1 Please see analyst certification and other important disclosures starting on page 72. Internet Advertising Trends 7/5/05 mary.meeker@morganstanley.com brian.pitz@morganstanley.com Morgan Stanley does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Morgan Stanley in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 800-624-2063 to request a copy of this research. 2 Please see analyst certification and other important disclosures starting on page 72. • Perspective • ‘Age of Engagement’ – Internet Impact Just Starting • Search / Find / Obtain (SFO) • Numbers Tell Story • Data Tell Story • What’s Next? • Inventory! Outline 3 Please see analyst certification and other important disclosures starting on page 72. Perspective 4 Please see analyst certification and other important disclosures starting on page 72. What We Have Lived Through with Internet Company Creation Bust Boom-let Wealth Creation Bust Boom Patterns Boom Boom-let 5 Please see analyst certification and other important disclosures starting on page 72. 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 • $237B = market value — 6/27/05 Google + Yahoo! + eBay + Yahoo! Japan + Amazon.com Google included after company’s 8/04 IPO. 6 Please see analyst certification and other important disclosures starting on page 72. 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 Please see analyst certification and other important disclosures starting on page 72. Global Data Points… Google 7B global searches (+77% Y/Y, 4/05); 355MM global unique visitors (+31%, 5/05) per comScore Broadband 151MM global subscribers (+45% Y/Y, CQ1); 41MM in N. America; 52MM in Asia Yahoo! 917MM streaming video (music…) sessions (+119% Y/Y, CQ4) Digital Music 400MM cumulative iTunes as of 5/05 (+270% in CQ1); 16MM iPods; digital music = 15% of US music units sold in 2004 Yahoo! 40MM+ estimated My Yahoo! users Blogging 27% of US Internet users indicated they read blogs Tencent 13MM peak concurrent Instant Messaging users in China 8 Please see analyst certification and other important disclosures starting on page 72. …Global Data Points Wireless Internet 196MM messaging subscribers (CQ4) in China, No. 1 in world VoIP 42MM registered Skype users (6/05) - fastest product ramp ever? 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 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 3MM+ NTT DoCoMo wallet phone users (CQ1) in Japan 9 Please see analyst certification and other important disclosures starting on page 72. 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 10 Please see analyst certification and other important disclosures starting on page 72. Mobile Increasingly Important Mobile Phone to Internet User Ratio Country 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 [...]... analyst certification and other important disclosures starting on page 72 Internet Ad Spend at $145 Per Home vs $674 for Newspapers? 2004E Advertising Spending ($B) Households (MM) Medium Ad Spending / Household ($) Promotions Direct Telephone Newspapers Classifieds Direct Mail Broadcast TV Radio Cable TV Magazine Yellow Pages Internet / Online $101 91 48 17 51 45 20 18 21 15 10 99 105 72 55 99 108... may use multiple advertising mediums 24 Please see analyst certification and other important disclosures starting on page 72 Gap Between Internet Consumption and Ad Spend is Large US Media Usage (1) to Ad Spending (2) (3) Ratios Youth Media Usage to Ad Spending Ratios 12.0x 12.0x 10.0 10.0 8.0 (2) 8.0 6.0 11.3x 6.0 4.7x 4.0 4.0 2.0 2.0 0.0 0.0 New spapers + Magazines Total TV Radio Internet New spapers... 10.0 8.0 (2) 8.0 6.0 11.3x 6.0 4.7x 4.0 4.0 2.0 2.0 0.0 0.0 New spapers + Magazines Total TV Radio Internet New spapers + Magazines Total TV Radio Internet (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... US media usage on a medium divided by percent of US ad spending on a medium 25 Please see analyst certification and other important disclosures starting on page 72 Advertising Moving Online at Rapid Clip Global Advertising Spending eBay Advertising Spending (2) (1) Online 3% Offline 38% Online 62% Offline 97% (1) PricewaterhouseCoopers, 2003 totals (6/04) (2) eBay (2004), Morgan Stanley 26 Please see... Maslow 2005 - ? ;) Selfactualization Internet / Mobile Phone Esteem Belonging Shelter Safety Food / Water 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 14 Please see analyst certification and other important disclosures starting on page 72 ‘Age of Engagement’ – Internet Impact Just Starting 15... starting on page 72 Don’t Underestimate Power of Google + Yahoo! Ecosystems… • While Google generated $1.2B in gross online advertising revenue in CQ1 it PAID OUT $462MM to thousands of partners like AOL, Ask Jeeves and iVillage • While Yahoo! generated $1.0B in gross online advertising revenue in CQ1 it PAID OUT an estimated $353MM to thousands of partners like MSN, ESPN and The Wall Street Journal... became smarter about expanding / improving eBay’s user experience, volume and scope of listings and value of goods increased, while conversion rates (ex-ASP increases) remained relatively steady Similar trends playing out in search – as searchers, advertisers and search engines become more sophisticated about expanding / improving user experience and relevancy of sponsored / natural search results, search... Revenue ($MM) 1,200 1,000 27% 800 600 27% Total US, +26% Y/Y •Google, +73% 23% •Yahoo!, +46% 20% •Others (5), +3% 400 200 0 CQ1:04 (1) (2) (3) (4) (5) CQ1:05 Source: IAB/PriceWaterhouseCoopers Interactive Advertising reports Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue Yahoo! Gross US Ad revenue forecast by holding constant CQ4:04 reported TAC rate, and multiplying... Personalization My Yahoo! Relaunch Local Maps, SmartView, Local Search Launch Mobile Mobile Site Upgrade, Messenger, Photos, Search Access Partners BT Communicator, Rogers Portal, Y! Browser / Sidebar Advertising Overture Advertiser Tools, Overture Local Match Community Mobile Mail Y! Partner Network Y! 360 Beta, Groups Redesign Source: Yahoo! 11 Please see analyst certification and other important... Google, Gross (2) 27% (3) AOL 29% Others (4) 46% Yahoo! US Gross Revenue (2), $749MM Other 28% Yahoo!, Gross (2) 27% (1) (2) (3) (4) (5) Yahoo!, Net (2) 50% Source: IAB/PriceWaterhouseCoopers Interactive Advertising report Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue AOL estimates from Morgan Stanley Cable Analyst Richard Bilotti MSN US ad revenue computed as reported . certification and other important disclosures starting on page 72. Internet Advertising Trends 7/5/05 mary.meeker@morganstanley.com brian.pitz@morganstanley.com Morgan. ever? 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