Internet Trends - wsos. â€؛ attachment â€؛ ck12.pdf Internet Trends May 25, 2007 56th Annual Seminar

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  • Internet Trends May 25, 2007

    56th Annual Seminar - Santa Barbara

    mary.meeker@ms.com / david.joseph@ms.com / richard.ji@ms.com

    Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800-624-2063 to request a copy of this research. For our latest industry research, please visit www.morganstanley.com/techresearch.

    Morgan Stanley & Co. Incorporated ("Morgan Stanley") is currently acting as financial advisor to DoubleClick Inc ("DoubleClick") in its announced proposed sale to Google Inc. The proposed transaction is subject to customary closing conditions. DoubleClick has agreed to pay fees to Morgan Stanley for its financial services, including transaction fees that are subject to the consummation of the proposed transaction. Morgan Stanley is currently acting as financial advisor to aQuantive Inc. ("aQuantive") with respect to its announced proposed acquisition by Microsoft Corp. The proposed transaction is subject to the consent of aQuantive shareholders and other customary closing conditions. This report and the information provided herein is not intended to (i) provide voting advice, (ii) serve as an endorsement of the proposed transaction, or (iii) result in the procurement, withholding or revocation of a proxy or any other action by a security holder. aQuantive has agreed to pay fees to Morgan Stanley for its financial advice, including transaction fees that are subject to the consummation of the proposed transaction.

    For analyst certification and other important disclosures, refer to the Disclosure Section.

  • Current Internet Trends

  • 3

    Hierarchy of Needs Drives Growth?!

    Self- actualization

    Esteem

    Belonging

    Safety

    Physiological

    Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate

    1943 - Maslow 2007 - ? ;)

    Internet / Mobile

    Shelter

    Food / Water

  • 4

    Internet Highlights…

    • Users / Usage — Yahoo! has base of 477MM+ monthly unique visitors (+19% Y/Y with +22% Y/Y page view growth, CQ1)

    • Customer Acquisition — Google (500K - 1MM advertisers / vendors, and rising); Paid Clicks up 52% Y/Y in CQ1 - effective targeting should continue to improve + drive rising monetization

    • Commerce / Payments — PayPal (143MM accounts, +36% Y/Y, CQ1) + Shopping.com has 60MM+ products in 300+ categories

  • 5

    …Internet Highlights…

    • Advertising — 8% of total US advertising online in 2006E growing to estimated 13%+ within 5 years. Google + Yahoo! = key drivers + beneficiaries – 100%+ of overall incremental growth is online

    • Significant targeting / conversion improvements (related to technology improvements + data leverage) — should bolster annualized global net revenue per unique user of $21 for Google (+57% Y/Y), revenue per active customer of $173 for Amazon (+12% Y/Y)

    • Personalization — Recommendation engines improve monetization – examples include Amazon.com + Yahoo! Music

    • Music – Apple iPod + iTunes @ $21B cumulative revenue - up from $141MM 4 years ago

  • 6

    …Internet Highlights…

    • Communications / Telephony — Skype (196MM registered users, +107% Y/Y, +14% Q/Q, CQ1 – may be fastest growing product ever). Based on CQ1:07 data, Skype traffic = ~4% of global international long distance minutes. Global mobile data services revenue (ex- messaging) has $10 ARPU (and rising). IM (instant messaging) + SMS / MMS showing strong growth

    • Video — ~60% of Internet traffic may be P2P file sharing of largely unmonetized video — ramp in tagging (for search) + partnerships + monetization – note recent moves by likes of ABC / CBS / FOX / NBA / Sony / Warner / Universal / Google / Yahoo!. Challenges (especially related to copyright / infrastructure stress) are significant, but over time, consumer demand should rule and content creators should benefit

  • 7

    …Internet Highlights

    • Local — Google ‘Long Tail’ + eBay Classifieds (26MM+ unique visitors, +137% Y/Y, CQ4, per eBay) – traction emerging

    • Community / Social Media — Likes of Wikipedia, MySpace, YouTube, Yahoo! Flickr (24MM unique visitors, up 86% Y/Y*) + Yahoo! Answers (79MM unique visitors, up 596% Y/Y*) have experienced extraordinary growth. CyWorld (2MM visitors*, Korea) + Tencent (59MM visitors, China) monetizing. 71MM+ blogs per Technorati. 1B camera- enabled mobiles – ‘citizen journalism’ in infancy

    • Mobile — While 17% of global Internet users (38% in N. America) have residential broadband, 8% of global mobile phone subscribers use 3G. American Idol – 63MM votes (via mobiles + Internet) in final 4-hour round, China’s Super Girl – 12MM votes (primarily mobiles) in final 3- hour round. Mobile data services (bolstered by 2.5G & ex. messaging) revenue ~$20B, comparable to online advertising revenue – illustrates potential monetization opportunity for broadband Internet

    Source: *comScore Global MediaMetrix 4/07

  • 8

    # of Internet Users – ROW Continues to Rise in Relevance N. America = 35% of Users in 2000E; 16% in 2007E

    0%

    20%

    40%

    60%

    80%

    100%

    2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E

    North America Europe Asia/Pacific Rest of World Latin America

    Geographic Distribution of Internet Users (MM)

    390 491 621 724 851 977 1,122 1,302

    Note: ROW denotes rest of the world Source: Morgan Stanley Research

  • 9 Source: comScore Global MediaMetrix 4/07

    User-Generated Content (UGC) – YouTube + Wikipedia + MySpace Have Moved to Top of Internet User Pack

    86107MySpace12 (5)101Adobe13

    6581Viacom 15 (14)79 Lycos14

    29115Apple11 (9)111Ask10 33120CNET9 1137 Amazon8

    506163 YouTube7 71 209Wikipedia6 (4)248eBay5 21267Time Warner4 1468Yahoo!3 3 520Microsoft2

    12%528Google1 Y/Y Growth4/07PropertyRank

    Total Global Unique Visitors (MM)

  • 10

    Web 2.0 – Consumer Control / Contribution / Interaction

    SyndicationStickiness

    Tagging ('folksonomy')Directories (taxonomy)

    WikisContent management

    ParticipationPublishing

    Web servicesScreen scraping

    Cost per clickPage views

    Search engine optimizationDomain name speculation

    upcoming.org and EVDBevite

    BloggingPersonal websites

    WikipediaBritannica Online

    Napstermp3.com

    BitTorrentAkamai

    FlickrOfoto

    Google AdSenseDoubleClick

    Web 2.0Web 1.0

    Source: O’Reilly Media, Inc.

  • 11

    • Convergence is happening (many IM sessions end in phone call). Opportunities exist for non-mobile players to leverage existing subscribers.

    • Who has the most valuable customer base as transition occurs? Who will have it over time?

    Email Providers

    MSN Hotmail Active Accounts (2) (261MM)

    Yahoo! Mail Unique Visitors (1) (249MM)

    Google GMail Unique Visitors (1) (70MM)

    IM / VoIP Services

    MSN Messenger Active Accounts (2) (215MM)

    Skype / eBay Registered Users (2) (196MM)

    Yahoo! Messenger Unique Visitors (1) (88MM)

    ICQ Unique Visitors (1) (28MM)

    Internet Sites

    Google Unique Visitors (1) (528MM)

    MSN – Windows Live Unique Visitors (1) (520MM)

    Yahoo! Unique Visitors (1) (468MM)

    eBay Unique Visitors (1) (248MM)

    MySpace.com Unique Visitors (1) (105MM)

    Amazon.com Active Customers (2) (66MM)

    Search Engines

    Google Search Unique Visitors (1) (465MM)

    Yahoo! Search Unique Visitors (1) (237MM)

    (1) Source: comScore Global MediaMetrix 4/07 (2) Source: Company Reports as of CQ1

    Payments

    PayPal / eBay Accounts (2) (143MM)

    Next Generation Communications Hubs?

  • 12

    Strong Momentum in Many Emerging Fast Growers

    Note: Criteria for choosing companies based on the following variables: recent growth in Internet traffic, absolute Internet traffic, age of company, and presence on blogs and at conferences

    Sources: (1) Cachelogic; (2) comScore Global MediaMetrix 4/07; (3) Technorati

    Company Market Data Points

    P2P File Sharing 5MM uniques vs. 3MM Y/Y (2)Accounted for 35% of all Internet traffic in 2004 (1)

    Blog Search Engine 7MM uniques vs. 6MM Y/Y (2)71MM+ blogs indexed (3)

    Video / Electronics 100K+ SlingBox units sold in first 6 months of shipment Network of 3K+ retailers in N. America in

  • 13

    Watch Where Global Younger Generation Goes

    Social NetworkingRingtone Downloads, Connecting Mobile to Net

    Video

    Web OS Programs In-Game AdvertisingBlogs

    Tencent Instant Messaging (PC / Mobile)

    Knowledge Sharing

  • Online Advertising Trends

  • 15

    S