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Internet Trends Presentation (49 pages)
1
Internet Trends
The Kelsey Group: Interactive Local Media 2004
Mary Meeker
mary.meeker@morganstanley.com
November 2004
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.
2
• Global Basics
• Recent Trends
• Where we Are
• High Level Online Ad Trends
• A Few Thoughts on Search
• Your Questions
Outline
3
Global Basics
4
1998: 147MM Internet Users 2003E: 751 MM Internet Users
Rest of
World
6%
Asia
Pacific
9%
Japan
7%
Latin America 3%
Europe 28% North America
46%
Rest of
World 7%
Latin America
5% North America
26%
Japan 8% Europe 28%
Asia
Pacific
25%
Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch
N. America = 26% of Internet Users, was 46% in 1998
5
• China Internet – 87MM+ users; #2 in world, likely #1 within 5 years; more than 70%
of Internet users under 30
• S. Korea – Broadband penetration of 70%+ is higher than any other country
• Shanda Networking – 1.7MM peak concurrent online gamers in CQ3:04, in China
• Ringtones – $3B+ annual market
• Picture phones – 1 of 6 mobile phones sold globally in 2003
• Apple – 70%+ market share of online paid-music market
• Yahoo! – 3.6B+ annual run-rate for music video streaming sessions
• Google News – 7MM global visitors/month, 5K sources, zero human intervention
• eBay – facilitated CQ3 trades of $8B, up 44% Y/Y with 46%, and rising, outside US
• VoIP – Japan leads with 4MM+ subscribers via Softbank / Yahoo! BB
Technology Adoption… Not all Made in the USA
6
Wireless Messaging Becoming More Important
Mobile
Phone to
Internet
Country User Ratio
Mobile
Phones
(MM)
Internet
Users
(MM)
Installed
PCs
(MM)
China
US
Japan
Germany
UK
Italy
South Korea
207
141
79
60
49
49
32
59
162
53
34
32
20
26
3.5 : 1
0.9 : 1
1.5 : 1
1.8 : 1
1.5 : 1
2.5 : 1
1.2 : 1
29
198
49
36
24
12
13
Source: Morgan Stanley Research – Global Market Sizing of TMT Products and Services – 9/03; 2002 year-end data.
7
Recent Trends
8
• $ 2B = market value at pre-2000 IPO
• $178B = market value at Nasdaq peak – 3/10/00
• $ 32B = market value at Nasdaq trough – 10/9/02
• $231B = market value at 11/3/04
eBay + Google + Yahoo! + Yahoo! Japan + Amazon.com
Top 5 Global Internet Market Cap Leaders
Note -Google included after the company’s 8/04 IPO
9
Google
19% Q/Q (101% Y/Y) net revenue growth to
$503MM with $280MM in operating income
Yahoo!
8% Q/Q (84% Y/Y) net revenue growth to
$655MM with $215MM in operating income
eBay
4% Q/Q (44% Y/Y) net revenue growth to
$806MM with $273MM in operating income
Strong Financial Results - CQ3
10
eBay CQ3 Gross Merchandise Volume (GMV) Growth
61% Y/Y – $11B – Motors
41% – 3 – Consumer Electronics
23% – 3 – Computers
68% – 2 – Clothing / Accessories
29% – 2 – Books / Movies / Music
17% – 2 – Collectibles
55% – 2 – Home / Garden
43% – 2 – Sports
26% – 1 – Toys
34% – 1 – Jewelry / Watches
18% – 1 – Cameras / Photo
57% – 1 – Business / Industrial
Broad-based e-Commerce Growth - CQ3
11
eCommerce Share Gains Continue
*Does not include travel, financial services, or event ticket sales. eBay U.S. Gross Merchandise Volume (GMV) not included; In CQ2:04 eBay U.S. GMV
was $4.4B. GMV-adjusted, US Retail eCommerce Sales in CQ2:04 would have been $19.7B (up 24% Y/Y, flat Q/Q).
eCommerce sales are goods and services where an order is placed by the buyer or price and terms of sale are negotiated over an Internet, extranet,
EDI network, e-mail, or other online system. Payment may or may not be made online.
Source: U.S. Department of Commerce, August 2004.
Total US Retail Sales
Y/Y Change
Total US Retail eCommerce Sales*
Y/Y Change
% of Total US Retail Sales
$2,868
--
$15
--
0.52%
$3,072
7%
$28
87%
0.91%
$3,163
3%
$35
22%
1.09%
$3,230
2%
$44
29%
1.37%
$3,400
5%
$56
26%
1.65%
$919
8%
$16
23%
1.70%
(All Figures US$ in Billions) C1999 C2000 C2001 C2002 C2003 CQ2:04
12
eBay
48% Y/Y listings growth (31%Y/Y - US; 75% Y/Y - non-US)
38% Y/Y active user growth to 52MM
55% Y/Y active PayPal user growth to 17MM
Yahoo!
35% Y/Y page view growth
28% Y/Y active registered user growth to 157MM
Penetration still low into 800MM+ base of Internet users…
Strong User & Usage Growth - CQ3
13
eBay
7.4% from 7.1% Y/Y increase in US take rate,
11.0% from 10.6% Y/Y increase including PayPal
Yahoo!
$2.17 from $1.38 Y/Y increase in marketing
services revenue per 1,000 pages delivered
Strong Monetization Growth - CQ3
14
Outlook for Solid User Growth
Total Internet Users (MM)
North America
Europe
Asia/Pacific
Japan
Rest of World
Latin America
1998E
147
68
41
13
11
10
5
1999E
229
93
68
30
17
13
8
2000E
341
122
102
56
28
18
15
2001E
485
156
136
100
42
27
24
2002E
609
176
169
141
53
38
32
2003E
751
198
210
187
64
51
41
2004E
872
221
249
217
73
64
49
2005E
976
242
269
246
82
79
58
02-05E
CAGR
17%
11%
17%
20%
16%
28%
22%
Source: Morgan Stanley Global Market Sizing of TMT Products and Services (9/03) http:// www.morganstanley.com/techresearch
15
Outlook for Strong Usage Growth
C2000 C2001 C2002 C2003
Global Broadband Subscribers (000's) 13,477 31,933 56,093 88,194
Y/Y Growth -- 137% 76% 57%
North America 7,174 13,948 21,075 29,036
Y/Y Growth -- 94% 51% 38%
Europe 1,287 4,118 9,589 17,555
Y/Y Growth -- 220% 133% 83%
Japan 625 2,836 7,806 13,641
Y/Y Growth -- 354% 175% 75%
Asia-Pacific 4,351 10,707 16,862 26,444
Y/Y Growth -- 146% 57% 57%
Latin America 41 324 761 1,518
Y/Y Growth -- 689% 135% 99%
Source: Morgan Stanley estimates updated 10/12/04; R. Bilotti, S. Flannery, S. Simon, P. Marsch, Y. Motoyama, M. Kim, N. Sebrell, B. Swinburne, L. Choi;
CQ2:04E
106,704
47%
33,776
38%
23,160
76%
16,055
47%
31,692
39%
2,021
96%
16
• Broadband
• User experience
• Search
• Personalization with more effective targeting
• User-generated content (RSS, blogs, reviews, images, audio…)
• Music
• Short- and long-form video
• Local
• Accessibility (including mobile devices and desktop)
Usage Growth Likely Paced by Innovation
17
• 10-15% annual global Internet user growth
• 20-30% usage growth
• 30%+ monetization growth
Basic Thesis…
18
• Development of user-generated web services platforms.
At risk of oversimplifying:
eBay = e-commerce
Google = search and ad targeting
Yahoo! = content serving, etc…
Microsoft = etc…
• Korea broadband / mobile…
• Music video monetization…
• Healthy ecosystem…
Things to Watch…
19
Source: Morgan Stanley Research, Mitchell Kim; Chiefexecutive.net, “Korea’s Broadband Revolution”; US Department of Commerce.
• In South Korea, the country with world’s highest
broadband penetration (70%+), always-on, highspeed
internet connections have changed media
consumption patterns
• Korean TV channels allow users to download
shows for ~$1
• In 2003, e-commerce comprised 12% of retail
sales in Korea vs. <2% in US
Broadband Impact on Internet Usage Patterns
20
Source: Morgan Stanley Research, Yahoo! (9/04).
<15% of music videos (at 300MM per month in 10/04) on Yahoo! LAUNCH have ads
preceding them, implying significant opportunity for expansion of highly targeted ads…
Online Advertising is Undermonetized…
21
…Online Advertising is Undermonetized…
High Volume
of Sponsored
Links
22
…Online Advertising is Undermonetized
Low Volume
of Sponsored
Links
23
Source: Google, NYTimes.com (7/04).
• Initiatives like Google AdSense for
Content (which automatically
serves ads relevant to subject
matter of a Web page) help expand
ad inventory and monetization
• Status now like US roadside
Targeted, billboard opportunity in the 1950s?
Relevant Ad
NYTimes.com article
about broadband triggers
sponsored ads for
broadband providers
…Online Advertising is Undermonetized
24
Where we Are
25
To organize the world’s information
and make it universally accessible
and useful.
Google’s Mission is a Very Big Idea
26
Source: Morgan Stanley Research, Yahoo!, Amazon.com, TiVo (9/04).
Search
for “TiVo”
Obtain
Find
Search / Find / Obtain (SFO) Getting Easier
27
eBay (One Website) vs. All U.S. Newspapers (1,468 Dailies) Annual
Classified Ads (MM)
4
33
123
238
320
427
602
141 144 145 146 127 122 120
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003
Listings (MM)
eBay (US) All US Newspapers
eBay Has Expanded SFO Market
28
Source: Robert Coen, Universal McCann
…Why Shouldn’t Same Trends Occur in Local?
11.4
12.0
12.7
13.4 13.8 13.9
14.5
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
$16.0
1997 1998 1999 2000 2001 2002 2003
US Directories Revenue ($B)
29
Market Size
30-40MM references
per day
Source: Yahoo!, Analyst Day (5/04).
Targeting
Leads Generated
Tracking
Dollars Spent
Usage
25-35MM phone calls
per day
$14B
You seek leads
300MM searches
per day
150MM leads
per day
~$3B
Track in realtime
using online tools
Leads find you
Pay only when lead
visits Web site
11MM pieces read
per day
2MM responses
per day
$49B
Track responses via
phone/mail
You seek leads
Pay whether or not you
generate leads
Yellow Pages Direct Mail
Pay whether or not you
generate leads
Mostly untracked, some use
separate phone numbers
Search
Again, Why Shouldn’t Same Trends Occur in Local?
30
High Level Online Ad Trends
31
Source: Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Newspapers include Classifieds. Promotions
($97B) include: incentives ($26B), promotional products ($20B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing
($6B), promotional fulfillment ($4B), product sampling ($2B), and in-store marketing ($1B). Households may use multiple advertising mediums.
Promotions
Newspapers
Classifieds
Direct Telephone
Direct Mail
Broadcast TV
Radio
Cable TV
Yellow Pages
Internet / Online
$97
45
15
85
48
43
20
16
14
7
99
50
55
99
99
99
60
70
99
60
$976
898
289
863
483
429
328
226
146
120
2003E Advertising
Spending ($B) Households (MM)
Ad Spending /
Medium Household ($)
Total
Average
$374
42
735
82
$4,469
497
Internet Ad Spend at $120 Per Home vs. $898 for
Newspapers?
32
6
12
14
17
8
0
4
8
12
16
20
Books &
Magazines
Phone (Cell &
Landline)
Radio TV Internet
Source: Veronis Suhler Stevenson (2003), Yahoo! (5/04). Youth defined as age 17 and under.
Younger Demographic Spends More Time
Online vs. Other Media
33
(5.3%)
(1.6%) (1.1%) (0.9%)
1.8%
16.4%
(1.9%)
(10)
(5)
0
5
10
15
20%
Rec. Music TV Newspapers
Magazines Radio Cable Internet
Source: Veronis Suhler Stevenson (2003).
Internet Estimated to Gain Most Media in Media
Consumption, 2003-2007E
34
Media Usage Source: SRI-Knowledge Networks, Fall 2003.
Ad Spending Source: Universal McCann, (6/03); Internet Advertising Bureau (3/04).
Ratios are calculated as percent of US media usage on a medium divided by percent of US ad spending on a medium.
US Media Usage to Ad Spending Ratios
4.7x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0x
Newspapers Magazine TV Cable TV Radio Internet
Gap Between Internet Consumption and Ad Spend is Large
35
Source: Morgan Stanley Research; IAB.
Revenue
Y/Y Change
Q/Q Change
(US$ in Billions)
$2.1
+19%
+9
$1.9
-3%
-12
$1.8
-12%
-1
$1.8
-9%
-4
$1.6
-23%
-7
$1.5
-19%
-7
$1.5
-21%
-4
$1.5
-18%
-1
$1.6
-4%
+9
$1.6
+7%
+3
$1.7
+14%
+2
$1.8
+24%
+5
$2.2
+38%
+22
$2.3
+37%
+2
Q4:00 Q1:01 Q2:01 Q3:01 Q4:01 Q1:02 Q2:02 Q3:02 Q4:02 Q1:03 Q2:03 Q3:03 Q4:03 Q1:04
Softness in Ad Market Strength in Ad Market
$2.4
+43%
+6
Q2:04
Impressive Y/Y Acceleration in US Online Ad Growth
36
A Few Thoughts on Search
37
Improving User Experience Creates Opportunities…
• Effective matching of queries with satisfactory
results is still in its infancy – this is the
opportunity
• Financial opportunity lies in ability to improve
users’ satisfaction in finding what they are
looking for
38
Source: Morgan Stanley Research.
• As buyers, sellers and eBay became smarter
about expanding and improving eBay’s user
experience, volume and scope of listings and
value of goods increased across eBay
platform, while conversion rates (ex-ASP
increases) remained relatively steady
• Similar trends may play out in search – as
searchers, advertisers and search engines
become more sophisticated about expanding
and improving user experience and relevancy
of sponsored and natural search results,
search query volume, conversions plus
resulting revenue levels could increase
• The key takeaway is that more sophisticated
user experience leads to a higher ROI, for
both eBay and its sellers
eBay Listings, Gross Merchandise Volume (GMV)
As eBay and buyers / sellers became smarter, the online marketplace improved…
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Listings ('000)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
$9,000,000
Total GMV (MM)
Listings GMV
…Improving User Experience Creates Opportunities…
39
Source: Morgan Stanley Research.
Improvements in natural search (85% of clicks…)
Increasing the number of documents
crawled
Improving algorithms that determine the
relevancy of results
Partnerships with premium research
sources
Highly relevant natural results
Greater R&D spend
Improving natural-language processing,
intent-based results
Increasing amounts of web content
…Improving User Experience Creates Opportunities…
40
Improvements in sponsored search
Improved keyword matching
technology
Increased keyword coverage
An efficient, high- volume market for
sponsored results
More nuanced campaign control
More bidders, greater volume
Advertisers’ greater financial
incentive to improve relevancy
Source: Morgan Stanley Research.
…Improving User Experience Creates Opportunities…
41
Improvements and demand for natural vs.
sponsored search has been somewhat
asynchronous…and may remain this way in the
future as both ways of searching continue to
improve and become more similar…
…Improving User Experience Creates Opportunities
42
Revenue Per Search (RPS) Components
Source: Yahoo! Analyst Day as of 5/04. Morgan Stanley Research.
RPS = Coverage XClick-through Rate X Price Per Click
# Searches that
Show Ads
Total # Searches
Total # Clicks on
Ads
# Searches that
Show Ads
Total Amount
Received from
Advertisers
Total # Clicks on
Ads
RPS = X X
RPS =
Total Amount
Received from
Advertisers
Total # Searches
43
Revenue Per Search Trends…
Source: Yahoo! Analyst Day (5/04). Morgan Stanley Research.
3+
2-3
1-2
Number of
Words
600MM
20MM
50K
Unique Terms
$0.10 �� $1.52
$0.95 �� $1.84
$1.45
�� $1.73
April 03 Price ��
March 04 Price
“Credit Card
Fee No
Interest
Transfer”
“APR Credit
Card”
“Credit Card”
Sample
Term
• Ad inventory increases as searchers enter more specific (longer) queries. Highest Price Per Click Y/Y
growth is in longer phrases
• We believe there are still many price inefficiencies at the lower tiers—longer phrases that could
convert effectively but that are not bid on. As advertisers discover these terms, we believe
discrepancies could close
44
…Revenue Per Search Trends…
While RPS may have an upward bias on an on-going
basis for quite some time for certain words as
optimization tools improve and ROI declines, we
believe that overall industry RPS could decline (or
show modest growth) while overall search industry
revenue rises nicely owing to volume ramps and
rising pricing for longer terms which currently support
below-average RPS…
45
Source: inceptor (8/04).
1-word 2-3 word 3-5 word 5 word+
Length of Query
Price Per Click
Tail
• More descriptive phrases
• Lower cost
• Higher predictability
Common Bidding Range
• Fewer words
• More expensive
• Lower conversions
• Keyword price decreases as query length increases, initially
• But as advertisers “discover” and begin bidding on these terms, these
longer keywords begin to increase in price
…Revenue Per Search Trends
46
First Closing Thought
In our view, the combination of competition,
innovation and user demand for new and improved
services should drive strong usage and
monetization growth over the next few years. Every
company won’t win, however, overall market growth
should be strong…
47
Final Closing Thought
People have very little intuition for what it will
mean when the top 40% of US households,
based on income, have half a dozen
computers, all of them connected to the Net,
all of them with "instant on." They just don’t
know how important a part of our daily life
the online world will be!
Jeff Bezos interview with Chip Bayers, Business 2.0
September, 2002
48
Disclaimer
Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most
closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight
are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). 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.
Analyst Stock Ratings
Overweight (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.
Underweight (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.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s
view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile
(unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For
definitions, please go to www.morganstanley.com/companycharts.
Analyst Industry Views
Attractive (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 named on the cover of this
report.
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 named on the cover of this report.
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 named on the cover of this report.
Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley
at 1585 Broadway, 14th Floor (Attention: Research Disclosures), 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, Lina Choi, Yoshiko Motoyama, Andy Xie, Stephen Roach, Mark Shuper, Viktor Ma, Eric Wen,
Brian Pitz, Brian Fitzgerald, Minyan Liu, Shawn Kim, Mitchell Kim, Javier Marin.
Global Stock Ratings Distribution
(as of March 31, 2004)
Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count
% of
Total Count
% of
Total IBC
% of Rating
Category
Overweight 619 35% 262 41% 42%
Equal-weight 785 44% 280 44% 36%
Underweight 375 21% 101 16% 27%
Total 1,779 643
49
Disclaimer
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