Google/DoubleClick Partner Summi Google/DoubleClick Partner Summit The Opportunity in Non-Premium Display

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  • Member of the FINRA and SIPC.

    San Francisco ChicagoNew York MinneapolisBoston

    Google/DoubleClick Partner Summit

    The Opportunity in Non-Premium Display Advertising June 22, 2006

    William Morrison 415-249-1989

    wmorrison@thinkequity.com

    Robert Coolbrith 415-249-6363

    rcoolbrith@thinkequity.com

    Please see analyst certification (Reg. AC) and other important disclosures on slides 40-41 of this report

  • 1

    Premium vs. Non-Premium Display

    � Premium �Guaranteed time and place �Exclusive opportunities �High-touch, upfront sales �Typically sold by internal sales force �High average CPM (~$10 to $50+) �10% of display inventory, 82% of display revenue �Low sell through usually reflects selling constraints, not intrinsic value

    � Non-Premium �No placement guarantees �Typically sold by ad networks or spot marketplaces/exchanges �Low average CPM (~$0 to $2.00) �90% of display inventory, 18% of display revenue �“Fast, cheap and out of control”

    Source: ThinkEquity LLC estimates

  • 2

    The Opportunity in Non-Premium Display

    � Ad Dollars Are Moving Online, But Challenges Persist �Large allocation gap: 8% of $$ online vs. 20-30% of consumer usage in U.S. �But wait, Online-DR 15% penetrated, Online-Brand 4% penetrated �Non-premium inventory growing faster (~15-20%) than premium (~3-5%)

    � Challenges for Brand Marketers/Agencies �The Web is fragmenting at an accelerating pace = more complexity & more cost �Agency/brand marketer comfort zone: Tier 1 “premium” inventory �Comfort zone inventory isn’t growing (as quickly as it had been)

    � Challenges for Premium Publishers �Bursty traffic � unpredictable inventory �supply uncertainty �Impressions (per page view) & premium CPMs maxed out �Low sell through often reflects selling constraints, not intrinsic value of inventory

    � The Solution �Break out of the comfort zone, embrace alternatives �Key alternative: non-premium display

    Source: ThinkEquity LLC estimates

  • 3

    What Happened? Why Are We Here?

    Source: Netcraft and ThinkEquity LLC

    -

    20,000,000

    40,000,000

    60,000,000

    80,000,000

    100,000,000

    120,000,000

    140,000,000

    160,000,000

    180,000,000

    200,000,000

    M ay

    -0 0

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    b- 08

    M ay

    -0 8

    Au g-

    08 No

    v-0 8

    Hostnames Active

    187 Million Registered Websites, 4.031026 More To Go

  • 4

    The Tipping Point – October 16, 2006

    Dan Rosensweig, Yahoo!, COO

    “I will talk about the inventory glut, and it has definitely been a huge change… …It is going to change the market dynamics.”

    “I think there's going to be a glut for a while and there will be a transition… but I think in the end our assets will ultimately help us take advantage of that

    opportunity.”

    “Can you give us a sense of how much more inventory is in the marketplace from the likes of MySpace and YouTube and what impact that could have on your business?”

    “Is that something you look at and adjust pricing?”

    Analyst Question:

    Source: Thomson

  • 5

    Social Media Taking Share from Portals…and Search

    Source: Alexa

  • 6

    Source: comScore, Compete, IAB, and ThinkEquity LLC

    The Non-Premium Monetization Challenge

    -

    100,000

    200,000

    300,000

    400,000

    500,000

    600,000

    700,000

    Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

    Month

    U .S

    . P

    ag e

    V ie

    w s

    (M M

    )

    Social/UGC All Other

    RPM ~ $7.00

    RPM ~ $0.50

  • 7

    Non-Premium Categories Gaining Share

    Source: comScore

  • 8

    The Challenge for Premium Publishers/Portals

    Source: Company reports and ThinkEquity LLC

    Yahoo! O&O Display Business

    0

    200

    400

    600

    800

    1,000

    1,200

    1,400

    1,600

    1,800

    2,000

    2004 2005 2006 2007 2008 2009E

    Year

    R ev

    en u

    e ($

    M M

    )

    Class II Class I

    2005 2006 2007 2008 2009E

    Y/Y Growth

    Class II 58.7% 74.3% 96.3% 61.4% 56.9%

    Class I 40.7% 29.0% 12.6% 0.1% (27.4%)

    O&O Display 41.4% 31.0% 17.5% 6.0% (15.0%)

  • 9

    The Market Response to Fragmentation

    Source: Rubicon Project and ThinkEquity LLC

    Ad Network Growth 2000-2008

    0

    50

    100

    150

    200

    250

    300

    350

    400

    450

    2000 2001 2002 2003 2004 2005 2006 2007 2008

  • 10

    Hyper-Specialization of Network Space

    Ad Network Capabilities, 2009

    Targeting � Vertical � Contextual � Behavioral � Demographic � Re-targeting � Geographic � Social � Mobile

    Formats � Display � Text � In-Text � Video � Mobile � In-Game � Blog � RSS � Email � Audio/Podcast � Widgets

    Pricing � CPM � CPC � CPL � CPA

    Business Model � Rev Share � Arbitrage � Rep Firm

  • 11

    CPC/CPA Taking Share from CPM

    12%

    21%

    57%

    45%

    34%

    13%

    4%

    47%

    41%

    51%

    37%

    41%

    46%

    42%43%

    48%

    39%

    45%

    48%

    40%

    5% 4%

    20%

    17%

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    2001 2002 2003 2004 2005 2006 2007 2008

    % o

    f T ot

    al R

    ev en

    ue s

    Performance CPM Hybrid

    Source: IAB and ThinkEquity LLC

  • 12

    Premium Pain Points Accelerated the Shift to Non-Premium

    � Hyper fragmentation – of sites, inventory, media formats, standards…

    � Increasingly inefficient publisher-centric buying model

    � Antiquated sales processes make it extremely expensive to execute online campaigns

    � Difficulty forecasting inventory creates issues for publishers and marketers

    � CPMs at parity or more expensive than alternatives, magnitudes higher than non-premium

    � Lack of standards and comparability with other traditional media

    � Big growth catalysts (like video) are being held back by their own issues

    Problems with Buying Premium Display Online Advertising

  • 13

    Market Drivers

  • 14

    Past is Prologue

    � Increasing fragmentation of consumer media usage (among and within media). � Emergence of lower-priced online advertising alternatives.

    � Now: revenue crisis for content creators/aggregators/distributors

    � Soon: consumer attention crisis for marketers � $10B++ has been invested in the non-premium display opportunity

    � What happens now?

    Source: ThinkEquity Partners LLC

  • 15

    Two Big Needs/Opportunities

    � “Rationalize” supply �Product/Channel management

    �Inventory management

    �Yield management

    � Catalyze demand

    �Efficiency

    �Transparency �Scalability

    �Targetability

    �Flexibility

  • 16

    Supply-side Innovation

  • 17

    Supply: Product/Channel Management

    � Product management today: �Premium

    �Non-premium

    �Undersold and remnant �Problem: fungibility of premium and undersold non-premium

    � Crucial challenge: increase yield without increasing sales channel conflict

    � Sales channel conflict: �Selling the same product at the same time at different prices

    �Absent supply constraint/obfuscation, buyers have a significant incentive to wait

    � Options: �Sell everything in real time

    �Sell nothing in real time

    �Create product differentiation

  • 18

    Premium vs. Non-Premium: Round 1

    Source: MySpace

  • 19

    Premium vs. Non-Premium: Round 2

    Source: The New York Times Digital

  • 20

    Premium vs. Non-Premium: Round 3

    Source: The New York Times Digital

  • 21

    Supply: Product/Channel Management

    � One Vision (product oriented): �Secondary premium

    � Traditionally undersold, not remnant

    �Premium � Status quo

    �Non-premium

    �Remnant

    � Another (channel oriented):

    �Spot Markets �Real-time, discrete sales via auction

    �Forward Markets

    �Guaranteed del