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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.
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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
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…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
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…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
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…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
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# 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)
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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.
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• 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
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