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Global Market Sizing of TMT Products and Services (91 pages)
March 23, 2006
Internet, Technology,
Media & Telecom
Global TMT Market Sizing:
Emerging Markets Have
Finally Emerged
Five related trends emerge from the latest update
of our Global TMT Database:
1) Emerging TMT markets have finally emerged. US
and China remain clear TMT (technology / media /
telecom) market leaders, but China should pass the US
in 2006. Markets poised for more substantive five-year
growth are large, less-penetrated markets including
China, India, and Russia.
2) Global residential broadband growth is
compelling. In several countries – including Korea,
Japan and the US – broadband Internet penetration is
into the adoption “sweet spot,” at a penetration level of
25%+.
3) Global Internet is increasingly mobile-centric.
Mobile devices are becoming small, functional
computers that offer increasing levels of connectivity.
Mobile services with basic Internet connectivity should
enter their own “sweet spot” of adoption within two
years.
4) The pace of global innovation is accelerating.
Innovation is coming from outside the US in areas
related to broadband and mobile Internet. And global
investors appear willing to support it.
5) Internet leaders, for the most part, are well
positioned. And, increasingly, they are vying to
become next-generation communications hubs.
This report includes a summary slide presentation
starting on page 9 and a data-rich TMT-focused
Appendix on page 52.
Korea Internet Services
Mitchell Kim
Europe Internet & Media
Javier Marin
Japan Internet
Naoshi Nema
Asia/Pacific Media
Minyan Liu
US Telecom Services
Simon Flannery
Vance Edelson
Europe Telecom Services
Neil Wedlake
Sean Gardiner
Asia/Pacific Telecom Services
Mark Shuper
Latin America Telecom Services
Mario Epelbaum
Vera Rossi
North America Cable/Satellite
Richard Bilotti
Benjamin Swinburne
China Technology
Viktor Ma
Asia / Pacific Technology
Sunil Gupta
US Systems & PC Hardware
Rebecca Runkle
Kathryn Huberty
US Specialty Financial Services
Ken Posner
Chief Economist
Stephen Roach
Asia-Pacific Chief Economist
Andy Xie
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 U.S. can receive independent, third-party
research on the company 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
1-800-624-2063 to request a copy of this research.
For analyst certification and other important
disclosures, refer to the Disclosure Section.
+= Analysts employed by non-U.S. affiliates are not registered pursuant to NASD/NYSE rules.
Morgan Stanley & Co. Incorporated Mary Meeker
Mary.Meeker@morganstanley.com
+1 (1)212 761 8042
Brian Fitzgerald
Brian.Fitzgerald@morganstanley.com
+1 (1)212 761 4276
Brian Pitz
Brian.Pitz@morganstanley.com
+1 (1)212 761 4133
Morgan Stanley Dean Witter Asia
Limited
Richard W Ji
Richard.Ji@morganstanley.com
N O R T H A M E R I C A
2
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Table of Contents
1) Overview — Emerging TMT Markets Have Finally Emerged 3
Summary Presentation Slides – Global TMT Market Sizing 9
2) Potential Upside for Internet Users, Usage and Uses… 30
3) China TMT Trends Remain Especially Impressive 34
4) Global Residential Broadband Remains Compelling 36
5) Global Internet Is Increasingly Mobile-Centric 41
6) Pace of Global Innovation Is Accelerating 43
7) Internet Leaders, For Most Part, Are Well Positioned 45
Methodology 48
Technology Industry Views 50
Appendix 52
3
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Overview — Emerging TMT Markets Have Finally Emerged
The Global TMT (Technology / Media / Telecom)
Database is our effort to gauge how the Internet
might evolve on a global basis.
Five years ago, we made a simple statement: “We
believe someday there will be as many Internet users
as landline phone users.” We asked a simple
question: “How many landline phone users are
there?”
To determine how pervasive the Internet might
become, we looked at the core user components of
TMT around the world. After much global
collaboration, we found estimates for the number of
global telephone lines. We then pushed and
estimated the installed base of PCs, the number of
mobile phones in use, the number of cable
subscriptions, the number of issued credit / debit
cards, and, yes, the number of Internet users. We did
this for the top 40-50 countries based on population
and GDP per capita (or ~80% of the world’s
population and ~95% of GDP).
Our view was that country-by-country user and
penetration stats for core TMT products / services —
combined with product knowledge — would help give
us a sense of how each market might develop. And
each year, a different message emerged:
2001 – outlook for global Internet user / usage
growth is strong – despite negative sentiment
2002 – outlook for many non-US TMT markets
(especially China) is robust
2003 – broadband deployment is approaching
critical mass and has begun to help drive Internet
user / usage growth
Data from 2004 and our forecasts to 2010 tell the
story of the emerged markets.
The US ranked the highest in 2004 in our TMT
database for the fourth year running. But in terms of
global market share, China has the largest market
share in telephone lines (24%), mobile phones (21%)
and cable TV (28%). Meanwhile, the US has the
largest numbers of PC (29%) and Internet users
(22%).
If current trends continue, China would become the
leading global TMT market in 2006. Other rapidly
growing markets have also moved up sharply. By
2010, assuming 2004 growth rates for all countries
continue, China, India, Russia, and Brazil should
move up the list, as the US, Japan, Germany, the UK,
France, South Korea, Italy and Canada move down.
Growth in emerging markets accounts for a
significant portion of the global growth in TMT
services and products.
In 2004, global Internet users grew 18%; mobile
phones in use rose 13%; installed PCs rose 10%;
cable subscriptions grew 9%; credit / debit cards in
use rose 9%; and telephone lines increased by 4% —
against a backdrop of 1% population growth and a 5%
rise in nominal GDP per capita. See Exhibit 1.
Exhibit 1
Global Size and Growth of TMT Categories,
2004
Category Annual Growth Rate Market Size
Internet Users 18.4% 901MM
Mobile Phones in Use 13.4 1,589MM
Installed PCs 10.4 696MM
Credit/Debit Cards in Use 9.4 3,567MM
Cable TV Subscriptions 8.9 459MM
GDP per Capita 8.3 $28,582
Telephone Lines 4.3 1,198MM
Population 1.3 6,288MM
Source: Morgan Stanley Research; GDP figures from IMF, shown in
current USD; Data include totals for 50 countries in our TMT
database, as well as other (roughly 150) countries.
We have entered two of the most important
computing cycles of the last 50 years, defined by
pervasive broadband and mobile Internet
technologies.
The first 10 years (1995-2005) of the commercial
Internet look to us like a warm-up act for what is about
to happen. At the margin, it appears that consumers
around the world, not enterprises, are now driving
demand. Their desire to communicate and connect,
combined with the acceptance and convergence of
usage of broadband and mobile Internet, is at the
core of innovation. For businesses, the opportunities
— and potential dislocations — are significant.
Exhibit 2 summarizes our relative weightings of TMT
markets for the top 15 countries for 2004 and 2010.
We note the sizable and fast-growing TMT gains that
4
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
China, India and Russia are expected to make in the
next five years.
Exhibits 3 and 4 highlight the relative weightings of
TMT markets for the top 15 countries and detail the
key components of our rating systems for 2004 and
2010, respectively. The following TMT metrics are
used to determine a country’s propensity for TMT
products and services: population; GDP per capita;
telephone lines; installed PCs; mobile phones in use;
cable TV subscriptions; Internet users; and credit /
debit cards in use.
In 2010, we highlight China at the #1 spot, up from #2
in 2004. The US is expected to go down one spot to
#2 from #1, while India is expected to achieve the
largest stride to #3 from #6. Emerging markets such
as Russia and Brazil are expected to take the #7 and
#9 spots moving up from #13 and #11, respectively.
5
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 2
Relative Weightings of Top 15 TMT Markets, by Country, 2004 & 2010E
2004
Relative
Country Weighting
1 USA 9.0
2 China 8.1
3 Japan 6.5
4 Germany 5.7
5 United Kingdom 5.5
6 India 5.3
7 France 5.2
8 Italy 5.2
9 South Korea 5.1
10 Canada 5.1
11 Brazil 5.0
12 Spain 5.0
13 Russia 5.0
14 Netherlands 5.0
15 Norway 5.0
2010E
Relative
Country Weighting
1 China 8.7
2 USA 7.7
3 India 7.0
4 Japan 5.9
5 Germany 5.3
6 United Kingdom 5.2
7 Russia 5.2
8 France 5.1
9 Brazil 5.1
10 South Korea 5.0
11 Canada 5.0
12 Italy 5.0
13 Spain 5.0
14 Norway 5.0
15 Australia 4.9
Exhibit 3
Relative Weighting Details of Top 15 TMT Markets, 2004
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
Exhibit 4
Relative Weightings Details of Top 15 TMT Markets, 2010E
Country
2010E
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 China 8.7 1 ,348 $2,271 611 108 807 317 336 953
2 USA 7.7 312 51,945 184 244 267 122 306 878
3 India 7.0 1,201 947 69 59 572 97 585 898
4 Japan 5.9 128 36,432 89 67 123 38 108 645
5 Germany 5.3 84 33,405 67 41 80 32 78 96
6 United Kingdom 5.2 62 38,923 33 32 59 24 59 142
7 Russia 5.2 142 10,215 47 53 129 13 111 129
8 France 5.1 63 36,688 35 30 46 10 53 45
9 Brazil 5.1 188 6,646 51 55 116 3 44 175
10 South Korea 5.0 51 24,615 29 31 42 25 41 93
11 Canada 5.0 34 44,254 20 18 24 10 28 62
12 Italy 5.0 58 29,791 27 24 56 7 56 55
13 Spain 5.0 43 35,941 21 17 42 3 34 110
14 Norway 5.0 5 64,166 3 3 4 1 4 7
15 Australia 4.9 22 42,115 13 13 20 3 18 47
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. To determine relative weighting 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 then 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 metric
category to 2010. 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
6
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 5
US vs. China / India / Russia / Brazil – Comparison of Global TMT Market Share and Rank
(In Millions)
Country
Telephone
Lines
Share
Rank
Mobile
Phones
Share
Rank
Cable
TV
Subs
Share
Rank
Internet
Users
Share
Rank
Installed
PCs
Share
Rank
China 283 24% 1 335 21% 1 128 28% 1 94 10% 2 42 6% 3
USA 184 15 2 171 11 2 99 22 2 202 22 1 204 29 1
India 47 4 5 40 3 10 49 11 3 39 4 5 13 2 12
Russia 38 3 7 58 4 5 10 2 9 22 2 10 19 3 8
Brazil 42 3 6 49 3 8 2 1 22 18 2 12 19 3 9
Source: Morgan Stanley Research.
A note on our initial / first pass 2010 estimates…
In order to look at our 2010 scenario for TMT market
propensity, we compute rough 2010 estimates for
each country’s TMT categories by applying the 2003-
2004 Y/Y growth rates as a CAGR out to 2010 and
we endeavor to ensure that penetration levels do not
reach unrealistic levels. For GDP per capita, we use
the IMF estimates out to 2006 (the latest forecast year
available) and then apply the 2005-2006 Y/Y growth
rate as a CAGR out to 2010. Obviously, forecasting
market growth in evolving economies and TMT
markets is fraught with risk—and our 2010 estimates
are subject to general economic and market
conditions. That said, we believe our forecasting
framework provides a good scenario analysis for
investor expectations and should be directionally
useful.
7
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 6
Overview of Global TMT Markets – Sorted Regionally by Population
MORGAN STANLEY TECHNOLOGY RESEARCH Mar-06
Overview of Global TMT Markets - Absolute Values Sorted Regionally by Population
2004 2004 2004 2004 2004 2004
2004 2004 GDP Per Telephone Installed Mobile Cable Internet Credit/Debit
Country Population Capita Lines PCs Phones In Use Subscriptions Users Cards
(000's) (US$) (000's) (000's) (000's) (000's) (000's) (000's)
N. America USA 293,819 39,935 183,688 203,677 170,723 99,091 201,833 878,000
Canada 31,908 31,134 19,943 15,738 14,712 10,086 21,850 61,700
Total 325,728 203,631 219,414 185,435 109,177 223,683 939,700
Weighted Average 39,248
Europe Russia 142,362 4,087 38,035 18,935 57,620 9,927 22,300 24,400
Germany 82,786 33,390 56,936 39,252 68,121 25,801 46,312 95,600
France 61,786 32,911 34,223 23,138 41,506 7,861 24,848 30,200
United Kingdom 59,941 35,548 33,374 25,964 53,662 15,148 35,179 141,700
Italy 57,521 29,014 26,720 15,218 53,964 3,272 28,610 55,400
Spain 41,127 25,320 18,234 9,584 36,625 2,905 13,440 94,500
Poland 38,829 6,344 12,006 5,493 20,100 5,660 10,600 18,224
Netherlands 16,320 37,326 10,006 8,375 14,060 6,334 10,806 29,900
Belgium 10,279 33,866 5,067 2,571 9,168 4,005 5,100 14,700
Czech Republic 10,214 10,485 3,303 2,085 9,950 1,131 3,530 8,100
Portugal 10,213 15,982 4,368 1,605 9,104 1,778 4,165 22,600
Hungary 9,809 10,233 3,514 1,293 7,907 1,998 3,050 6,901
Sweden 9,013 38,493 6,728 5,956 8,482 3,088 7,364 7,383
Austria 8,091 36,244 3,861 3,260 6,855 1,229 4,630 8,897
Switzerland 7,261 49,300 5,647 5,593 6,171 2,808 4,668 8,227
Denmark 5,394 44,808 3,825 3,310 4,991 1,730 3,720 2,994
Finland 5,219 35,666 2,566 2,415 4,878 1,173 3,260 2,746
Norway 4,594 54,600 3,401 2,574 4,352 960 3,140 6,799
Ireland 4,044 45,675 2,123 1,932 3,147 856 1,319 3,066
Total 584,802 273,936 178,554 420,663 97,665 236,041 582,338
Weighted Average 31,797
Japan Japan 127,641 36,596 77,790 53,569 85,147 21,165 72,677 644,700
Asia China 1,300,024 1,272 282,524 41,600 334,820 128,000 94,000 684,700
Non-Japan India 1,086,529 622 47,188 12,627 40,323 49,234 39,200 38,100
Indonesia 221,279 1,191 8,812 3,350 32,130 188 11,906 8,900
Pakistan 150,109 684 4,121 893 3,305 18 2,387 0
Philippines 83,986 1,010 3,414 2,949 25,062 1,095 4,829 0
Thailand 64,847 2,521 7,416 3,270 32,919 457 8,420 11,400
South Korea 48,338 14,151 24,681 27,041 37,164 12,793 31,600 65,900
Malaysia 25,467 4,646 4,590 5,378 13,110 1,566 9,513 19,900
Taiwan 23,016 13,451 13,603 10,232 21,782 5,094 10,205 120,000
Australia 20,286 30,682 11,463 12,088 14,292 1,650 13,611 46,400
Hong Kong, China 6,953 23,608 3,695 3,249 6,612 622 4,878 16,200
Singapore 4,318 24,740 1,885 2,854 3,477 412 2,413 10,000
New Zealand 4,057 23,846 1,662 1,781 2,726 625 2,340 4,400
Total 3,039,209 415,055 127,312 567,721 201,753 235,301 1,025,900
Weighted Average 9,060
Lat. America Brazil 175,507 3,325 41,568 18,910 49,171 2,395 17,945 175,000
Mexico 103,975 6,494 17,280 12,126 36,862 3,515 12,250 49,700
Colombia 45,346 2,149 8,394 2,583 6,761 1,748 3,178 13,500
Argentina 38,837 3,915 8,011 3,638 8,514 4,810 4,818 22,100
Peru 28,889 2,492 1,707 1,516 3,700 922 2,924 3,540
Venezuela 25,910 4,175 3,116 1,822 8,022 1,612 1,551 11,700
Chile 15,992 5,903 3,554 2,247 8,003 969 4,000 6,500
Total 434,455 83,630 42,843 121,033 15,971 46,665 282,040
Weighted Average 4,655
Rest of Nigeria 142,655 500 872 994 4,495 969 1,044 4,035
World(ROW) Turkey 70,589 4,286 19,068 3,935 29,832 989 6,000 55,000
Egypt 69,330 1,111 9,868 1,632 12,530 1,465 3,000 965
Iran 68,317 2,364 14,806 6,174 4,393 792 4,800 404
South Africa 47,312 4,587 5,155 4,132 17,567 4,134 4,373 15,900
Algeria 32,313 2,655 2,091 316 960 332 978 385
Saudi Arabia 24,952 11,065 3,544 5,220 9,178 691 2,923 11,612
Israel 6,575 17,780 2,952 1,749 6,104 1,550 3,040 3,500
Other 1,314,583 1,325 85,847 50,367 123,747 2,583 60,455 177
Total 1,776,628 144,203 74,519 208,807 13,505 86,613 91,978
Weighted Average 3,366
TOTAL 6,288,463 28,582 1,198,245 696,212 1,588,805 459,236 900,981 3,566,655
Growth Rate 1% 8% 4% 10% 13% 9% 18% 9%
Population, GDP, and household data sourced from Morgan Stanley Research, The CIA World Factbook 2004/2005 & the IMF - Telephone lines represent total (business & commercial) lines in use: source - World Bank,
Euromonitor, Morgan Stanley estimates. The numbers for Cable Subscribers is based on information from The World Bank and Euromonitor, cross referenced with Kagan World Media Ltd and Informa Media Group: source - World
Bank, Morgan Stanley estimates, Kagan, Informa Media Group. PC numbers represent the raw total (business and commercial) PC figures, both desktop and laptop: source - World Bank, Euromonitor, Morgan Stanley estimates,
IDC. Mobile Phone subscriptions data is sourced from the World Bank, Morgan Stanley estimates, The International Telecommunication Union, Euromonitor, and IDC. Internet users reflect the number of users accessing the Web
(users may share/use multiple devices, users accessing the web from home and work are counted only once); source - Morgan Stanley estimates, InternetWorldStats.com, ETC New Media Review, IDC. Credit Card figures include
debit cards: source - Morgan Stanley estimates, The Nilson Report (DRI/McGraw Hill), Euromonitor. Penetration figures are calculated by dividing the relevant data point by the population.
8
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 7
Overview of Global TMT Market Growth Rates – Sorted Regionally by Population
MORGAN STANLEY TECHNOLOGY RESEARCH Mar-06
Overview of Global TMT Market - Y/Y Growth Rates Sorted Regionally by Population
2004 2004 2004 2004 2004 2004
2004 2004 2004 GDP Per Telephone Installed Mobile Cable Internet Credit/Debit
Country Population Population Capita Lines PCs Phones In Use Subscriptions Users Cards
Y/Y Y/Y Y/Y Y/Y Y/Y Y/Y Y/Y Y/Y
(000's)
N. America USA 293,819 1% 6% -1% 3% 8% 4% 9% 7%
Canada 31,908 1 13 -1 1 9 0 24 3
Average 3 25,728 1% 9% -1% 2% 8% 2% 16% 5%
Europe Russia 142,362 -1% 36% 4% 19% 34% 4% 49% 32%
Germany 82,786 0 13 3 1 3 4 19 1
France 61,786 0 13 0 5 2 5 13 7
United Kingdom 59,941 0 17 -2 4 2 8 11 11
Italy 57,521 0 13 -1 8 1 15 25 13
Spain 41,127 1 17 2 9 3 2 37 13
Poland 38,829 0 15 2 13 15 1 18 10
Netherlands 16,320 1 12 0 5 2 0 16 4
Belgium 10,279 0 15 -1 8 3 1 17 2
Czech Republic 10,214 0 18 -5 8 4 6 14 14
Portugal 10,213 0 13 0 15 2 6 8 12
Hungary 9,809 0 23 -2 9 4 4 33 10
Sweden 9,013 0 14 1 3 4 7 10 10
Austria 8,091 0 15 -1 5 1 5 24 10
Switzerland 7,261 0 11 2 3 2 1 39 10
Denmark 5,394 0 14 2 3 6 2 6 10
Finland 5,219 0 14 -3 2 3 7 23 10
Norway 4,594 1 13 1 3 5 2 4 10
Ireland 4,044 2 16 4 7 2 1 5 10
Average 0% 16% 0% 7% 5% 4% 20% 10%
Sum 5 84,802
Japan Japan 127,641 0% 9% 2% 4% 6% 10% 14% 3%
Asia China 1,300,024 1% 16% 14% 17% 25% 16% 18% 10%
Non-Japan India 1,086,529 2 14 7 29 75 12 57 69
Indonesia 221,279 1 7 6 15 55 36 49 --
Pakistan 150,109 2 13 6 14 62 3 59 --
Philippines 83,986 2 6 1 15 22 6 24 --
Thailand 64,847 1 13 7 17 21 5 35 16
South Korea 48,338 1 11 3 2 1 12 5 5
Malaysia 25,467 2 12 -1 22 16 31 7 10
Taiwan 23,016 1 6 2 5 3 2 14 31
Australia 20,286 1 19 3 1 6 10 29 7
Hong Kong, China 6,953 1 4 -2 6 1 7 25 2
Singapore 4,318 2 14 -1 4 1 8 12 5
New Zealand 4,057 1 22 -3 4 4 4 11 10
Average 1% 12% 3% 12% 23% 12% 26% 17%
Sum 3 ,039,209
Lat. America Brazil 175,507 1% 18% 3% 19% 15% 2% 16% 20%
Mexico 103,975 1 5 7 20 15 11 33 10
Colombia 45,346 2 20 4 11 22 14 16 11
Argentina 38,837 1 18 0 10 12 1 18 4
Peru 28,889 2 11 1 14 24 12 3 10
Venezuela 25,910 2 26 5 11 9 8 17 9
Chile 15,992 1 27 1 11 8 4 12 7
Average 1% 18% 3% 14% 15% 8% 16% 10%
Sum 4 34,455
Rest of Nigeria 142,655 3% 21% 11% 14% 71% 53% 26% 10%
World(ROW) Turkey 70,589 2 24 0 12 10 9 9 25
Egypt 69,330 2 -7 12 16 59 36 31 10
Iran 68,317 2 19 10 12 33 49 12 10
South Africa 47,312 2 28 3 12 11 4 8 3
Algeria 32,313 1 24 5 19 59 27 55 10
Saudi Arabia 24,952 3 13 3 32 26 19 45 12
Israel 6,575 2 4 -1 4 4 4 19 3
Other 1,314,583 2 14 4 103 5 8 34 10
Average 2% 15% 5% 25% 31% 23% 27% 10%
Sum 1 ,776,628
Population, GDP, and household data sourced from Morgan Stanley Research, The CIA World Factbook 2004/2005 & the IMF - Telephone lines represent total (business & commercial) lines in use: source - World Bank,
Euromonitor, Morgan Stanley estimates. The numbers for Cable Subscribers is based on information from The World Bank and Euromonitor, cross referenced with Kagan World Media Ltd and Informa Media Group: source - World
Bank, Morgan Stanley estimates, Kagan, Informa Media Group. PC numbers represent the raw total (business and commercial) PC figures, both desktop and laptop: source - World Bank, Euromonitor, Morgan Stanley estimates,
IDC. Mobile Phone subscriptions data is sourced from the World Bank, Morgan Stanley estimates, The International Telecommunication Union, Euromonitor, and IDC. Internet users reflect the number of users accessing the Web
(users may share/use multiple devices, users accessing the web from home and work are counted only once); source - Morgan Stanley estimates, InternetWorldStats.com, ETC New Media Review, IDC. Credit Card figures include
debit cards: source - Morgan Stanley estimates, The Nilson Report (DRI/McGraw Hill), Euromonitor. Penetration figures are calculated by dividing the relevant data point by the population.
9
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Summary Presentation Slides – Global TMT Market Sizing:
Emerging Markets Have Finally Emerged
10
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
1
Global TMT Market Sizing -
Emerging TMT Markets Have Finally Emerged
March 2006
mary.meeker@morganstanley.com
brian.fitzgerald@morganstanley.com
brian.pitz@morganstanley.com
richard.ji@morganstanley.com
All of Morgan Stanley’s technology equity research reports are available on the Internet through Client Link at https://secure.ms.com. If you
wish to receive this service please contact your institutional sales representative. Also this presentation and its associated report (along with
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2
• Large, less penetrated markets — like China, India, and Russia — have
entered, or have begun to enter, sweet spots of technology adoption and
penetration cycles - US and China remain clear TMT (technology / media /
telecom) market leaders, but China should pass US in 2006. Markets poised for
most substantive five-year growth appear to be India, Russia, South Korea, and
Taiwan, while Japan, Germany, UK, France, Italy and Canada lose ground.
• In this update to our TMT sizing database, we remain upbeat about Internet
trends - We reiterate that average annual growth (over the next 2-5 years) should
be 10-15% for Internet users while usage increases 20-30% and monetization
rises 30%+.
• Internet and Mobile remain TMT growth leaders - Global Internet users (in
2004) grew 18%, mobile phones in use rose 13%, installed PCs rose 11%, cable
subscriptions grew 9%, credit / debit cards in use rose 9%, and telephone lines
increased by 4%. Global population grew 1% and nominal GDP per capita 5%.
Emerging TMT Markets Have Finally Emerged
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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Key Global TMT Trends
1) Emerging TMT Markets Have Finally Emerged
2) Potential Upside for Internet Users, Usage and Uses…
3) China TMT Trends Remain Especially Impressive
4) Global Residential Broadband Remains Compelling
5) Global Internet is Increasingly Mobile-Centric
6) Pace of Global Innovation is Accelerating
7) Internet Leaders, For Most Part, Are Well Positioned
4
1
Emerging TMT Markets Have Finally Emerged
• Large, less penetrated markets — like China, India, and
Russia — still have low penetration levels, but in terms of
absolute users, they are beginning to show their potential
• China should surpass the US in 2006 as the TMT market
leader, based on our analysis of TMT market sizing
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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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.
6
…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
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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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. To determine relative weighting 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 then 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 metric category to 2010.
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
China / India / Russia Likely to Make
Impressive TMT Gains In Next 5 Years
8
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
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March 23, 2006
Internet, Technology, Media & Telecom
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2010E – Top TMT Countries
Country
2010E
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 China 8.7 1 ,348 $2,271 611 108 807 317 336 953
2 USA 7.7 312 51,945 184 244 267 122 306 878
3 India 7.0 1,201 947 69 59 572 97 585 898
4 Japan 5.9 128 36,432 89 67 123 38 108 645
5 Germany 5.3 84 33,405 67 41 80 32 78 96
6 United Kingdom 5.2 62 38,923 33 32 59 24 59 142
7 Russia 5.2 142 10,215 47 53 129 13 111 129
8 France 5.1 63 36,688 35 30 46 10 53 45
9 Brazil 5.1 188 6,646 51 55 116 3 44 175
10 South Korea 5.0 51 24,615 29 31 42 25 41 93
11 Canada 5.0 34 44,254 20 18 24 10 28 62
12 Italy 5.0 58 29,791 27 24 56 7 56 55
13 Spain 5.0 43 35,941 21 17 42 3 34 110
14 Norway 5.0 5 64,166 3 3 4 1 4 7
15 Australia 4.9 22 42,115 13 13 20 3 18 47
10
10-15% user growth
20-30% usage growth
30%+ monetization growth
2
Potential Upside for
Internet Users, Usage and Uses…
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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…Compelling Upside for
Internet Users, Usage and Uses
• We expect the strongest Internet user growth to come from
Asia/Pacific, and the slowest growth to come from North
America and Latin America.
• For 2004-07, we forecast the strongest regional Internet
user growth (3-year CAGR) to be in Asia/Pacific category
(24%), followed by Rest of World (11%) and Europe (10%).
We expect the slowest growth to come from North America
(6%) and Latin America (6%).
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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
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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• China leads the world in number of mobile phone users, cable
households, and telephone lines
3
China TMT Trends Remain Especially Impressive
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
14
• China leads the world in number of mobile subscribers
• China ranks No. 2 in Internet users with more Internet users under
the age of 30 than any other country
• Growth drivers for Chinese Internet have been / are robust
Source: CNNIC, Morgan Stanley Research; Notes: MVAS- mobile value-added services; ARPU- average revenue per user
Major Drivers for Chinese Internet Trending Up
By the end of 2004 CAGR for next 3 years
Volume
Internet users 94MM (18% yoy; < 7% of population) 13%
Broadband users 43MM (146% yoy; <3% of population) 32%
Mobile users 335MM (24% yoy; 26% of population) 12%
ARPU
Internet users $5-$6 per month
Broadband users $10-$15 subscription fee per month
Industry revenue
MVAS $770MM (89% yoy) 28%
Online Gaming $390MM (90% yoy) 37%
Online Advertising $220MM (78% yoy) 24%
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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4
Global Residential Broadband Remains Compelling
• In several countries (including Korea, Japan and the US),
broadband Internet penetration is well into an adoption
“sweet spot,” with penetration levels of 25%+ of
households in 2004.
• While global penetration is roughly 17%, penetration by
region is N. America (32%); Europe (25%); Japan (38%);
Asia-Pacific (11%, with an estimated 70% in Korea, offset
by only 7% in China); and Latin America (4%) (1)
• We see 20+% Y/Y global growth in the next few years.
The global broadband subscriber count (as of CQ4:05)
appears to be at least 209MM (up +42% Y/Y and +8%
Q/Q), and continues to grow at a rapid clip.
(1) Morgan Stanley Research; year-end 2004
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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
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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• 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 2005E
• $19B in global Mobile Internet premium services revenue,
comparable to Internet advertising revenue in 2005, expected to grow
at a 25% CAGR through 2009E
Source: Morgan Stanley Research.
5
Global Internet is Increasingly Mobile-Centric
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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
• Compelling usage / revenue generated on Mobile Internet platform
− Messaging, 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
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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Profound Changes in How People Communicate
Combination of Moore’s Law, IP-networks, fixed and mobile
broadband changing how people communicate…
• Computer - telephony integration is happening rapidly, blurring
lines between phone / computer applications, spilling over to mobile
− 75MM registered Skype users making phone calls via PC - Google, Yahoo!, AOL, MSN
responding with competitive VoIP / IM offers
− Community and communications arising faster and in more ways than ever before –
immediate global acceleration of blogs to mass-market
• Mobile devices could disrupt PC ecosystem
− Phones are available with 4GBs of storage, 400Kbps 3G speeds (KDDI W41T) - Phone more
and more like computer – potentially connect via UWB / or cable to any keyboard and monitor
− Mass-consumer devices that are “mobile” but aren’t “phones” (wireless iPod…) almost here
− Battery life biggest remaining challenge
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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.
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
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Source: Euromonitor, CNNIC, World Bank, Morgan Stanley 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
22
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.
Revenue Composition - Mobile Internet
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 it Up on Volume!
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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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 - $2B
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6
Pace of Global Innovation Is Accelerating
• Innovation is coming from outside US in areas related to
broadband and mobile Internet
• US companies, at the margin, will likely continue to turn
overseas for technological innovations
• Global investors have proven they are willing to commit
rising amounts of capital to non-US technology companies,
particularly in Asia
• Many Asian technology companies have been criticized for
being ‘fast followers’ rather than fast innovators — but that
has begun to change
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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Asia Pacific
41%
Europe
19%
ROW
18%
N. America
11% South
America
11%
Mobile Subscribers – 2B
C2005E (2)
(1) Source: Morgan Stanley Research.
(2) Source: Morgan Stanley Communications Equipment Research - Scott Coleman, John Marchetti.
Asia Pacific
36%
Europe
24% ROW
12%
N. America
23%
South America
5%
Internet Users – 1B
C2005E (1)
Mobile Users 2x > Than Internet Users
26
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002 2003 2004 2005
Geographic Distribution of Technology Equity
and Equity-Linked Transaction Volume ($B)
U.S. Europe Asia Japan
$34 $109 $181 $67 $35 $58 $63 $55
Source: SDC, Dealogic, Morgan Stanley; 01/31/06
US Share of Technology Financings Falling
2005
US – 38%
Asia – 33%
Europe – 20%
Japan – 9%
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
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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
\
28
7
Internet Leaders, For Most Part, Are Well Positioned
• We foresee an accelerated scramble among Internet
leaders for control of next-generation communications hubs
• Internet leaders are observing the convergence of the
Internet with other types of communications, and they plan
to leverage existing subscriber bases into new services
• But the leading mobile service providers — China Mobile
(with 225 million subscribers); Vodafone (165 million);
China Unicom (120 million) and China Netcom (120 million)
— also desire to be next-generation market leaders
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
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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%
30
Leading Global TMT Companies Typically
Maintain Geographic Bias
• In telephone line segment, companies with very large market shares among
the top markets are Telemex in Mexico (96%), KT Corp in Korea (95%
share), Deutsche Telekom in Germany (89%), Telefonica in Spain (89%),
and Telia in Sweden (84%)
• Highest country market share in PCs — arguably the most competitive of
the segments — belongs to Dell in US, with 35% share (plus 29% in UK and
25% in Canada)
• Mobile handsets show slightly more concentration — Nokia has 42% share
in Western Europe and 31% worldwide. In Japan, NEC has largest share at
17%
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Leading TMT Markets by Category
Population 1 6,288MM
Telephone Lines 4 1,198MM
GDP per Capita 8 $28,582
Cable TV Subscriptions 9 459MM
Credit/Debit Cards in Use 9 3,567MM
Installed PCs 10 696MM
Mobile Phones in Use 13 1,589MM
Internet Users 18% 901MM
Market Size
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.
32
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
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Internet, Technology, Media & Telecom
33
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.
34
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
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Internet, Technology, Media & Telecom
35
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
36
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
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37
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
38
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
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Internet, Technology, Media & Telecom
39
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
30
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Potential Upside For Internet Users, Usage, and Uses…
Global Internet user growth should remain a solid 14%
annually over the next three years, supported by a narrowing
Internet penetration gap, even though growth rates will likely
decelerate.
Worldwide, we believe global Internet users could rise to 1,343MM
in 2007 (14% global population penetration), up from 901MM
users at the end of 2004 (9% penetration) and about 379MM
users at the end of 2000 (4% penetration). User penetration has
increased rapidly over the past few years, considering the still
relatively early stage of the Internet medium, and the penetration
level remains somewhat low compared to other media such as
cable subscribers and mobile phones. However, the law of large
numbers does suggest to us that the growth rate will decline from
18% in 2004 to 15% in 2005, 15% in 2006, and 13% in 2007.
Internet user growth should slow as more countries reach the
50%+ population penetration level over the next three years.
We expect Internet usage to continue to grow at a faster
rate than Internet user growth.
We believe the primary drivers of increased usage will be
broadband adoption, continued expansion onto the mobile
platform, and ongoing improvements to the online user
experience. Our broad Global Internet growth thesis is that
user growth will grow at 10-15% Y/Y, usage will grow at 20-
30% Y/Y, and monetization will grow at 30%+ Y/Y. (See the
section on broadband for a discussion of trends in the different
regions.)
Mobile phones continue to exceed the number of fixed
telephone lines in use — a trend that is particularly evident
in China.
In China, as of year-end 2004, mobile phone penetration is
now higher than fixed-line telephone penetration (26% vs.
22%). In terms of units added, China has nearly twice the
number of mobile phones compared to telephone lines in 2004.
Mobile phones grew 25% year-over-year in China in 2004,
while telephone lines increased 14%. We expect this pattern to
continue in large countries, where the infrastructure costs of
providing telephone service far outweigh the costs of mobile
phone towers.
North America has now slipped to No. 3, behind both
Asia/Pacific and Europe in terms of Internet users.
The number of Internet users in Asia/Pacific (including Japan
and China) grew to 308MM in 2004, which is 84MM more
Internet users than in North America. And we see more room
for growth in Asia, where the overall population penetration rate
remains particularly low. Europe moved into the No. 2 position
in 2004, with an estimated 26% share of global Internet users,
compared to 25% for the US.
Exhibit 8
Internet Users by Region
0%
20%
40%
60%
80%
100%
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
North America Europe Asia/Pacific Rest of World Latin America
379 482 610 761 901 1,039 1,191 1,343
Source: Morgan Stanley Research. E = Morgan Stanley Research Estimates.
We expect the strongest Internet user growth to come
from Asia/Pacific, and the slowest growth to come from
North America and Latin America.
For 2004–07, we forecast the strongest regional Internet user
growth (3-year CAGR) to be in Asia/Pacific category (24%),
followed by Rest of World (11%) and Europe (10%). We
expect the slowest growth to come from North America (6%)
and Latin America (6%).
Despite the differential in growth rates, Internet
penetration should remain highest in North America, then
Europe, for the foreseeable future.
By 2007, we estimate the penetration rate could reach 82% in
North America, 53% in Japan, 16% in Asia/Pacific, 12% in
Latin America, and 6% in Rest of World.
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March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 9
Internet Penetration — Top Five Countries, 2004E
1) Sweden (82%)
2) Hong Kong (70%)
3) Denmark (69%)
4) USA (69%)
5) Canada (68%)
E = Morgan Stanley Research Estimates
Source: Morgan Stanley Research
Exhibit 10
Internet Users — Top Five Countries, 2004E
1) United States
(202MM, 69% penetration, up 9% Y/Y in 2004)
2) China
(94MM, 7% penetration, up 18% Y/Y in 2004)
3) Japan
(73MM, 57% penetration, up 14% Y/Y in 2004)
4) Germany
(46MM, 56% penetration, up 19% Y/Y in 2004)
5) India
(39MM, 4% penetration, up 57% Y/Y in 2004)
E = Morgan Stanley Research Estimates
Source: Morgan Stanley Research
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 11
Morgan Stanley Global Internet User Estimates, 2003E–2004E
Country
2003 Internet
Users
2004 Internet
Users
2004 Y/Y
Growth Rate
2003E Internet
Population
Penetration
2004E Internet
Population
Penetration
(000's) (000's)
N. America USA 185,668 201,833 9% 64% 69%
Canada 17,640 21,850 24 56 68
Total 203,308 223,683 10%
Weighted Average 63% 69%
Share of World 27% 25%
Europe Germany 39,000 46,312 19% 47% 56%
United Kingdom 31,736 35,179 11 53 59
Italy 22,852 28,610 25 40 50
France 21,900 24,848 13 36 40
Russia 14,932 22,300 49 10 16
Spain 9,829 13,440 37 24 33
Netherlands 9,300 10,806 16 57 66
Poland 8,970 10,600 18 23 27
Sweden 6,668 7,364 10 74 82
Belgium 4,350 5,100 17 42 50
Switzerland 3,348 4,668 39 46 64
Austria 3,730 4,630 24 57 57
Portugal 3,872 4,165 8 38 41
Denmark 3,504 3,720 6 65 69
Czech Republic 3,100 3,530 14 30 35
Finland 2,650 3,260 23 51 62
Norway 3,033 3,140 4 66 68
Hungary 2,299 3,050 33 23 31
Ireland 1,260 1,319 5 32 33
Total 196,334 236,041 20%
Weighted Average 34% 40%
Share of World 26% 26%
Asia China 79,500 94,000 18% 6% 7%
Non-Japan India 24,981 39,200 57 2 4
South Korea 30,220 31,600 5 63 65
Australia 10,572 13,611 29 53 67
Indonesia 8,000 11,906 49 4 5
Taiwan 8,930 10,205 14 39 44
Malaysia 8,892 9,513 7 36 37
Thailand 6,231 8,420 35 10 13
Hong Kong, Chin 3,913 4,878 25 57 70
Philippines 3,900 4,829 24 5 6
Singapore 2,150 2,413 12 51 56
Pakistan 1,500 2,387 59 1 2
New Zealand 2,110 2,340 11 53 58
Total 190,899 235,301 23%
Weighted Average 6% 8%
Share of World 25% 26%
Japan Japan 63,900 72,677 14% 50% 57%
Share of World 8% 8%
Lat. America Brazil 15,464 17,945 16% 9% 10%
Mexico 9,243 12,250 33 9 12
Argentina 4,100 4,818 18 11 12
Chile 3,575 4,000 12 23 25
Colombia 2,732 3,178 16 6 7
Peru 2,850 2,924 3 10 10
Venezuela 1,325 1,551 17 5 6
Total 39,290 46,665 19%
Weighted Average 9% 11%
Share of World 5% 5%
Rest of Turkey 5,500 6,000 9% 8% 8%
World (ROW) Iran 4,300 4,800 12 6 7
South Africa 4,050 4,373 8 9 9
Israel 2,549 3,040 19 40 46
Egypt 2,293 3,000 31 3 4
Saudi Arabia 2,010 2,923 45 8 12
Nigeria 828 1,044 26 1 1
Algeria 630 978 55 2 3
Other 45,229 60,455 34 4 5
Total 67,389 86,613 29%
Weighted Average 4% 5%
Share of World 9% 10%
Total 761,119 900,981 18% 12% 14%
E = Morgan Stanley Research Estimates; Sources: Morgan Stanley Research
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Internet, Technology, Media & Telecom
Exhibit 12
Morgan Stanley Internet User Forecasts, 2000E–2007E
04-07E
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E CAGR
Total Internet Users (MM) 379 482 610 761 901 1,039 1,191 1,343 14%
North America 137 157 178 203 224 241 255 268 6
Europe 105 132 157 196 236 271 290 312 10
Asia/Pacific (including China, Japan) 101 143 198 255 308 382 486 588 24
Rest of World 18 26 44 67 87 97 108 120 11
Latin America 18 23 32 39 47 50 53 55 6
Source: Morgan Stanley Research (US - M. Meeker, B. Pitz), (Europe - J. Marin), (Asia/Pacific - M. Liu), (Japan - Y. Motoyama), (Latin America - M. Epelbaum, N. Sebrell). E = Morgan Stanley
Research Estimate. Note that Europe includes both Western and Eastern Europe.
Exhibit 13
Morgan Stanley Internet User Annual Growth Forecasts, 2000E–2007E
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
Total Internet Users Growth (Y/Y) 67% 27% 26% 25% 18% 15% 15% 13%
North America 47 15 14 14 10 8 6 5
Europe 54 26 18 25 20 15 7 8
Asia/Pacific (including China, Japan) 117 41 38 29 21 24 27 21
Rest of World 74 48 69 52 29 12 12 11
Latin America 113 28 38 23 19 6 6 4
Source: Morgan Stanley Research. E = Morgan Stanley Research Estimate
Exhibit 14
Morgan Stanley Internet User Regional Share Forecasts: 2000E–2007E
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
Share of Total Internet Users
North America 36% 33% 29% 27% 25% 23% 21% 20%
Europe 28 27 26 26 26 26 24 23
Asia/Pacific (including China, Japan) 27 30 33 33 34 37 41 44
Rest of World 5 5 7 9 10 9 9 9
Latin America 5 5 5 5 5 5 4 4
Source: Morgan Stanley Research. E = Morgan Stanley Research Estimate
Exhibit 15
Morgan Stanley Internet User Regional Penetration Forecasts: 2000E–2007E
2000E 2001E 2002E 2003E 2004E 2005E 2006E 2007E
Internet Penetration 4% 5% 7% 8% 9% 11% 12% 14%
North America 44 50 56 63 70 75 79 82
Europe 18 23 27 34 37 46 49 53
Asia/Pacific (including China, Japan) 2 3 5 6 8 10 13 16
Rest of World 1 2 3 4 5 5 6 6
Latin America 4 6 8 9 10 11 12 12
Source: Morgan Stanley Research. E = Morgan Stanley Research Estimate
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March 23, 2006
Internet, Technology, Media & Telecom
China TMT Trends Remain Especially Impressive
China continues to rank second in terms of size based on
our relative share calculation. The low population
penetration rates create a significant growth opportunity.
Below we have an update from our China Internet analyst,
Richard Ji.
For more thoughts on the Internet in China, see our China
Internet Report and the complementary slide presentation
(April 2004) at:
http://www.morganstanley.com/institutional/techresearch/Ch
inainternet_report0404.html
Also, see our Initiation Report on the China Internet Industry
and the complementary slide presentation (Sept 2005) at:
http://www.morganstanley.com/institutional/techresearch/Ch
ina_Internet_091205.html
Big and Getting Bigger…
China’s number 2 ranking reflects its position among the top
five countries in terms of telephone lines, installed PCs,
mobile phones, Internet users, and cable households on an
absolute basis — and growth rates, on a relative basis, that
remained solid in 2004. Specifically, China ranks as the
largest market worldwide in terms of mobile phone users,
cable households, and telephone lines, the second-largest
market in terms of Internet users (and the largest in terms of
Internet users under the age of 30), and the fourth-largest
market in terms of installed PCs.
Exhibit 16
China’s Leading Global Rank in TMT Categories
TMT Category Global Ranking Units (MM) 2004 Growth
Mobile Phones 1 335 25%
Cable TV Subscriptions 1 128 16%
Telephone Lines 1 283 14%
Internet Users 2 94 18%
Installed PCs 4 42 17%
Source: Morgan Stanley Research
View of China Internet Market Segments
1) Online gaming is Richard Ji’s favorite segment pick.
We estimate the industry revenue for online gaming at
$390MM in 2004, growing at a three-year sales CAGR
of 37% to $1B in 2007. Local players with selfdevelopment
and distribution capacity may emerge as
long-term winners.
2) Competition is breaking out in online brand advertising
(industry revenue was $220MM in 2004, and should
expand at a CAGR of 24% to $420MM in 2007), which
faces inventory oversupply and a secular shift toward
performance-centric models. Paid search, on the other
hand, is poised for robust expansion.
3) Richard sees an overlooked opportunity in mobile
value-added services (MVAS; industry sales for MVAS
excluding those for mobile carriers was $770MM in
2004, and should grow at a CAGR of 28% to $1.6B in
2007). Despite regulatory concerns, entry barriers are
rising and a segment recovery is in sight.
4) Richard sees rising opportunities in online commerce,
including travel, instant messaging-related services,
and auctions. Emerging payment mechanisms are
needed for more substantive growth.
Exhibit 17
Major Drivers for Chinese Internet Trending Up
By the End of 2004 CAGR for next 3 years
Volume
Internet users 94MM (18% Y/Y; <7% of population) 13%
Broadband users 43MM (146% Y/Y; <3% of population) 32%
Mobile users 335MM (24% Y/Y; 26% of population) 12%
ARPU
Internet users $5-$6 per month
Broadband users $10-$15 subscription fee per month
Industry revenue
MVAS $770MM (89% Y/Y) 28%
Online Gaming $390MM (90% Y/Y) 37%
Online advertising $220MM (78% Y/Y) 24%
Note: ARPU- average revenue per user.
Source: CNNIC, Morgan Stanley Research
Unlike Rest of the World, China Internet is Mobilecentric
Rather Than PC-centric
Unlike most other regions of the world, China’s Internet
market centers on mobile handsets rather than personal
computers (PCs):
• As of September 2005, China had over 360MM mobile
phone users, 3.6 times more than Internet users. The
total number of Chinese mobile users is equal to the
total of the next three nations combined. In the US, it is
the reverse: the total number of Internet users in the
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March 23, 2006
Internet, Technology, Media & Telecom
US is equal to the total of the next three nations
combined.
• We estimate ISPs (or Internet Service providers,
including Sina, TOM Online, and Tencent) generated
around $700-800MM from MVAS for 2004, two times
more than online gaming and three times more than
online advertising.
• There are six publicly traded companies (Sina, TOM
Online, Tencent, KongZhong, Linktone and Hurray!)
that generated the majority of their 2004 revenues from
MVAS, versus three (Shanda, NetEase and The9) from
online gaming and two (Sohu and Baidu) from online
advertising/ search.
• China’s people are heavier users of mobile data
services, relative to other countries. This trend is
exemplified by the usage of SMS (short message
service, a service that allows brief text messages to be
sent and received on mobile phones): there were 652
SMS per mobile phone sent in China vs. 139 SMS per
mobile phone sent in the US, in 2004 (where China
SMS data is from the Ministry of Information Industry,
US SMS data is from SMS.ac, and mobile data is from
Morgan Stanley Research). We believe this China
trend is due to the immediacy and cost-effectiveness of
phones. (When we say cost-effectiveness, we don’t
mean on a per MB basis, but on an absolute dollar
basis, since the cost of a computer and Internet
connection outweighs that of a mobile phone and a text
message in the short term.)
• China, in many ways, is leading the development and
monetization of mobile content (i.e., KongZhong, TOM
Online) in ways that are still nascent in the US; we
believe investors underappreciate the secular trend at
work within mobile computing, and the value, both in
terms of wealth and consumer satisfaction, that mobile
value-added services can contribute.
China Has Attracted Major Internet Players
We maintain that China is a key strategic market for the
major Internet players and will continue to monitor
developments closely in coming years. We believe the
recent actions of some of the Internet leaders demonstrate
a recognition of the importance of the China market, and we
list some of the most relevant transactions below:
• In June 2004, Google acquired a stake in Baidu.com, a
Chinese search company that went public on 8/5/05
and closed that trading day with a market capitalization
of $4.0 billion.
• Silicon Valley venture capital firm Accel Partners said it
partnered with the media company International Data
Group to form a $250 million fund to invest in Chinese
tech companies. Others, including Intel, have
established similar funds to take advantage of China's
booming technology, gaming, broadband and cellular
markets.
• PayPal, the online payment subsidiary of Net auction
giant eBay, launched a new payment service for
Internet users in China. PayPal China will deal in the
local currency, the company said. The payment service
is integrated with 15 Chinese banks and more than 20
different debit cards. PayPal has offered buyer
protection on purchases made on popular Chinese
portals NetEase and TOM Online, and has offered the
same on eBay's own Chinese auction site, eBay
EachNet, since September 1, 2005.
• On October 23, 2005, Yahoo! acquired a 46% minority
stake (40% on a fully diluted basis) in the outstanding
common stock of Alibaba.com Corporation from
Softbank Corp. and other investors for approximately
RMB 8.1B (US $1.0B) in cash, the contribution of
Yahoo! China based businesses, and direct transaction
costs of $8MM. Jerry Yang, co-founder and Chief
Yahoo!, will assume a board seat at the combined
entity and Yahoo! will obtain 35% voting rights. This
acquisition marks the biggest investment yet made by a
foreign investor in the Chinese e-commerce industry.
On October 25, 2005, Alibaba.com acquired 100%
stake in Yahoo! China Co Ltd for an undisclosed
amount. The new asset, called Alibaba Yahoo!, is
valued at ~$4.25B (including $250MM in cash
contributed from Yahoo! plus $750MM in cash paid by
Yahoo! to Alibaba shareholders plus $100MM in cash
held by Alibaba + Taobao). The combined entity will
comprise Alibaba properties (Alibaba International,
Alibaba China, AliPay, Taobao) and Yahoo! properties
(Yahoo! China portal with its communications /
advertising services, Yahoo! Search Technology and
3721).
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Global Residential Broadband Remains Compelling
The global broadband subscriber count (as of CQ4:05)
appears to be at least 209MM (up +42% Y/Y and +8% Q/Q),
and continues to grow at a rapid clip.
The estimate is based on Morgan Stanley C2005 data from
the major players in the major markets (Asia-Pacific, North
America, Europe, Japan and Latin America) for broadband
subscriber count (largely residential, with cable modem and
DSL deployments). We expect 20+% Y/Y global growth over
the next few years.
We continue to believe that the residential broadband ramp
is part of an important inflection point for Internet usage.
Surveys have shown that broadband (versus narrowband)
users spend more time and money online, owing in large part
to: 1) fast speed, 2) “always-on” functionality, and 3) high
user satisfaction.
Exhibit 18
Broadband Subscriptions by Region, CQ4:05
Rank Region Subscriptions (MM) Y/Y Growth
1 North America) 50 29%
2 Asia Pacific 70 58
3 Europe 60 43
4 Japan 23 23
5 Latin America 7 52
TOTAL 209 42%
Source: Morgan Stanley Research, Nick Sebrell, Paul Marsch, Richard Bilotti, Simon
Flannery, Mitchell Kim
Regional Broadband Updates
US — Richard Bilotti (Cable & Entertainment) and Simon
Flannery (Wireline Telecommunications Services) estimate
that there were 50MM total broadband (DSL and cable
modem) customers in the US at the end of 2005, which
should grow to 42MM or 33% household penetration by the
end of 2006. By the end of 2007, they look for residential
penetration to increase to 45% (53MM subscriptions).
The level of incremental market share gain for the cable and
telecom sectors has consumed investor attention. However,
Rich and Simon believe the aggregate combined penetration
is equally important. While the market shares of net
additions for DSL and cable modem have moved as much as
500-800 basis points per quarter, over longer periods the
shares have been generally equal (i.e., 50/50%) since the end
of 2003. For 2006, they estimate a 53/47 share of additions
for cable modem and DSL, compared to 51/49 in 2004. Cable
modem additions should benefit from VoIP telephony
deployments. Cable modem net additions should continue to
benefit from VoIP over the next few years, as MSOs deploy
VoIP telephony more aggressively and begin to market
discounted data/voice bundles.
For US broadband penetration, we gathered estimates of
total PC and total Internet households in the US from several
sources. These estimates vary widely depending on the
source, showing Internet penetration anywhere from 60-70%
of total households. However, we believe that the Motion
Picture Association of America (MPAA) showed the most
consistent data from Nielsen Media Research. We believe
this is not coincidental, as the MPAA’s constituents have a
great deal to lose from increased Internet access. Based
upon these estimates, total US Internet penetration reached
60% of total households at the end of 2005 and will likely
approach 75% by 2010.
Broadband has also rapidly gained share from dial-up since
1999. At the end of 2004, broadband reached 43% of total
Internet households, reaching roughly 50% in CQ3:05.
However, growth will likely reach an inflection point and
should slow over the next several years.
Rich and Simon expect broadband penetration will likely
reach ~65% of Internet households by 2010 (see Exhibits 20
and 21), and believe that 10% of Internet households will
always use dial-up – the most cost-efficient way to access
the Internet and, therefore, available to a wider group of
users. Although dial-up has been in a steady decline, we
believe there will be a floor at roughly 20MM subscribers.
In several countries – including Korea, Japan
and the US – broadband Internet penetration
is into the adoption “sweet spot”, at a
penetration level of 25%+, where
opportunities have been greatest for investors
into new technologies.
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 19
US Internet Penetration Levels per PC Household
0%
10%
20%
30%
40%
50%
60%
70%
2000
2001
2002
2003
2004
2005E
2006E
2007E
2008E
2009E
2010E
2011E
Total Broadband Dial-up Total Internet
Source: Morgan Stanley Research, Richarch Bilotti, Benjamin Swinburne, David Gober,
Hunter DuBose; E= Morgan Stanley Research Estimates
Exhibit 20
As US Residential Broadband Continues to Grow,
Cable and DSL Should Split Net Additions 50-50
0%
10%
20%
30%
40%
50%
60%
70%
2000
2001
2002
2003
2004
2005E
2006E
2007E
2008E
2009E
2010E
2011E
Residential DSL Cable Modem Total Broadband
Source: Morgan Stanley Research, Richarch Bilotti, Benjamin Swinburne,
David Gober, Hunter DuBose; E= Morgan Stanley Research Estimates
• Broadband has steadily taken share from narrowband
since 2002. We believe this trend will continue.
However, narrowband will likely continue to exist for
several years to come.
• Cable should retain its historical lead over DSL, but DSL
will likely gain low-end subscribers as RBOCs have
continued to cut rates.
• We anticipate that alternative broadband technologies
will continue to account for only a small portion of
broadband subscribers.
• Wireless technologies such as WiMax will likely be
utilized by cable and DSL providers limiting the threat of
pure wireless competitors.
Europe — Our European Telecom and Internet teams
estimate 43MM DSL subscribers and 8MM cable modem
subscribers in Europe as of the end of CQ4:05. Broadband
adoption has proliferated across Europe over the past 3-4
years, with a CAGR of 14% for the market over the past 2
years (and 43% Y/Y growth in CQ4:05). By contrast,
narrowband subscribers have seen very low single-digit Q/Q
growth figures, as consumers who are connecting to the
Internet for the first time opt for broadband, and ISPs seek to
migrate subscribers from narrowband to broadband. We note
that the European market is now much more competitive than
it was two years ago: incumbent ISPs have seen their
monopolistic market shares fall markedly as alternative ISPs
have entered the space, encouraged by the potential of the
broadband market and the intervention of regulators. France
is a prime example, where consumers can choose among up
to 10 ISPs. This has caused the prices of broadband
connections to fall, the volume of connections to multiply, and
bandwidth to increase substantially.
Recognizing both the threat and the opportunity, European
telecom operators (PTOs) have established full control of the
ISPs in which they held a controlling stake: Telefonica
launched a bid for the minority shareholders of Terra Lycos
earlier this year after a failed attempt in 2003; France Telecom
did the same with Wanadoo in February 2004; and in October
2004 Deutsche Telekom launched a tender offer for the
minorities of T-Online. This reintegration illustrates the PTOs’
efforts to streamline their operations and focus on the core
strategy, which sees broadband activities (both fixed-line and
wireless) as the major growth drivers in the medium term.
For the medium term, we believe broadband market growth
will be sustained at similar levels to those detailed above,
thanks to the advent of VoIP, triple-play offerings, IPTV and
many other innovations, coupled with the fact that parts of
Europe still have relatively low internet penetration.
Japan — As of CQ4:05, Japan had 22MM broadband
subscribers (46-47% of households). Although the Q/Q
growth rate was down roughtly +5%, the Y/Y growth rate
continued its climb at +23%. DSL still has the overwhelming
lead in cumulative subscribers at 65% of overall broadband
subscriber, but FTTH (fibre-to-the-home) caught up gradually
through C2005. DSL has been the main driver of subscriber
growth so far, but this has generally been shifting to FTTH
since CQ1:05. In CQ4:05, DSL had 239,000 net subscriber
adds, vs. 842,000 for FTTH. Since apartments make up a
large percentage of Japanese residences, it is possible to
share a FTTH connection between apartments in one building
at a low price to each user. FTTH providers are not only NTT,
the incumbents, but also affiliated companies of electric power
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March 23, 2006
Internet, Technology, Media & Telecom
companies (which own the infrastructure) and independents
like USEN. These companies have been aggressive in pulling
in subscribers via frequent, large-scale campaigns. We expect
FTTH to drive growth in the broadband market.
Asia-Pacific (ex. Japan) — Our Asia-Pacific team expects
total residential broadband subscribers grew 58%, from
44MM in 2004 to 70MM in 2005. South Korea accounts for
roughly 35% of the total subscribers in the Asian Pacific
broadband market. However, Mitchell Kim, our Korean
Telecom analyst, notes that the Korean market growth rate
has slowed considerably. Lina Choi, our Chinese Telecom
analyst, believes China is the major growth market in the
region — accounting for 65% of total Asian Pacific
broadband users.
South Korea — Broadband penetration rate surpassed 70%
of households in 2005. Monthly subscriber growth has
slowed considerably to a mere 25K. Although the
penetration rate is approaching saturation, competition for
subscribers remains intense, as broadband operators are
spending US$100-200 for subscriber acquisition and
installation costs. Competition is likely to continue intensify
throughout 2006, as the government allowed a new entrant
in retail broadband services. Powercomm, 45% owned by
Dacom, is a network operator, which leases out its HFC
(Hybrid Fiber Coax) network or cable network to cable
system operators and cable modem based Internet Service
Providers such as Hanaro, Thrunet and Onse. And
Powercomm just recently entered the retail broadband
services market in the beginning of September 2005. The
entry of a new player is likely to increase marketing costs for
all players but it is also likely to lead to greater market
penetration, in our view.
To stay competitive, leading broadband operators are
actively upgrading their subscribers to faster speed modems
called VDSL (very-high-speed digital subscriber line), with
speeds up to 20Mbps. VDSL covers 17% of all broadband
subscribers in Korea. However, higher speed has not
translated into higher revenue. Operators have been offering
VDSL to retain subscribers rather than to boost ARPU.
Latin America — Broadband penetration remains in its early
stages in most of Latin America, where only Chile shows
double-digit household penetration. We see sequential
growth continuing in the double digits for some quarters to
come. In Brazil and Chile, greater competition is expected
as fixed-line companies race for broadband customers, partly
to preempt cable companies and other providers. These
markets also have the most aggressive pricing strategies. In
Brazil, relatively low-bandwidth (less than 256 kbps) DSL
costs roughly $20 per month. In Chile, similar offerings cost
$25. Additionally, the Chilean unit of Telmex has launched a
new broadband service – Broadband On Demand – aimed at
the corporate sector, affording clients to high speed Internet
access without the need to pay for a permanent dedicated
broadband contract. The new service is offered via the
company's IP-MPLS network and allows users to select the
speed they require for each project. In Mexico, pricing
remains relatively high, at about $30 for the lowest
bandwidth offering.
China — Broadband remains in its early growth stage. At
2.5% population penetration and what we estimate to be 8.5%
household penetration, China adds 1-1.2MM broadband users
per month, which implies a Y/Y growth rate of 25-30%. ADSL
remains the key growth driver, with Ethernet and cablemodem
also contribution to the increase in users.
Significant unit revenue erosion has accompanied rapid user
growth. At China Telecom and China Netcom, the two
dominant broadband service providers, average ARPU has
fallen from US$17-18 in 2003 to US$10-11 currently. This
implies an average annual erosion of 21%.
Both China Telecom and Netcom remain focused on raising
broadband penetration and the weight of broadband services
in their overall revenue portfolios. As of C2005, we estimate
broadband to contribute 11% of CT and CNC’s total revenue,
but 30-40% of the growth rate.
Exhibit 21
China – Large Broadband Market, Low Penetration
28
11.2 11.2 11.1
3.1 3
1.2 0.8 0.4 0.2
US
Japan
Korea
China
UK
Taiwan
Hong Kong
Australia
Singapore
Malaysia
Subscribers (in millions) - 2003
0.1 0.1
2.2 2.7
9.3
29.7
36.2
57.7
69.5
India
Thailand
Malaysia
China
Australia
Japan
Singapore
Hong Kong
Korea
(% of Households) - 2003
Source: China Netcom
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 22
China Broadband at Inflection Point for Growth
0
50
100
150
200
250
300
350
400
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Broadband
Mobile
Mobile Broadband
Monthly Add: 1.6mm subs 1 mm
Penetration: 3.4% 1.8%
Total Rev enue Rmb 86 bn Rmb 23 bn
Monthly Add: 5.9 mm subs
Penetration: 26.2%
Total Rev enue: 250 bn
Total subscribers in China (MM)
Source: China Netcom
40
M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 23
Global Broadband Subscriber Data, C2002-C2005E
Quarterly Annual
Metric
Share CQ1:03 CQ2:03 CQ3:03 CQ4:03 CQ1:04 CQ2:04 CQ3:04 CQ4:04 CQ1:05 CQ2:05 CQ3:05 CQ4:05E C2002 C2003 C2004 C2005E
Global Broadband Subscribers (000's) 100% 69,585 78,609 88,046 96,309 112,051 123,286 133,992 147,699 165,802 178,471 192,796 209,112 56,550 96,309 147,699 209,112
Y/Y Growth 92% 90% 79% 70% 61% 57% 52% 53% 48% 45% 44% 42% 81% 70% 53% 42%
Q/Q Growth 23% 13% 12% 9% 16% 10% 9% 10% 12% 8% 8% 8% -- -- -- --
North America 24% 2 2,607 24,336 26,649 28,880 31,540 3 3,505 36,153 38,740 41,699 4 3,788 4 6,797 49,848 20,484 28,880 38,740 49,848
Y/Y Growth 47% 43% 45% 41% 40% 38% 36% 34% 32% 31% 29% 29% 41% 41% 34% 29%
Q/Q Growth 10% 8% 10% 8% 9% 6% 8% 7% 8% 5% 7% 7% -- -- -- --
Europe 29% 1 6,363 18,543 20,951 24,693 28,572 3 2,376 36,237 42,225 47,738 5 1,624 5 5,436 60,301 9,966 24,693 42,225 60,301
Y/Y Growth 331% 318% 158% 148% 75% 75% 73% 71% 67% 59% 53% 43% 247% 148% 71% 43%
Q/Q Growth 64% 13% 13% 18% 16% 13% 12% 17% 13% 8% 7% 9% -- -- -- --
Japan 11% 9 ,397 10,939 12,256 13,641 14,917 1 6,238 17,304 18,295 19,488 2 0,428 2 1,398 22,479 7,806 13,641 18,295 22,479
Y/Y Growth 143% 119% 100% 75% 59% 48% 41% 34% 31% 26% 24% 23% 175% 75% 34% 23%
Q/Q Growth 20% 16% 12% 11% 9% 9% 7% 6% 7% 5% 5% 5% -- -- -- --
Asia-Pacific 33% 1 9,762 23,132 26,243 26,836 34,426 3 8,090 40,645 44,115 52,032 5 7,228 6 3,157 69,896 16,991 26,836 44,115 69,896
Y/Y Growth 58% 66% 70% 58% 74% 65% 55% 64% 51% 50% 55% 58% 59% 58% 64% 58%
Q/Q Growth 16% 17% 13% 2% 28% 11% 7% 9% 18% 10% 10% 11% -- -- -- --
Latin America 3% 1 ,457 1,659 1 ,947 2,259 2,596 3 ,077 3,653 4,324 4,847 5 ,403 6,008 6,588 1,304 2,259 4,324 6,588
Y/Y Growth 83% 69% 73% 73% 78% 85% 88% 91% 87% 76% 64% 52% 303% 73% 91% 52%
Q/Q Growth 12% 14% 17% 16% 15% 19% 19% 18% 12% 11% 11% 10% -- -- -- --
Source: Morgan Stanley Research, Rich Bilotti, Simon Flannery, Paul Marsch, Mitchell Kim, Nick Sebrell, Vera Rossi
E - Morgan Stanley Research estimates
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Global Internet Is Increasingly Mobile-Centric
Global Internet Becoming More Mobile-Centric
Fast growth in mobile phone penetration, particularly in large
markets like China, is making the Internet increasingly
mobile-centric rather than PC-centric. There are more
mobile phones than fixed telephone lines worldwide, and
mobile devices are increasingly becoming gateways to the
Internet. We expect this pattern to continue in large
countries, where the infrastructure costs of providing
telephone service far outweigh the costs of mobile phone
towers. In China, as of year-end 2004, mobile phone
penetration is now higher than fixed-line telephone
penetration (26% to 22%). Unlike most other regions of the
world, China’s Internet market centers on mobile handsets
rather than personal computers (PCs). China now has over
360MM mobile phone users, 3.6 times more than its Internet
users. The total number of China’s mobile users equals the
total of the next three nations combined. For the US, that
ratio holds for Internet users: the total number of Internet
users in the US equals the total of the next three nations
combined.
We believe investors underappreciate the capacity of
value-added mobile computing services to improve
customer satisfaction and generate wealth
China, in many ways, is leading the development and
monetization of mobile content (i.e., KongZhong, TOM
Online) in ways that are still nascent in the US. China’s
users are heavier users of mobile data services, relative to
other countries. This is manifest in the usage of SMS (short
message service, a service that allows brief text messages
to be sent and received on mobile phones): there were 652
SMS per mobile phone sent in China vs. 139 SMS per
mobile phone sent in the US, in 2004.
Mobile devices are becoming increasingly powerful
devices both in their own right and in tandem with PCs
Over the next 2-3 years, we expect the relationship between
PCs and mobile devices will evolve into more of a clientserver
environment. Users likely will spend more time on
their home PCs using self-programmed products like My
Yahoo! to customize the type of content that will be made
available to their mobile devices.
Mobile network speeds continue to advance, greasing
the skids for innovation on the mobile platform
2.5G should enter a ‘sweet spot’ of sorts over the next two
years, as 25% of users use the service. 2.5G allows for
basic downloads, like ring tones and screensavers, and
limited Web browsing. However, we believe the adoption of
3G, with speeds of 200-700 Kbps, will be key to monitor for
more advanced development of the mobile Internet. As we
saw with the conversion of the dial-up Internet to the
broadband Internet, faster access speeds make for more
compelling user experiences, and create a more feasible
environment for developing applications and services.
Increasingly, as mobile phone features and access speeds
improve, users will expect, in effect, to use their phones as
remote control devices to search and pay for products,
services and information.
The ramp-up in WiFi / WiMax, the glue for ubiquitous
connectivity, may happen faster than expected
Accurate global data for WiFi hot spots and users are
elusive. We estimate roughly 60 million WiFi users globally
(based on Synergy's Global data of SOHO / Home Client
WLAN units shipped and assuming a replacement cycle
three years or longer) and about 200,000 hotspots in 2006.
The leaders in the WiFi market are T-Mobile and Boingo.
Various municipal initiatives may significantly accelerate the
pace of the roll-out. Google’s proposal to install WiFi access
devices in San Francisco rests on an expectation of local
advertising revenues. In addition, we would expect a
number of different businesses to contribute to similar
projects in order to derive a marketing benefit from rolling out
WiFi access in specific neighborhoods — an “Adopt a
Highway” type program.
Revenue streams for broadband and mobile Internet
now differ, but will likely grow to resemble each other
Broadband revenue typically is advertising or commissionbased,
whereas mobile revenue involves payments for
content or services. We believe market forces are about to
change that distinction. Just as mobile users have been
willing to pay for à-la-carte content like ring tones, so will
broadband users as they are enabled to find whatever they
are looking for, anytime, anywhere. Conversely, advertising
and commission-based revenue should take off in the mobile
market, helped by improving access speeds, rising
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
acceptance of payment systems, and enhanced searchrelated
featured for mobile phones. The rapid ramp of
Google’s revenue and profit growth suggests that vendors
find Google’s on-demand online customer acquisition tools to
be quite effective — and Google is just beginning to tap this
opportunity in the mobile market.
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Pace of Global Innovation Is Accelerating
The Internet is now anything but US-centric, and so will
be the next round of global innovation
Not only do North American users account for a mere 23%
of global Internet users, but also we expect many of the
most exciting innovations to emerge from outside the US.
The US now lags in a number of areas — mobile
messaging and mobile content — that we expect to spur
innovations related to broadband and mobile-Internet over
the next 10 years.
North America has fallen to the No. 3 region in terms of the
number of Internet users; there are now more Internet users
in Asia/Pacific and Europe than in North America. Internet
user growth in China and India has proved to be stronger
than we had expected, causing the number of Internet users
in Asia/Pacific (including Japan) to grow to 308MM in 2004,
which is 84MM more Internet users than in North America.
Europe has also overtaken North America and now
accounts for 26% of global Internet users in 2004 versus
25% for North America.
US companies, at the margin, will likely continue to turn
overseas for technological innovations
The eBay/Skype acquisition, along with VeriSign/Jamba,
are important examples of leading US-based technology
companies purchasing leading non-US technologies that
had leadership in foreign markets with the intent, in part, to
bring technology into US market. We expect this trend to
continue.
Exhibit 24
US Share of Technology Usage / Innovation
Falling
Asia Pacific
41%
Europe
19%
ROW
18%
N. America
11% South
America
11%
Mobile Subscribers – 2B
C2005E (2)
Asia
Pacific
36%
Europe
24% ROW
12%
N. America
23% South
America
5%
Internet Users – 1B
C2005E (1)
Source (1) Morgan Stanley Research. (2) Morgan Stanley Communications Equipment
Research: Scott Coleman, John Marchetti.
Global investors have been willing to commit rising
amounts of capital to technology companies outside
the US, particularly in Asia
Public market financings, for non-US based companies, as
a percentage of total technology financings, are at an all
time high, and rising. In 2005, non-US technology company
financings accounted for 62% of technology financings,
versus 58% in 2004, 51% in 2003 and 39% in 1998. Non-
Japan Asia has supported the highest and most consistent
growth. In 2005, it accounted for 33% of total public
technology financings in dollar terms.
Exhibit 25
Non-US Share of Technology Financings Rising
Geographic Distribution of Technology Equity and Equity-Linked
Transaction Volume ($B)
2005
Non-US, 62%,
with
Asia, ex-Japan 33%,
Europe, 20%,
Japan, 9%
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002 2003 2004 2005
Geographic Distribution of Technology Equity
and Equity-Linked Transaction Volume
U.S. Europe Asia Japan
$34 $109 $181 $67 $35 $58 $63 $55
Source: SDC, Dealogic, Morgan Stanley.
Exhibit 26
Global Technology Financings by Sector
Technology Equity and Equity-Linked Transaction Volume
by Sub-Sector ($B)
2005
Semiconductors 26%
Hardware 25%
Internet & Cons S/W 22%
IT Services 16%
Enterprise Software 9%
Comms Equip 2%
$181 $67 $35 $58 $63 $55
0%
20%
40%
60%
80%
100%
1998 1999 2000 2001 2002 2003 2004 2005
Technology Equity and Equity-Linked
Transaction Volume by Sub-Sector
Semiconductors Hardware
Internet IT Services
Software Communications Equipment
$34 $109
Source: SDC, Dealogic, Morgan Stanley.
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
Exhibit 27
Global Technology Financings by Sector
Rest of
World
34%
US
66%
1970
US
47%
Rest of
World
53%
2001
Rest of
World
73%
US
27%
2030E
Source: AXA. Projected data for C2030E calculated using the rate of growth of market
capitalization for Rest of World and USA since 1970.
Many Asian technology companies have been criticized
for being ‘fast followers’ rather than fast innovators —
but that has begun to change
A rising number of Asian technology companies have begun
to ramp up focus on anticipating consumer needs. We cite
Japan’s NTT DoCoMo (mobile data services), KDDI (mobile
data services), Toshiba (flash memory), Sharp (TFT LCDs
and solar cells) and Canon (imaging); Korea’s Samsung
(memory) and SK Telecom (mobile data services); Taiwan’s
TSMC (flexible semiconductor manufacturing); India’s iFlex
(banking application software) and Infosys (outsourcing),
Tencent (instant messaging), NetEase (online gaming),
Ctrip (online and offline travel) and Tom Online (mobile
value added services) as good examples.
China will likely surprise over the next 5-10 years as a
source of technological innovation
Large numbers of trained engineers and users of the
Internet and mobile phones now spur innovation in China.
Faced with an expectation of low-cost services, technology
leaders there are striving to meet market demands.
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March 23, 2006
Internet, Technology, Media & Telecom
Internet Leaders, For Most Part, Are Well Positioned
We determine the companies that are the market share
leaders for each TMT segment for each country (see TMT
Appendix for more detail).
Despite intensifying intramural squabbles, Internet
leaders, for the most part, remain well positioned
We foresee an accelerated scramble among Internet
leaders for control of the next-generation communications
hubs. Internet leaders are observing the convergence of
the Internet with other types of communications (for
instance, more than 10% of Yahoo! instant messaging
sessions result in a phone call), and they are reacting
accordingly with plans to leverage their existing subscriber
bases into new services.
However, the Internet leaders are not the only ones that
support tens of millions — and often, hundreds of
millions — of users of their core products
The leading mobile service providers — China Mobile (with
225 million subscribers); Vodafone (171 million); China
Unicom (121 million) and China Netcom (120 million) —
also desire to be next-generation market leaders. They
have hefty user bases and active development
environments for mobile value added services (MVAS) to
support their efforts.
How does all this get paid for?
• In part, through advertising. We believe many still
underestimate the potential for increased spending on
online advertising. In the US, we are still at only $145 in
advertising spending per Internet household in 2004,
compared to $674 for every newspaper home.
• In part, through a convergence of search / find / obtain
(SFO) for goods and services on the Internet. Will there
always be a difference between advertising, marketing, and
selling? We think that the business models being created
by Amazon, eBay, Google, and Yahoo! are blurring those
distinctions.
• And in part through “$1 content.” Very low-price
downloadable digital content (e.g., ring tones and iTunes),
assisted by easy-to-use payment systems (e.g., mobile
operators and PayPal), is generating billions in revenue.
We believe the next exciting market will be for online video.
Maybe, just maybe, if one has truly great low-price content
— and makes it very easy to search / find / obtain (SFO) —
one can make it up on volume.
Market Share Concentration in the Hands of a Few
The key takeaway from our company analysis is that, in
most TMT markets, a handful of companies dominate the
market. This is especially the case with telephone lines,
where often a state-operated (or formerly state-operated)
company has near total market share (e.g., Deutsche
Telecom (89%) in Germany (see Exhibit 29). In many
cases, dominance in telephone lines translates to a leading
position as an ISP, both narrowband and DSL. The US
offers a strong exception to this rule though, with AOL /
RoadRunner taking a leadership spot (27% US ISP market
share) despite not having a telco relationship. We note the
same exception in Japan, where ISP market share has
remained fragmented because telecom companies have
been unable to garner sufficient user traffic to acquire
customers. Yahoo! Japan has this advantage and,
therefore, rapidly built itself into the No. 1 ADSL ISP/portal
position, ahead of telcos and electronics giants who had
first-mover advantage.
In the US mobile phone services segment, market leaders
are Cingular (27% share), Verizon (25%), Sprint PCS
(12%), T-Mobile (10%), and Nextel (8%). In the US ISP
segment, we believe market leaders are AOL / RoadRunner
(27% share), Comcast (8%), NetZero/Juno (6%) and SBC
Yahoo! (6%).
Some of the major corporate alliances — within countries
and between countries — are not captured in this data sort,
although the strong potential competitive positioning of the
alliances can be drawn from the data.
Focusing on Leaders
As analysts, one of our consistent objectives has been to
focus on the largest market segments and the No. 1 and
No. 2 players within each segment. We believe marketshare
leaders in the largest markets often have the greatest
revenue and earnings potential. With that in mind, we note
several key points from our company database:
First, in the telephone line segment, companies with
very large market shares among the top markets are
Telemex in Mexico (96%), KT Corp in Korea (95%
share), Deutsche Telecom in Germany (89%), Telefonica
in Spain (89%), and Telia in Sweden (84%). Telephone
lines arguably are the most regulated of the segments, thus
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M O R G A N S T A N L E Y E Q U I T Y R E S E A R C H
March 23, 2006
Internet, Technology, Media & Telecom
the very strong presence of government/quasi-government
companies in this segment should not come as too much of
a surprise.
Second, as a point of contrast, the highest country
market share in PCs — arguably the most competitive
of the segments — belongs to Dell in the US, with a 35%
share (plus 29% in the UK and 25% in Canada). Across
the other countries, the market share leaders generally
have a 20+% sha