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Economy + Internet TrendsMarch 20, 2009
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2
Economy + Internet Trends 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 + material disruptions for traditional players that may accelerate in recession
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…
Economy
Recession =
Long time coming, how long will it last?Ten years of inflated growth to be followed by ____?
Hope for six more tough months but plan for 3-5 years
Advertising Spending =
Closely tied to GDP growth. Challenges for Internet but likely not as draconian as 2000-2002
Commerce =
Slowing but Amazon.com + iTunes data illustrate material online share gains from offline, recession / mobile should accelerate share gains
3
10 Years Ago –I Don’t Want to Miss a Thing, Aerosmith = Billboard Top 5 Song of 1998
Source: YouTube. 4
USA Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008
Roots of Economic Challenge?10+ Years of Rising Home Ownership + Declining Interest / Savings Rates
Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. All data as of 12/31/08.
Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research. 5
58%
60%
62%
64%
66%
68%
70%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
U.S
. Hom
e O
wne
rshi
p R
ate
0%
4%
8%
12%
16%
20%
U.S
. Int
eres
t Rat
e &
Per
sona
l Sav
ings
Rat
e
U.S. Home Ownership RateU.S. Interest Rate
January 1993: HUD began promoting broader home ownership. US home ownership = 62MM
June 2004: US home ownership = 73MM
U.S. Home Ownership Rate 30-year (1965-1995) TrendlineU.S. Personal Savings Rate
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 makehome 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
6Note: 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.
10 Years of Rising Home Prices –Up ~2x at Peak
Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller.
USA Real Home Price & Building Cost Indexes, % Change 1965 - 2008
7
-20%
0%
20%
40%
60%
80%
1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
% C
hang
e Fr
om 1
965
Leve
l
U.S. Real Home Price Index U.S. Real Building Cost Index
Systemic Leverage Helped Pace ‘Easy Money’Debt at Record Level + Sharp Ramp Up in Foreign Ownership of US Treasuries
Note: Foreign ownership of US treasuries data N/A before 1965. Source: Federal Reserve, Ben Wattenberg, The Statistical History of the United States, From Colonial Times to the Present, Bridgewater, Morgan Stanley Research. 8
100%
150%
200%
250%
300%
350%
400%
1920 1928 1936 1944 1952 1960 1968 1976 1984 1992 2000 2008
Tota
l Deb
t as
% o
f GD
P
0%
10%
20%
30%
40%
50%
60%
70%
Fore
ign
Ow
ners
hip
of U
.S. T
reas
urie
s,%
of T
otal
Mar
ket C
ap
U.S. Total Debt, % of GDPForeign Ownership of US Treasuries, % of Total Market Capitalization
1933: 3.0x GDP
2008: 3.6x GDPU.S. Total Credit Market Debt as % of GDP& Foreign Ownership % of U.S. Treasuries,
1920 - 2008
Households
Corporates
Financials
GSE
Government
0%
50%
100%
150%
200%
250%
300%
350%
1929 1934 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004
U.S
. Cre
dit M
arke
t Deb
t / G
DP
(%)
Households Corporates Financials GSE GovernmentNote: GSE (Government Sponsored Enterprises) debt includes various agency-backed mortgages; Source: Federal Reserve, Ben
Wattenberg, The Statistical History of the United States, From Colonial Times to the Present
Excessive Debt Levels = 2008 & 1933Corporate Debt Much Lower on Relative Basis Now
, Morgan Stanley Research. 9
U.S. Total Credit Market Debt as % of GDP, 1929 – 2008& Sector Share Breakdown
1984 - 2008Net Increase
1933 2008 Amount ($T)
Government + GSE 24% 33% $14.4
Households 18 27 11.9
Corporates 51 22 8.8
Financials 7 18 8.5
% Share of Total Debt
USA Debt Mix Shift –Mortgages / ABS / GSE Up to 23% of Debt vs. 7% 2 ½ Decades Ago
Note: Debt amounts are nominal, ABS is Asset Backed Security, GSE is Government Sponsored Enterprise.Source: Federal Reserve, Morgan Stanley Research. 10
2008U.S. Total Debt: $53T
Total Mortgage / ABS / GSE Debt: $12T
1984U.S. Total Debt: $7T
Total Mortgage / ABS / GSE Debt: $0.5T
Mortgage PoolsMortgage Pools9%9%
ABS IssuersABS Issuers8%8%
HouseholdHousehold27%27%
CorporateCorporate14%14%
GovernmentGovernment16%16%
OtherOther20%20%
GSEGSE6%6%
Mortgage Pools Mortgage Pools –– 4%4%
ABS Issuers ABS Issuers –– 0%0%
Other Other –– 22%22%
CorporateCorporate19%19%
HouseholdHousehold26%26%
GovernmentGovernment25%25%
GSE GSE –– 3%3%
USA Mortgage Delinquency @ Record High 7.88%
USA Residential Mortgage Delinquency Rates, CQ1:98 – CQ4:08
Note: National delinquency rate of 7.88% and Q/Q jump of 89 basis points in CQ4:08 are 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. 11
0%
5%
10%
15%
20%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Del
inqu
ency
Rat
es (%
)
All U.S. Mortgages Prime Mortgages Subprime Mortgages
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Rea
l Ben
efits
Pai
d ($
MM
)
0%
2%
4%
6%
8%
10%
12%
Une
mpl
oym
ent R
ates
Real Benefits Paid Unemployment Rate
Unemployment Benefits At 38-Year High and Rising
U.S. Unemployment Rates & Total Benefits Paid, 1971 - 2009
Note: Unemployment Insurance : Benefits Paid Through State Programs are inflation adjusted, but not seasonally adjusted, while Civilian Unemployment Rates (16 yr+) are seasonally adjusted. Source: Bureau of Labor Statistics. Morgan Stanley Research. 12
Michigan Unemployment @ 11.6%, Up Nearly 2x Y/YUSA @ 7.6%, On Way to California Level of 10.1%?
7.3%
5.7%6.3% 6.1%
5.3% 5.0% 5.3%5.9%
4.8%
5.7% 6.0%5.5% 5.3% 5.2%
11.6%
10.4% 10.3% 10.1% 9.9% 9.7% 9.4% 9.3% 9.2%8.8% 8.7% 8.7% 8.6% 8.6%
3%
5%
7%
9%
11%
13%
Michigan
South Caro
lina
Rhode Isla
ndCali
fornia
Oregon
North C
arolin
aNev
ada
Washington D
CIndian
a
OhioMiss
issippi
Kentuck
yTen
nesse
eGeo
rgia
Une
mpl
oym
ent R
ate
Jan-08 Jan-09
Note: 2/09 preliminary U.S. national unemployment rate was 8.1%. Source: Bureau of Labor Statistics. Morgan Stanley Research. 13
U.S. State Unemployment Rates, 1/08 vs. 1/09
1/09 National Average
-20%
-10%
0%
10%
20%
30%
40%
1973 1976 1980 1983 1987 1990 1994 1997 2001 2004 2008
Res
iden
tial M
ortg
age
Del
inqu
ency
Rat
es Y
/Y G
row
th
-40%
-20%
0%
20%
40%
60%
80%
100%
Initi
al C
laim
s Fo
r Une
mpl
oym
ent I
nsur
ance
Y/Y
Gro
wth
U.S. Residential Mortgage Delinquency Rates Y/Y GrowthU.S. Initial Claims For Unemployment Insurance Y/Y Growth
Rising Unemployment Higher Mortgage Defaults…
U.S. Residential Mortgage Delinquency Ratesvs. Initial Claims For Unemployment Insurance
Y/Y Growth, 1973 - 2008
Note: Both mortgage delinquency rates and initial claims for unemployment insurance are seasonally adjusted. Source: Mortgage Bankers Association, Bureau of Labor Statistics, Morgan Stanley Research. 14
-100%
-50%
0%
50%
100%
150%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
…Higher Unemployment / Mortgage Defaults Rising Personal Bankruptcy Filings…
U.S. Weekly Personal Bankruptcy Filings, Y/Y Growth, 2000 - 2009
Note: “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005” went into effect on 10/17/05, causing anomalies in the Y/Y growth series from late 2005 through early 2007. Source: Lundquist Consulting, US Census, Administrative Office of the US
Courts, Morgan Stanley Research, Betsy Graseck, Cheryl Pate and Justin Kwong. 15
16
… Consumer Confidence Falling
0%
10%
20%
30%
40%
50%
60%
Jun-06 Nov-06 Mar-07 Jun-07 Sep-07 Jan-08 Apr-08 Jul-08 Sep-08 Dec-08 Feb-09
Spending More Spending Less
Overall Consumer Spending Survey Results – 6/06 - 2/09
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% survey respondents now
saying they’ll spend less money
2/0961%
Note: Survey based on responses of 2,715 U.S. consumers. Source: Changewave, 2/18/09.
Average Consumer Wealth Destruction = ~25% Through CQ4:08 –56%+ of USA Household Assets in Real Estate + Stocks
Real EstateReal Estate38%38%
Equities +Equities +Mutual FundsMutual Funds
18%18%
PensionPensionReservesReserves
22%22%
DepositsDeposits12%12%
Credit MarketCredit MarketInstrumentsInstruments
7%7% OthersOthers3%3%
USA Household Asset Breakdown, C2007A Real Estate & Equities Market Performances,% Change from CQ1:07
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. The total value of all USA household’s real estate + equities + mutual funds + pension fund reserves declined 25% from the peak in
CQ2:07; the Y/Y decline in CQ4:08 is -21%; the Y/Y decline of total household assets in CQ4:08 is -15%. Source: Federal Reserve; Standard & Poor's; Morgan Stanley Research. 17
-40%
-30%
-20%
-10%
0%
10%
CQ1:07 CQ3:07 CQ1:08 CQ3:08
% C
hang
e fr
om C
Q1:
07
S&P/Case-Shiller Home Price IndexS&P 500 Index
Difficult Retail Environment
0%
-2%
-10%
6%
-1%-3%
-7%
-11%
-14%
-20%
-28%
-24%
-20%
-30%-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan Mar May Jul Sep Nov Jan
Com
para
ble
Stor
e Sa
les
Y/Y
% C
hang
e
Abercrombie & Fitch Same-Store SalesY/Y % Change, 1/08 – 2/09
Note: Same-store sales are sales in stores open more than one year. Source: Abercrombie & Fitch, British Retail Consortium. 18
3% 2%
-2%-1%
2%
0% -1%-1%-1%-2%-3%-3%
1%
-2%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
Jan Mar May Jul Sep Nov Jan
Com
para
ble
Stor
e Sa
les
Y/Y
% C
hang
e
UK Retail Same-Store SalesY/Y % Change, 1/08 – 2/09
Retail Sales + e-Commerce Growth Rates Slowing
-10%
0%
10%
20%
30%
40%
CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08
Y/Y
Gro
wth
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 (CQ4:08), Morgan Stanley Research. 19
Adjusted Retail Sales vs. Adjusted E-Commerce SalesY/Y Growth, CQ3:01 – CQ4:08
20
Corporate Sales –Increasingly Below Plan Since CQ1:06
0%
10%
20%
30%
40%
50%
60%
CQ1:01 CQ4:01 CQ3:02 CQ2:03 CQ1:04 CQ4:04 CQ3:05 CQ2:06 CQ1:07 CQ4:07 CQ3:08
Above Plan Below Plan
Note: Survey based on responses of 3,029 U.S. respondents. Source: Changewave, 12/5/08.
CQ4:0851%
CQ3:0150%
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?
21
Material Revenue Growth Declines – TMT CompaniesIntel + Nokia = Accelerating -20%+ Declines
Note: CQ1:09E figures based on FactSet consensus estimates; CQ4:08 for VIA is an estimate.Source: Company data, FactSet, Morgan Stanley Media Research.
-30%
-15%
0%
15%
30%
45%
60%
75%
CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E
Y/Y
Rev
enue
Gro
wth
Microsoft Intel Cisco NokiaDisney Viacom* News Corp Time WarnerYahoo! Google Amazon.com eBayAT&T Verizon
TMT Companies Revenue Y/Y Growth, CQ1:07 – CQ1:09E
Technology Revenue – So far, a 2001 Redux of 5 Flat / Down Sequential Quarters…Now 4…This Time, Secular Outlook Worse
0
100
200
300
400
500
600
700
CQ1:98 CQ3:99 CQ1:01 CQ3:02 CQ1:04 CQ3:05 CQ1:07 CQ3:08
Rev
enue
( $B
)
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Y/Y
Gro
wth
Revenue Y/Y Growth
Average Y/YGrowth = 11%
Global Technology Sector Revenue & Y/Y Growth, CQ1:98 – CQ4:08
Note: Revenue and Y/Y Growth compiled from 570 publicly traded global technology companies.Source: FactSet, Morgan Stanley Research. 22
20
30
40
50
60
70
80
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
ISM
PM
I Ind
ex (%
)
May 1982PMI=35.5
Feb 1991PMI=39.4
Dec 2008PMI=32.9
Oct 2001PMI=40.8
PMI > 50=
Expansion
PMI < 50=
Contraction
60-year Average= 52.7
USA Manufacturing Contracting Rapidly –12/08 PMI Index Lowest Level Since 1980, 2/09 PMI = 35.8
U.S. PMI (Purchasing Managers Index), 1/48 – 2/09
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. 23
-6.2% Q/Q USA GDP Growth in CQ4 / Consumer Spending Fell 4.3% Biggest Q/Q Decline in GDP / PCE Since CQ1:82 / CQ2:80
U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE)Q/Q % Change, 2005-2008
-7%
-5%
-3%
-1%
1%
3%
5%
Q/Q
Gro
wth
Rat
es
U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
Note, Real GDP and real PCE are inflation- and seasonally adjusted; CQ4:08 data is preliminary, may differ from final reported #s. -6.2% Q/Q real GDP decline is the largest since CQ1:1982; -4.3% Q/Q real PCE decline is the largest since CQ2:1980.
Source: BEA, Morgan Stanley Research.24
25
Global GDP Growth Forecasts =Continued Trend of Downward Revisions
Country / Region 2007 2008 2009E 2010E 2009E 2010E
USA 2.0% 1.1% -1.6% 1.6% -0.9% 0.1%
-1.5 -0.7
-1.5 -0.9
-1.8 -1.5
-1.2 -0.3
-4.2 -3.2
-1.2 -1.0
-1.7 -0.5
-1.8 -1.2
-1.7 -0.8
Euro zone 2.6 1.0 -2.0 0.2
UK 3.0 0.7 -2.8 0.2
China 13.0 9.0 6.7 8.0
India 9.3 7.3 5.1 6.5
Russia 8.1 6.2 -0.7 1.3
Brazil 5.7 5.8 1.8 3.5
Developed Markets(1) 2.7 1.0 -2.0 1.1
Emerging Markets(2) 8.3 6.3 3.3 5.0
World 5.2 3.4 0.5 3.0
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, 1/09. Morgan Stanley Research.
IMF Forecasts, 1/09Difference from
11/08 IMF Forecasts
Note: all indices start at a value of 100 on 3/17/06; data as of 3/18/09; Source: FactSet.
Stock Markets Stabilizing = Leading Indicator of Economic GrowthRussia off 74% vs. 36-Month Peak, Oil -67% / China -63% / India -57% / Japan -56% / S&P500 -49%
26
0
50
100
150
200
250
300
350
400
450
500
3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09
Inde
xed
Valu
e (b
ase
= 10
0)
S&P 500 NASDAQ Composite IndexChina Shanghai SE Composite India SENSEXRussia RTS Light Crude Oil - Continuous ContractGold - Continuous Contract Japan Nikkei 225
2006 20082007
Note: (1) % Change from S&P 500 peak on 10/9/07 to 3/18/09; (2) S&P 500 total market cap and % change, different from S&P 500 index price & % change.
Source: Bloomberg, Morgan Stanley Research.
S&P500 –Key Spending Sectors Have Taken Big Hits
27
Total MktCap ($B) 2009 Peak to
S&P Sector 3/18/2009 2007 2008 YTD Current (1) Market Cap Leaders
Financials 825 -20% -52% -23% -71% JPMorgan, Wells Fargo
Industrials 661 7 -40 -27 -58 GE, United Technologies
Consumer Discretionary 618 -18 -38 -14 -54 McDonald's, Walt Disney
Materials 229 14 -45 -9 -50 Monsanto, DuPont
Information Technology 1,255 12 -43 -4 -46 Microsoft, IBM
Telecom Services 281 -12 -34 -9 -44 AT&T, Verizon
Energy 936 36 -37 -15 -42 Exxon, Chevron
Utilities 294 6 -28 -14 -39 Exelon, Southern
Health Care 1,065 1 -24 -11 -35 Johnson & Johnson, Pfizer
Consumer Staples 998 10 -20 -14 -29 Wal-Mart, Procter & Gamble
S&P 500 Total (2) 7,506 1% -37% -14% -49%
% Change
2007200519941993199219871984197819701960 20061956 20041948 19881947 19861923 19791916 19721912 1971
2000 1911 19681990 1906 19651981 1902 19641977 1899 19591969 1896 19521962 1895 19491953 1894 1944 20031946 1891 1926 19991940 1889 1921 19981939 1887 1919 19961934 1881 1918 19831932 1877 1905 1982
2001 1929 1875 1904 19761973 1914 1874 1898 19671966 1913 1872 1897 1963 19971957 1903 1871 1892 1961 19951941 1890 1870 1886 1951 19911920 1887 1869 1878 1943 19891917 1883 1868 1864 1942 19851910 1882 1867 1858 1925 19801893 1876 1866 1855 1924 19751884 1861 1865 1850 1922 19551873 1860 1859 1849 1915 1950
2002 1854 1853 1856 1848 1909 19451974 1841 1851 1844 1847 1901 1938 1958 19541930 1837 1845 1842 1838 1900 1936 1935 19331907 1831 1835 1840 1834 1880 1927 1928 18851857 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%
2008 -39%
S&P500 Down 39% in 2008, 2nd Worst in 183 Year History –Bad Years Often Follow Good Years
Note: S&P 500 historical info from 1825 to 2007.Source: Value Square Asset Management, Yale University.
28
Current USA Bear Market – 3rd Worst in HistoryDuration Still Relatively Short
Note: Current bear market is on-going, data as of 3/19/09, duration only includes trading days. Source: ISI. 29
S&P 500
RankPeak-to-Trough Magnitude (%) Duration Days Start Date End Date
1 -86% 704 1929 - Sep 16 1932 - Jul 82 -60 1,284 1937 - Mar 10 1942 - Apr 283 -55 497 2007 - Oct 9 TBD4 -49 637 2000 - Mar 24 2002 - Oct 95 -49 459 1906 - Jan 19 1907 - Nov 156 -48 436 1973 - Jan 11 1974 - Oct 37 -46 602 1901 - Jun 17 1903 - Nov 98 -44 283 1919 - Nov 3 1920 - Dec 219 -40 268 1916 - Nov 21 1917 - Dec 19
10 -36 389 1966 - Nov 29 1970 - May 2811 -34 71 1987 - Aug 25 1987 - Dec 412 -30 761 1946 - May 29 1949 - Jun 1313 -29 1,178 1909 - Nov 19 1914 - Jul 3014 -28 136 1961 - Dec 11 1962 - Jun 2615 -27 430 1980 - Nov 28 1982 - Aug 12
GSEs / Washington
Plan
Lehman Bankruptcy
AIG Nationalized
MS / MUFG Investment
JPM Acquires
WaMu
Wells Fargo Acquires Wachovia
Fortis Nationalized
Leading Banks Enter
Preferred Stock
Purchase Program
BofA Acquires ML
GS / Berkshire
Investment$700Bn TARP
B&B Nationalized
Santander / Sovereign
UK Bank Bail Out
September 7 September 14 September 16 September 22 September 25 October 3September 29 October 14
EuropeUnited States
(23%)
5 Weeks in History – Financial Services Restructuring(~$3T in US Aggregate Sector Market Value 1/1/07…now $0.8T)
Dow Jones Industrial Average, 9/8/08 – 10/14/08
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, $0.8T as of 3/18/09.
Source: Morgan Stanley IBD; Bloomberg. 30
8,400
8,600
8,800
9,000
9,200
9,400
9,600
9,800
10,000
10,200
10,400
10,600
10,800
11,000
11,200
11,400
11,600
Dow
Jon
es In
dust
rial A
vera
ge
Credit Spreads @ 100-Year Extreme –Current Level Down From 12/08 Peak, But Still 250bps+ Higher Than Post-Depression Peaks
0
200
400
600
1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005
Spre
ad to
Tsy
(bps
)
BBBs (to Tsy) AAA/AA (to Tsy)
Current (3/09) Level: 655 bps
31Source: Moody’s, Yield Book, Morgan Stanley Credit Strategy Research.
Credit Spreads (to U.S. Treasury Securities), 1925 - 2009
0
20
40
60
80
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
VIX
Inde
x Va
lue
(%)
Stock Market Volatility Implies High Uncertainty –VIX Index Down From All-Time High But Still High
Chicago Board Options Exchange (CBOE) Volatility Index, 1990 - 2009
Note: Data N/A before 1990. VIX is a measure of implied volatility of S&P 500 index options.Source: FactSet. 32
When Does Vicious Cycle End?More Often Than Not, Peak Unemployment = Good Time to Invest
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%.
Latest data shows 2/09 unemployment rate at 8.1%, 270 basis points below 11/82 peak.Source: FactSet; Bureau of Labor Statistics. Morgan Stanley Research.
33
S&P 500 Index & U.S. Unemployment Rates, 1928 - 2008
1
10
100
1000
10000
1928 1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008
S&P
500
Inde
x Va
lue
(Log
Sca
le)
0%
5%
10%
15%
20%
25%
30%
Une
mpl
oym
ent R
ate
S&P 500 Index Price Unemployment RateRecessions Unemployment Peak
Sequencing the Asset Recovery Process –High Quality Financials / USA Non-Cyclicals / IG Super Senior Should Lead the Way
High Quality FinancialsUS Domestic Non-Cyclicals
Investment Grade (IG) Super SeniorEurope/Asia Non-Cyclicals
IG SeniorIG Equity Tranche
CLO AAAsIG Cyclicals
US High YieldIG Junior Mezz
CMBX AjsEU High Yield
US LoansEU Loans
Asia High Yield
Recovery Phasing and DurationStart End
Note: The yellow bars represent the relative phasing in and out, as well as the duration of the recovery process for each asset class. For example, in our view, high quality financials will recover first, and Asia high yield will be among the last. IG is
Investment Grade; CLO is Collateralized Loan Obligations;Source: Gregory Peters, Sivan Mahadevan, Neil McLeish, Morgan Stanley Global Credit Strategy Research. 34
-10%
-5%
0%
5%
10%
15%
20%19
86
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
U.S
. Ad
Spen
d vs
. GD
P, Y
/Y G
row
th
U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth
U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007
1991 Ad Growth = -2%
Median Y/Y Ad Spend Growth Rate = 5%
2001 Ad Growth = -12%
Source: Zenith Optimedia, IMF, Morgan Stanley Research. 35
Advertising Spending & GDP Growth =High Correlation of 81%
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
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.
U.S. Advertising Spending vs. Real GDP1986 – 2007
y = 3.0263x – 0.0394R2 = 0.6553
y – ad spend growthx – real GDP growth
36
-10%
-5%
0%
5%
10%
15%
20%
-1% 0% 1% 2% 3% 4% 5%
Real GDP Y/Y Growth
Ad
Spen
d Y/
Y G
row
th
U.S. Ad Spend vs. Real GDP Y/Y GrowthLinear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553)
If real GDP Ad spendY/Y growth Y/Y growth
is… could be…
5% 11%4 83 52 21 -10 -4
-1 -7-2 -10-3 -13-4 -16-5 -19
$267$907
$1,921
$4,621
$8,225$7,134
$6,009$7,267
$9,475
$12,542
$16,879
$21,206
$0
$5,000
$10,000
$15,000
$20,000
$25,000
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
U.S
. Onl
ine
Ad
Spen
ding
($M
M)
-50%
0%
50%
100%
150%
200%
250%
Y/Y
Gro
wth
Rat
e
U.S. Internet Ad Spending Y/Y Growth RateSource: IAB, Morgan Stanley Research. 37
U.S. Online Advertising Spending & Y/Y Growth Rates, 1996-2007
Online Ad Spending Bad News =From 2000 to 2002, USA Spending Fell 27%
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08
U.S
. Onl
ine
Spen
ding
& S
earc
h R
even
ue ($
MM
)
-50%
0%
50%
100%
150%
200%
250%
300%
Tota
l U.S
. Onl
ine
Spen
d Y/
Y G
row
th
U.S. Online Ad Spending Spending on SearchY/Y Growth Online Ad Spend Polynomial Trendline
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
Note: CQ3:08 search spending data not available. Source: IAB, Morgan Stanley Research. 38
39
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
Technology / Internet
Internet Becoming Necessity –Broadband Internet Last Thing to Go in Consumer Survey
7.2 7.2 6.8 6.6 6.6 6.5 6.4 6.2 5.9 5.6 5.54.7
3.9 3.5
0123456789
10
New fu
rnitu
re or f
loor cove
rings
Gamblin
g
Going out to re
stauran
ts, cl
ubs or p
ubsElec
tronics
Music, D
VDs, books
& gam
es
Making im
prove
ments
to your h
ome
Health
club m
embers
hip, golf o
r other
sports
Going away
on holiday
s or w
eeke
nd breaks
Premium or o
rgan
ice gro
cerie
s
Clothing, acc
esso
ries o
r footw
ear
Mobile Phone
Personal
Care, to
ileter
ies an
d cosm
etics
Fixed-lin
e tele
phone call
s
Broad
band In
ternet
Econ
omic
Vul
nera
bilit
y Sc
ore Economic Vulnerability Scores for Items of Discretionary Expenditure
10 = Most Vulnerable / 0 = Least Vulnerable
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. 40
Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008.
Consumer IP Traffic Driving Growth –46% IP Traffic CAGR, 2007 – 2012E
0
10,000
20,000
30,000
40,000
50,000
2006 2007 2008 2009E 2010E 2011E 2012E
Tota
l Int
erne
t IP
Traf
fic (P
etab
yte
per m
onth
)
Mobility
Consumer
Business
2007-2012ECAGR
125%
49%
35%
Global Internet Traffic, by Type2006 – 2012E
71%71%
75%75%
74%74%
62%62%
3%3%
41
YouTube + Facebook Gained ~600 Basis Points of Relative Share in Past 2+ Years While Yahoo! + MSN Lost Share
Global Minute Share, 6/06 – 1/09
Source: ComScore Global 1/09, Morgan Stanley Research. 42
0%
2%
4%
6%
8%
10%
12%
6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08
% S
hare
of G
loba
l Min
utes
Yahoo.com Msn.com Google.com YouTube.com Facebook.com
43
Users Y/Y Growth Comments
363MM(1) +40%
#2 site in global minutes; 6B views of online video in the US (Americans watched a total of 14B videos / 771MM hours online in 12/08); #2 global search engine – search queries on YouTube reached 10.8B in 1/09 (+45% Y/Y), surpassing Yahoo! sites with 9.0B searches (+2% Y/Y).(1,2,3,6)
236MM(1) +135%
#4 site in global minutes; 175MM+ active users; 50%+ users outside of college; 52K+ applications + 95% of Facebook members have used at least one(1,4)
405MM(5) +47%
If ‘carrier’ then #2 behind China Mobile; $1.43 annualized revenue per registered user (-14% Y/Y); 2.6B Skype Out minutes (+63% Y/Y); 21.0B Skype-to-Skype minutes (+72% Y/Y)(5)
70MM(5) +23%
$16B total payment volume (TPV), +14% Y/Y, higher than eBay’s global gross merchandise volume; Off-eBay payment volume +35% Y/Yto 52% of TPV(5)
Source: (1) comScore global 1/09; (2) comScore Video Metrix 12/08; (3) YouTube; (4) Facebook; (5) eBay CQ4, (6) comScore qSearch global, 1/09. Morgan Stanley Research.
Undermonetized Internet Usage Growth Drivers –Video + Social Networking + VoIP + Payments
Younger Generations Drive Online Usage Changes
Note: Selection based on (1) comScore’s reported global unique visitors & Y/Y growth for each website in 12/08;excluding sites with negative Y/Y growth, and (2) Alexa global traffic ranking.
Source: ComScore Global, 12/08, Alexa, Morgan Stanley Research. 44
Social NetworkingBlogs
(Sina Blog)
Video / Music Online Gaming
Knowledge Sharing
Social Bookmarking
Next Generation Consumer Technology Ecosystems =Cheap / Efficient / Fun / Disruptive
Note: * Nintendo Wii applications refer to game titles, downloads refer to game units sold. iTunes’ users only include paid-users; applications available / downloads refer to songs available / downloaded. Kindle’s 240k+ apps refer to book titles available. iPhone
users are estimates by Katy Huberty, YouTube, Facebook users per comScore global 1/09; Source: Amazon.com, Nintendo, YouTube, Facebook, Apple, Morgan Stanley Research.
*
Time Since Y/Y Applications ApplicationsPlatform Inception Users Growth Available Downloaded
Skype 5.5 Yrs 405MM 47% -- --
YouTube 3.9 Yrs 363MM 40% -- --
Facebook 4.9 Yrs 236MM 135% 52K+ 308MM+
iTunes Store 8.0 Yrs 75MM -- 10MM+ 6B+
Nintendo Wii 2.2 Yrs 45MM 125% ~1K 189MM+
Apple Wireless Devices 1.6 Yrs 33MM 265% 25K 800MM+
iPhone (2.5G + 3G) 1.6 Yrs 15MM 301% 25K --
iPod Touch (Wi-Fi) 1.3 Yrs 13MM 239% 25K --
Amazon Kindle 1.1 Yrs -- -- 240K+ --
45
Video-Related IP Traffic Driving Growth –To 49% Consumer Internet Traffic in 2012E vs. 32% in 2008
Source: Cisco Visual Networking Index – Forecast and Methodology, 2007 – 2012, published 6/16/2008.
0
5,000
10,000
15,000
20,000
2006 2007 2008 2009E 2010E 2011E 2012E
Tota
l Con
sum
er In
tern
et T
raffi
c (P
etab
yte
per m
onth
)
Internet Video to TV
Internet Video to PC
Video Communications
VoIP
Gaming
P2P
Web, email, data
2007-2012CAGR
104%
57%
44%
24%
30%
31%
34%
Global Consumer Internet Traffic, by Segment2006 – 2012E
44%44%37%37%
33%33%
60%60%
25%25%
30%30%
13%13%
31%31%
17%17%
46
0
20,000
40,000
60,000
80,000
100,000
USA Internet Backbone,2000 Year End
YouTube, 5/08 China P2P VideoStreaming, 1/08
IP T
raffi
c (T
erab
ytes
per
mon
th)
(USA)(USA)
(Global)(Global)
25,00025,000TB / MoTB / Mo
33,00033,000TB / MoTB / Mo
30,50030,500TB / MoTB / Mo
100,000100,000TB / MoTB / Mo
Internet Traffic per Month
Note: Monthly traffic are estimates by Cisco. Source: Cisco, Approaching the Zettabyte Era, 6/08.
YouTube USA IP Traffic > 2000 Total USA Internet Traffic
47
48
• YouTube - 363MM unique global visitors, +40% Y/Y, 48B minutes, +92% Y/Y(1); other video distribution models: Hulu, Fancast, veoh, Joost, Sling Media, VUDU…
• YouTube = 68% of unique US video viewers + 43% of videos watched online + 30% of total minutes(2)
0
50
100
150
200
250
300
350
400
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08
Tota
l Uni
que
Visi
tors
(MM
)
0
10
20
30
40
50
60
Tota
l Min
utes
(B)
Total Unique Visitors (MM) Total Minutes (B)
YouTube Global Traffic
Source: (1) comScore global 1/09; (2) comScore Video Metrix (US) 1/09, Morgan Stanley Research
Online Video –Traction High + Increasing
49
YouTube –New Portal(s) = Video Distribution Channel + Social Network
Source: Google, YouTube.
News & Politics - Most Viewed
• ‘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?
Sports - Most Viewed
Video Monetization – YouTube = <$1 Per User(1) –Paid Search / Click-to-Buy / Pre-Post-In Video Roll / Interactive
Note: (1) per year in 2008; average users per comScore global, revenue per our estimates. Source: YouTube. 50
Search for ‘iPhone 3G’…
…ads for ‘invisible shield’
Creative / Interactive...
‘Wario Land: Shake It’ video breaks YouTube’s UI
Like the music?...
…click to buy from iTunes / Amazon mp3
Hulu –Quickly up to 12% of YouTube’s U.S. Minutes(1)
• Hulu – 6MM global unique visitors (+9x Y/Y), 121MM minutes (+18x Y/Y) in 1/09.
• 7.7 minutes of average duration of videos viewed at Hulu, ~2x USA average
• Content support from major networks (NBC, Fox, USA, Bravo, FX, SciFi, E!...) + film studios (Universal, 20th Century Fox, MGM, Sony, Lionsgate)
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
Tota
l Uni
que
Visi
tors
(000
)
0
20
40
60
80
100
120
140
Tota
l Min
utes
(MM
)
Total Unique Visitors (000) Total Minutes (MM)
Hulu Global Traffic
Note: (1) comScore Video Metrix (US only) utilizes a different methodology and reports that Hulu has 24% of YouTube’s US unique viewers & 12% of YouTube’s US minutes in 1/09. US average duration of online video was 3.5 minutes in 1/09. Global unique
visitors & minutes per comScore global, 1/09. 51
Netflix Online Streaming –1MM+ Subscribers in 6 Months Since Launch
• 10MM+ offline subscribers as of 2/09, 1MM+ streaming subscribers / 1.5B+ streaming minutes since 9/08 launch.
• 12K+ movie / TV show titles available for instant streaming to PCs / living room TVs via Xbox Live / Roku digital video box / LG & Samsung Blu-Ray players / TiVo
• Streaming is free + unlimited for any member with an $8.99+ monthly plan
Source: Netflix. 52
Watch Movies Instantly on Your TV, via Xbox Live / TiVo / Roku
53
Social Networking –Significant Share Gains of Internet Traffic
Rank Web site2005 (1)
12345678910
yahoo.commsn.com
google.comebay.com
amazon.commicrosoft.commyspace.comgoogle.co.uk
aol.comgo.com
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).
Rank Web site2009 (2)
12345678910
google.comyahoo.com
youtube.comlive.com
facebook.commsn.com
wikipedia.orgblogger.com
myspace.comyahoo.co.jp
Alexa Global Traffic Rankings
(1) Rankings as of 12/31/05, excludes Microsoft Passport; (2) Rankings as of 2/25/09Source: Alexa Global Traffic Rankings, Morgan Stanley Research.
Social Networking –Fast Growth + Low Penetration
Source: comScore ‘Digital World – State of the Internet’ 6/08, data from 1/08.
Global Internet Category Visitors Y/Y Growth & Penetration
54
0%
20%
40%
60%
80%
100%
0% 10% 20% 30% 40% 50% 60%Unique Visitors Y/Y Growth
Pene
trat
ion
(% o
f Onl
ine
Use
rs)
SocialNetworks
Photos
Online Gaming
Reference
Sports
Auto
Travel
InstantMessangingGeneral
News
Business /Finance
Multimedia / Video
E-mailRetail
Entertainment
Search
Portals
World Wide Y/Y Visitor Growth = 10.4%
55Source: USC Annenberg School: Digital Future Report 2007.
0%
20%
40%
60%
80%
100%
Internet Television Radio Newspaper PersonalSource
% o
f Use
rs A
ge 1
7+ R
espo
ndin
g Im
porta
nt /
Very
Impo
rtant
Importance as Source of Information
73%80%
68%63% 63%
The New Social Network =Personal Sources on Internet
Messaging by Generation –Text…Facebook Wall…Email…Phone…US Postal Service
56
Brother (Rob - College)Wrote on my Facebook Wall
Brother (Rob - College)Wrote on my Facebook Wall Wife (Melissa)
Funny emailWife (Melissa)Funny email
Brother (James - High School)Text Message via Mobile
Brother (James - High School)Text Message via Mobile Mom (Victoria)
Phone call (45 minutes!!!)Mom (Victoria)
Phone call (45 minutes!!!)
Grandparents (Dom & Ida)Birthday card with $25
Grandparents (Dom & Ida)Birthday card with $25
Kids (Zach 5 & Jackson 3 yrs.)Hugs and Kisses
Kids (Zach 5 & Jackson 3 yrs.)Hugs and Kisses
Birthday Boy (Tom Zawacki)Happy Birthday from my Family
Birthday Boy (Tom Zawacki)Happy Birthday from my Family
Source: Tom Zawacki – CEO of Lemonade.
57
6%14%
8%
22%
35%
16%
All OtherCommunicationsSocial ConnectionsShopping & TravelEntertainment & LeisureWork, Business & Education
Worldwide Share of Online Time (1)
Category didn’t exist 3
years ago
12%
29%
42%
23%
0%
10%
20%
30%
40%
50%
Yahoo! Mail Facebook%
of T
otal
Min
utes
Age 15-24 Age 45+
Connecting – Younger Users Via Social Networks + Older Users Via E-Mail? (2)
Social Networking –Connectivity Changing…Is E-Mail Archaic?
Source: (1) comScore ‘Digital World – State of the Internet’ 6/08; (2) comScore global 1/09.
58
Facebook –Rapid User / Usage Growth
0
50
100
150
200
250
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09
Tota
l Uni
que
Visi
tors
(MM
)
0
5
10
15
20
25
30
35
40
45
Tota
l Min
utes
(B)
Total Unique Visitors (MM) Total Minutes (B)
Facebook Global Traffic
Source: comScore global 1/09, Facebook 2/09, Morgan Stanley Research.
• 236MM visitors, +135% Y/Y (175MM+ active users), 42B minutes (#4 globally behind Yahoo!, YouTube and Live), +110% Y/Y
• Avg user has 120 facebook friends; 15MM+ users update their status daily; 3B+ minutes spent on Facebook every day (worldwide)
• 850MM+ photos / 5MM+ 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.
59
Facebook -Connecting is Key
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.
Genres of Facebook’s 261 Most Used Applications
9%
3%
3%
5%
5%
7%
10%
10%
11%
12%
26%
Other
Playing games
Playing with digital pet
Self expression
Media sharing
Sending gifts
Categorizing friends
Profile enhancement
Playing social games
Comparing yourself with others
Enhanced communication
Top 40 Apps' # of Apps# of Monthly Active w/ 1MM+
Category Applications % of Total Users (MM) MAUs
Just For Fun 15,005 31% 137 37Games 4,496 9 78 25Sports 4,020 8 4 0Education 2,424 5 37 5Utility 2,287 5 20 2Music 1,918 4 11 13Chat 1,865 4 16 3Dating 1,840 4 52 13Messaging 1,716 4 30 8Photo 1,571 3 36 3Video 1,532 3 47 4Business 1,520 3 1 0Events 1,493 3 23 5alerts 1,313 3 27 7Fashion 1,155 2 5 1Food & Drink 1,056 2 8 1Politics 976 2 22 7Travel 873 2 7 2Money 553 1 1 0Mobile 482 1 7 1Classified 468 1 0 0File Sharing 303 1 1 0
Overall* 48,549 204 66
Facebook –15k+ Applications ‘Just For Fun’ / Top 40 Apps have 204MM+ Downloads
Note: Downloads refer to Monthly Active Users (MAU); Category breakdown per Facebook, one application can belong to multiple categories; Overall* statistics exclude these duplications; Facebook reports 52,000+ apps “built to date” while AppData reports 48,549
available as of 12/18/08. There are 17k ‘Just For Fun’ apps as of 2/26/09. Source: Facebook, AppData, Morgan Stanley Research. 60
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
the Wall
Picture / Video Updates on the
Multimedia Wall
Third-party Applications
Now on Toolbar
Online Chatting Function
Source: Facebook 61
‘Engagement Ads’ – Thump Up to Recommend
to Friends
62Note: (1) per year in 2007, average unique visitors per comScore global, revenue per our estimates.
Source: Facebook.
Social Networking – Facebook = $2 Per User(1)
Opportunity to Get in Middle of Conversations
Virtual Gift – $1 = One Wish
…Friends Notified via News Feeds
Become a Fan of …
Facebook Mobile –Explosive User + Usage Growth
• 20MM+ mobile active users in CQ4:08, > 4x Y/Y.
• Mobile facebook users on average 50% more active than non-mobile facebook users.
• 1MM users commented on their friends’ status changes on mobile within the first 24 hours of this feature’s launch.
Source: Facebook presentation at Palm’s CES keynote. 63
Note: Subscribers / ARPU data as of CQ3:08. Market Cap as of 1/15/08. *total excludes duplicates (mkt val); (1) China Netcom merged with China Unicom in 11/08; (2) AT&T & Verizon’s wireline ARPU is revenue per RGU (revenue generating unit) and
include business lines; (3) BSNL is owned by the Indian government, thus with no market value. (5) Subscriber figure for Skype is registered user amount as of CQ4:08. Source: company reports, Morgan Stanley Research.
Subscribers Y/Y Blended Y/Y Market CapRank Company Type Region (MM) Growth ARPU (US$) Growth ($B)
1 China Mobile Wireless China 450 22% $12 -8% $1862 Vodafone Wireless Europe 280 10 35 5 1083 China Telecom Wireline China 210 -10 8 4 284 America Movil Wireless LatAm 173 18 11 -5 505 Telefonica Moviles Wireless Europe / LatAm 172 20 41 -6 916 China Unicom Wireless China 133 13 6 -13 157 T-Mobile Wireless Europe / USA 127 8 21 -11 598 Orange Wireless Europe 118 12 44 0 659 China Unicom / Netcom (1) Wireline China 107 -4 10 30 15
10 Mobile Telesystem Wireless Europe 88 9 12 13 911 Bharti Airtel Wireless India 77 59 7 -15 2512 AT&T Mobility Wireless USA 75 14 51 0 14813 Telecom Italia Mobile Wireless Europe / LatAm 71 6 27 -4 2714 Verizon Wireless Wireless USA 71 11 52 1 8915 PT Telkom Wireless Asia 61 36 5 -20 1116 AT&T (2) Wireline USA 56 -10 80 3 14817 NTT DoCoMo Wireless Japan 54 2 66 -11 7618 Turkcell Wireless Europe 51 12 17 13 1119 NTT Wireline Japan 44 -0 34 -0 6820 Sprint / Nextel Wireless USA 42 -9 53 -5 721 BT (UK) Wireline Europe 38 -2 38 4 1422 Verizon (2) Wireline USA 36 -10 85 3 8923 BSNL (3) Wireless India 36 24 7 -15 --24 Deutsche Telekom Wireline Europe 35 -6 29 -2 5925 France Telecom Wireline Europe 33 -1 43 14 65
Total* 2.6B 10% $25 -1% $1,250BWireless 2.1B 16 25 -3 977Wireline 0.6B -7 28 5 486
Skype (5)
405MM Registered
Users
(+47% Y/Y)
VoIP –Skype = #2 Global ‘Carrier’ + 8% of Cross-Border Calling Minutes
64
Unified Communications For Consumers –Skype = Voice / Video / SMS On Your PC / Netbook / Cell Phone & More
Skype on PC / Laptop
Skype on Smartphones
Skype on Netbooks / Internet Tablets
Skype on …
3 SkypePhone Cordless Phone
Wi-Fi Phone
Source: Skype / eBay. 65
Unified Communication For Consumers –Google Voice Gives User One # + VoIP + Voicemail Transcription + SMS
• Google Voice – Launched on 3/11/09, gives user a single telephone number, to which all calls to user’s home / office / cellphone can be forwarded
• Voicemail transcription + SMS + future integration with Gmail
• VoIP calls can be initiated if user calls his / her own Google Voice number
Source: Google. 66
Online Content Consumption Mix in 5 Years?
• Consumer or professional generated?− 40% of USA consumers create entertainment (edit movies / music / photos...)(1)
• Consumer enhanced professional content?- Anchored with first-class pro content…augmented with first-class user-generated content that’s ranked / reviewed / ‘edited’…supplemented by all-comers user-generated content that’s ranked / reviewed…all presented in a holistic / widgeted way
- Clean combo of = wsj.com + bbc.co.uk + digg + techmeme + youtube + nytimes.com/technology + allthingsd + facebook + twitter…
67Note: (1) Based on a survey of 2,200 U.S. consumers in Deloitte’s 2007 State of the Media Democracy report. Source: Deloitte.
• Digg - 20MM unique visitors, +56% Y/Y, 44MM minutes, +74% Y/Y in 1/09
• 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
Consumers Expect –Wisdom of Crowds / Rankings / Searchability
68Source: comScore global 1/09, Digg.com.
Consumers Expect –Real-Time News / Opinions / Updates / Social Networking
Follow / Blog On Twitter.com… On Facebook…
• Twitter – 6M global unique visitors, +4x Y/Y, 50MM minutes, +6x Y/Y in 1/09
• Real-time micro-blogging / social networking / search, each text entry (tweet) limited to 140 characters
• Large ecosystem with complementary sites (twitpic, etc.) + 3rd-party applications on facebook / iPhone / Android…
Source: comScore global 1/09, Twitter.com, Morgan Stanley Research. 69
And On iPhone
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
Source: Foxnews.com. 70
Searchability
User rating / popularity
Upload from anywhere –UReport iPhone app
Consumers Expect –Fun / Images / Insight from Others
Find friends who share the visual DNA Find hotels via Hotels.com Visualiser
• Youniverse.com – 322K unique visitors, +204% Y/Y, 3MM minutes, +386% Y/Y in 12/08.
• 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.
Source: comScore global 12/08, Youniverse.com, Hotels.com, Morgan Stanley Research. 71
• Loopt – shows users where friends are located and what they are doing via maps on their mobile phones / can share location updates, geo-tagged photos and comments with friends in their mobile address book or on online social networks, communities and blogs
• Loopt Mix – opt-in discovery feature to help users connect with new people nearby who share common interests and affiliations
• Available on 100+ handset models / 7 national carriers in the USA
• Other location-based mobile social networking products include: Google Latitude, Joyity, Local, etc.
See Friends’ Location on Your Map
Find Interesting People Nearby
Explore Places With Geo-tagged Photos / User Reviews
Consumers Expect –Location-Aware Social Networking
Source: Loopt, Morgan Stanley Research. 72
Consumers Expect –Real-Time Video Streaming On Their Mobiles`
March Madness in Your Palm
• CBS Sports NCAA March Madness On Demand iPhone App
• $4.99 to stream every NCAA March Madness game on demand
• Live video streaming on Wi-Fi connection, live audio streaming on 3G / EDGE
• Also features game recaps / video highlights on demand / bracket information / real-time scores / stats / headlines.
Source: CBS Sports, Apple iTunes. 73
Bracket Information
Recaps / Highlights
Live Scores / Stats
Consumers Expect –Price Transparency…in <30 Seconds
Step 1:Tap Search
• Shop Savvy – Allows mobile (G1…) users to scan product barcodes and automatically retrieve best pricing information from web + local stores
• For web results, user can go to site or email link to friends…for local results, user can see store locations / get directions / call stores
• Additional functions include price alerts (notifies user when price is cheaper / hit user’s preset price target) / wish lists / search history
• Won Google’s Android Developer Challenge; featured in T-Mobile G1 ads
Source: Big In Japan, Morgan Stanley Research. 74
Step 2:Scan Barcode
Step 3:See Results
Step 4:Click to Buy
75
Consumers Expect –Personalization
Flip Mino HD Video Camera
Footjoy.com – Myjoys Picturedoor.co.uk
Source: footjoy.com, theflip.com, picturedoor.co.uk, mymms.com
MMs.com – MyM&M’s
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
CQ4:05 CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08 CQ4:08
Glo
bal O
nlin
e A
dver
tisin
g R
even
ue ($
MM
)
Google Yahoo! Microsoft AOL
Global Online Advertising Revenue (1)
48%48%
33%33%
10%10%
7%7%
20%20%
67%67%
6%6%
10%10%
Online Advertising –Google Share = 67% in CQ4:08 vs. 48% in CQ4:05
(1) Google and Yahoo! include TAC; Source: Company Reports, Morgan Stanley Research 76
Offline CPMs Materially Higher Than Online CPMs = Potential for Significant Dislocation / Arbitrage
CPM Comparisons
Source: Media Dynamics, 6/08, Morgan Stanley Media Research. 77
Broadcast TV
Newspaper
Cable TV
Spot TV
Internet
Magazine
Radio
Out-of-Home
CPM <$2 $6 $10 $14 $18 $22 $26 $30 >$34
78
Online CPMs Challenge =Significant Ramp of ‘New’ Social Inventory
Note: (1) ZenithOptimedia C2008E, 12/08; (2) Assumes 90% of Google Sites excl. YouTube revenue is from Google.com; (3) Net revenue estimates (ex-TAC), Microsoft does not breakout TAC;( 4) comScore restated AOL metrics in 1/08; (5) Negative
growth due to YouTube Page Views’ 62% Y/Y growth is much higher than our estimated revenue growth, youtube.com’s minutes 2x of google.com. (6) comScore adjusted their global Internet unique visitors estimates in 7/08, resulting in a higher-
than-normal users Y/Y growth and lower / flat ad revenue per user growth. Source: Morgan Stanley Research.
CQ4 Annualized CQ4 Ad RevenueCQ4 Unique CQ4 Total Pages CQ4 Total Global Ad Revenue per 1,000Users ('000) Viewed (MM) Minutes (MM) per User Page Views
Total Internet 996,143 6,701,135 4,063,148 $50.07 (1) $1.86 (1)
Y/Y Growth 23% 11% 10% -1% 9%
Google.com (2) 481,450 114,137 60,381 $28.05 (3) $29.58 (3)
Y/Y Growth 18% 1% 6% 3% 21%
Yahoo! 558,135 311,673 355,942 $8.33 (3) $3.73 (3)
Y/Y Growth 14% -1% 6% -12% 1%
MySpace 122,338 127,360 55,591 $4.68 (3) $1.12 (3)
Y/Y Growth 14% -10% 12% -18% 4%
Microsoft 641,771 216,661 568,438 $4.14 $3.06
Y/Y Growth 20% -8% 18% -11% 16%
AOL 269,705 80,232 117,919 $5.27 $4.42
Y/Y Growth (4) - - - - -
YouTube 351,457 129,440 133,930 $0.68 $0.46
Y/Y Growth 48% 62% 98% 1% -8% (5)
79
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
3/05
9/05
3/06
9/06
3/07
9/07
3/08
Impr
essi
ons
(MM
)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
$3.50
CPM
Banner Ads Impressions Banner Ads CPM
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
3/05
9/05
3/06
9/06
3/07
9/07
3/08
Impr
essi
ons
(MM
)
$0
$5
$10
$15
$20
$25
$30
$35
$40
CPM
Rich Media Impressions Rich Media CPM
Ad Supply > Ad Demand –Ad Impressions Growing Rapidly…CPMs Declining
Source: Internet Advertising Bureau (IAB), Nielsen NetRatings, Morgan Stanley Research.
U.S. Banner Ad Impressions & CPM,CQ1:05-CQ2:08
U.S. Rich Media Impressions & CPM,CQ1:05-CQ2:08
80Source: The State of Retailing Online 2007 / 2008 (Forrester Research), comScore global 12/08, Morgan Stanley Research.
6%4%
35%
1% 1% 1%
27%30%
9%6%
13%
4%
11%
4%2%
7% 7%
18%
4%5%2%
3%2%
0%
10%
20%
30%
40%
Search
engin
e mark
eting
Organ
ic tra
fficAffil
iate p
rogram
s
Email to
pros
pecti
ng lis
ts
Shopp
ing co
mparis
on en
gines
Catalog
sNew
porta
l dea
lsOffli
ne ad
vertis
ingBan
ner a
ds
Traditio
nal p
ortal
deals
Sweeps
takes
Social
netw
orking
sites
Co-reg
istrat
ion on
othe
r Web
sites
2006 2007
N/AN/A
% C
usto
mer
s ac
quire
d fr
om s
ourc
e
% of New Online Customers for Online Retailers / Marketing Spend Mix
N/A
Search Should Continue to Become More Important –35% Y/Y Google Query Growth, 12/08
0%
20%
40%
60%
80%
100%
2002 2003 2004 2005 2006 2007
U.S
. Int
erne
t Ad
Spen
d %
Mix
Search Advertising Banner Ads Rich MediaClassified Advertising E-mail and Other
U.S. Internet Advertising Mix
52%52%
20%20%
10%10%
12%12%
7%7%
15%15%
14%14%
15%15%
9%9%
47%47%
Search =Dramatic Share Gains of Online Ad Spending
Source: IAB, search spending adjusted by our estimates, Morgan Stanley Research. 81
Paid Search Placement =Top ROI For Marketers
0% 10% 20% 30% 40% 50% 60%
Paid PlacementOrganic SEO
Email marketingTV advertisingPrint mag ads
Direct mailConferences and exhibitions
PRContextually targeted text ads
Search KW graphical adsWeb graphical display
Print newspaperAffiliate mktg
Paid inclusionRadio ads
Print yellow pageTelemarketing
Web rich mediaPOS promo
Paid listings on shopping dirCoupons
Online yellow pagesOther
Survey Question:
"What are the top-three most-efficient forms of advertising or marketing you spend money on in terms of the return on investment (ROI) or return on ad spend (ROAS) that they yield?“ (ranked 1-3)
Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=317. 82
Search Engine Marketing (SEM) =Taking Budgets Away From Other Advertising Forms
0% 5% 10% 15% 20% 25% 30%
Print magazines advertisingDirect mail
Print newspaper advertisingWeb site development
TV advertisingConferences and exhibitionsPrint yellow page advertising
Radio advertisingEmail marketing
Web graphical display advertisingAffiliate Marketing
Public relationsOnline yellow page advertising
Paid listings on shopping directoriesWeb rich media advertising
CouponsTelemarketing
Point-of-sale promotionsOut of Home
Other
Survey Question:
"From which marketing/IT programs are you shifting budget away and moving it to your search marketing programs?"
Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=317. 83
Video Search –Advertisers Showing Rising Interest
YES YES –– 54%54%
NO NO –– 46%46%
Survey Question:
Would you be interested in contextually targeted advertising attached to video search results?
Survey Result:
Breakdown:
If yes, how interested are you in the following? (Scale of 1-5, 1=lowest, 5=highest)
7%
7%
11%
10%
27%
29%
33%
34%
22%
20%
0% 20% 40% 60% 80% 100%
Video Based
Text Based
1 2 3 4 5
Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229. 84
U.S. Internet Ad Revenue Share by Pricing Model, 2000 - 2007
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. 85
Performance-Based Advertising Gaining Share+20% Y/Y in CH1:08 vs. +12% for CPM-Based Revenue
10%12%
21%
37%41% 41%
47%51%
0%
15%
30%
45%
60%
2000 2001 2002 2003 2004 2005 2006 2007
% S
hare
of T
otal
Rev
enue
Performance CPM HybridSearch Revenue Share
Advertisers =Willing to Bid More For Behavioral Targeting
Survey Question:
Are you willing to bid more for
clicks based on behavioral
information such as in-market
consumers (i.e. consumers
currently shopping for a specific
product)?
Survey Result:
YES YES –– 75%75%
NO NO –– 25%25%
Source: Search Engine Marketing Professional Organization survey of SEM agencies and advertisers, Nov 08-Jan 09. Global Results. N=229. 86
87
E-Commerce -USA Online Penetration = 4-6% and Rising
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).
Categories’ Online Penetration of US Retail Market, 2007
1%Food / beverage / grocery10%Movie tickets
2%Auto / auto parts10%Apparel / footwear
4%Pet supplies11%Jewelry
5%Appliances / tools12%Flowers / cards21%Gift cards / certificates
6%OTC meds / personal care13%Office supplies24%Music / video
8%Sporting goods / apparel18%Consumer electronics24%Books
9%Cosmetics / fragrances19%Baby products27%Other event tickets
9%Home furnishings19%Toys / video games45%Computer products
>20% 10 - 20% <10%
88
Amazon.com’s Recommendation Engine =Web’s Most Effective Search Engine + Advertiser?
Source: Amazon.com, Google
Amazon.com search + recommendation engine: Leveraging data
What other customers are
thinking
What other customersare saying
What other customersare buying
New formats: Kindle
What Amazonrecommends
89
Amazon.com –Following Its Customers By Leading With Technology
Source: Amazon.com
• Search on any keyword (e.g. item name, author, artist, etc.) or ISBN / UPC codeAmazon TextBuyIt
1 2
Text search keywords to ‘AMAZON’(262966)
Reply with 1 or 2 to buy an
item from search results
3
Answer call to hear details + confirm order
Amazon iPhone App w/ Amazon Remembers
90
-10%
0%
10%
20%
30%
40%
50%
CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 CQ3:08
Y/Y
Gro
wth
US Adjusted Retail E-Commerce Sales Amazon.com North America RevenueUS Total Retail Sales
Amazon.com vs. US Retail E-Commerce Sales(1)
~25ppts
(1) Adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: Amazon.com (CQ4:08), US Dept. of Commerce (CQ4:08), Morgan Stanley Research.
Amazon.comKey Operating Metrics
Amazon.com Should Continue to Gain ShareHigh Customer Satisfaction / Recommendation Engine / Impressive Metrics
CQ1:08 CQ2:08 CQ3:08 CQ4:08
Revenue $4,135 $4,063 $4,264 $6,704
Y/Y Change 37% 41% 31% 18%
Active Customers 79 82 85 88
Y/Y Change 19% 18% 17% 16%TTM Revenue per Active Customer $202 $210 $215 $218
Y/Y Change 17% 19% 18% 12%
Active Sellers ('000) 1,300 1,420 1,405 1,500
Y/Y Change 17% 18% 17% 18%
Total Units 196,135 190,113 202,566 308,606
Y/Y Change 31% 32% 30% 28%Kindle Books Available ('000) 115 140 185 230
(All metrics in MMs, except for revenue per customer data and when noted)
91
2) Mobile –Innovation in wireless products / services accelerating – changes
should create + destroy significant wealth
Technology / Internet
Nintendo Wii
45MM consoles sold since 11/06 launch (+125% Y/Y) – raised bar with motion sensors + playability
Apple iPhone / iPod Touch
30MM combined units sold (17MM iPhone / 13MM iPod Touch) since 6/07; 18K apps, 500MM+ downloads since 7/08; – raised bar with ease-of-use + functionality
Sony PSP
52MM units sold since 12/04 launch (+42% Y/Y) – raised bar with online playability + built-in web browser
3 Skype Phone
500K+ units in < 200 days. Leverage large Skype / Facebook user base of 370MM (+51%Y/Y) / 200MM (+116%Y/Y) + create a low-cost web-enabled VoIP, social networking, digital presence phone. INQ1 next with 50K+ preregistrations…
Amazon.com Kindle
With free EV-DO + 240K titles + newspaper / magazine / blog subscriptions. Amazon may do with books what Apple did with tunes. Kindle accounts for ~12% of AMZN’s sales for titles available on Kindle
Netbooks
Estimated 12MM units shipped in 2008; as many as 45MM could be shipped in 2012E – low price points + high mobility + wireless / 3G access pioneering ‘Cloud Computing’ usage model.
Note: iPhone units sold includes ~2MM inventory-built units in CQ3:08; Netbook shipment estimates per Katy Huberty.Source: Nintendo, Sony, Amazon.com, Apple, 3, Morgan Stanley Research.
Mobile –New Computing Cycle With Wireless Game Changer Products with
Extraordinary Ease-of-Use
92
93
Key Mobile Internet Technologies Related to Networks / Devices / Services Hitting Critical Mass
• Infrastructure – broadband Internet, WiFi, high-speed cellular + GPS networks…
• Hardware – small / fast / cheap processors / storage / touch screens, GPS, motion sensors…
• Software – optimized user interfaces, browsers, widgets, operating systems, digital stores, centralized billing…
• Communication Tools – messaging (text / multimedia / chat / tweets…), social networking, VoIP, camera, interactive games…
• Digital Content – optimized music, video, news, search, shopping, weather, maps…
94
Notebooks Retrofitting to Cloud Via 3G –PCs Retrofitted to Internet Via Dial-Up ~1995 Deja Vu?!
• Global cellular modem shipment exceeded 35MM in 2008 – ABI Research, 2/09
• 64% of new Austrian broadband subs used cellular modems, CQ2:07
• 70%+ 3G network coverage in US / Japan / UK / France / Italy / Germany in 2007 – UK Ofcom
• 13MM cellular modem users in USA, CQ2:08E – Nielsen Mobile
Note: Cellular modem shipments includes PC Cards / ExpressCards, USB modems, internal modems + 3G/Wi-Fi routers); 3G networks include HSPA (Europe & Japan) and EV-DO Rev A (US), coverage is % of population in 2007.
Source: ABI Research, Informa, Ofcom, Nielsen Mobile.
Europe25%
North America
8%ROW13%
Latin America
11%
Asia / Pacific
43%
Note: ROW = Rest of World; Source: ITU, Morgan Stanley Research
Mobile Subscribers – 3.3B2007
Internet Users – 1.4B2007
Global Mobile Subscribers > 2x Internet Users –Illustrates ‘Up Sell’ Opportunity
• Global mobile subscribers exceed Internet users by > 2x• As mobile Internet usage penetration increases, we expect these figures to converge
Europe24%
North America
18%
ROW6%
Latin America
10%
Asia / Pacific
42%
95
Japan Internet Users by Access Device
40%
58%
73%
81% 81% 83%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2003 2004 2005 2006 2007
% o
f Jap
an In
tern
et U
sers
% using PC % using Mobile
Source: Japan Ministry of Internal Affairs and Communication. 96
Japan Shows Way in Mobile Internet Usage –Mobile Nearly Matches PC
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1/06 5/06 9/06 1/07 5/07 9/07 1/08 5/08 9/08 1/09
Tota
l Pag
es T
rans
code
d pe
r Mon
th (M
M)
Source: Opera Software, Morgan Stanley Research.
Global Opera Mini Browser Pages Transcoded per Month, 1/06 – 1/09
Opera Mobile Web Browser = Strong Mobile Internet Growth -~20MM Global Users, 7.6B Page Views (+325% Y/Y, Accelerating), 1/09
− Remote Server first pre-processes requested web pages
− Web content is then compressed to reduce the size of data transfer
− Fully-rendered web pages sent to your phone
− Advantage: full web rendering and faster browsing on simpler phones
A full web experience + 50% faster
97
(All connection numbers in 000s) 2007 2008 2009E 2010E 2011E 2012E 2013E
Western Europe 80,558 153,064 255,379 355,360 430,425 487,109 528,0303G Penetration 17% 31% 49% 67% 80% 88% 94%
Japan 72,691 90,949 102,851 111,544 116,917 121,234 124,1913G Penetration 72% 86% 93% 97% 98% 99% 99%
North America 57,679 86,135 121,338 155,759 186,090 221,214 262,9473G Penetration 21% 29% 39% 47% 54% 62% 71%
Asia / Pacific (ex. Japan) 48,027 81,928 150,020 277,333 444,346 655,544 933,7173G Penetration 4% 5% 8% 13% 18% 25% 33%
Middle East & Africa 11,095 21,193 34,650 67,171 116,047 174,103 246,4323G Penetration 2% 4% 6% 10% 16% 22% 30%
Eastern Europe 5,980 15,042 33,120 58,151 94,173 137,913 186,8963G Penetration 2% 4% 8% 13% 21% 31% 42%
South & Central America 3,082 9,455 20,611 38,898 71,846 122,082 168,7423G Penetration 1% 2% 5% 8% 15% 24% 32%
Total 279,113 457,765 717,971 1,064,215 1,459,844 1,919,200 2,450,9563G Penetration 8% 12% 16% 22% 29% 36% 44%
Western Europe + North America Hit 3G Penetration Inflection Point in 2007 – 2008, Global in 2010
3G* Enabled Handset & Penetration by Region, 2007 – 2013E
Note: Regions ranked by 2008 absolute numbers of 3G-enabled devices in use. 3G* technologies include WCDMA, HSPA, TD-SCDMA, 1xEV-DO, LTE and WiMax. Source: OVUM, Morgan Stanley Research. 98
99
Apple Changed Mobile Game…With Impressive UI + 2.5G!i – NOT – A - Phone
Apple iPhone 3G –Winning Consumers Via Simple + Useful Applications
Speak Mandarin?
Lonely Planet Mandarin
Phrasebook will say it for you.
Catchy Tunes?
Shazam will listen and find the song
for you.
Source: Apple. 100
Apple iPhone –Digital Content Ecosystem Augmented by iTunes Store
iTunes App Store on PC App Store on iPhone
Source: Apple 101
391 787 1,476 2,256 3,4425,009
7,110
10,978
16,476
173 410747
1,0361,480
2,238
2,994
4,228
5,761
0
5,000
10,000
15,000
20,000
25,000
At Launch(07/11/08)
1 MonthLater
(08/11/08)
2 MonthLater
(09/11/08)
3 MonthLater
(10/11/08)
4 MonthLater
(11/11/08)
5 MonthLater
(12/11/08)
6 MonthLater
(01/11/09)
7 MonthLater
(02/11/09)
7 MonthLater
(03/11/09)
Tota
l App
s A
vaila
ble
0%
20%
40%
60%
80%
100%
120%
M/M
Gro
wth
Paid Apps Free Apps M/M Growth
iTunes App Store –Rapid Ramp to 25K Apps, 74% Paid(1)
iTunes App Store # of Apps, Paid vs. Free, 7/11/08 – 3/11/09
Note: (1) Apple announced on 3/17 that there’re 25K+ apps, chart shows data through 3/11/09, when there were 22K apps availableSource: Apple iTunes, Morgan Stanley Research.
102
iTunes App Store –14% Games, 12% Books, 11% Entertainment + 800MM Downloads (~13 per User)
Note: Data as of 3/20/09, only showing apps available. Downloads per person assumes 50% are new downloads / 50% are update downloads. Apple announced that total apps / downloads reached 25K / 800MM as of 3/18.
Source: Apple iTunes, Morgan Stanley Research. 103
# of Apps % of Total# of Paid
AppsPaid as % of
Category Total
Average Price of
Paid AppsGames 3,326 14% 2,001 60% $2.23Books 2,837 12 2,675 94 3.82Entertainment 2,587 11 1,716 66 1.44Utilities 2,067 9 1,474 71 2.66Education 1,929 8 1,662 86 5.16Lifestyle 1,404 6 1,023 73 2.21Travel 1,258 5 1,064 85 5.09Reference 1,177 5 905 77 6.52Productivity 1,027 4 802 78 3.59Sports 895 4 664 74 3.11Music 838 4 559 67 3.90Navigation 727 3 594 82 6.88Healthcare & Fitness 704 3 577 82 2.94Business 601 3 422 70 9.08Photography 534 2 399 75 2.32Finance 511 2 366 72 5.11Social Networking 404 2 176 44 2.31News 343 1 151 44 1.89Medical 280 1 237 85 22.01Weather 127 1 88 69 3.02
Total 23,576 17,555 74% $3.93
Category
Apple iPhone –Data Usage 6-10x Higher than Average USA Mobile UsersApp Downloads per iPhone 100x Higher than non-iPhones
14%9% 10% 8% 9% 7% 5%
9%4% 3% 3%
79%
70%66% 66%
57% 54%
40% 39% 38% 37%29%
0%
20%
40%
60%
80%
100%
EmailGam
es*
Web Sea
rch
Music
Browsin
g New
s
Social
Netw
orkin
g
Restau
rant G
uides
Instant M
essa
ging
Persona
l Ban
king
Mobile
VideoOnli
ne Shop
ping
% o
f U.S
. Mob
ile S
ubsc
riber
s
Average U.S. Mobile Users iPhone Users
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:
comScore M:Metrics, 8/08 Survey of U.S. mobile subscribers, *Games category per KPCB estimates.
Mobile Content Consumption
104
USA Mobile Carriers –Data ARPU Growth Offsetting Declining Voice ARPU
$50 $50 $49 $47 $46 $45 $46 $44 $43 $43 $43 $41 $40 $40 $39
$3 $4 $5 $5 $6 $6 $7 $8 $8 $9 $10 $10 $11 $12 $12
$0
$10
$20
$30
$40
$50
$60
1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08
Voice ARPU Data ARPU Total Average ARPU
Average U.S. Wireless Carrier ARPU (Average Revenue Per User) Breakdown, CQ1:05 – CQ3:08
Source: Simon Flannery, Morgan Stanley Research. 105
Global Wireless Data ARPU –Japan in Clear Lead, USA Catching Up Faster Than Others
Data ARPU as Percentage of Total, CQ1:05 – CQ3:08
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. 106
26% 26% 26% 26%28% 28% 29% 29%
31% 32%33%
35%
37%39% 39%
6% 7%9%
10%11%
12% 13%15%
16%18% 18%
20%21%
22%24%
0%
10%
20%
30%
40%
CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08
Dat
a A
RPU
as
% o
f Tot
al
Japan Western Europe Asia (ex. Japan) USA$54
CQ3:08 BlendedARPU (US$) : $5 - $37$37 $51 ($95)
(iPhone)
Quarterly Worldwide Smartphone Sales by Operating System
05
10152025303540
CQ1:06 CQ2:06 CQ3:06 CQ4:06 CQ1:07 CQ2:07 CQ3:07 CQ4:07 CQ1:08 CQ2:08 CQ3:08
Uni
ts S
hipp
ed (M
M)
Symbian RIM Microsoft Apple Linux Palm Others
Source: Gartner.
02,0004,0006,000
8,00010,00012,00014,000
EMEA North America APAC ex. Japan Japan Latin AmericaCQ
3:08
Dis
t.of S
mar
tpho
ne S
ales
Symbian Dominates Smartphones But Losing Share –Apple / RIM Gaining Ground
107
108
Technology / Internet
3) Emerging Markets –Pacing next wave of technology adoption – leading players in
many emerging markets aren’t the usual suspects…
Broadband + Mobile + Internet =Especially High Global Growers
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. 109
2002 Y/Y 2007 Y/Y Global 2007 NetCategory Growth Rate Growth Rate Market Size Additions
Broadband Subscribers 78% 23% 349MM 64MM
Mobile Subscribers 20 20 3,319MM 563MM
Internet Users(1) 26 16 1,352MM 182MM
Financial Cards(2) 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
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
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.
0
100
200
300
400
500
600
700
2001 2002 2003 2004 2005 2006 2007 2008E
Inte
rnet
Use
rs (M
M)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Y/Y
Gro
wth
Top 10 Emerging Markets Top 10 Developed MarketsTop 10 EM Y/Y Growth Top 10 DM Y/Y Growth
110
Top 10 Emerging Markets = 2x Top 10 Developed Markets in Mobile Subscribers in 2008
Top 10 Emerging Markets vs. Top 10 Developed Markets – Mobile Subscribers
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.
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2001 2002 2003 2004 2005 2006 2007 2008E
Mob
ile S
ubs
(MM
)
0%
10%
20%
30%
40%
50%
60%
Y/Y
Gro
wth
Top 10 Emerging Markets Top 10 Developed MarketsTop 10 EM Y/Y Growth Top 10 DM Y/Y Growth
111
112
Rank CountryRelative
Weighting
2004
Rank CountryRelative
Weighting
12345678910
12345678910
USAChinaJapan
GermanyUK
IndiaFranceItaly
S. KoreaCanada
9.08.26.55.75.55.35.25.25.15.1
ChinaUSA
JapanGermany
IndiaUK
FranceRussia
S. KoreaBrazil
2007
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
TMT (Technology / Media / Telecom) Update =China #1 + Rest of BRIC Gaining Ground
8.98.86.15.65.65.35.35.25.25.2
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.
Internet User Net Additions –China, Brazil, Pakistan, Columbia, India, Iran, Russia Impressive
Note: Penetration is per person. Source: ITU, Morgan Stanley Research. 113
2007Net Internet
Users Added 2007 PenetrationRank 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: (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.
Source: Morgan Stanley Research.
Mobile Subscriber Net Additions –‘Emerging’ Markets Providing Growth
2007 NetMobile 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
114
Non-US Markets Lead Usage Penetration in Many Categories
Source: Morgan Stanley Research
Social Networking: Brazil / S. Korea
E-commerce: Germany
Mobile Payments + TV: Japan
Broadband:S. Korea
Online Gaming: China
Microtransactions via SMS: Philippines
Online Advertising: UK
115
116
4) Cloud Computing –Access + storage need + virtualization driving change
Technology / Internet
117
Storage Growth +62% in 2007E –Consumer > Professional Demand
Source: Seagate, Katy Huberty, Morgan Stanley Research
0
20,000
40,000
60,000
80,000
100,000
120,000
2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E
Peta
byte
s
Home Professional
Global Storage Sold Annually
Cloud Computing –Consumer + Enterprise Adopt ‘Software-as-a-Service’ Model
Amazon.com Salesforce.com
118Source: Amazon.com, Salesforce.com, Morgan Stanley Research
119119Source: Getty Images
Google Data Center – The Dalles, Oregon
‘A Giant Supercomputer’ –A Datacenter Behind the Cloud
120
1. sarah palin 2. beijing 20083. facebook login4. tuenti 5. heath ledger 6. obama7. nasza klasa 8. wer kennt wen9. euro 2008 10. jonas brothers
Google Zeitgeist –Predictive Power of Data Underutilized
1. obama 2. facebook 3. att4. iphone5. youtube6. fox news7. palin8. beijing 2008 9. david cook 10. surf the channel
Fastest Rising (US)
Economy – Layaway Makes a Comeback
Trendsetters 2008 – Going Green
Source: Google Year-End Zeitgeist, 2008.
Fastest Rising (global)
Politics – U.S. Presidential Election
121
Amazon Web Services –Providing Cheap / Reliable Storage in Cloud
0
50
100
150
200
250
300
350
400
450
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
Tota
l Reg
iste
red
Dev
elop
ers
(000
)
0%
2%
4%
6%
8%
10%
12%
14%
16%
Q/Q
Gro
wth
Total Registered Developers (000) Q/Q Growth
Amazon Web Services
• 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 $0.10 / instance-hour).
Source: Amazon.
122
Closing Thoughts
1) Companies with cogent business models that provide consumer value should survive / thrive – consumers need
value more than they have needed it in a long time
HugeMarket
Active, MissionaryFounders
GreatManagement
Team,Culture
ConstantImprovement
InsaneCustomer
Focus
BigGross
Margin (1)
Annuity-Like
ModelStrongBoard
Simple, FocusedMission
X
X
X
X
XX
X
X
X
XX
X
X
X
X
X
X
X
X
O
X
X
X
X
X
X
34
65
18
77
83
56
79
81
Apple
Cisco
Dell
eBay
Intel
Microsoft
Yahoo!
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
X
X
X
X
X
XX
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
2% of Public Tech Companies Create 100% of Wealth* –A Look at Some of Biggest Winners of Our Day
Source: (1) F2009E for Dell; F2008E for Apple, Cisco, eBay, Google, Intel; F2007A for Microsoft, Yahoo! Morgan Stanley Research, Morgan Stanley “The Technology IPO Yearbook’ 123
Top 15 Global Internet Companies
(US$ in Millions, except per share data, as of 3/19/09)
3/19/09 Market C2008 Total Return % 52-WeekRank Company Region Price (US$) Value ($MM) Revenue ($MM) 2006 2007 2008 2009 YTD High Low
1 Google US $324 $102,288 $21,796 11% 50% -56% 5% $602 $2472 Amazon.com US 69 29,414 19,166 -16 135 -45 34 92 353 Yahoo! US 14 18,836 7,209 -35 -9 -48 11 30 94 eBay US 12 15,345 8,541 -30 10 -58 -15 33 105 Yahoo! Japan Japan 251 14,188 2,633 -48 13 -10 -38 548 2296 Softbank Japan 13 13,158 27,891 -54 6 -14 -28 21 77 Activision US 10 12,915 3,026 25 72 -42 14 19 88 Tencent China 7 11,964 998* 233 113 -15 3 9 49 Baidu China 173 5,920 469 79 246 -67 32 383 101
10 Rakuten Japan 464 5,802 2,757 -52 6 28 -26 672 41411 Electronic Arts US 18 5,699 4,480 -4 16 -73 11 55 1412 Alibaba China 1 5,034 439* -- -- -80 38 2 013 NHN Korea 101 4,583 1,658* 38 97 -57 -2 252 5914 NetEase China 22 2,772 424 33 1 17 1 27 1515 Expedia US 7 2,121 2,937 -12 51 -74 -10 26 6
Global Top Internet Companies by Market Value
Note: * denotes Morgan Stanley estimate; ~60% of Softbank’s C2008 revenue was coming from their mobile operator business.Source: FactSet; Morgan Stanley Research. Data as of 3/19/09. 124
125
CBS Television
CBSSports.com
CBS Mobile
2007 Football Season
• Plasma Screen TV – HD Quality Event • PC Screen – Fantasy, Stats, and Injury Reports• Mobile Screen – Highlights, Scores
ThursdayKickoff
Patriots vs.Colts
NFLSundays
Old Media (TV) / New Media (Internet + Mobile) –Complementary Platforms
2007 Football Season
Source: CBS Sports Interactive.
Younger Generation (18-41) –Spend Most Time on Internet / Cell Phone vs. Other Media
% of Media ConsumptionSeniors
(Age 63+)Younger Generation
(Age 18 - 41)
Total Hours of Media Usage Per Week:49 Hours
Total Hours of Media Usage Per Week: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.
Newspaper - 3%Magazine - 4%
Video Game- 6%
Movie - 11%
Cell Phone- 15%
Radio - 14%
Internet - 25%
TV - 22%
Newspaper- 13%Magazine - 8%
Video Game- 2%
Movie - 8% TV - 38%
Internet - 12%
Radio - 13%
Cell Phone- 13%
126
32%
25%
17%
13%
7%6%
32%
8%9%
20%
6%
0%
5%
10%
15%
20%
25%
30%
35%
TV Internet Radio MobilePhone
Newspaper Magazine
% o
f Tot
al M
edia
Con
sum
ptio
n Ti
me
or A
dver
tisin
g Sp
endi
ng
Time Spent Ad Spend
% of Time Spent in Media vs. % of Advertising Spending, USA 2008E
<1%
Media Time Spent vs. Ad Spend Out of Whack –Internet / Mobile (upside…) vs. Newspaper / Magazine / TV (downside…)
Note: Time spent data per Forrester Research, ad spend data per Nielsen Media Research, mobile medium ad spending is Morgan Stanley’s estimate. Source: Nielsen Media Research, Forrester, Morgan Stanley Research. 127
128
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.
Direct TelephonePromotionsNewspapers
ClassifiedsDirect MailBroadcast TVCable TVInternet / OnlineRadioYellow PagesOutdoor
$11011646156144272120167
1071155656
1141128071
113114114
$1,0321,011
81826053239032728817214163
2007 Advertising Spending ($B) Households (MM)
Ad Spending / Household ($)Medium
TotalAverage
$46947
$4,774477
Internet Advertising – Lots of Ad Share to Gain$288 Per Home for Internet vs. $818 for Newspapers Implies Upside
Source: PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, Morgan Stanley Research. 128
129
Offline Advertising Revenue Declines Accelerating –Newspaper Redux?
Every time we have seen a recession, we have endured this panic… I recognize that we may
Source: Newspaper Association of America, Morgan Stanley Media Research.Newspaper figures relate to the “print” portion of ad revenues. CQ4:08 / CQ1:09E Y/Y declines are Morgan Stanley estimates.
never return to record levels, but we can recapture a large percentage of advertising that does return.
- Rupert Murdoch, Chairman and CEO, News Corp. (2/5/09)
Cable TV Network TV Local TV
--3%3%
--10%10%
--18%18%
--5%5%
-30%
-20%
-10%
0%CQ1:07 CQ3:07 CQ1:08 CQ3:08 CQ1:09E
Ad
Rev
enue
Y/Y
Cha
nge
Print Newspaper
--15%15%
--30%30%
Traditional Media Ad Revenue Y/Y Growth, CQ1:07 – CQ1:09E
Search =Still Lots of Share to Grab
U.S. Internet Search Spendingvs.
Ad Spending on Classified, Yellow Pages & Newspaper, 2000-2007
$122 $299 $889 $2,133$4,113
$6,910$9,430
$12,282
$68,402
$61,224 $60,890$63,265
$67,115$69,923
$65,146
$70,348
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
2000 2001 2002 2003 2004 2005 2006 2007
Ad
Spen
d ($
MM
)
Internet Search Combined Classified, Yellow Pages & NewspaperSource: IAB, search spending adjusted by our estimates;
Classified, Yellow Pages & Newspaper spending per MS Media team.Morgan Stanley Research. 130
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. Source: IAB, ZenithOptimedia, DOC, Morgan Stanley Research 131
0%
2%
4%
6%
8%
10%
12%
0%
2%
4%
6%
8%
10%
12%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
U.S. Online Ad Spending as % of Total Ad SpendingU.S. Adjusted E-Commerce as % of Total Retail Sales
(1)
(2)
U.S. Online Ad Spend + E-Commerce Share Gains, 1995 - 2007
% o
f Tot
al
20-y
r Ave
rage
Y/Y
Gro
wth
20-yr Average Total Ad Spending & Retail
Sales Y/Y Growth = 5%
USA Online Ad Spend + E-Commerce Penetration –Near / Beyond Level of Total Industry Growth Rates = Big Deal!! There’s No Going Back!
2007 2007Total 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 63 Verizon Telecom 3,016 189 94 General Motors Automotive 3,010 212 105 Time Warner Media 2,962 98 66 Ford Automotive 2,525 164 107 GlaxoSmithKline Healthcare 2,457 29 28 Johnson & Johnson Consumer 2,409 49 39 Walt Disney Media 2,293 141 10
10 Unilever Consumer 2,246 47 511 Sprint Nextel Telecom 1,903 71 512 General Electric Conglomerate 1,791 79 713 Toyota Automotive 1,758 57 514 Chrysler Automotive 1,739 53 515 Sony Technology 1,737 72 716 L'Oreal Consumer 1,632 12 217 Sears Retail 1,628 23 318 Kraft Foods Consumer 1,508 36 319 Bank of America Financial 1,491 72 1820 Nissan Automotive 1,423 34 4
Largest USA Advertisers Under Spend on Internet Only 5 of ‘Top 20’ Spenders Spent >= 8-12% Industry Average
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. Source: Advertising Age, “100 Leading National Advertisers” 6/08; Morgan Stanley Research
132
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. 133
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. 134
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 AdRevenue:
$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. 135
We are Undergoing the Greatest Media Transformation in History
136
Amazon.com =Greatest Advertiser / Agency of Past Decade?
137
• 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.
Source: Advertising Age, WikipediaNote: 2 ads before 1900 are included in 1900s decade.
Alka-Seltzer ads are included in 1960s decade. 138
0%
5%
10%
15%
20%
25%
1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s
% o
f Top
100
Ads
Advertising Age – Best Campaigns 1900-2000 –Most Fertile Decades = 1950-1980
Source: Advertising Age. 139
These Campaigns Were Really / Really Awesome –They Sold Lots of Product
Rank Company Commercial Ad Agency Year1 Volkswagen Think Small Doyle Dane Bernbach 19592 Coca-Cola The pause that refreshes D'Arcy Co. 19293 Marlboro The Marlboro Man Leo Burnett Co. 19554 Nike Just do it Wieden & Kennedy 19885 McDonald's You deserve a break today Needham, Harper & Steers 19716 DeBeers A diamond is forever N.W. Ayer & Son 19487 Absolut Vodka The Absolut Bottle TBWA 19818 Miller Lite Beer Tastes great, less filling McCann-Erickson Worldwide 19749 Clairol Does she...or doesn't she? Foote, Cone & Belding 1957
10 Avis We try harder Doyle Dane Bernbach 196311 Federal Express Fast talker Ally & Gargano 198212 Apple Computer 1984 Chiat/Day 198413 Alka-Seltzer Various ads Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene 1960s, 1970s14 Pepsi-Cola Pepsi-Cola hits the spot Newell-Emmett Co. 1940s15 Maxwell House Good to the last drop Ogilvy, Benson & Mather 195916 Ivory Soap 99 and 44/100% Pure Proctor & Gamble Co. 188217 American Express Do you know me? Ogilvy & Mather 197518 U.S. Army Be all that you can be N.W. Ayer & Son 198119 Anacin Fast, fast, fast relief Ted Bates & Co. 195220 Rolling Stone Perception. Reality. Fallon McElligott Rice 198521 Pepsi-Cola The Pepsi generation Batton, Barton, Durstine & Osborn 196422 Hathaway Shirts The man in the Hathaway shirt Hewitt, Ogilvy, Benson & Mather 195123 Burma-Shave Roadside signs in verse Allen Odell 192524 Burger King Have it your way BBDO 197325 Campbell Soup Mmm mm good BBDO 1930s
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.
140
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)
141
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)
142
143
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 February 27, 2009, 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, WebMD Health Corp., Yahoo!.As of February 27, 2009, 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.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, Dice Holdings, Inc., 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.
Disclosure Section
144
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 February 28, 2009)
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.
Disclosure Section
Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count % of Total Count % of Total IBC % of Rating Category
Overweight/Buy 714 32% 216 38% 30%
Equal-weight/Hold 1003 44% 246 43% 25%
Not-Rated/Hold 33 1.5% 9 1.6% 27.3%
Underweight/Sell 507 22% 100 18% 20%
Total 2,257 571
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.
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Analyst Stock RatingsOverweight (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 [email protected] (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 ViewsAttractive (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.
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