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The Age of Engagement (50 pages)
1
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The Age of Engagement
AD:TECH – 4/25/05
mary.meeker@morganstanley.com
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
2
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• Perspective
• ‘Age of Engagement’ – Internet Impact Just Starting
• Search / Find / Obtain (SFO)
• Numbers Tell Story
• Data Tell Story
• Please Bring This On…
Outline
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Perspective
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What We Have Lived Through with Internet
Company Creation Bust Boom-let
Wealth Creation Bust Boom
Patterns
Boom
Boom-let
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Top 5 Global Internet Market Cap Leaders
• $ 2B = market value — pre-2000 IPO
• $178B = market value — Nasdaq peak – 3/10/00
• $ 32B = market value — Nasdaq trough – 10/9/02
• $197B = market value — 4/22/05
Google + Yahoo! + eBay + Yahoo! Japan + Amazon.com
Google included after company’s 8/04 IPO.
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Internet 24x7…Everywhere
Patagonia 7 Miles Above North Sea
From: Peter Bloom
To: Mary Meeker
Sent: Fri Apr 15 11:04:43 2005
Subject: Amazing paradigm shift at 36,000
feet...the world really is getting smaller!
I am currently 7 miles above the earth on an
SAS flight somewhere over the North Sea. I
am writing this email from one of the first
planes to have a high speed continuous
connection to the Internet. I am connected
using standard wireless access and in
addition to email I have three IM sessions
running with instantaneous response and also
just executed a trade on NASDAQ. [I plan to
make a VoIP call later.]
Truly awesome implementation of
technology...but sadly the last haven from
"the connected world" has now been
obliterated. Someday we'll all take emails
like this for granted but I couldn't pass up
the opportunity to send one of the first
ones.
Coming up on Greenland!
7
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Global Data Points…
Google
Broadband
Yahoo!
Digital Music
Yahoo!
Blogging
5B global searches (+62% Y/Y, 2/05); 355MM global unique
visitors (+36%, 2/05) per comScore
135MM global subscribers (+51% Y/Y, CQ4); 39MM in N.
America; 63MM in Asia
917MM streaming video (music…) sessions (+119% Y/Y, CQ4)
300MM cumulative iTunes (+270%, CQ1 to 100MM); 16MM
iPods; digital music = 15% of US music units sold in 2004
40MM+ estimated My Yahoo! users
27% of US Internet users indicated they read blogs
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…Global Data Points
Wireless Internet 196MM messaging subscribers (CQ4) in China, No. 1 in world
VoIP 33MM registered Skype users (4/05) - fastest product ramp ever?
Shanda
Networking
2MM peak concurrent online gamers (+69% Y/Y, CQ4) in China
PayPal 72MM accounts (+57% Y/Y, CQ1); 22MM users (+52%)
Mobile Payments Dutch Railways rolling out SMS ticketing for trains
Global N. America = 26% of Internet users in 2004; was 46% in 1998
S. Korea Broadband penetration of 70%+ - No. 1 in world
China More Internet users < age of 30 than anywhere
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Flat to Down to Way Down
Music – 2004 sales down 21% from 1999 peak
TV – Network TVs audience share down by 1/3 since 1985
Radio – Listener-ship at lowest level in 25+ years
Newspapers – Circulation peaked in 1987; decline accelerating
Magazines – Circulation peaked in 2000; now at 1994 levels
Up
Movies – 2004 = record year in for theaters + DVDs
Videogames – 2004 = record year despite end-of-cycle consoles
Web – Online ads could grow 30% in 2005; surpassing $10B (5% of advertising)
Chris Anderson…Mass Media �� Social Media
Chris Anderson, Wired Magazine (http://longtail.typepad.com/the_long_tail/2005/04/media_meltdown.html), US data.
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Broadband Ramp in 25-30% Penetration Sweet Spot…
Morgan Stanley Research.
0
10
20
30
40
50
60
70
80
2002 2003 2004 2005E 2006E 2007E 2008E 2009E 2010E 2011E
US Residential Broadband
Subscribers (MM)
0%
10%
20%
30%
40%
50%
60%
% of Total US Households
US Residential Broadband Subscribers % of Total US Households
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Mobile Increasingly Important
Mobile
Phone to
Internet
Country User Ratio
Mobile
Phones
(MM)
Internet
Users
(MM)
Installed
PCs
(MM)
China
US
Japan
Germany
UK
Italy
S. Korea
334
180
94
68
54
54
34
94
201
68
42
30
26
30
3.6 : 1
0.9 : 1
1.4 : 1
1.6 : 1
1.8 : 1
2.1 : 1
1.1 : 1
42
204
54
40
26
15
27
Euromonitor, CNNIC, World Bank, Morgan Stanley Research – 2004 year-end data
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Content / User Experience Continues to Improve…
Community Y! 360 Beta, Groups Redesign
Advertising Overture Advertiser Tools, Overture Local Match Y! Partner Network
BT Communicator, Rogers Portal, Y! Browser /
Sidebar
Access Partners
Mobile Mobile Site Upgrade, Messenger, Photos, Search Mobile Mail
Local Maps, SmartView, Local Search Launch
Personalization My Yahoo! Relaunch
Games Relaunch (EUR), My / Front
Page on BT / Rogers
Messenger 6.0 (WW), LaunchCast (UK), Mail
Upgrade, Toolbar Anti-Spy (EUR), Kelkoo
Relaunch, My Yahoo! Relaunch (EUR), Front
Page Relaunch (EUR)
International
Small Biz Domains 2.0, HotJobs Local Listings, HotJobs RSS, Free Local Business Sites
Personals Premier
SBC 2.0, Yahoo! BT, Yahoo! Plus, Small Biz
Merchant Solns
Marketplaces
My Movies Recommend, Games/News
Redesign
Sports Upgrade, Finance Quotes Redesign, Autos Redesign, Games Upgrade
Movies User Reviews
Content
Desktop, Video, Y!Q Contextual Search,
Firefox toolbar
Proprietary Search Platform, News Search,
Search Shortcuts, Toolbar Anti-spy, Search
Results Redesign, Travel Search, Video Search
Search 4.0, Enhanced News Search, Product
Search, Shopping SmartSort
Search
Mail Spam Tools, Messenger 5.0, Photos Messenger 6.0, Mail Upgrade, Avatars 1.0 Mail Storage Increase
Relaunch
Communications
Front Doors Front Page Search Redesign Front Page Relaunch
2003 2004 2005YTD
Yahoo!
Yahoo! Product Launches
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…Content / User Experience Continues to Improve…
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…Content / User Experience Continues to Improve
Consumer Satisfaction with Merchants in CQ4 Holidays
50%
29%
18%
2% 1%
58%
28%
12%
1% 0%
73%
22%
3% 2% 0%
0
10
20
30
40
50
60
70
80
Very Satisfied Somewhat
Satisfied
Neither Somewhat
Dissatisfied
Very
Dissatisfied
Percent Selecting Response
2002 2003 2004
Shop.org/BizRate Research Online Holiday Mood Study
BizRate Research, a Division of Shopzilla
Conducted By Shop.org and BizRate Research
Wave 2 Dates
2002: 12/2 – 12/3
2003: 12/1 – 12/2
2004: 12/6 – 12/7
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Hierarchy of Needs?
Selfactualization
Esteem
Belonging
Safety
Physiological
Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate.
1943 - Maslow 2005 - ? ;)
Internet /
Mobile Phone
Shelter
Food / Water
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‘Age of Engagement’ – Internet Impact Just Starting
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900MM+ global customers driving on same
highway with same information at same time
Only differences: speed; language; device
(mobile, PC…)
360° of Engagement
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Our mission is to organize all the world’s
information and make it universally accessible
and useful. - Google
‘All the World’s Information…’
Mmm, this may be doable well before most of
folks in this room retire
Think about ~$500MM in annual capex and
universal language translation on the fly
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Consumers in charge
Inefficient markets becoming efficient - eBay
Unprecedented global innovation
‘Engagement’ Being Redefined
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Search / Find / Obtain (SFO)
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Evolution of Search, eBay as Proxy
As buyers, sellers and eBay became smarter
about expanding / improving eBay’s user
experience, volume and scope of listings and
value of goods increased across platform,
while conversion rates (ex-ASP increases)
remained relatively steady
Similar trends playing out in search – as
searchers, advertisers and search engines
become more sophisticated about expanding /
improving user experience and relevancy of
sponsored / natural search results, search
query volume, conversions and resulting
revenue levels should increase
Key takeaway -- more sophisticated user
experience leads to a higher ROI, for both
eBay and its sellers
eBay Listings, Gross Merchandise Volume (GMV)
As eBay and buyers / sellers became smarter, eBay’s online marketplace improved…
0
50
100
150
200
250
300
350
400
450
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Sep-04
Listings (MM)
0
2,000
4,000
6,000
8,000
10,000
$12,000
Total GMV (MM)
Listings GMV
Morgan Stanley Research, eBay.
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Shift to online from offline advertising will continue for many
reasons:
targeting + branding; accountability; measurability; flexibility;
ease-of-use; compelling ROI; consumer benefits
However, biggest growth driver of online shift may be tool /
network improvements paced by Google, Yahoo!, Microsoft (?)
On-going Improvements in Online Ad Tools are Key
1. MSN operating expenses computed as MSN revenue, multiplied by Microsoft gross margin, less MSN operating expenses.
Google Yahoo! MSN (1)
Operating Expenses ($MM)
R&D ($MM)
Capital Expenditures ($MM)
$879
384
319
$1,587
381
246
$1,612
--
--
C2004
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10-15% user growth
20-30% usage growth
30%+ monetization growth
Global Internet Thesis
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Numbers Tell Story
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(1) Google unique user count from comScore and Morgan Stanley estimates of global users at year-end (’02 – 209MM, ’03 – 251MM, ’04 – 327MM, ’05 – 409MM). (2) Yahoo! active
registered users per company reports and Morgan Stanley estimates (’02 – 101MM, ’03 – 133MM, ’04 – 165MM, ’05 – 202MM). (3) eBay Payments users per company reports and Morgan
Stanley estimates (’02 – 8MM, ’03 – 13MM, ’04 – 20MM, ’05 – 26MM). eBay figures not presented pro-forma for PayPal acquisition, acquired 10/02.
$2
$11 $12
$9
$20
$37
0
5
10
15
20
25
30
35
40
Google Net Revenue per
Unique User (1)
Yahoo! Net Revenue per
Active Registered User (2)
eBay Payments Revenue
per Active Account (3)
Revenue per User or Account
C2002
C2003
C2004
C2005E
Monetization Continues to Rise
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We are offering unprecedented visibility into
the performance of advertising campaigns.
– Sergey Brin
In a Nutshell
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Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Newspapers include Classifieds. Promotions ($97B)
include: incentives ($26B), promotional products ($20B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing ($6B),
promotional fulfillment ($4B), product sampling ($2B), and in-store marketing ($1B). Households may use multiple advertising mediums.
Promotions
Newspapers
Classifieds
Direct Telephone
Direct Mail
Broadcast TV
Radio
Cable TV
Yellow Pages
Internet / Online
$97
45
15
85
48
43
20
16
14
7
99
50
55
99
99
99
60
70
99
60
$976
898
289
863
483
429
328
226
146
120
2003E Advertising
Spending ($B) Households (MM)
Ad Spending /
Medium Household ($)
Total
Average
$374
42
735
82
$4,469
497
Internet Ad Spend at $120 Per Home vs. $898 for Newspapers?
28
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(1) Adapted from SRI-Knowledge Networks, Fall 2003. (2) Adapted from Universal McCann, (6/03); Internet Advertising Bureau (3/04). (3) Veronis Suhler
Stevenson (2003), Yahoo! Analyst Day (5/04). Youth defined as age 17 and under. Ratios are calculated as percent of US media usage on a medium divided
by percent of US ad spending on a medium.
US Media Usage (1) to Ad Spending (2) Ratios
4.7x
0.0
2.0
4.0
6.0
8.0
10.0
12.0x
Newspapers
+ Magazines
Total TV Radio Internet
Youth Media Usage (3) to Ad Spending (2)
Ratios
11.3x
0.0
2.0
4.0
6.0
8.0
10.0
12.0x
Newspapers
+ Magazines
Total TV Radio Internet
Gap Between Internet Consumption and Ad Spend is Large
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Advertising Moving Online at Rapid Clip
eBay Advertising Spending (2)
Offline
38%
Online
62%
Global Advertising Spending (1)
Offline
97%
Online
3%
(1) PricewaterhouseCoopers, 2003 totals (6/04). (2) eBay (2004), Morgan Stanley.
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eBay (One Website) vs. All U.S. Newspapers (1,468 Dailies) Annual Classified Ads (MM)
4 33
123
238
320
427
603
764
141 144 145 146 127 122 119 119
0
100
200
300
400
500
600
700
800
900
1997 1998 1999 2000 2001 2002 2003 2004
Listings (MM)
eBay (US) All US Newspapers
eBay Has Grown Classified Market
Newspaper Association of America, eBay, Morgan Stanley Research
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Data Tell Story
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Search – Sponsored & Natural (iProspect)
Sponsored
Search
40%
Natural
Search
60%
iProspect Search Engine User Survey (5/04). Based on answer to question, for a given query, “Which result is more relevant,
natural or sponsored?”, from a US survey of 1,649 respondents (http://www.iprospect.com/about/searchenginemarketingwhitepapers.htm)
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Search – Driving Branding & Sales (SEMPO)
14%
21%
44%
54%
58%
61%
0% 10% 20% 30% 40% 50% 60% 70%
To provide informational/educational content only
To generate leads for a dealer or distributor network to
close as sales
To drive traffic to our Web site, the revenue model of
which is online advertising
To generate leads that we ourselves will close as sales
via another channel
To sell products, services, or content directly online
To increase/enhance brand awareness of
products/services
Percentage of Respondents Answering
SEMPO (12/04); survey of 288 search engine advertisers and SEM agencies.
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Search – Driving Branding (IAB / Nielsen)
Image Ad 4 5 2 4 8 8
(728 X 90)
Content Ad 7 2 2 5 14 10
5th Search 8 (4) 6 6 11 11
Paid Ad
1st Search 19% 2% 14% 8% 16% 16%
Paid Ad
Health Auto Beverage Electronics Retail Financial
Unaided Brand Awareness Summary, by Category
IAB and Nielsen//NetRating (6/04), as quoted by AR | Search, a division of Avenue A | Razorfish.
35
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Search – Driving Sales – Online & Offline (Overture / ComScore)
Same
Session
Online
Conversion
1%
Latent
Online
Conversion
7%
Offline
Conversion
92%
Estimated 92% of conversion activity occurs offline
Search and the Consumer Buying Cycle, Overture and comScore study 2005, as quoted by AR |
Search, a division of Avenue A | Razorfish. 25% of initial sample were conversions.
36
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Clicks in ‘Tails’ (findmefaster)
Clickthrough Rate vs. Phrase Length
1.0%
2.5% 2.8%
4.8%
7.1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
1 Word 2 Words 3 Words 4 Words 5 Words
Phrase Length
Clickthrough Rate
findmefaster (2004). Chris Anderson coined term “The Long Tail.”
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Conversions in ‘Tails’ (Oneupweb)
Oneupweb (1/05); (1) Based on high-traffic keywords, top 100 terms as ranked by total unique visitors. Conversion rate defined as the
percentage of unique visitors that purchased or converted.
1
2
3
4
5
6+
6%
15
22
38
10
9
Number of Words
Average Conversion
Rate (1)
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ROI in ‘Tails’ (findmefaster)
1 Word
18%
3+ Words
46%
2 Words
36%
1 Word
19%
3+ Words,
$0.24
26%
2 Words,
$0.49
55%
How users navigate to findmefaster How findmefaster buys keywords
findmefaster. Chris Anderson coined term “The Long Tail.”
39
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Please Bring This On
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You just heard you missed one of the greatest
golf shots in the history of the game. You want
see it and you are happy to pay to watch it or
perhaps view an ad in front of the footage.
You just want to watch it…
When Can We Do This?
41
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Google and Yahoo! Search Don’t Help
Search: Tiger Woods 16th hole Augusta video
• Lots of news stories
• No video
42
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Google & Yahoo! Video Search Don’t Help
Search: Tiger Woods 16th hole Augusta
• Pictures, text
• Not video we’re looking for
43
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What Does Help?
• Blogger posts video in the spirit of
creating a prototype Nike ad
• It’s downloadable, it’s free, but
potentially missing appropriate
permissions…
44
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The Shot!
click on image below for video clip
Note -- Adobe® Acrobat® Reader® version 6.0 or greater required to play video clip
To download a free copy, go to http://www.adobe.com/products/acrobat/readstep2.html
Source: Blogger (http://www.jaffejuice.com).
45
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We Want it, Make it Easy!
Content / Rights Owners
User searches for content Search Engines
Content owners receive payments via payment mechanism or ad
User gets content
Payment Mechanism Advertisements Such as…
46
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What We Know
Yahoo! — 917MM streaming video (mostly music) sessions (CQ4); <10%
preceded by streaming ads (rising to 50%, in our view) with compelling CPMs
Korea — TV channels allow users to download shows for ~$1
Google — launched upload.video.google beta (4/05)
Digital Music — 300MM iTunes / 16MM iPods sold
Digital sales could rise to as much as 25% of global music sales in five years…
At long last the threat has become the opportunity… -- IFPI, Digital Music Report, 2005
PayPal — 72MM accounts (CQ1); 22MM active users; 110MM payments with
$6B in volume; 3-8% of iTunes
Online Paid Content — $1.8B US revenue in 2004 per OPA
47
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What We May Know
Unleashing great, easy-to-access content (videos…) to 900MM+
Internet plus 1B+ mobile phone users with low prices / high CPMs?
Importantly, content ownership / rights create adoption governors.
But, perhaps content owners can make it up on volume…
48
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• Broadband
• Mobile
• User experience
• Search
• Personalization with more effective targeting
• User-generated content (RSS, blogs, reviews, images, audio…)
• Music
• Payments
• Short- and long-form video
• Local
• Pay per call
• Accessibility (PC + mobile…)
Innovation will Drive Usage Growth
49
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Impact of Internet has Just Begun
People have very little intuition for what it will
mean when the top 40% of US households,
based on income, have half a dozen computers,
all of them connected to the Net, all of them with
"instant on." They just don’t know how important
a part of our daily life the online world will be!
Jeff Bezos interview with Chip Bayers, Business 2.0
September, 2002
50
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