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Global Technology / Internet Trends (106 pages)
Global Internet Trends
04/07/06
mary.meeker@morganstanley.com
brian.pitz@morganstanley.com
brian.fitzgerald@morganstanley.com
richard.ji@morganstanley.com
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent,
third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganstanley.com/equityresearch or can call 800-624-2063 to request a copy of this research.
For analyst certification and other important disclosures, refer to the Disclosure Section
2
Internet Trends –
Many Things to Worry About…
1) Plethora of emerging opportunities can create near-term costs
2) Increasingly competitive landscape (intramural and other) can drive
uncertainty
3) Infrastructure builds can increase costs
4) Rapid growth of mobile Internet can create transitions
5) Rapid growth of emerging markets can create challenges
6) Rising competition for talent can increase costs
7) Regulatory intervention can slow momentum
8) Impact of high oil prices plus on-going threats from likes of terrorism and
pandemics can create uncertainties
3
Internet Trends –
Many Things to Be Excited About!
1) Secular shift to IP-based digital media has tremendous momentum
2) Broadband penetration remains low
3) Online advertising spending relative to usage remains low
4) Online vs. offline commerce penetration remains low
5) Usage growth of digital content (broadband and mobile) remains robust
6) Monetization of broadband and wireless content / usage remains low
7) Global Internet usage growth (including mobile) remains healthy
8) Internet leaders have garnered significant audience / competitive
advantage over the years
9) 2007 could be a year of leverage
4
Hierarchy of Needs?
Selfactualization
Esteem
Belonging
Safety
Physiological
Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate.
1943 - Maslow 2006 - ? ;)
Internet /
Mobile Phone
Shelter
Food / Water
5
Outline
1) Public Internet Companies
2) Communications Hubs?
3) Global
4) Broadband
5) Mobile
6) VoIP
7) Video
8) Local
9) Finding
10) Emerging Trends
11) Emerging Companies
12) Closing Thoughts
13) Appendix
6
1
Public Internet Companies
7
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech
Investor Interest Model) with >$1B market cap (as of 3/13/2006).
US Companies = 82% of Global Market Value…
Company
U.S.
Market
Cap ($B)
Y/Y Change
In Mkt Cap
C2005 Rev
($MM)
Y/Y Change
In Rev
C2005 Op
Inc ($MM)
C2005 Op
Margin
Microsoft $281,510 3% $39,788 8% $16,642 42%
Google 9 7,820 106 6,139 92 2,129 35
AOL Time Warner 7 8,544 (2) 43,652 4 7,502 17
eBay 5 3,190 4 4,552 39 1,442 32
Yahoo! 4 3,119 (2) 3,696 43 1,160 31
Electronic Arts 1 5,656 (25) 2,862 (10) 351 12
Amazon.com 1 5,055 6 8,490 23 465 5
E*Trade 1 0,210 114 2,548 22 636 25
InterActiveCorp 9 ,944 (37) 5,754 (7) 345 6
Intuit 9 ,157 12 2,038 9 524 26
Monster.com 5 ,901 62 987 17 176 18
VeriSign 5 ,643 (22) 1,609 38 225 14
NAVTEQ 4 ,458 12 497 26 134 27
CheckFree 4 ,299 15 758 25 72 10
WebMD 3 ,652 32 169 26 27 16
Activision 3 ,480 7 1,484 9 41 3
CNET 1 ,954 47 353 21 41 12
ValueClick 1 ,629 66 304 80 79 21
aQuantive 1 ,587 137 308 95 61 20
THQ Interactive 1 ,549 33 -- -- -- --
WebEx Communications 1 ,457 48 -- -- -- --
Netflix 1 ,374 176 688 36 11 2
RealNetworks 1 ,327 34 325 22 (17) (5)
RSA Security 1 ,251 6 -- -- -- --
TakeTwo Interactive 1 ,160 (38) 1,203 7 40 3
Internet Security Systems 1 ,072 12 330 14 57 17
8
…US Companies = 82% of Global Market Value…
Company
Europe
Market
Cap ($B)
Y/Y Change
In Mkt Cap
C2005 Rev
($MM)
Y/Y Change
In Rev
C2005 Op
Inc ($MM)
C2005 Op
Margin
Japan
T-Online International AG $11,517 (14%) $2,730 0% $471 17%
Thomson Multimedia 4 ,643 (38) 6,727 (38) 532 8
TPI 3 ,991 18 768 (7) 226 29
Eniro 1 ,983 7 607 (18) 128 21
Seat Pagine Gialle 1 ,968 2 809 0 (141) (17)
Freenet.De Ag 1 ,577 1 845 32 -- --
Kudelski 1 ,490 (22) -- -- -- --
Tiscali 1 ,168 (20) 874 (40) (87) (10)
Yahoo! Japan $38,029 1% $1,099 0% $562 51%
Softbank Corp 2 7,785 9 5 7,809 0 (237) (3)
Nintendo 1 8,443 2 6 4,808 0 1,041 22
Rakuten 9 ,903 (10) 1,099 147 295 27
Konami 3 ,292 1 7 2,432 0 263 11
Cyber Communications 1 ,935 1 98 225 0 9 4
Koei 1 ,457 1 3 263 0 88 34
Cyber Agent 1 ,315 1 6 381 57 23 6
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech
Investor Interest Model) with >$1B market cap (as of 3/13/2006).
9
…US Companies = 82% of Global Market Value
Company
China
Market
Cap ($B)
Y/Y Change
In Mkt Cap
C2005 Rev
($MM)
Y/Y Change
In Rev
C2005 Op
Inc ($MM)
C2005 Op
Margin
S. Korea
Hong Kong
Netease $2,811 95% -- -- -- --
Sina.com 1 ,313 ( 19) -- -- -- --
CTrip 1 ,269 8 9 $65 60% $27 42%
Tom Online 1 ,098 8 3 123 0 31 2 6
Tencent Holdings $2,367 99% $138 0% $54 39%
NHN Corp $4,052 185% $253 0% $66 26%
Ncsoft Corp. 1 ,265 ( 17) 280 0 94 34
Source: FactSet, Morgan Stanley Research. Note; Data Includes companies in the Internet & Consumer Software category, per Morgan Stanley’s GTIIM (Global Tech
Investor Interest Model) with >$1B market cap (as of 3/13/2006).
10
Rest of
World
34%
US
66%
1970
Rest of
World
53%
US
47%
Powerful Non-US Market Capitalization Growth
Source: AXA.
Projected data for C2030E calculated using the rate of growth of market capitalization for Rest of World and USA since 1970.
2001
Rest of
World
73%
US
27%
2030E
11
US Maintains Dominance in Global Tech Company
Market Capitalization
Source: Morgan Stanley Technology Research.
Region
N. America
Japan
Asia
Europe
Total
63%
17
11
9
100%
$2,455B
665B
421B
361B
$3,902B
-1%
3
39
-5
3%
% Total
Market
Value
Market
Value
(12/31/05) Y/Y Change
12
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002 2003 2004 2005
Geographic Distribution of Technology Equity
and Equity-Linked Transaction Volume ($B)
U.S. Europe Asia Japan
$34 $109 $181 $67 $35 $58 $63 $55
Source: SDC, Dealogic, Morgan Stanley; 01/31/06
Non-US Markets Gaining Share
of Technology Financings
2005
US – 38%
Asia – 33%
Europe – 20%
Japan – 9%
13
Leading Global TMT Companies
Source: 2004 data from Morgan Stanley Research TMT database. Orange represents absolute market size within a given country; company market share listed below. For ISPs, the company market shares refer to share of
the ISP market, while the user numbers refer to Internet users. *Shipment units.
USA 184MM 99MM 204MM 171MM 141MM 171MM users 5.8MM 878MM
Pop. 294MM
EchoStar - 11% Gateway - 6% NetZero/Juno - 6%
China 283MM 128MM 42MM 335MM 85MM 335MM users 3.3MM 685MM
Pop. 1,300MM Tongfang - 8%
Japan 78MM 21MM 54MM 85MM 49MM 85MM users 7MM 645MM
Pop. 128MM ACCA Networks - 10%
Japan Telecom - 7%
Germany 57MM 26MM 39MM 68MM 30MM 68MM users 3.1MM 96MM
Pop. 83MM HP - 11%
UK 33MM 15MM 26MM 54MM 30MM 54MM users 0.55MM 142MM
Pop. 60MM
RBS/NatWest - 16%
HSBC Bank - 6%
Telephone Lines Cable Subscriptions Installed PCs
Verizon - 36% Comcast - 22% Dell - 35% Citibank - 13%
SBC Comm. - 31% DirecTV - 14% HP - 19% Verizon - 25% Bank One - 10%
Cingular - 27% Motorola - 35% AOL/RoadRunner - 27% SBC - 38%
Sprint PCS - 12% Samsung - 16% Bell South - 18%
LG - 17% Comcast - 8% Verizon - 31%
MBNA - 8%
Qwest - 9% Time Warner - 11% Apple - 5% T-Mobile - 10% Nokia - 14% SBC Yahoo! - 6% Qwest - 9% Bank of America - 8%
BellSouth - 14%
Sprint - 5% Cox - 6% Lenovo - 5% Nextel - 8% Kyocera - 4% EarthLink - 5% JPMorganChase - 6%
China Telecom - 60% Shanghai Cable Lenovo - 26% China Mobile - 64% Noka - 26% China Telecom - 15% ChinaNet Ind. & Comm. Bank of
China Netcom - 36% Tianjin Cable Founder Elec.- 12% China Unicom - 36% Motorola - 10% China Unicom - 14% China Netcom of China - 20%
China TieTong - 4% Beijing Cable Samsung - 9% China Netcom - 10% GBNet Bank of China - 18%
Dell - 7% Bird - 8% China Unicom Agr. Bank of China - 14%
IBM - 5% TCL - 6% China Const. Bank - 10%
NTT Sky Perfect - 15% NEC - 20% NTT DoCoMo - 56% NEC - 17% @nifty - 14% NTT Regional - 43% Sumitomo Mitsui - 16%
KDDI Jupiter Telecom - 8% Fujitsu - 19% KDDI (au) - 22% Panasonic - 14% SoftbankBB - 13% BB Technologies - 25% UC Card - 15%
Japan Telecom Dell - 11% Vodafone - 17% Sharp - 13% NTT (OCN) - 12% Nippon Shinpan - 14%
Toshiba - 8% TU-KA - 4% Sanyo - 12% NEC (biglobe) - 11% e-Access - 10% Credit Saison - 12%
IBM - 7% Fujitsu - 11% KDDI (dion) - 8% UFJ Card - 9%
Deutsche Telecom - 89% K a bel Deustch. - 38% Fujitsu Siemens - 21% T-Mobile - 40% Nokia - 33% T-Online - 53% Deutsche Telecom Bank. Berlin - 7%
Arcor Ish (Kabel NRW) - 16% Vodafone D2 - 36% Samsung - 16% freenet.de Citibank - 6%
Mobilcom Premiere World - 13% Acer - 10% E-Plus - 13% Motorola - 13% AOL Barclaycard - 6%
Kabel Baden Wurt. - 9% Medion - 10% O2 - 11% Siemens - 9% Tiscalie Commerzbank - 5%
EWT (UPC) - 8% Dell - 9% Sony Ericsson - 8% KarstadtQuele Bank - 4%
BT - 83% Sky Digital - 48% Dell - 29% O2 - 25% BT Barclays Bank - 18%
Acer - 5%
Nokia - 33% Freeserve - 9%
NTL/Telewest - 13% Freeview - 30% HP - 16% T-Mobile - 24%
Orange - 23%
NEC/Packard Bell - 5% Vodafone - 23% MBNA - 6%
Motorola - 13% BT/Genie - 6%
Toshiba - 5% Co-operative Bank - 4%
Mobile
Subscriptions
Sony Ericsson - 8% LineOne - 5%
Siemens - 9% AOL - 5%
Samsung - 16% World Online - 6%
Credit / Debit
Cards
Internet Service DSL
Providers (ISPs)
Mobile Handsets*
NTL/Telewest - 22%
14
2
Communications Hubs?
15
• Convergence is happening (~10% of Yahoo!
IM sessions end in phone call).
Opportunities exist for non-mobile players
to leverage existing subscribers.
• Who has the most valuable customer base
as transition occurs? Who will have it when
it is over?
Email Providers
Yahoo! Mail
Unique Visitors (1)
(233MM)
MSN Hotmail
Active Accounts (2)
(230MM)
Google GMail
Unique Visitors (1)
(54MM)
IM / VoIP Services
MSN Messenger
Active Accounts (2)
(205MM)
Yahoo! Messenger
Unique Visitors (1)
(79MM)
Skype / eBay
Registered Users (2)
(75MM)
AOL Instant Messenger
Unique Visitors (1)
(45MM)
ICQ
Unique Visitors (1)
(34MM)
Google Talk
Unique Visitors (1)
(4MM)
Internet Sites
Yahoo!
Unique Visitors (1)
(471MM)
Google (1)
Unique Visitors (1)
(451MM)
MSN
Unique Visitors (1)
(428MM)
eBay
Unique Visitors (1)
(241MM)
Amazon.com
Active Customers (2)
(52MM)
MySpace.com
Unique Visitors (1)
(46MM)
AOL
Subscribers (2)
(26MM)
Search Engines
Google Search
Unique Visitors (1)
(395MM)
Yahoo! Search
Unique Visitors (1)
(243MM)
(1) Source: Global Unique Visitors, comScore Media Metrix (1/06).
(2) Source: Company Reports, as of CQ4:05 for eBay, Microsoft, as of CQ3:05 for others. AOL subscribers based
on sum of US and Europe AOL-branded subscribers.
Payments
PayPal / eBay
Accounts (2)
(96MM)
Next Generation Communications Hubs?
16
Significant Infrastructure Builds
Source: Company filings, Morgan Stanley Research. Figures exclude capital expenditures from acquired companies.
(1) C2003 includes $125.1MM purchase of additional office space.
E = Morgan Stanley Research estimates.
C2004
$319
80%
$246
109%
$293
(20%)
$89
94%
Google
Y/Y
Yahoo!
Y/Y
eBay (1)
Y/Y
Amazon.com
Y/Y
C2003
$177
375%
$117
128%
$365
163%
$46
17%
C2005
$838
163%
$409
66%
$338
16%
$203
128%
(US$ in Millions)
Capital Expenditures
17
3
Global
18
Strong PC Unit Growth Driven Boosted by
Internet & Consumer Demand…
Source: IDC and Morgan Stanley Research – R. Runkle, K. Huberty
Note: Enterprise includes large enterprises and the government vertical. SMB stands for Small Medium Business.
Global Estimated PC Shipments by Segment
(PC Unit Shipment Data in Millions)
Total Units
Y/Y Growth
Enterprise
SMB
Consumer
CQ1:04
42
17%
29%
34
37
CQ2:04
40
15%
32%
34
33
CQ3:04
45
13%
32%
33
35
CQ4:04
52
15%
28%
33
39
CQ1:05
47
13%
28%
34
37
CQ2:05
47
18%
30%
34
35
CQ3:05
53
17%
30%
33
37
CQ4:05
60
16%
27%
33
40
C2004
179
16%
30%
34
36
C2005
208
16%
29%
34
38
19
Leading TMT Markets by Category
Population 1 6,288
Telephone Lines 4 1,198
GDP per Capita 6 $19,168
Cable TV Subscriptions 9 459
Credit/Debit Cards in Use 9 3,567
Installed PCs 11 696
Mobile Phones in Use 14 1,589
Internet Users 18% 901MM
Market Size
(MM)
2004 Growth
Category Rate
Source: Morgan Stanley Research; GDP figures from IMF, shown in current USD.
Note: Data include totals for 50 countries in our TMT database, updated for 12/2004; GDP updated for 12/2005.
20
Morgan Stanley TMT Market Sizing Methodology…
We measure 2004 market sizes / growth rates for 8 core TMT-related metrics:
1) Population
2) Nominal GDP per Capita
3) Telephone Lines
4) Cable Subscriptions
5) Installed PCs
6) Mobile Phones in Use
7) Internet Users
8) Credit/Debit Cards
We do this for the 50 most important economies, as measured in terms of
population size, land mass, and GDP per capita.
21
…Morgan Stanley TMT Market Sizing Methodology
We measure market sizes and growth rates for core TMT metrics: nominal GDP per capita
(USD, current); telephone lines; cable subscribers; installed PCs; mobile phones in use;
Internet users and credit/debit cards in use. We do this for the 50 most important economies
based on purchasing power / economic strength, as measured in terms of population size, land
mass and 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 each country, we calculate past / present / potential global market weightings across seven
TMT metrics - we call this our relative weighting - we use it to measure / rank a country’s
propensity for TMT products and services.
Sample Calculation: Computing the relative weighting for US Telephone Lines and then the overall US relative weighting:
3.4 5 8.4
47,742
183,688 23,495
Z 5
X
= + =
−
= − + =
−
score relative weighting
σ
μ
Following from this, the overall US relative weighting calculation
(across the seven TMT categories) for the US is 9.16, derived by the
equation: [6.4+8.4+11.3+7.6+8.9+10.7+9.6] / 7 = 9.0
22
Rank Country
Relative
Weighting
2004
Rank Country
Relative
Weighting
123456789
10
123456789
10
USA
China
Japan
Germany
United Kingdom
India
France
Italy
South Korea
Canada
9.0
8.2
6.5
5.7
5.5
5.3
5.2
5.2
5.1
5.1
China
USA
India
Japan
Germany
United Kingdom
Russia
France
Brazil
South Korea
8.7
7.7
7.0
5.9
5.3
5.2
5.2
5.1
5.1
5.0
2010E
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: nominal GDP per capita (current USD); telephone lines; cable subscribers; installed PCs; mobile phones in use; Internet users and
credit/debit cards in use. For each economy, we calculate past / present / potential global market weightings across seven TMT metrics - we call this our
relative weighting and we use it to measure / rank a country’s propensity for TMT products and services. We do this for the 50 most important economies based
on purchasing power/economic strength, as measured in terms of population size, land mass and GDP per capita. We standardized each country’s position in
the global market in each category and adjusted the values to reflect a positive scale. The relative ratings and ranks were determined by calculating an average
of z-scores across categories. For example, in the United States, standardized and adjusted values of 6.4 in GDP per capita, 8.4 in telephone lines, 11.3 in
installed PCs, 7.6 in mobile subscribers, 8.9 in cable subscribers, 10.7 in Internet users, and 9.6 in credit/debit cards produces a relative weighting of 9.0.
2010E relative weightings derived by assuming 2003-2004 growth CAGR for each category to 2010, and ensuring category penetrations were not exceeded.
China / India / Russia Likely to Continue
to Make Impressive TMT Gains
Source: Morgan Stanley Research.
Red indicates countries moving out of the top 10 TMT countries; green indicates countries moving into the top 10. GDP figures from IMF, shown in constant USD
23
Internet Users by Region
Source: Morgan Stanley Internet Research
5 Latin America 47 55 6
2 Europe 236 312 10
3 North America 224 268 6
14%
11
24%
3-Year
CAGR
901MM
87
308MM
Internet Users
C2004
TOTAL GLOBAL
Rest of World
Asia Pacific
Region
1.3B
120
588MM
Internet Users
C2007E
4
1
Rank
Asia Pacific Should Lead World
in Internet User Growth
24
China = Most Internet + Mobile Users
Engineering Grads 4:1 vs. US + Capital Flowing
TMT Category
Mobile Phones
Cable TV Subscriptions
Telephone Lines
Internet Users
Installed PCs
Source: Morgan Stanley Research
Global
Ranking
Units
(MM)
2004
Growth
1
1
1
2
4
335
128
283
94
42
25%
16
14
18
17
25
2004 - Top TMT Countries
Country
2004
Relative
Weighting
Population
(MM)
GDP per
Capita
Telephone
Lines
(MM)
Installed
PCs
(MM)
Mobile
Phones in Use
(MM)
Cable TV
Subscriptions
(MM)
Internet
Users
(MM)
Credit/Debit
Cards in Use
(MM)
1 USA 9.0 2 94 $39,935 184 204 171 99 202 878
2 China 8.1 1 ,300 1,272 283 42 335 128 94 685
3 Japan 6.5 1 28 36,596 78 54 85 21 73 645
4 Germany 5.7 8 3 33,390 57 39 68 26 46 96
5 United Kingdom 5.5 6 0 35,548 33 26 54 15 35 142
6 India 5.3 1 ,087 622 47 13 40 49 39 38
7 France 5.2 6 2 32,911 34 23 42 8 25 30
8 Italy 5.2 5 8 29,014 27 15 54 3 29 55
9 South Korea 5.1 4 8 14,151 25 27 37 13 32 66
10 Canada 5.1 3 2 31,134 20 16 15 10 22 62
11 Brazil 5.0 1 76 3,325 42 19 49 2 18 175
12 Spain 5.0 4 1 25,320 18 10 37 3 13 95
13 Russia 5.0 1 42 4,087 38 19 58 10 22 24
14 Netherlands 5.0 1 6 37,326 10 8 14 6 11 30
15 Norway 5.0 5 54,600 3 3 4 1 3 7
26
N. America -
36% of Internet Users in 2000E; 20% in 2007E
0%
20%
40%
60%
80%
100%
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
North America Europe Asia/Pacific Rest of World Latin America
Geographic Distribution of Internet Users (MM)
Source: Morgan Stanley Research.
379 482 610 761 901 1,039 1,191 1,343
27
4
Broadband
28
Global Broadband –
In / Entering Adoption Sweet Spot
Source: Morgan Stanley Research.
0
10
20
30
40
50
60
70
80
2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E
US Residential Broadband Households
(MM)
0%
10%
20%
30%
40%
50%
60%
US Residential Broadband Households % of Total US Households
Broadband Ramp in
25-30% Penetration
Sweet Spot…
29
Global Broadband Trends
Broadband Data by Region, CQ4:05
Source: Morgan Stanley Research, Nick Sebrell, Paul Marsch, Richard Bilotti, Simon Flannery, Mitchell Kim.
(1) Cable modem, DSL or FTTH deployments; In terms of broadband-users, we roughly estimate 2.0+ users per Internet subscription
(2) Broadband subscriptions per household; data based on 2004 households from Morgan Stanley’s TMT database. Using subscriber-to-user
multiplier, user penetration would be higher.
5 Latin America 7 52 14 4
2 Europe 60 43 120 25
3 North America 50 29 100 32
418MM
44
140MM
Users(1)
17%
38
11%
Penetration(2)
209MM
22
70MM
Subscribers(1)
TOTAL GLOBAL
Japan
Asia Pacific (ex. Japan)
Region
42%
23
58%
Y/Y
Growth
4
1
Rank
30
5
Mobile
31
Mobile to the Max?!
Blackberry – Protect Your Skull While You Destroy Your Thumbs
(Click to launch video clip)
32
Asia Pacific
41%
Europe
19%
ROW
18%
N. America
11% South
America
11%
Mobile Subscribers – 2B
C2005E (2)
Source: Morgan Stanley Research and Morgan Stanley Communications Equipment Research - Scott Coleman, John Marchetti.
Asia Pacific
36%
Europe
24% ROW
12%
N. America
23%
South America
5%
Internet Users – 1B
C2005E (1)
Mobile Users 2x > Than Internet Users –
N. America = 11% of Mobile / 23% of Internet Users
33
Source: Euromonitor, CNNIC, World Bank, Morgan Stanley Internet Research (July 2005)
Mobile Users Internet Users Mobile Phone to Installed PCs
Country (MM) (MM) Internet User Ratio (MM)
China 363 100 3.6:1 53
US 177 211 0.8:1 207
Japan 88 78 1.1:1 55
Germany 69 51 1.4:1 39
UK 54 37 1.5:1 26
Italy 54 32 1.7:1 16
S. Korea 37 32 1.2:1 27
Mobile Leads Internet in Most Markets
34
Global Mobile –
Should Enter Adoption Sweet Spot in 2006 / 2007+
Source: Morgan Stanley Telecom Research Scott Coleman, John Marchetti.
0
200
400
600
800
1,000
1,200
1,400
1,600
2005E 2006E 2007E 2008E 2009E
Subscribers (MM)
0%
10%
20%
30%
40%
50%
60%
% of Total Wireless Subscribers
2.5G Subscribers 3G Subscribers % 2.5G Penetration % 3G Penetration
Global 2.5G / 3G Penetration
2.5G Ramp in 25-
30% Penetration
Sweet Spot…
35
Mobile –
Next Internet Opportunity
• Networked personal computer (thanks to broadband adoption)
still has lots of evolutionary running room
• In 5th major computing cycle - Mobile Internet
• If past is prologue, Mobile Internet will likely be bigger (based
on aggregate wealth creation) and have more reach (based on
global users) than cycles that have come before it
• ~2B global mobile phones in use > ~1B Internet users in 2005
• $19B in global Mobile Internet premium services revenue
comparable to Internet advertising revenue in 2005
Source: Morgan Stanley Research.
36
Mobile –
A New Computing Cycle
• Mobile Internet represents a new computing cycle
Mainframe �� Minicomputer �� PC �� PC Internet �� Mobile Internet
• Unlike past cycles, US is follower, not leader
− 89% of mobile subscribers, 93% of Mobile Internet users in non-US markets; China is #1
• Uncharted / new sources of usage generated for / from Mobile Internet platform
− What will be the dominant killer application for the mobile consumer? E-mail? SMS?
Ringtones? Games? Search? Blogs? Location-Based Services?
• Why now? 1) handsets becoming small functional computers; 2) cheaper / faster / more
data; 3) more content
− 334MM (48%) of handsets shipped (18% of base) Mobile Internet ready (can run Java or
BREW applications…), 2005E
− 374MM subscribers (20%) with 2.5G (~50Kbps) or 3G (~300Kbps) network access;
61MM 3G subscribers (3%) have broadband-like services (browsing, full track music)
− Mobile content improving steadily - consumers are spending billions on it
37
Global Data Tell Story…
2.1B Mobiles 3.5x number of PCs, growing at 20% Y/Y vs. 12% for PCs
$1 Trillion
Mobile carrier revenue was $600B+ (and rising) of the $1T+
telecom market in 2004 (Yankee 11/04)
Asia & Europe
10x US
Asia / Pacific + Europe have 7x mobile subscribers (Morgan
Stanley), 10x mobile data users than N. America (Informa
5/05)
China
China Mobile - $2.8B mobile data revenue (+103% Y/Y, CH1:05),
20% of total revenue (vs. 7% average for US carriers)
$171MM China Mobile ring back revenue, +961% Y/Y;
#1 song had 5MM mobile downloads, comparable to #1 CD album
Wireless
VoIP
75MM Skype users as of 12/05 – fastest product ramp ever? –
dual mode WiFi / GSM handsets shipping now
MVNOs MVNOs taking off worldwide, Virgin Mobile USA (3MM
subscribers) buys voice / data transport from Sprint
38
…Global Data Tell Story
Cameras 75% of cameras shipped (300MM) to be in mobile phones
in 2005E (ex. disposables, Mobile Imaging Report 2005)
$50B+
Messaging
1.1T SMSs sent with $50B in revenue in 2004 (Informa
5/05); more emails sent in Japan via mobile phone than
PC (DoCoMo 2005)
$3B Music $3B annualized ringtone sales (Informa 5/05) - vs. 1B cumulative
iTunes songs sales (1/06); 50x more full track music & ringtones
downloads done via mobile than PC in Japan
Content VeriSign’s Jamba exceeded $530MM (+194% Y/Y) in 2005
revenue
Games $1.8B to be spent on mobile gaming in 2005E, up 42% Y/Y (MS
Research)
Commerce 3MM+ NTT DoCoMo wallet phone users (CQ1:05) used pre-paid
technology on mobile phones to complete transactions
Community Mobile community leader SMS.ac exceeds 40MM users (6/05)
39
Business Leaders Tell Story
Mobile phones are more than a billion smart computers we can’t ignore that may
create a software spiral like that of PC over the next 10 years.
- Paul Otellini, Intel CEO
We really believe we are on the cusp of a whole new era of mobile computing.
- Steve Ballmer, Microsoft CEO
This is much bigger than what we saw 10 years ago [with the PC Internet].
- Jonathan Sacks, MFORMA CEO
Most people’s first computing experience will be via a cell phone.
- Eric Rudder, SVP, Technical Strategy, Microsoft
40
Mobile Internet Is Here –
$19B+ Revenue (+23% Y/Y in 2005E)
Mobile Internet with $19B in 2005E revenue is already as big as online
advertising but with smaller wealth creation
Transport (1)
Voice
Data
Handsets (2)
Mobile Internet Premium Services (3)
Online Advertising (4)
2005E 2009E CAGR
$529
55
124
19
$19
$559
61
102
45
$46
1%
2
(5)
24
25%
• Transport growth hurt declining prices / slowing subscriber growth
• Handset revenue growth decelerating hurt by declining ASPs not offset by volume growth
• Mobile Internet premium services expected to grow steadily, in-line with online advertising …
biggest threat to forecast could come from mobile content piracy
(1) Informa (5/05). (2) Frost & Sullivan (5/05). (3) Source: Morgan Stanley Research, total market. (4) Source: PriceWaterhouseCoopers (6/05).
Global Revenue (US$ in Billions)
41
Broadband vs. Mobile Internet Revenue Composition
Source: Left Chart - Morgan Stanley Research estimates: includes revenue from Google, eBay, Yahoo!, Yahoo! Japan, Amazon.com, T-Online, InterActive, Time Warner (AOL
only, ex-access), Microsoft (MSN only, ex-access), and Rakuten. CQ3:05 annualized revenue for Rakuten, and T-Online. Right Chart – Morgan Stanley Research estimates,
Global Data. Informa (5/05), Ovum (5/05). (1) Personalization includes ringtones, wallpapers, and screensavers. If SMS / MMS were added to Mobile Internet—it would add
$55B to total revenue and would account for 74% of total revenue.
Mobile Internet - Revenue Composition
C2005E - $19B
Enterprise
Services
10%
Search / 411
16%
Other Info &
Infotainment
24%
Games
10%
Music & Video
4%
Gambling
1%
Personalization (1)
35%
Commerce
61%
Payments
3%
Advertising
36%
Top 10 Internet Companies - Revenue Composition
C2005 - $42B
Broadband vs. Mobile Internet Revenue Composition
[ask vlad
Broadband – Vendor / Seller Pays
Mobile – User Pays…Make Up on Volume?!
42
Type of content users expect to access within 12 months
Games / Ringtones / Music - Most Popular
Source: LogicaCMG 6/05. * includes screen savers. ** includes movie previews
Full feature films 11 8 3 8
Video clips** 25 7 7 10
Multimedia images* 56 16 13 13
Sports clips 29 12 10 13
News 31 15 15 23
Music 55 15 13 28
Ring tones 73 20 27 25
Games 49% 15% 11% 30%
South
America (%)
North
America (%)
Europe
(%)
Asia
Pacific
(%)
43
0
100
200
300
400
500
600
700
800
900
Mobile Subscribers Mobile Internet Users
Subscribers (MM)
Asia Pacific Europe
North America South America
Africa / Middle East
20%
12%
7%
5
10
15
20
25
Mobile Data as % of
Revenue (leading
carrier in region)
Asia / Europe Lead –
Mobile Internet Adoption + Carrier Revenue
Source: Informa 5/05. Mobile Internet user defined as someone who regularly uses data (including SMS) a minimum of once per week, whether for internet browsing or regular push services
to their terminal. For right chart, leading carriers by wireless subscribers in Asia Pacific, Europe, and North America are China Mobile, Vodafone, and Cingular, respectively.
44
Complexity of Mobile Internet
• Simple ecosystem
•Microsoft Windows operating
system and Intel x86 architecture
create standardized development
platform for applications and
content
PC Internet Mobile Internet
• Complex ecosystem
• Different handsets support different
network standards (CDMA, GSM,
HSDPA)
• Handset replacement cycle time shrinking
from 26 to 18 months (1)
• Fragmented, proprietary operating system
landscape (Java, Brew)
• Multiple processor architectures (TI,
Samsung, Intel)
(1) Source: Frost & Sullivan (2005).
45
Melon
Unlimited MP3 Downloads
KRW4,500/mo
($4.60/mo)
Cizle
Movie Preview, Reservation and
VOD viewing
GXG
Mobile Games
KRW14,000/mo
($14.30/mo)
Korea Mobile Broadband Sets Standard
46
China Internet Companies –
Diversified Revenue Mix
Source: Morgan Stanley Research, company data. Based on CQ3:05 earnings results for Baidu, Shanda, NetEase, SINA, Tom Online, Tencent,
Sohu, The9, Linktone, KongZhong, 51job, Ctrip, and Hurray. Companies selected based on market capitalization as of 2/13/06.
Gaming
27%
Advertising
28%
MVAS
31%
Others
14%
Revenue Composition - Top 13 China Internet Companies
CQ3 Annualized - $2B
47
Mobile Internet Food Chain –
US Example
2 billion people globally with mobile devices
buy mobile content from 2 primary sources…
Wireless
Carriers
Portals,
Websites,
Media
…who in turn may obtain content from content providers…
…with the help of billing / payment processors / infrastructure providers
Source: Motricity, Morgan Stanley Research.
48
Off-Portal Sales Have Grown Share, at Margin
Source: qPass Customer Data (1/06). Non-operator = 3rd party mobile content vendor, such as Jamster. On-portal = content purchased via nonoperator’s
WAP site or Web site. Off-portal = not sanctioned by the operator or available via the operator’s deck of content.
qPass’ Global Non-Operator Storefront Sales
• While most content transactions in US are consummated on carrier portal, we are likely to
see value of this screen real estate reduced, as users navigate directly to content, but
expanded / independent mobile payment systems are key. Similar trends played out on
Internet, with homepage advertising for large sites.
49
But Off-Portal Distribution Varies by Geography
Source: Yankee Group (2004), as quoted by qPass (4/05) http://www.qpass.com/connections/april2005/offportal.html.
“Off-Portal” Revenue Share in Europe and the US
• In Europe, where carriers partner with a greater number of content providers with their transparent
billing systems, 70% of revenue is generated off-portal
• In US, where access to transparent billing by content providers is limited and where content
provision is not generally enabled off-portal, 30% of revenue is generated off-portal
0
10
20
30
40
50
60
70
80%
2004 2005 2006 2007 2008
EU US
50
Mobile Content Value Chain –
Fighting Over End-User Wallet Share
• As content becomes richer, content owners may gain leverage / revenue share
over time
• Shift to real tones from polyphonic ringtones may potentially squeeze
middlemen, increasing content owner / label share
• Carriers, who possess extensive customer relationships (including billing) and
distribution channels, are also likely to demand higher share of pie and fight to
protect ‘walled garden’ fees
• In US, carriers make ~20-30% for on-portal content, and potentially make less
from off-portal content, per qPass
• However, owing to differences in platform (on-portal vs. off-portal), content
(polyphonic ringtone, mastertone ringtone, game), and service level (billing,
customer service, marketing), carrier fees can vary from 5-40%
Source: Morgan Stanley Research and qPass (2005).
51
Walled Garden –
Different Philosophies
1) Cingular
If a customer wants to do it [access content off Cingular’s deck], we need a darn good
reason to block them. [Cingular services] should win on their merits, we want to be
very open. - Jim Ryan, VP Cingular Data
Cingular allows access to any web site, and more notably allows content downloads from any
source, even those that bypass Cingular billing
2) Verizon Wireless
Verizon is very particular and careful [about the content it selects], we are not
interested in opening that up. – Jim Straight, VP Verizon Wireless Data
Verizon Wireless recently moved to block access to any website except those accessible via
Verizon’s deck; content downloads allowed only using Verizon billing and from Verizon deck
3) China Mobile
China Mobile retains significant control over what content is offered, but is moving toward a
more open and flexible walled garden approach: service providers choose to keep 85%, 70%
or 50% of revenues depending on what level of service they want from China Mobile: 1)
billing, 2) customer service, 3) marketing
52
Leading Global Wireless / Wireline Carriers –
Skype / eBay = #8
Company Region
Subscribers
(MM)
Market Cap
($B)
China Mobile
Vodafone (1)
China Unicom
Telefonica Moviles
America Movil
T-Mobile
Orange
NTT
Cingular
SBC (2)
Verizon (2)
NTT DoCoMo
Verizon Wireless
Sprint / Nextel
Telecom Italia Mobile (1)
China
Europe / Japan
China
Europe / LatAm
LatAm
Europe / USA
Europe
Japan
USA
USA
USA
Japan
USA
USA
Europe / LatAm
247
171
121
90
93
87
84
56
54
49
49
50
51
47
44
$94
131
11
46
59
71
59
66
NA
92
95
67
NA
71
52
Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery.
Note: Subscriber data based on most recent quarter. (1) As of CQ3:05. (2) Subscribers given as access lines.
Total switched access lines do not include DSL. (3) Subscriber figure for Skype is registered user amount as of CQ4:05.
Y/Y
Growth
21%
13
15
26
53
12
16
(6)
10
(6)
(7)
5
17
18
19
Type
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireline
Wireless
Wireline
Wireline
Wireless
Wireless
Wireless
Wireless
Skype (3)
75MM Registered Users
(+277% Y/Y)
Average Growth: 12%
53
Leading Global Wireless / Wireline Carriers –
ARPU Splits
Company ARPU
Voice
ARPU
Data
Type ARPU
Source: Morgan Stanley Telecom Research: Lina Choi, Nick Delfas, Simon Flannery.
Note: Data from CQ4:05. Vodafone estimated on UK, Spain, Germany, Italy and UK average. For Telefonica Moviles and Telecom Italia Mobile, only domestic
operations considered. Orange estimated on UK and France averages. Verizon and AT&T do not break out ARPU for wireline segments.
Sprint / Nextel
NTT DoCoMo
T-Mobile
Cingular
Verizon Wireless
Telefonica Moviles
Orange
Vodafone
Telecom Italia Mobile
NTT
America Movil
China Mobile
China Unicom
AT&T
Verizon
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireless
Wireline
Wireless
Wireless
Wireless
Wireline
Wireline
% Revenue
from Voice
% Revenue
from Data
$62
59
52
49
49
40
38
37
35
23
15
10
6
--
--
$56
43
47
44
45
34
--
30
29
--
14
85
--
--
$6
16
5546
--
76
--
121
--
--
90%
74
83
90
90
86
--
82
74
--
90
80
86
--
--
10%
26
17
10
10
14
--
18
16
--
10
20
14
--
--
54
China Mobile (the Company) –
Mobile Internet Ecosystem
• 247MM mobile subscribers (+21% Y/Y, C2005)
• $6B in data revenue (+59% Y/Y to 21% of revenue, C2005) - components
include SMS & MMS ($3B in 2005), IVR, WAP and color Ringtones
• Mobile music is gaining momentum, color Ringtones downloaded 300MM+
times in C2005
• Creation of powerful MVAS ecosystem - 80-85% revenue share with Mobile
Internet companies (such as Tom Online)
• 70%+ of content for China Mobile is purchased off deck (vs. <20% for US
market, per qPass)
Source: Morgan Stanley Research, China Mobile.
55
Mobile Internet Market Opportunities
• Converged devices / services
• Music
• Video
• New Media Devices
• Games & Gambling
• Paid Content
• Messaging
• Location-Based Services
• Cameras
• Community
• Search
• Advertising
• Payments
• Enterprise Productivity
• Telematics
• Battery Life
• Other Connected Devices
• Enabling Platforms & Infrastructure Services
• Browsers on Mobile Devices
56
Ten First Pass Mobile Internet Predictions
What’s going:
10. Expensive transport – VoIP & competition puts $600B transport business at risk
9. Microsoft monopoly – Linux has shot at mobile. MSFT has <1% share
8. Walled garden – cracking already. Emerging payment systems may assist
7. World wide wait – by 2006, 100MM+ subs w/ fast 3G, 500MM+ 2.5G
6. Hit content / media / studios / artists without mobile strategies
What’s coming soon:
5. Mobile search, then mobile advertising – $3B market for 411 is good start
4. Smash hit IM / email / community / photo sharing applications
3. Yahoo! or Google of Mobile – may not be YHOO / GOOG or a carrier
What’s coming later (5+ years to mass market):
2. Digital phone, in part, displaces analog wallet, keys & ID
1. Batteries that last and last – powered by motion, fuel cells …
57
Digital Paid-For Content – Developed on Mobile;
Developing on Internet
iTunes Music + Video
+
Lost
Desperate
Housewives
+
Jamster
See Jamster Ad
for content
Text message
short code in ad
for content
Crazy Frog Ringtone
+
Spy Hunter Game
Mobile Internet Broadband Internet
1 credit in 9 credit plan
for $5.99 / month
1 credit in 2 credit plan
for $5.99 / month $1.99 per video
U2, Vertigo Song
$0.99 per song
58
Watch These Phones As Users Develop Co-Dependent
Relationships With These Remote Control Devices
Barcode readers in phones
can simply read product
barcodes and automatically
display order forms on the
screen—and even make
payments.
Denso Wave Barcode
Reader in DoCoMo Phone Samsung 7 Megapixel Phone
Camera resolution higher
than most existing digital
cameras.
Sling Box
Watch / control your TV remotely. Slingbox
enables you to watch your TV from
wherever you are by turning virtually any
Internet-connected PC into your personal
TV. Whether you’re in another room or in
another country, you have access to TV.
59
iPod Nano
• 4GB in < 1.5 cubic inches!
Storage is Game Changer
60
Assume You Are On Candid Camera!
• Mass market adoption of camera and video phones may open up new markets
(Google’s Blogger.com and upload.video.google.com) with potential for financial
reward for citizen journalist / photographer…
• Check Out Korea:
What allowed operators to see a return on investment on their EV-DO [3G]
networks was not other content, but subscribers' own content. Content that was
made by people and exchanged with others has been incredibly popular.
– Hyeon Lee, VP Samsung
61
Mobile GPS – Keep on Trackin’
+ + =
Mapping services that know
where you are
Vendor offering
Location-Based
Coupons
• Opt-in location-based coupons / advertising provide similar degree of
engagement with consumers, on personalized / local / day-parted levels
• About 10% of global handsets are GPS-enabled today, up from 1% in 1999(1)
(1) Source: Always On and American Tech Research.
62
Benefits of Recommendation Engines
• A recommendation engine is an application which suggests items for users to
view based on user settings and past behavior/purchases – ‘users who liked this
item also liked this item…’
• One popular variant is Amazon.com’s recommendation engine, which creates
suggestions based on purchase histories of other customers with similar tastes
• Increased page views
• Greater site stickiness
• Higher Sales!
Benefits of
Recommendation Engines:
63
User programs
content on PC
Abbreviated
version of
content syncs
wirelessly with
mobile device
Server
Mobile-PC as New Client-Server Model
Client
64
6
VoIP
65
75MM as of
12/05
(1) Source: Company Data, Morgan Stanley Research.
Skype Registered Users (1)
Skype (VoIP) =
Fastest Growing Product Ever?
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
1
4
7
10
13
16
19
22
25
28
Months Since Inception
66
Pay Per Call –
Compelling Conversion Rates
Step 1: Search
for “Refinance”
Step 2: Enter your
Phone number
Step 3: Wait for
a call
Step 4: Speak live
with vendor
Source: Google.
67
7
Video
68
Rapid P2P Growth (Mostly Video) is Stressing
Internet & is Undermonetized
• Peer-to-Peer (P2P) traffic was 60% (and rising) of Internet traffic in
2004, with BitTorrent accounting for 30% of traffic, per CacheLogic
• “P2P affects Quality of Service (QoS) for ALL subscribers” (1)
(1) Source: CacheLogic “P2P in 2005,” (9/05).
Internet Protocol Trends (1)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Email FTP Other P2P Web
69
(1) Source: CacheLogic “P2P in 2005,” (9/05). Mix of file formats by volume of traffic generated over 4 main P2P networks: BitTorrent,
eDonkey, FastTrack, and Gnutella. Weighted by volume of traffic on each network.
• Video is P2P bandwidth hog
Video
Audio 62%
11%
Other
27%
Video Dominates P2P
File Format Mix on 4 Major
P2P Networks (1)
70
Source: Cisco (12/05)
Video could drive difference between
growth trajectories
Video Should Help Drive
Internet Infrastructure Growth
Web Traffic +
Video
300-500% Y/Y
Growth
Web Traffic
alone
100% Y/Y
Growth
Internet
Capacity Requirements
2005 2015
71
1. 2/04 – BBC launches private demo of Internet Media Player (iMP) allowing users to watch TV shows 24 hours after their initial
scheduling date
2. 10/05 – Disney / ABC and Apple to offer episodes of popular shows like Lost and Desperate Housewives available ad-free
via iTunes for $1.99 apiece
3. 10/05 – 1MM+ videos, priced at $1.99 each, downloaded from Apple’s iTunes site in less than 20 days
4. 11/05 – Comcast / CBS and DirectTV / NBC to offer on-demand TV shows for $0.99
5. 11/05 – Cisco to acquire Scientific Atlanta for $7B to prepare for demands of online video; expecting network traffic increases
of 4-6x annually, instead of 2x gains seen in US and Europe, driven by video consumption requirements
6. 11/05 – Time Warner to stream episodes for free (supported by 2-minute blocks of 15-30-second commercials) in Jan 2006.
Initial run limited to 30 series (Wonder Woman, Growing Pains, Kung Fu…) but TWX plans to expand to 100+ series and
300+ episodes per month
7. 11/05 – NBC Nightly News to air its entire broadcast on the Internet -- NBC Nightly News Netcast with Brian Williams will be
available for free beginning at 10PM EST
8. 12/05 – NBA to digitize 60+ years of footage and post on NBA.com, beginning in 2006, with a searchable database that will
include players involved and exact locations on court
9. 12/05 – CBS will offer NCAA basketball March Madness games for free in 2006, on streaming ad-supported basis
10. 12/05 – CBS offers free streaming video of 2 comedy programs Two and a Half Men and How I Met Your Mother this Yahoo!
during the week of 12/27
11. 12/05 – AOL / Google to collaborate to showcase AOL’s premium video service within Google Video
12. 1/06 – Google to offer for-pay video over Internet from likes of CBS and NBA
13. 1/06 – DirectTV / FOX to offer on-demand TV shows for $0.99 and pre-air shows for $2.99
14. 3/06 – Cingular to offer on-demand video service for 3G mobile phones for $20 a month
Online Video –
P2P2 = Peer-to-Peer PLUS Pay-to-Play
72
Online Video –
It’s Findable, Should Be Tagged / Easy to Search!
73
Google Video –
Short On-Demand Attention Spans Rule?!
Start Here: http://video.google.com
Other Popular Video Sites
Premium Content
User-Generated Content
Popular
Videos
For-Pay
Videos
74
8
Local
75
Local Should Be Substantive Market
Source: The Kelsey Group (3/2006).
• 20% of US explicit searches local in nature; 40% of
US implicit searches are local
• Global local search market (Internet Yellow Pages,
Geo-targeted search, Wireless) generated $3.4B in
revenue in 2005E (+33% Y/Y), of this, US local search
was $1B (+54% Y/Y)
• US Yellow Pages off-line market of $15B (+1% Y/Y)
76
Mobile May Help Drive Local Growth
Google Local for Mobile Yahoo! Go
77
9
Finding
78
SFO - Will There Be a Difference Between
Advertising / Marketing / Selling?
Search
for “TiVo”
Obtain
Find
79
Google gives advertisers / vendors a toolset /
dashboard to manage / measure customer
acquisition through sponsored search
Google =
On Demand Customer Acquisition Tool
80
0
10
20
30
40
50
CQ1:04E CQ2:04E CQ3:04E CQ4:04E CQ1:05E CQ2:05E CQ3:05E CQ4:05E
Global Query Volume (B)
Google Yahoo! MSN Other Search
Source: comScore Global qSearch and MediaMetrix. Traffic is defined as page views.
Internet is a Distribution Channel –
Search is Key Front-End
7% of global Internet traffic was derived from search while 65% of global users used
search in CQ4, per comScore
22B
27B 30B
34B
37B
41B 40B
43B
81
(1) Source: Ad revenue totals from IAB/PriceWaterhouseCoopers Interactive Advertising reports.
(2) Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue.
(3) Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue.
(4) Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up 20% Y/Y.
SFO –
Importance of Google / Yahoo! & Affiliates…
0
200
400
600
800
1,000
1,200
1,400
CQ3:04E CQ3:05E
US Ad Revenue ($MM)
Google, US Gross Ad Revenue (2)
Yahoo!, US Gross Ad Revenue (2)
Others (3)
22%
25%
30%
27%
US Online Ad Revenue Mix (1)
42%
53%
Total US, +34% Y/Y
•Google, +84%
•Yahoo!, +44%
•Others (4), +8% Y/Y
82
…SFO –
Importance of Google / Yahoo! & Affiliates
• Google generated $1.9B in gross revenue in
CQ4 it PAID OUT $629MM to thousands of
partners like AOL, Ask Jeeves and EarthLink
• Yahoo! generated $1.5B in gross revenue in
CQ4 it PAID OUT an estimated $433MM to
thousands of partners like MSN, ESPN and The
Wall Street Journal
83
Payments – PayPal Has Impressive Broadband Internet
Leadership With ~100MM Accounts. Mobile?
Source: Morgan Stanley Research.
0
20
40
60
80
100
120
CQ1:04 CQ2:04 CQ3:04 CQ4:04 CQ1:05 CQ2:05 CQ3:05 CQ4:05
Total PayPal Accounts (MM)
0
1
2
3
4
5
6
7
8
9
Total Payment Volume (B)
Total Payment Volume (B) Total PayPal Accounts (MM)
84
10
Emerging Trends
85
Innovation / Network Effects Drive Usage Growth
• Broadband
• Mobile
• User experience
• Search
• Personalization with more effective targeting
• User-generated content (RSS, blogs, reviews, video, images, audio…)
• Music
• Payments
• Short- and long-form video
• Interactive entertainment
• In-game Advertising
• VoIP
• Local
• Pay per call
• Digital Rights Management (DRM)
• Ubiquitous connectivity
86
11
Emerging Companies
87
WMaotbcihle W Inhteerren eGt l–obAa lN Yeowu nCglieern Gt-eSneervraetri oWn oGrlode?s
Ringtone Downloads, Social Networking
Connecting Mobiles to Net
Social Tagging
Web OS Programs In-Game Advertising
88
UGC / Personalization / Community are Key
Yahoo! Movie Reviews
eBay
Feedback
Ratings
Social
Networking / Tagging
Google
Video
Search
Tencent Instant
Messaging (PC / Mobile)
Blogs
89
Representative Emerging Companies to Watch –
Based on Data Trends
Sources: Morgan Stanley Research, Alexa, comScore MediaMetrix.
Note: Criteria for choosing companies based on the following variables: recent growth in Internet traffic, absolute Internet traffic, age of company, and presence on blogs and at conferences
(1) Source: Cachelogic; (2) Source: comScore MediaMetrix; (3) Technorati; (4) Xfire.
Company Market Data Points
P2P File Sharing Accounted for 35% of all Internet traffic in 2004(1)
Online Video Content 11MM uniques (1/06) vs. 327K (8/05) (2)
Blog Search Engine Over 29MM blogs indexed (3);
11% of U.S. Internet users read blogs (3)
IM for Gamers 348K uniques (1/06) vs. 185K uniques (8/05) (2)
10K new customers / day (4)
Personalized Search
Social Networking 7MM uniques (1/06) vs. 3MM uniques (8/05) (2)
News Aggregator 2MM uniques (1/06) vs. 579K uniques (7/05) (2)
Personalized Radio 2MM uniques (1/06) vs. 528K uniques (7/05) (2)
3MM uniques (1/06) vs. 1MM uniques (8/05) (2)
Online Marketplace 10MM uniques (1/06) vs. 6MM uniques (7/05) (2)
90
12
Closing Thoughts
91
Internet Thesis
10-15% user growth
20-30% usage growth
30%+ monetization growth
92
Huge
Market
Simple,
Focused
Mission
Active,
Missionary
Founders
Great
Management
Team,
Culture
Constant
Improvement
Insane
Customer
Focus
Big
Gross
Margin
Annuity
-Like
Model
Strong
Board
X
X
X
X
XX
X
X
X
XX
X
X
X
X
X
X
X
Apple
Cisco
Dell
eBay
Google
Intel
Microsoft
Yahoo!
X
O
X
X
X
X
X
X
28
68
19
82
89
61
82
87
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
A Look at Some of Biggest Winners of Our Day
Source: Morgan Stanley Research (2005).
93
13
Appendix
94
15 Iran 68,317 2 1
14 Egypt 69,330 2 1
13 Turkey 70,589 2 1
12 Germany 82,786 0 1
11 Philippines 83,986 2 1
10 Mexico 103,975 1 2
9 Japan 127,641 0 2
8 Russia 142,362 -1 2
7 Nigeria 142,655 3 2
6 Pakistan 150,109 2 2
5 Brazil 175,507 1 3
4 Indonesia 221,279 1 4
3 USA 293,819 1 5
2 India 1,086,529 2 17
1 China 1,300,024 1% 21%
Country (000's) Growth Share
Population 2004 Worldwide
2004
Total 6,288,463
Population – Top 15 Markets
95
Nominal GDP per Capita – Top 15 Markets
15 Canada 27,531 31,134 13
14 France 29,035 32,911 13
13 Germany 29,647 33,390 13
12 Belgium 29,330 33,866 15
11 United Kingdom 30,273 35,548 17
10 Finland 31,164 35,666 14
9 Austria 31,622 36,244 15
8 Japan 33,705 36,596 9
7 Netherlands 33,199 37,326 12
6 Sweden 33,678 38,493 14
5 USA 37,708 39,935 6
4 Denmark 39,295 44,808 14
3 Ireland 39,532 45,675 16
2 Switzerland 44,439 49,300 11
1 Norway $48,325 $54,600 13%
Country (US$) (US$) Growth
Capita Capita 2004
2003 GDP Per 2004 GDP Per
Note: Morgan Stanley Research GDP per capita figures (current prices) from IMF.
96
15 Mexico 17,280 7 17 1
14 Spain 18,234 2 44 2
13 Turkey 19,068 0 27 2
12 Canada 19,943 -1 63 2
11 South Korea 24,681 3 51 2
10 Italy 26,720 -1 46 2
9 United Kingdom 33,374 -2 56 3
8 France 34,223 0 55 3
7 Russia 38,035 4 27 3
6 Brazil 41,568 3 24 3
5 India 47,188 7 4 4
4 Germany 56,936 3 69 5
3 Japan 77,790 2 61 6
2 USA 183,688 -1 63 15
1 China 282,524 14% 22% 24%
Country (000's) Growth Penetration Share
Lines 2004 Line Worldwide
Telephone Telephone
2004
Total 1,198,245
Telephone Lines – Top 15 Markets
Source: Morgan Stanley Research
97
15 South Africa 4,134 4 9 1
14 Argentina 4,810 1 12 1
13 Taiwan 5,094 2 22 1
12 Poland 5,660 1 15 1
11 Netherlands 6,334 0 39 1
10 France 7,861 5 13 2
9 Russia 9,927 4 7 2
8 Canada 10,086 0 32 2
7 South Korea 12,793 12 26 3
6 United Kingdom 15,148 8 25 3
5 Japan 21,165 10 17 5
4 Germany 25,801 4 31 6
3 India 49,234 12 5 11
2 USA 99,091 4 34 22
1 China 128,000 16% 10% 28%
Country (000's) Growth Penetration Share
Subscriptions 2004 Cable Worldwide
Cable
2004
Total 459,236
Cable Subscriptions – Top 15 Markets
Source: Morgan Stanley Research
98
15 Taiwan 10,232 5 44 1
14 Australia 12,088 1 60 2
13 Mexico 12,126 20 12 2
12 India 12,627 29 1 2
11 Italy 15,218 8 26 2
10 Canada 15,738 1 49 2
9 Brazil 18,910 19 11 3
8 Russia 18,935 19 13 3
7 France 23,138 5 37 3
6 United Kingdom 25,964 4 43 4
5 South Korea 27,041 2 56 4
4 Germany 39,252 1 47 6
3 China 41,600 17 3 6
2 Japan 53,569 4 42 8
1 USA 203,677 3% 69% 29%
Country (000's) Growth Penetration Share
PCs 2004 PC Worldwide
Installed
2004
Total 696,212
Installed PCs – Top 15 Markets
Source: Morgan Stanley Research
99
15 Indonesia 32,130 55 15 2
14 Thailand 32,919 21 51 2
13 Spain 36,625 3 89 2
12 Mexico 36,862 15 35 2
11 South Korea 37,164 1 77 2
10 India 40,323 75 4 3
9 France 41,506 2 67 3
8 Brazil 49,171 15 28 3
7 United Kingdom 53,662 2 90 3
6 Italy 53,964 1 94 3
5 Russia 57,620 34 40 4
4 Germany 68,121 3 82 4
3 Japan 85,147 6 67 5
2 USA 170,723 8 58 11
1 China 334,820 25% 26% 21%
Country (000's) Growth Penetration Share
Phones In Use 2004 Phones Worldwide
Mobile Mobile
2004
Total 1,588,805
Mobile Phones – Top 15 Markets
Source: Morgan Stanley Research
100
15 Mexico 12,250 33 12 1
14 Spain 13,440 37 33 1
13 Australia 13,611 29 67 2
12 Brazil 17,945 16 10 2
11 Canada 21,850 24 68 2
10 Russia 22,300 49 16 2
9 France 24,848 13 40 3
8 Italy 28,610 25 50 3
7 South Korea 31,600 5 65 4
6 United Kingdom 35,179 11 59 4
5 India 39,200 57 4 4
4 Germany 46,312 19 56 5
3 Japan 72,677 14 57 8
2 China 94,000 18 7 10
1 USA 201,833 9% 69% 22%
Country (000's) Growth Penetration Share
Users 2004 Users Worldwide
Internet Internet
2004
Total 900,981
Internet Users – Top 15 Markets
Source: Morgan Stanley Research
101
15 India 38,100 69 4 1
14 Australia 46,400 7 229 1
13 Mexico 49,700 10 48 1
12 Turkey 55,000 25 78 2
11 Italy 55,400 13 96 2
10 Canada 61,700 3 193 2
9 South Korea 65,900 5 136 2
8 Spain 94,500 13 230 3
7 Germany 95,600 1 115 3
6 Taiwan 120,000 31 521 3
5 United Kingdom 141,700 11 236 4
4 Brazil 175,000 20 100 5
3 Japan 644,700 3 505 18
2 China 684,700 10 53 19
1 USA 878,000 7% 299% 25%
Country (000's) Growth Penetration Share
Cards 2004 Card Worldwide
Credit / Debit Credit / Debit
2004
Total 3,566,655
Credit / Debit Cards – Top 15 Markets
Source: Morgan Stanley Research
102
Source: Morgan Stanley Telecom Research.
Average
Technology Speed US Players Common Data Applications
WiMax 70 Mbps Various Stream. video, movie/MP3 downlds.
Wi-Fi 35 Mbps + Various Stream. video, movie/MP3 downlds.
Flarion 1.5 Mbps Nextel Stream. video, movie/MP3 downlds.
HSDPA 400-700 Kbps + Cingular Stream. video, movie/MP3 downlds.
EV-DO 300-500 Kbps VZW, Sprint PCS Stream. video, movie/MP3 downlds.
UMTS 220-320 Kbps Cingular Stream. video, movie/MP3 downlds.
WiDEN 100-130 Kbps Nextel MMS, Video conferencing
EDGE 100-130 Kbps Cingular, T-Mobile Multimedia e-mail, Web infotainment
CDMA1X 40-80 Kbps VZW, Sprint PCS Video-conferencing
GPRS 30-40 Kbps AWE, Cingular, T-Mob E-mail and access to corporate data
networks and the Internet
CDMA 10-20 Kbps VZW, Sprint PCS SMS
iDen 20 Kbps Nextel Two-way radio, Alphanumeric paging
GSM 9.6 - 21 Kbps AWE, Cingular, T-Mob SMS
TDMA 9.6 Kbps AWE, Cingular, T-Mob SMS/multimedia games
2G 2.5G 3G Beyond
Mobile Network Speeds / Carriers / Uses
103
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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: Brian Fitzgerald, Mary Meeker, Brian Pitz.
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Intuit (common stock), Amazon.com (common stock), Yahoo! (common stock), Microsoft (common stock), eBay (common stock); Brian Pitz - Amazon.com (common stock), Yahoo!
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Disclaimer
104
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Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count % of Total Count
% of Total
IBC
% of Rating
Category
Overweight/Buy 744 36% 276 40% 37%
Equal-weight/Hold 937 45% 323 47% 34%
Underweight/Sell 400 19% 95 14% 24%
Total 2,081 694
105
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