing Journal WordPress TumblrSource: Wedbush Securities, Inc.Our thesis is that Second Internet companies are well positioned to grow dramatically. We point out that recent data illustrates the on-going traction of Second Internet companies beyond Facebook. The HuffingtonPost remains a great poster child of our thesis as itrecently passed The NY Times to become the most trafficked news site: 13
  14. 14. Figure 18: Huffington Post Has Surpassed NY Times To Become the Most Trafficked News WebsiteSource: comScoreWe also call attention to Tumblr.Tumblr’s mission as a blogging site is both simple and broad:“Tumblr lets you effortlessly share anything. Post text, photos, quotes, links, music, and videos, from your browser, phone, desktop,email, or wherever you happen to be. You can customize everything, from colors, to your themes HTML.”It turns out that there are tens of millions of people who want a simple yet broad and customizable blogging template. While Tumblrstarted the year with just seven million blog, stats on its site indicate it has tripled that number in six months.Figure 19: Tumblr User StatsSource: TumblrWith this growth, Tumblr has eclipsed WordPress in terms of total blogs hosted, which is a real milestone for Tumblr given WordPress’sbroad reach and four year head start. Users are not only starting blogs, but they are utilizing the platform to generate content, and thecontent is driving significant page views, which are growing at almost the same pace as the growth of blogs: 14
  15. 15. Figure 20: Tumblr Page View GrowthSource: QuantcastIt’s also important to note that more than half of the blogs that utilize the open sourced WordPress technology host the site themselves,so the total number of “WordPress Sites” is over 47 million, and growing rapidly as well. Google’s Blogger also remains a massiveblogging platform, generating about four times the total number of global page views as both Tumblr or Wordpress (Google does notrelease statistics on the number of blogs hosted on Blogger).Merchant Circle Survey Finds Social Networks & Daily Deals Are Both Effective Marketing ChannelsMerchantCircle is an online business directory that leverages social networking and customizable web listings to enable its 1.6 millionlocal merchants to attract new customers efficiently. We found several interesting insights from the company’s recently released surveyof 4,942 local business owners. Marketing budgets are tiny for most businesses, with over 75% reporting budgets of $5,000 or less:Figure 21: Three Quarters of Local Merchants Report Marketing Budgets of $5,000 or LessSource: MerchantCircle 15
  16. 16. Given the modest budgets of most small businesses, it’s very positive for Facebook that it’s the most utilized web site used by localmerchants to promote their business:Figure 22: Over 65% of Local Merchants Utilizing Facebook for PromotionSource: MerchantCircleWhile only 22% of the local merchants surveyed had run Facebook ads, of that group, an impressive 65% indicated they would useFacebook ads again:Figure 23: Over 65% of Local Businesses That Have Bought Facebook Ads Would Do So AgainSource: MerchantCircle 16
  17. 17. Facebook scored well in terms of ease of use of the system, with the difference between merchants that would use the service againand merchants that wouldn’t, largely being based on the success, or lack thereof, in acquiring new customers.Figure 24: Ease of Facebook Ad Use Scored HighestSource: MerchantCircleThe survey results were also very positive for Daily Deal Sites, as merchants who tried Daily Deals indicated they were even more likelyto repeat usage than were merchants who used Facebook ads (77% vs. 65%):Figure 25: 77% of Local Merchants That Offered a Daily Deal Indicated They Would Do So AgainSource: MerchantCircle 17
  18. 18. Satisfaction, or dissatisfaction, with Daily Deals stemmed from the success of the programs to effectively attract customers.Figure 26: Merchant Satisfaction with Daily DealsSource: MerchantCircleThe survey confirmed our belief that after many years of being mystified at how to leverage the Internet, increasingly large numbers oflocal merchants are beginning to figure it out. As a result, dollars spent on daily deals for local merchants are poised to growdramatically. The results above are further supported by a recent Rice University study. 18
  19. 19. Figure 27: Breakdown of Merchants Profitability With Various Daily Deal SitesSource: Uptal Dholakia, Rice UniversityZynga Forays Into Strategic Gaming, “Empires & Allies” Off to a Fast StartZynga released its most ambitious project to date on June 1st, with the launch of Empires & Allies. The game was developed in Zynga’sMarina Del Rey studio and is a departure from Zynga’s previous games because of its strategic framework. The game is still designedto appeal to mainstream audiences with its happy, toy-like feeling created by Matt Briton former General Manager of Jim Henson’sCreature Shop. According to Amer Ajami, the game’s Executive Producer, it’s “Cityville meets Risk”.The game borrows heavily from Cityville, including an identical city building mechanism. In Empires & Allies, troops can perish andthus players can actually “lose”. The game itself is billed as Zynga’s “most social” game to date because of the way in which friends areenlisted and designated as either friends or enemies. To develop resources, friends can trade virtual items to enhance the chances ofsuccess.Leveraging Zynga’s vast base of 250 million Facebook gamers (although that double and triple counts some members who playmultiple Zynga games every month), usage for Empires & Allies has surged to over 30 million MAUs (Monthly Active Users) in the firstseventeen days following its release. This makes it the second fastest growing Facebook game of all time, after Zynga’s Cityville. 19
  20. 20. Figure 28: Empires & Allies’ Rapid MAU RampSource: Wedbush Securities, Inc, AppdataZynga hopes to broaden its gamers beyond the middle-aged women typically drawn in by the casual and social nature of Zynga’sgames, and “Empires & Allies” is built to attract more hard core gamers than Zynga’s usual fare. In addition to playing the gameslonger, hard core gamers generally spend more on games, so the profitability can be significant. The challenge for Zynga will be tocreate a game that attracts traditional gamers, yet does not alienate its core. By branching in to strategic gaming, Zynga hopes“Empires & Allies” players will engage with the game for a longer period of time, as is usually the case with hit strategic games.While Zynga is working to expand the breadth of its gaming reach and profitability on Facebook, it is also trying to drive growth viamobile, where it currently has 3 games (Hanging with Friends, Zynga Poker, and Words with Friends) in the top 15 grossing apps in theApple store:Figure 29: Top Grossing iOS Apps as of June 16, 2011Source: iTunes 20
  21. 21. Zynga’s latest iOS games include a version of Cityville called CityVille Hometown and Hanging with Friends, a cross between Hangmanand Words with Friends. With its growing pool of developers and capital, we expect Zynga to attempt the same viral game marketing ithas implemented effectively on Facebook. Zynga is also likely to continue its acquisitive ways with mobile games. According to ScreenDigest, there were 26 mobile gaming-related acquisitions last year, and that number is only set to grow this year, and Zynga willprobably help.Figure 30: Hanging With Friends Top Paid iOS Apps by Downloads Rank Name  Developer 1 Angry Birds Clickgamer Technologies 2 Hanging With Friends Zynga 3 Pocket God: Journey To Uranus Bolt Creative 4 Tiny Wings Andreas Illiger 5 Angry Birds Rio Clickgamer Technologies 6 Fruit Ninja Halfbrick 7 TETRIS® EA 8 Cut the Rope Chillingo 9 Camera+ taptaptap 10 Feed Me Oil ChillingoSource:, Appdata.comFacebook Shares Trade at All-Time High of $84 B as Speculation Swirls of an IPO at $100 B+Despite the pullback in public equities over the last month, Facebook continues to reach new highs, trading up 4% last week to reach$33.75, which values the company just over $84 billion.Figure 31: Facebook Up 4%, Reaches $33.75 Implying $84 Billion ValueSource: Company data, Wedbush Securities, Inc. 21
  22. 22. Last week’s price jump was likely fueled in part by a CNBC report that Facebook is “likely to go public by the first quarter of 2012… at avaluation pegged at north of $100 billion”. As Facebook has stated that it will release financials starting in April of 2012, as required bycurrent regulations, we believe it’s likely that Facebook will go public prior to that time. We also believe the “north of $100 billion”conjecture, given our current Facebook model, conservatively values Facebook at north of $200 billion based on 2015E projections:Figure 32: WEDBUSH’S FACEBOOK MODEL ESTIMATED FACEBOOK FINANCIAL DATA 2009E 2010E 2011E 2012E 2013E 2014E 2015E Global Advertising Revenue $ 50,400 $ 61,000 $ 71,000 $ 80,000 $ 88,000 $ 95,000 $ 101,000 Facebook % Share 1.0% 2.4% 4.0% 5.9% 8.3% 11.4% 15.4% Facebook Ad Revenue $ 525 $ 1,464 $ 2,840 $ 4,720 $ 7,304 $ 10,830 $ 15,554 Other Facebook Revenue $ 225 $ 525 $ 1,050 $ 1,890 $ 3,024 $ 4,536 $ 6,532 Total Facebook Revenue $ 750 $ 1,989 $ 3,890 $ 6,610 $ 10,328 $ 15,366 $ 22,086 Facebook EBITDA Margin 33.3% 50.0% 51.5% 50.0% 50.0% 50.0% 50.0% Facebook EBITDA $ 250 $ 995 $ 2,003 $ 3,305 $ 5,164 $ 7,683 $ 11,043 Public Market Multiple 20X Estimated Value $ 220,860 Cash $ 1,500 $ 2,278 $ 3,600 $ 5,666 $ 8,739 $ 13,156 Value $ 95,853 $ 119,816 $ 149,770 $ 187,213 $ 234,016 Private Market Discount $ 71,890 $ 89,862Source: Wedbush Securities, Inc.Figure 33: Facebook’s Funding Over TimeSource: Namesake 22
  23. 23. THE SECOND INTERNET IMAGE OF THE WEEKFigure 34: Victory Cigar 2.0Source: Twitpic via @MCuban 23
  24. 24. About Wedbush Securities Private Shares GroupThe Private Shares Group of Wedbush Securities covers the growing base of privately traded securities, with anemphasis on those in the social media space. The mandate of the group is to build our trading network in all privateshares, source deal flow in the space (including “initial private offerings”), and to build funds and create other alternativeinvestment opportunities across private shares for our institutional and accredited retail clients.About Lou Kerner Lou Kerner is Managing Director of the Private Shares Group within Wedbush Securities’ Equities Division. Prior to this, Lou was Wedbush and Wall Street’s first recognized Social Media equity research analyst. Before becoming an internet executive in 2000, Lou was an equity analyst following media and internet related companies for Goldman Sachs and Merrill Lynch. Lou started his internet career as CEO of The .tv Corporation, which licensed the top level domain .tv from the tiny island nation of Tuvalu. .tv was acquired by Verisign in 2001. Subsequently, Lou acquired one of the early leaders in social networking,Bolt Media, which grew to over 20 million monthly uniques under his three years of leadership. Lou has a BA inEconomics from UCLA and an MBA from Stanford University.Contact Wedbush Securities Private Shares Group:Lou KernerManaging Director, Private Shares Group(212) CohenDirector of Trading, Private Shares Group(213) 688-8089kevin.cohen@wedbush.comMichael SilversteinResearcher, Private Shares Group(213) 688-6663michael.silverstein@wedbush.comCraig MuhlradResearcher, Private Shares Group(213) 688-8084craig.muhlrad@wedbush.comAbout Wedbush SecuritiesFounded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking,equities research, public finance, fixed income sales and trading, and asset management to individual, institutional andissuing clients. Wedbush currently ranks the #1 liquidity provider for NASDAQ, and was ranked #1 stock picker for 2010by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service,client financial safety, continuity, and advanced technology. ( 24
  25. 25. IMPORTANT DISCLOSURES The information contained herein is intended for accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors. WEDBUSH SECURITIESWedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firmmay have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factorin making their investment decision.The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity.The analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generatedby WS’ investment banking activities. ANALYST CERTIFICATIONI, Lou Kerner, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not,directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained inthis report.Capital Markets Disclosures as of June 20, 2011 Company Disclosure Facebook (private) 12 Klout (private) 12 Apple 1Research Disclosure Legend1. WS makes a market in the securities of the subject company.2. WS managed a public offering of securities within the last 12 months.3. WS co-managed a public offering of securities within the last 12 months.4. WS has received compensation for investment banking services within the last 12 months.5. WS provided investment banking services within the last 12 months.6. WS is acting as financial advisor.7. WS expects to receive compensation for investment banking services within the next 3 months.8. WS provided non-investment banking securities-related services within the past 12 months.9. WS has received compensation for products and services other than investment banking services within the past 12 months.10. The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks.11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.12. Lou Kerner maintains a position in shares of Facebook (private) and Klout (private).Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding andassuming the risks involved.Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their valuecausing losses that may equal your original investment.Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it mayprove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investor’s ownobjectives, experience, risk tolerance, and resources.The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information containedherein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information. 25
  26. 26. This information is not intended to be or should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitationof an offer to sell or buy any security mentioned herein.This firm, Wedbush Securities, its affiliates, officers, employees, members of their families, or any one or more of them, and itsdiscretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, fromtime to time, purchases or sales thereof in the open market or otherwise.The information and expressions of opinion contained herein are subject to change without further notice.The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm.Any reference to past performance is not a guarantee of future results.Supporting documentation will be furnished upon request for any claims, comparisons, recommendation, statistics or other technicaldata. Additional information with respect to the information contained herein may be obtained upon request.Applicable disclosure information is also available upon request by contacting the Business Conduct Department at (213) 688-8090.You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017. RESEARCH DEPT. • (213) 688-4505 • EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000 26