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Online Search Advertising Presentation - September 2004 (76 pages)
1
Online Search Advertising
Mary Meeker
mary.meeker@morganstanley.com
Brian Pitz
brian.pitz@morganstanley.com
Brian Fitzgerald
brian.fitzgerald@morganstanley.com
Benjamin Dorr
Ramji Srinivasan
US Internet Team – September 2004
Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
All of Morgan Stanley’s technology equity research reports are available on the Internet through Client
Link at www.morganstanley.com. If you wish to receive this service please contact your institutional
sales representative. This report can also be downloaded from www.morganstanley.com/techresearch.
2
Outline
• Need for search
• Why online search has so much potential
• What people search for…
• Online advertising still in early growth stages
• Improving user experience creates opportunities
• Revenue Per Search (RPS) trends
• Natural search vs. sponsored search click-through trends
• Companies impacting (and impacted by) search
3
Need For Search
4
Information has become fragmented, owing to…
Analog Digitization Digital
Passive Interactive
Audience / Customer Publisher / Seller
…media has shifted from one-source to many sources
Interactivity
Source: Morgan Stanley Research
Need For Search
5
Need For Search
Source: Morgan Stanley Research
Hierarchy &
Directory
All Stores
Yellow Pages
Cable TV
TV Guide
Many Publications
Dewey Decimal
System
Search is useful when information / products cease to fit into a digestible directory / hierarchy
Market Medium
Search Mechanism
Commerce Increasing number of stores, products
Entertainment Medium
Search Mechanism
Entertainment Increasing number of channels
Information Medium
Directory
Mall
Map
Broadcast TV
Flip through
channels
Publication
Table of Contents
Searchable
Hierarchy &
Directory
Everything for Sale
eBay
Digital Cable
On-Screen Interface
All Publications
Search Mechanism Lexis Nexis
Single
Element
Store
Shop
TV Channel
Watch
Article
Read
Information Increasing number of sources
6
Anyone can be publisher / audience or seller / buyer…
…expansion of information sources requires really great search tools…
…this is challenging when information comes from disparate sources / media…
For example, it’s easy for eBay to search eBay listings and for Lexis-Nexis to search
Lexis-Nexis formatted articles — but what happens when files, images, and ideas
don’t share an underlying structure?
This is a holy grail of computing, and underscores Google’s stated mission…
to organize the world’s information and make it universally accessible and useful
Need For Search
7
Why Online Search Has So
Much Potential
8
• Search / Find / Obtain (SFO) has become next “killer
application” of the Internet, after email and browser
• Improvements in SFO’ing global and local information 24x7 at
high speed (boosted by broadband adoption) have been
impressive, yet are still in early stages of development,
acceptance and relevance
• Note success of eBay, Yahoo!, Google, Amazon.com and
Microsoft: product acceptance; market cap creation (ex-
Microsoft) of $155B, 9/20/04; annualized online revenue of
$15B, CH1:04
Why Online Search Has So Much Potential
9
Search is omnipresent…
You can't always get what you want
And if you try sometime you find
You get what you need
– The Rolling Stones
I still haven’t found what I’m looking for…
– U2
I want what I want when I want it…
– Bangs
Why Online Search Has So Much Potential
10
Search
for “TiVo”
With the Web, search has become easier and more efficient
Obtain
Source: Morgan Stanley Research, Yahoo!, Amazon.com, TiVo (9/04).
Find
Why Online Search Has So Much Potential
11
eBay illustrates market expansion from online search
eBay (One Website) vs. All U.S. Newspapers (1,468 Dailies)
Annual Classified Ads (MM)
4 33
123
238
320
427
602
141 144 145 146 127 122 120
0
100
200
300
400
500
600
700
1997 1998 1999 2000 2001 2002 2003
Listings (MM)
eBay (US) All US Newspapers
Source: Morgan Stanley Research. Newspaper data provided by Morgan Stanley Publishing Analysts, Douglas Arthur and Lisa Monaco.
Why Online Search Has So Much Potential
12
While searching is easier than before, online search is not always:
– comprehensive
– relevant, fresh, timely
– trustworthy
– local
– personalized
– accessible
– integrated with relevant online content / commerce
– linked to for-pay (or subsidized) content
– linked to audio and video content
– in desired language
– easily integrated into the PC desktop
Why Online Search Has So Much Potential
13
In addition, as search becomes more personal, the opportunity for
non-commercial search-related services rises:
– your personalized “one box” desktop formatted to your needs
– focus on stuff you care about
– community
– sharing (playlists…)
– archival / retrieval
The transition from analog to digital content is still in its infancy...
Why Online Search Has So Much Potential
14
Good news for future of online search:
– Global customer demand is high
– Advertisers and vendors are funding growth
– Ecosystem (optimizers, intermediaries…) has developed
– Key competitors (eBay, Yahoo!, Google, Amazon.com,
Microsoft…) have different strengths and are pressing hard to
make on-going improvements in their product offerings…
– Natural and sponsored search should improve owing to
technology, competitive and experience advances
Why Online Search Has So Much Potential
15
Market Size
30-40MM references
per day
Source: Yahoo!, Analyst Day (5/04).
Targeting
Leads Generated
Tracking
Dollars Spent
Usage
25-35MM phone calls
per day
$14B
You seek leads
300MM searches
per day
150MM leads
per day
~$3B
Track in realtime
using online tools
Leads find you
Pay only when lead
visits Web site
11MM pieces read
per day
2MM responses
per day
$49B
Track responses via
phone/mail
You seek leads
Pay whether or not you
generate leads
Yellow Pages Direct Mail
Pay whether or not you
generate leads
Mostly untracked, some use
separate phone numbers
Search
Search as a Marketing Tool: Untapped Potential
Why Online Search Has So Much Potential
16
What People Search For…
17
0
2
4
6
8
10
12
14
16
18
Entertainment Adult Content Travel Consumer
Spending
Technology Auto Personal
Finance
Self
Improvement
Home Gambling
Searches (MM)
12/03 5/04
Source: Epic Sky as quoted in Marketing Sherpa (12/02, 5/04). Searches are the computed as the sum of individual generic terms, and as such, may not be
Source: wholly representative of searches within a category (for example, the one-word search term “book” is included in Consumer Spending).
Entertainment, adult content, travel and products/services top lists…
What People Search For…
18
Source: Enquiro, Search Engine Marketing Firm, “Inside the Mind of a Searcher” at http://www.enquiro.com/research.asp (8/04).
Based on survey results of a focus group of 24 participants.
Buying Funnel
Awareness
Consideration or Research
Decision
Purchase
% Who Would Use a Search Engine
9%
68%
43%
28%
Majority of online searchers appear to be priming for action…
What People Search For…
19
Source: IBM (8/04).
Keywords
Potential terms that
describe keyword
Search volume
CPC
Click-through Rate
Notebook computer
~50
High
Expensive
1%
P4 notebook
Pentium notebook
~100 to 500
Medium
Moderate
2%-5%
Thinkpad R40
2388-7RU
~5,000 to 50,000
Low
Inexpensive
3%-5%
Learn Shop Buy
IBM Case Study of the Buying Funnel
As queries get more specialized, volume decreases but click-through rates increase
What People Search For…
20
Online Advertising Still In Early
Growth Stages
21
Internet estimated to garner highest gains in media consumption
(5.3%)
(1.6%) (1.1%) (0.9%)
1.8%
16.4%
(1.9%)
(10)
(5)
0
5
10
15
20%
Rec. Music TV Newspapers
Magazines Radio Cable Internet
2003-2007E Predicted Change in Media Consumption
Source: Veronis Suhler Stevenson (2003).
Online Advertising Still In Early Growth Stages
22
US Youth -
Activity Hours Spent per Week
6
12
14
17
8
0
4
8
12
16
20
Books &
Magazines
Phone (Cell &
Landline)
Radio TV Internet
Source: Veronis Suhler Stevenson (2003), Yahoo! (5/04). Youth defined as age 17 and under.
Youth spend more time on Internet than other media
Online Advertising Still In Early Growth Stages
23
Media Usage Source: SRI-Knowledge Networks, Fall 2003.
Ad Spending Source: Universal McCann, (6/03); Internet Advertising Bureau (3/04).
Ratios are calculated as percent of US media usage on a medium divided by percent of US ad spending on a medium.
US Media Usage to Ad Spending Ratios
4.7x
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0x
Newspapers Magazine TV Cable TV Radio Internet
Gap between Internet consumption and advertiser spending remains large…
Online Advertising Still In Early Growth Stages
24
2003E US Spending Per Household for Various Media
Source: Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Newspapers include Classifieds. Promotions
($97B) include: incentives ($26B), promotional products ($20B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing
($6B), promotional fulfillment ($4B), product sampling ($2B), and in-store marketing ($1B). Households may use multiple advertising mediums.
Promotions
Newspapers
Classifieds
Direct Telephone
Direct Mail
Broadcast TV
Radio
Cable TV
Yellow Pages
Internet / Online
$97
45
15
85
48
43
20
16
14
7
99
50
55
99
99
99
60
70
99
60
$976
898
289
863
483
429
328
226
146
120
2003E Advertising
Spending ($B) Households (MM)
Ad Spending /
Medium Household ($)
Total
Average
$374
42
735
82
$4,469
497
Online Advertising Still In Early Growth Stages
25
Source: Morgan Stanley Research.
Historical Global Internet User Growth
341
609
751
485
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003
’00-’03 CAGR
30%
Broadband Subscriber Growth
13
56
89
32
0
10
20
30
40
50
60
70
80
90
100
2000 2001 2002 2003
’00-‘03 CAGR
90%
Internet user growth strong, usage growth stronger (with
broadband and content improvement assists)
Online Advertising Still In Early Growth Stages
26
Source: Morgan Stanley Research; R. Bilotti, S. Flannery, S. Simon, P. Marsch, Y. Motoyama, M. Kim, N. Sebrell, B. Swinburne, L. Choi (7/04).
Drilling down by region, plenty of room for incremental broadband
penetration—spelling increased Internet usage
Global Broadband Subscribers
Y/Y Growth
% of Total Internet Users
North America
Y/Y Growth
% of North America Internet Users
Europe
Y/Y Growth
% of Europe Internet Users
Japan
Y/Y Growth
% of Japan Internet Users
Asia-Pacific
Y/Y Growth
% of Asia-Pacific Internet Users
Latin America
Y/Y Growth
% of Latin America Internet Users
13
--
4
7
--
6
1
--
1
1
--
2
4
--
8
--
--
--
32
137%
7
14
94%
9
4
220%
3
3
354%
7
11
146%
11
0.3
690%
1
56
76%
9
21
51%
12
10
133%
6
8
175%
15
17
57%
12
1
135%
2
89
58%
12
30
40%
15
18
83%
8
14
75%
21
26
57%
14
2
99%
4
2000 2001 2002 2003 (Subscribers in Millions)
Online Advertising Still In Early Growth Stages
27
Source: Morgan Stanley Research, Mitchell Kim; Chiefexecutive.net, “Korea’s Broadband Revolution”; US Department of Commerce.
• In South Korea, the country with the world’s highest broadband
penetration (70%+), always-on, high-speed internet connections
have changed media consumption patterns
• Korean TV channels allow users to download missed shows for
roughly $1
• In 2003, online shopping comprised 12% of all retail sales in Korea,
versus less than 2% in the US
Broadband can have a significant impact on Internet usage patterns
Online Advertising Still In Early Growth Stages
28
Source: Yahoo! Analyst Day (5/04). “Reach” is defined at the percentage of users who visit a given site (or category) within a given month.
Online Advertising Still In Early Growth Stages
29
Source: Yahoo! Analyst Day (5/04).
Online Advertising Still In Early Growth Stages
30
Source: Morgan Stanley Research; IAB.
Impressive Y/Y growth acceleration in US online ad revenue…
Revenue
Y/Y Change
Q/Q Change
(US$ in Billions)
$2.1
+19%
+9
$1.9
-3%
-12
$1.8
-12%
-1
$1.8
-9%
-4
$1.6
-23%
-7
$1.5
-19%
-7
$1.5
-21%
-4
$1.5
-18%
-1
$1.6
-4%
+9
$1.6
+7%
+3
$1.7
+14%
+2
$1.8
+24%
+5
$2.2
+38%
+22
$2.3
+37%
+2
Q4:00 Q1:01 Q2:01 Q3:01 Q4:01 Q1:02 Q2:02 Q3:02 Q4:02 Q1:03 Q2:03 Q3:03 Q4:03 Q1:04
Softness in Ad Market Strength in Ad Market
$2.4
+43%
+6
Q2:04
Online Advertising Still In Early Growth Stages
31
(US$ in Millions)
$1,920
$4,621
$8,087
$7,134
$6,010
$7,267
0
2,500
5,000
7,500
$10,000
1998 1999 2000 2001 2002 2003
All Other Sponsored Search
Sponsored Search:
$2.5B,
up 182% Y/Y to
35% of Total
US Online
Advertising
Source: IAB, Morgan Stanley Research; Google launched its pay-for-performance search product in February 2002.
Sponsored search supporting strong growth…
Online Advertising Still In Early Growth Stages
32
Online advertising is undermonetized
Source: Morgan Stanley Research, Yahoo! (9/04).
Less than 20% of music videos on Yahoo! LAUNCH have ads preceding them, implying
significant opportunity for expansion of highly targeted ads…
Online Advertising Still In Early Growth Stages
33
Source: Forrester, “The mind of the DVR User: Media And Advertising,” (9/04). Based on online survey response of 588 Digital Video Recorder (DVR) users to
the question “In recorded programming, what percentage of ads do you actually watch?”
• Lower ad viewing habits of DVR users could lead advertisers to shift away from TV
• Online advertising could be a beneficiary of share shift away from TV, given
Internet’s increasingly broad reach and targeted capabilities of online medium
83% of DVR users
watch less than
10% of TV Ads
0
10
20
30
40
50
60%
None Less than 10% 10% to 25% 26% to 50% More than 50%
% of TV Ads Actually Watched by DVR users
Online Advertising Still In Early Growth Stages
34
Online advertising is undermonetized
Source: Morgan Stanley Research, Yahoo! (9/04).
Limited ad usage in
local search implying
opportunity for
expansion
Search for “Golf” in
Mesa, AZ
Online Advertising Still In Early Growth Stages
35
Online advertising is undermonetized
• Initiatives like Google AdSense for Content (which
automatically serves ads relevant to subject matter
of a Web page) help expand ad inventory and
monetization
• Status now like US roadside billboard opportunity
in the 1950s?
• When we overlay potential for local online
advertising and potential for behavorial online
advertising over the actual use of the medium,
undermonetization of online advertising is all the
more pronounced
Targeted,
Relevant Ad
Source: Google, NYTimes.com (7/04).
NYTimes.com article
about broadband triggers
sponsored ads for
broadband providers
Online Advertising Still In Early Growth Stages
36
Source: iMedia / Millward Brown / Advertising.com Marketing & Media Snapshot: 2004 (9/04). Based on survey responses of 292 marketing decision makers.
(1) Based on response to the question “How does your marketing/media budget compare to your 2003 marketing/media budget for the following media?”
(2) Based on response to “Please tell us which budget increased the most as a percent of the total budget.”
Online ad spending trends are strong vs. other media…
Online
Cable TV
Direct Mail
Network TV
Magazine
Newspaper
Radio
Outdoor
57.2%
37.0
37.7
35.6
33.6
28.1
27.1
22.6
54.1%
35.6
34.2
30.8
29.5
27.7
25.0
19.2
‘04 vs. ‘03 ‘05 vs. ’04
% of Marketers Expecting
to Increase Spending for
Each Medium (1)
Online
Network TV
Cable TV
Magazine
Direct Mail
Newspaper
Radio
Outdoor
25.7%
12.7
9.2
6.9
6.5
3.4
1.7
1.4
% of Marketers Naming Each
Medium to Grow the Most as
Share of Total Budget (2)
Online Advertising Still In Early Growth Stages
37
• Localization will likely become more important for online
advertisers
~25% of searches are local and ~10% of local searches have
commercial intent (compared with 30-40% for search in general),
Kelsey, 11/03. Sites have begun using user profiles or
regional/local IP targeting to target ads
• Internet Yellow Pages (iYP) should continue to take share
from offline
At $14B in revenue in 2003, US Yellow Pages account for 4% of
US advertising and ~46% of 2002 local small-to-medium
enterprise (SME) ad dollars. All in, we estimate that local online
advertising accounts for 3-4% of online ad spending.
Source: Morgan Stanley Research, Robert Coen, Universal McCann, The Kelsey Group.
Online Advertising Still In Early Growth Stages
38
Source: eMarketer (February 2004), Kelsey Group (2003), Morgan Stanley Media Research, wmph.org, Company websites.
Improvements in online local advertising are ramping…and are becoming
especially compelling and dynamic vs. paper-based yellow pages…
Traditional Yellow Pages
Not Comprehensive, often out-of-date,
physically bulky
Internet Yellow Pages
Expanded listings information, frequently refreshed, on any PC
with an Internet connection
Online Advertising Still In Early Growth Stages
39
Source: Morgan Stanley Research, Netgear, Yahoo! (9/04).
• The next leg of local
search adoption could
be driven by “smarter”
smartphones, with Wi-
Fi browsing
capabilities, and
seamless Internet
access and browsing
• Might help the
uninitiated in
“browsing” for a bar in
Palo Alto while on the
road and combined
with reviews, steer
them away from Blue
Chalk
Fast, always-on wireless (Wi-Fi) access
Comprehensive local listings
Cost-effective,
Internet-enabled
smartphones
Local and mobile could have significant areas of overlap, enhancing
both…that said, both are long-term (5+ year) financial propositions…
Speed
Mobile Content
Online Advertising Still In Early Growth Stages
40
Why do advertisers find online advertising, and
search, in particular, compelling?
– Ability to target – deliver the right offer to the right
user at the right time
– Measurable
– Flexible
– High ROI (25%+ is not uncommon) relative to
other media
Online Advertising Still In Early Growth Stages
41
Improving User Experience
Creates Opportunities
42
Improving User Experience Creates Opportunities
• Online “queries and clicks” have been around a long time but
monetization of queries has occurred for a shorter period
• Effective matching of queries with satisfactory results is still in its
infancy – this is the opportunity
• Financial opportunity lies in ability to improve users’ satisfaction in
finding what they are looking for
43
0
200
400
600
800
1,000
1,200
1,400
1,600
Jan-03
Mar-03
May-03
Jul-03
Sep-03
Nov-03
Jan-04
Mar-04
May-04
Jul-04
Queries (MM)
Google Yahoo! AOL MSN
Other Ask Jeeves CNET
Source: comScore Media Metrix, (8/04). Data is for North America only. In 6/03 – Yahoo! used Google for natural results. For comparability, the figures above
are presented as if Yahoo! had been using Inktomi on its Web site since inception. Yahoo! transitioned to Inktomi for natural results in 2/04.
Sites that are the Source of Search Queries
32%
26%
20%
2%
0%
4%
16%
0% 10% 20% 30% 40% 50%
Google
Yahoo!
AOL
MSN
Other
Ask Jeeves
CNET
Share of Queries
Jul 03
36%
29%
12%
6%
0%
3%
15%
0% 10% 20% 30% 40% 50%
Google
Yahoo!
AOL
MSN
Other
Ask Jeeves
CNET
Share of Queries
Jul 04
Queries to leading search engines rising…
Improving User Experience Creates Opportunities
44
48%
44%
6%
3%
0% 10% 20% 30% 40% 50% 60%
Google
Yahoo!
Teoma
Everything Else
Share of Queries
0
500
1,000
1,500
2,000
2,500
01/03
02/03
03/03
04/03
05/03
06/03
07/03
08/03
09/03
10/03
11/03
12/03
01/04
02/04
03/04
04/04
05/04
06/04
07/04
Queries (MM)
Google Yahoo! Everything Else Teoma
51%
43%
4%
2%
0% 10% 20% 30% 40% 50% 60%
Google
Yahoo!
Everything Else
Teoma
Share of Queries
Query Volume at Search Result Provider
Jul 03
Jul 04
Source: comScore Media Metrix, (8/04). Data is for North America only. In 6/03 – Yahoo! used Google for natural results. For comparability, the figures above
are presented as if Yahoo! had been using Inktomi on its Web site since inception. Yahoo! transitioned to Inktomi for natural results in 2/04.
Improving User Experience Creates Opportunities
45
Source: Morgan Stanley Research.
• As buyers, sellers and eBay became smarter
about expanding and improving eBay’s user
experience, volume and scope of listings and
value of goods increased across eBay
platform, while conversion rates (ex-ASP
increases) remained relatively steady
• Similar trends may play out in search – as
searchers, advertisers and search engines
become more sophisticated about expanding
and improving user experience and relevancy
of sponsored and natural search results,
search query volume, conversions plus
resulting revenue levels could increase
• The key takeaway is that more sophisticated
user experience leads to a higher ROI, for
both eBay and its sellers
eBay Listings, Gross Merchandise Volume (GMV)
As eBay and buyers / sellers became smarter, the online marketplace improved…
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
Mar-98
Sep-98
Mar-99
Sep-99
Mar-00
Sep-00
Mar-01
Sep-01
Mar-02
Sep-02
Mar-03
Sep-03
Mar-04
Listings ('000)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
$9,000,000
Total GMV (MM)
Listings GMV
Improving User Experience Creates Opportunities
46
Source: Morgan Stanley Research.
Improvements in natural search (85% of clicks…)
Increasing the number of documents
crawled
Improving algorithms that determine the
relevancy of results
Partnerships with premium research
sources
Highly relevant natural results
Greater R&D spend
Improving natural-language processing,
intent-based results
Increasing amounts of web content
Improving User Experience Creates Opportunities
47
Improvements in sponsored search
Improved keyword matching
technology
Increased keyword coverage
An efficient, high- volume market for
sponsored results
More nuanced campaign control
More bidders, greater volume
Advertisers’ greater financial
incentive to improve relevancy
Source: Morgan Stanley Research.
Improving User Experience Creates Opportunities
48
• Improvements and demand for natural vs. sponsored search has been
somewhat asynchronous…and may remain this way in the future as
both ways of searching continue to improve and become more similar…
Improving User Experience Creates Opportunities
49
Source: Morgan Stanley Research, Yahoo!, Google.
Search for “florists” in New York
Search for “Dentists” in Palo Alto
Local Searches, combined with ratings /
feedback systems, could improve the
user’s search experience
Improvements in local search
Improving User Experience Creates Opportunities
50
2. Google returns
page with links to user
Source: Yahoo!, Google, SBC, Acxiom, Verizon, Best Buy, Circuit City.
1. Searches for “TiVo”
on Google Local
3. Google pays
yearly licensing
fee for natural
results
4. User clicks “Best Buy”
ad and goes to Best Buy
Web site
5. Best Buy pays
Google a costper-
click fee
Situation: User searches for “TiVo” in New York on local.google.com
and clicks “Best Buy” Sponsored Link
How do Google and the Yellow Page Directories get paid?
Advertisers
Yellow Page Providers
Improving User Experience Creates Opportunities
51
• Personalization, which integrates user profiles for features such as custom
news alerts, start/home pages, and Internet Yellow Pages (iYP), will
become integrated into sites and search engines
• Ads based on user’s behavior and profile should be more relevant to user…
Source: Google, Amazon.com, Kanoodle.
Results and
advertisements
based on search
history (behavioral)
Results
based on
user
profiles
Improving User Experience Creates Opportunities
52
Improvements in Mobile Search
Source: Google, Yahoo!.
Increasing smartphone
penetration
Improving connection
speeds
Wi-Fi access
on phones
Instantly Accessible Search
Greater reliance on, and
familiarity with, search
Better geotargeting
Increased mobile
content
Increased smartphone
storage
Improving User Experience Creates Opportunities
53
North
America
26%
Int'l
74%
Internet Users: 2003E
Upside Potential
for International
Revenue
Google
Yahoo!
Revenue by Geography: CH2:04
North
America
69%
Int'l
31% North
America
80%
Int'l
20%
International opportunity should be larger than US over time…for now
Google has a nice market share advantage
Source: Google, Yahoo!, Morgan Stanley Research (8/04).
Improving User Experience Creates Opportunities
54
Revenue Per Search (RPS)
Trends
55
Revenue Per Search (RPS) Trends
Source: Yahoo! Analyst Day as of 5/04, Morgan Stanley Research.
RPS = Coverage XClick-through Rate X Price Per Click
• Acquisition of the
right advertisers
• More offers
• Advanced Matching
Number of searches for
which sponsored ads
appear divided by total
number of searches
Number of times ads are
shown divided by total
number of clicks on ads
Total dollar amount
received from
advertisers divided by
total number of clicks
• Relevance of offers
• Optimized
presentation
• Depth/liquidity of
offers
• Value vs. marketing
alternative
• Measurement
systems
Drivers
Definition
Revenue Per Search (RPS) Levers
56
Revenue Per Search Trends: RPS Derivation
Source: Yahoo! Analyst Day as of 5/04. Morgan Stanley Research.
RPS = Coverage XClick-through Rate X Price Per Click
Revenue Per Search (RPS) components for the math geeks out there…
# Searches that
Show Ads
Total # Searches
Total # Clicks on
Ads
# Searches that
Show Ads
Total Amount
Received from
Advertisers
Total # Clicks on
Ads
RPS = X X
RPS =
Total Amount
Received from
Advertisers
Total # Searches
57
Price Per Click
$0.29
$0.36 $0.40 $0.42 $0.44 $0.45 $0.47
0.00
0.20
0.40
0.60
0.80
$1.00
2003E 2004E 2005E 2006E 2007E 2008E 2009E
Price Per Click
’03-’09E CAGR
8%
Source: JupiterResearch (8/04).
Revenue Per Search Trends: Price Per Click
58
• Price per click for a basket of 719 words that we track on a daily basis has been
steadily increasing since we began monitoring prices on Google’s AdWords in 6/04
• Average price per click for the basket stands at $0.40, up 7% from inception
• We believe that price per click increases are a sign (but not the whole story) of the
value that advertisers place in search advertising
Price Per Click for Selected Terms
0.00
0.20
0.40
0.60
0.80
$1.00
1.20
6/8/04
6/15/04
6/22/04
6/29/04
7/6/04
7/13/04
7/20/04
7/27/04
8/3/0 4
8/10/04
8/17/04
8/24/04
8/31/04
9/7/04
Price Per Click
Campaign Average "Headlights" "Matrix" "thingamajigs"
Source: Morgan Stanley Research, Maximum AdWords bid is $3.00.
Revenue Per Search Trends: Price Per Click
59
Revenue Per Search Trends: Price Per Click
Source: Yahoo! Analyst Day (5/04). Morgan Stanley Research.
3+
2-3
1-2
Number of
Words
600MM
20MM
50K
Unique
Terms
$0.10 �� $1.52
$0.95 �� $1.84
$1.45
�� $1.73
April 03 Price ��
March 04 Price
“Credit Card
Fee No
Interest
Transfer”
“APR Credit
Card”
“Credit Card”
Sample
Term
• Ad inventory increases as searchers enter more specific (longer) queries
• Highest Price Per Click Y/Y growth is in longer phrases
• That said, we believe there are still many price inefficiencies at the lower tiers—longer phrases that
could convert effectively but that are not bid on—as advertisers discover these terms, we believe the
discrepancies could close; and this is supported by the dramatic PPC increase for “credit card fee no
interest transfer” noted above
60
Revenue Per Search Trends
While RPS may have an upward bias on an on-going basis for quite
some time for certain words as optimization tools improve and ROI
declines, we believe that overall industry RPS could decline (or show
modest growth) while overall search industry revenue rises nicely owing
to volume ramps and rising pricing for longer terms which currently
support below-average RPS…
61
Source: inceptor (8/04).
1-word 2-3 word 3-5 word 5 word+
Length of Query
Price Per Click
Tail
• More descriptive phrases
• Lower cost
• Higher predictability
Common Bidding Range
• Fewer words
• More expensive
• Lower conversions
• Keyword price decreases as query length increases, initially
• But as advertisers “discover” and begin bidding on these terms, these
longer keywords begin to increase in price
Revenue Per Search Trends: Coverage
62
Source: OneStat.com (8/04). All numbers are the average of the last two months of data.
30%
27%
17% 15%
7%
3% 1%
0
5
10
15
20
25
30
35%
2-word 3-word 1-word 4-word 5-word 6-word 7-word
Search Query Length
% of Search Queries
Jul 04
Longer queries continue to increase in share and prices will likely continue to rise
33%
26%
19%
13%
6%
2% 1%
0
5
10
15
20
25
30
35%
2-word 3-word 1-word 4-word 5-word 6-word 7-word
Search Query Length
% of Search Queries
Feb 04
Revenue Per Search Trends: Coverage
63
7.06%
4.75%
2.75% 2.51%
1.00%
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00%
5-word 4-word 3-word 2-word 1-word
Search Query Length
Click-through Rate
Revenue Per Search Trends: Coverage
Source: findmefaster (8/04).
Longer Search Queries Have Higher Click-through Rates…
$0.24
$0.49
$0.28
0.00
0.10
0.20
0.30
0.40
0.50
0.60
3+-word 2-word 1-word
Search Query Length
Cost Per Click
…But Not Necessarily Higher Prices (Yet)
• As marketers understand that longer phrases convert at better rates, we believe prices of
longer (3+ word) phrases could increase
• That said, we believe that larger advertisers will see branding value in short phrases (such
as Amazon.com with the keyword “DVD”), so we don’t expect negative pressure on shortphrase
pricing, just slower price growth for these terms
Source: findmefaster, as quoted in MarketingSherpa (8/04).
64
• Search click-through rates were 2.53% in 8/04, per reprisemedia, at a ~3x higher conversion rate
than contextual ads, largely due to different user intent when visiting a content page versus a
search engine -- users are less intent on purchasing while browsing content pages when compared
to viewing search engine listings
Source: reprisemedia (8/04).
Click-through Rate
2.53%
0.98%
0.00
0.50
1.00
1.50
2.00
2.50
3.00%
Search Contextual
Click-through Rate
Revenue Per Search Trends: Coverage
65
Trends in Natural Search vs.
Sponsored Search
66
Source: iProspect Survey of 1,649 respondents (5/04).
Ad Receptivity vs Lifetime Internet Use
54%
39% 37%
47%
61% 63%
0
10
20
30
40
50
60
70%
0-3 Years 4-6 Years 7+ Years
Years of Internet Use Survey: Most Relevant
Results Sponsored Results Natural Results
Ad Receptivity vs Daily Internet Use
44%
35%
56%
65%
0
10
20
30
40
50
60
70%
Less than 4 Times a Day More than 4 Times a Day
Number of Internet Uses per Day
Survey: Most Relevant
Results
Sponsored Results Natural Results
Newer users tend to click through sponsored links more frequently than seasoned users…
Trends in Natural Search vs. Sponsored Search…
67
eCommerce Sites' Conversion Rate by Price Bucket
3.1%
6.0%
3.9%
5.3%
7.6%
3.9%
4.8%
2.8%
7.3%
5.9%
4.9%
6.5%
2.9%
4.0%
6.0%
0.0
2.0
4.0
6.0
8.0
10.0%
< $50 $51-100 $101-200 $201-500 < $500
ASP on eCommerce Site
Conversion Rate
All Site Visits Sponsored Search Natural Search
Source: Marketing Sherpa, Search Marketing Metrics Survey (7/04).
• Although sites noted above are eCommerce sites, data could have directional significance
• Conversion rates for natural search appears to be better than sponsored search for lower price buckets
(< $100)
• Conversion rates for sponsored search appear to exceed or match that of natural search in higher price
buckets (> $100)—potentially owing to increased buyer intent (versus “window shopping”) on higherpriced
items
Trends in Natural Search vs. Sponsored Search…
68
Seasonality in Overture's Paid Clicks (1)
(20)
(10)
0
10
20
30
40
50%
CQ1 CQ2 CQ3 CQ4 (2)
% Q/Q Growth in Paid Clicks
2001 2002 2003
Seasonality in eBay's Global Listings (3)
0
5
10
15
20
25
30
CQ1 CQ2 CQ3 CQ4
% Q/Q Growth in Global Listings
2001 2002 2003
(1) Source: Morgan Stanley Research, Overture.
(2) Following Yahoo!’s acquisition of Overture (closed 10/7/03), Yahoo! stopped disclosing paid clicks.
(3) Source: Morgan Stanley Research, eBay.
• Summer seasonality in search query volume tends to negatively impact CQ2 and CQ3
• Search query volume (and consequently search advertising revenue) could be seasonally light in CQ2 and CQ3
• Mobile access could dampen this volatility, but that technology has not yet achieved maturity or reliability, in our
view
Trends in Natural Search vs. Sponsored Search…
69
Companies Impacting
(and Impacted by) Search
70
$689,668
679,938
333,450
21,738
--
100%
71
--
--
--
Google
Yahoo! (1)
Microsoft (2)
eBay
Amazon.com
Leading brand
Tight integration with own
properties, advertiser /
access relationships
Massive, potentially
receptive base
Vertical-specific
capabilities
Highly relevant
personalized results
Search only, no content, small number of customer
relationships and partnerships
Google mind/market share and technology
Lagging in share and innovation
Doesn't receive broad-based search traffic
Doesn't receive broad-based search traffic
Company
Total Ad
Revenue % PPC (3)
CQ2:04
Key Search Positive Key Search Negative
(1) Total Ad Revenue is the sum of Yahoo!'s reported Traffic Acquisition Cost ("TAC"), Morgan Stanley Research estimates for Global Sponsored
Search, Overture 3rd Party & Affiliate Revenue, Traditional Branded Advertising, and Kelkoo. % Price Per Click = (Global Sponsored Seach +
Overture 3rd Party & Affiliate + Kelkoo) / Total Ad Revenue
(2) Morgan Stanley Research estimates based on Microsoft press releases.
(3) "Price Per Click" includes ads served on affiliate pages.
Companies Impacting (and Impacted by) Search
71
Domestic Revenue Per Search Continues to Increase for Leaders
• Google’s Domestic Revenue Per Search outpaces Yahoo!
• Ask Jeeves’ Revenue Per Search also outpaces Yahoo!, despite lower query base
• Recall the equation, Revenue Per Search = Coverage X Click-through Rate X Price Per Click; Google’s
outperformance over Yahoo! could potentially be driven by higher click-through rates, given that Yahoo! puts
less of an emphasis on advertisers’ click-through than does Google
Companies Impacting (and Impacted by) Search
F2003A F2004E
3/03 6/03 9/03 12/03 3/04 6/04
Google
Proprietary Searches, Billions (1) 2.9 3.5 3.2 3.4 3.7 4.1
Proprietary Revenue / Search (2) $0.04 $0.04 $0.05 $0.05 $0.06 $0.06
Yahoo!
Proprietary Searches, Billions (1) 3.2 3.1 2.7 2.7 3.3 3.3
Proprietary Revenue / Search (2) $0.01 $0.02 $0.02 $0.03 $0.03 $0.03
Ask Jeeves (3)
Proprietary Searches, Billions 0.6 0.6 0.5 0.7 0.8 1.2
Proprietary Revenue / Search $0.03 $0.04 $0.04 $0.04 $0.04 $0.04
Footnotes
(1) Source: comScore qSearch.
(2) Source: Morgan Stanley Research Estimates.
(3) Source: Ask Jeeves.
72
Companies Impacting (and Impacted by) Search
Share of Search Engine Referrals
12%
36%
41%
37% 37%
31%
27%
15% 15%
18% 20%
29%
0
5
10
15
20
25
30
35
40
45%
2001 2002 2003 2004
Google EYnaghionoe! MSN
Source: eMarketer, April 2004. Measurements include referrals from paid
Source: keywords, natural search and banner ads on search engines’ sites;
Source: Yahoo! percentages include Overture referrals, but do not include
Source: Overture listings appearing on other domains.
Frequency of Search by Engine
63%
51%
45%
37%
45%
49%
55% 55%
0
10
20
30
40
50
60
70%
Google Yahoo! MSN AOL
More than once a day Less than once a day
Source: iProspect, Search Engine User Attitudes, 5/04.
73
Source: Morgan Stanley Research Estimates, Google, IAB. Yahoo!’s C2003E Global Sponsored Search revenue is the sum of two calculation methods --
one for CQ1:03 through CQ3:03, and one for CQ4:03. In CQ1:03 – CQ3:03, Yahoo! Global Sponsored Search revenue is calculated as Yahoo!’s
reported revenue from Overture divided by the estimated TAC % that Overture pays to affiliates. Yahoo!’s CQ4:03 estimated Global Sponsored
Search revenue is not adjusted for TAC because ads on Yahoo! search after CQ3:03 did not incur TAC. North America revenue estimated by
multiplying each company’s percentage of gross domestic revenue by respective revenue line item.
Other
66%
Google Web
Sites
22%
Yahoo! Global
Sponsored
Search
12%
C2003E
Total: $2,543MM
Share of Estimated North America Keyword Search Gross Revenue
Other
66%
Google Web
Sites
24%
Yahoo! Global
Sponsored
Search
10%
CH1:04E
Total: $1,840MM
Companies Impacting (and Impacted by) Search
74
Other
59%
Google
Advertising
20%
Total
Advertising
21%
Companies Impacting (and Impacted by) Search
Other
66%
Google
Advertising
14%
Yahoo! Total
Advertising
20%
C2003E CH1:04E
Total: $7,267MM Total: $4,599MM
Share of Estimated Total North America Online Advertising Revenue
Source: Morgan Stanley Research, Google, IAB. Yahoo!’s C2003E revenue is the sum of three different calculation methods for different periods: CH1:03,
CQ3:03, and CQ4:03. Yahoo!’s CH1:03 Total Advertising revenue = (Yahoo!’s estimated Traditional Branded Advertising revenue) + (Overture’s Total
Reported Gross revenue). Yahoo!’s CQ3:03 Total Advertising revenue = (Yahoo!’s estimated Traditional Branded Advertising revenue) + (Overture’s
estimated Total Gross Revenue). Yahoo!’s CQ4:03 Total Advertising revenue = (Yahoo!’s estimated Traditional Branded Advertising revenue) + (Yahoo!’s
reported TAC) + (Yahoo!’s estimated Global Sponsored Search revenue) +(estimated Overture 3rd party and affiliated revenue, ex-TAC). Yahoo!’s
CH1:04 Total Advertising revenue = (Yahoo!’s estimated Traditional Branded Advertising revenue) + (Yahoo!’s reported TAC) + (estimated Global
Sponsored Search revenue) + (estimated Overture 3rd-party and Affiliate revenue, ex-TAC). North America revenue estimated by multiplying each
company’s percentage of gross domestic revenue by respective revenue line item.
75
Data include common stock and ADRs currently assigned ratings. For disclosure purposes (in accordance with NASD and NYSE requirements), we note that Overweight, our most positive stock rating, most
closely corresponds to a buy recommendation; Equal-weight and Underweight most closely correspond to neutral and sell recommendations, respectively. However, Overweight, Equal-weight, and Underweight
are not the equivalent of buy, neutral, and sell but represent recommended relative weightings (see definitions below). An investor's decision to buy or sell a stock should depend on individual circumstances
(such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last
12 months.
Analyst Stock Ratings
Overweight (O). The stock’s total return is expected to exceed the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock’s total return is expected to be in line with the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18
months.
Underweight (U). The stock’s total return is expected to be below the average total return of the analyst’s industry (or industry team’s) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst’s
view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile
(unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner.
Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Ratings prior to March 18, 2002: SB=Strong Buy; OP=Outperform; N=Neutral; UP=Underperform. For
definitions, please go to www.morganstanley.com/companycharts.
Analyst Industry Views
Attractive (A). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark named on the cover of this
report.
In-Line (I). The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark named on the cover of this report.
Cautious (C). The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark named on the cover of this report.
Stock price charts and rating histories for companies discussed in this report are also available at www.morganstanley.com/companycharts. You may also request this information by writing to Morgan Stanley
at 1585 Broadway, 14th Floor (Attention: Research Disclosures), New York, NY, 10036 USA.
Analyst Certification
The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or
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Global Stock Ratings Distribution
(as of August 31, 2004)
Coverage Universe Investment Banking Clients (IBC)
Stock Rating Category Count
% of
Total Count
% of
Total IBC
% of Rating
Category
Overweight/Buy 641 36% 268 41% 42%
Equal-weight/Hold 817 45% 297 45% 36%
Underweight/Sell 339 19% 94 14% 28%
Total 1,797 659
Disclaimer
76
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