Internet Advertising Trends morganstanley pptx

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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

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• Perspective

• ‘Age of Engagement’ – Internet Impact Just Starting

• Search / Find / Obtain (SFO)

• Numbers Tell Story

• Data Tell Story

• What’s Next?

• Inventory!

Outline

Perspective

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What We Have Lived Through with Internet

Patterns

Boom

Boom-let

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.

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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!

Global Data Points…

America; 52MM in Asia

iPods; digital music = 15% of US music units sold in 2004

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…Global Data Points

Shanda

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

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Mobile Increasingly Important

Mobile Phone to Internet User Ratio Country

Mobile Phones (MM)

Internet Users (MM)

Installed PCs (MM) China

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

Content / User Experience Continues to Improve…

Y! 360 Beta, Groups Redesign

Community

Y! Partner Network Overture Advertiser Tools, Overture Local Match

Search 4.0, Enhanced News Search, Product Search, Shopping SmartSort

2003

Source: Yahoo!

Yahoo! Product Launches

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…Content / User Experience Continues to Improve…

…Content / User Experience Continues to Improve

Consumer Satisfaction with Merchants in CQ4 Holidays

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Hierarchy of Needs?

actualization Esteem

Self-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.

19 43 - Maslow 2005 - ? ;)

Internet / Mobile Phone

Shelter

Food / Water

‘Age of Engagement’ – Internet Impact Just Starting

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950MM+ global customers driving on same highway with same information at same time

Our mission is to organize all the world’s

information and make it universally accessible and useful - Google

‘All the World’s Information…’

More and faster progress may be made here than most folks imagine…

Think about ~$600MM in annual capex and universal language translation on the fly

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Search / Find / Obtain (SFO)

Truth is that interactions with customers, and the customer experiences that result from those interactions, are, for many businesses, the sole remaining frontier of competitive advantage

1) In this era of near total commoditization, competitive differentiation along traditional dimensions of corporate performance is becoming largely

Jeff Rayport / Bernard Jaworski from Best Face Forward…

Where can you find what you are looking for AND high quality service?

THE WEB!

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Search / Find / Obtain (SFO)

Obtain Find

Search

for “TiVo”

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, 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…

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Numbers Tell Story

(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

Monetization Continues to Rise

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Morgan Stanley Research, PricewaterhouseCoopers, IAB, Jupiter Research, McCann-Erickson, RAB; Newspapers include Classifieds Promotions ($101B) include: incentives ($27B), promotional products ($22B), POS ($17B), specialty printing ($8B), coupons ($7B), premiums ($6B), promotional licensing ($6B), promotional fulfillment ($5B), product sampling ($2B), and in-store marketing ($1B) Households may use multiple advertising mediums.

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 60 74 99 99

66

$1,022 865 674

302

514 416 334 240 216 151

145

2004E Advertising Spending ($B) Households (MM)

Ad Spending / Household ($) Medium

Total Average

$420 42

881 88

$4,575

458

Internet Ad Spend at $145 Per Home vs $674 for Newspapers?

(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

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

New spapers + Magazines

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.

eBay (One W ebsite) vs All U.S New spapers (1,468 Dailies) Annual Classified Ads (MM)

) eBay (US) All US Newspapers

eBay Has Grown Classified Market

Newspaper Association of America, eBay, Morgan Stanley Research

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(1) Source: IAB/PriceWaterhouseCoopers Interactive Advertising reports

(2) Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue

(3) Yahoo! Gross US Ad revenue forecast by holding constant CQ4:04 reported TAC rate, and multiplying Overture 3rd Party & Affiliate revenue by TAC rate / (1 - TAC rate)

(4) Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross revenue

(5) Assuming that TAC of Google and Yahoo! was included in others total, this segment would have been up 14% Y/Y

Google + Yahoo! Account for 54% (and rising) of US

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

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Q1:05 US Online Ad Revenue: $2.8B (1)

(1) Source: IAB/PriceWaterhouseCoopers Interactive Advertising report

(2) Calculated as reported revenue multiplied by the reported percentage of US Ad Revenue

(3) AOL estimates from Morgan Stanley Cable Analyst Richard Bilotti

(4) MSN US ad revenue computed as reported MSN ad revenue multiplied by MSFT year-end percentage of

US revenue For F2005, US percentage estimated at 65%

(5) Calculated as the difference between total IAB US revenue and the sum of Google, Yahoo! gross

revenue

Google, Gross (2)

27%

Others (4)

46%

Yahoo!, Gross (2)

27%

Other 21%

AOL (3)29%

Google, Net (2)50%

Yahoo! US Gross Revenue (2), $749MM

Google US Gross Revenue (2), $757MM

…Don’t Underestimate Power of Google + Yahoo!

Ecosystems

Other 28%

MSN (4)22%

Yahoo!, Net (2)50%

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)

For a given query, which result is more relevant, natural or sponsored?

Search – Driving Branding & Sales (SEMPO)

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); Based on answer to the question, “What is your company using search engine marketing to accomplish?” Survey of 288 search engine advertisers and SEM agencies.

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Search – Driving Branding (IAB / Nielsen)

8 8

4 2

5 4

Image Ad

(728 X 90)

10 14

5 2

2 7

Content Ad

11 11

6 6

(4) 8

Paid Ad

16% 16%

Electronics Beverage

Auto Health

Impact to Unaided Brand Awareness, by Category

IAB and Nielsen//NetRatings (6/04), as quoted by AR | Search, a division of Avenue A | Razorfish Based on answer to question to request to name a specific brand within a tested industry, with 10,500 participants recruited from Survey Sample International.

Search – Driving Sales – Online & Offline (Overture / ComScore)

Same Session Online Conversion 1%

Latent Online Conversion 7%

Offline Conversion 92%

Estimated 92% of conversion activity following a Consumer

Electronics / Computer Search 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 searchers purchased

a product, and an estimated 92% purchased offline Based on buying activity within 90 days of Internet users who conducted a consumer electronics or computer (CE/C) search

at one of the top 25 search engines in CQ1:04.

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Clicks in ‘Tails’ (findmefaster)

Clickthrough Rate vs Phrase Length

Conversions in ‘Tails’ (Oneupweb)

Oneupweb (1/05); (1) Based on Oneupweb client data, and 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%

findmefaster (2004) Based on findmefaster site data Chris Anderson coined term “The Long Tail.”

What’s Next?

Usage Growth Will Drive Inventory Growth

Expansion of highway system assisted

growth in billboards / outdoor inventory

Lots of unused inventory on the

web

Image sources: http://www.bctf.bc.ca/WorthSpeakingOutFor/materials/billboard.html , GameSpot

Creative Marketers in a Virtual Candy Store!

Trends imply we are in first inning of development of

optimized online advertising:

• inventory

• tools / measurability / targeting

• ROI

• revenue per user

• international (+36% Q/Q to 39% of Google CQ1 gross revenue vs 75%+ of Internet users outside US)

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We're moving to a world where we're able to show very, very clear value to advertisers in

a way that's been unprecedented…in any

form of advertising before.

– Sergey Brin, Google, 4/05 What Did Sergey Brin Say?

What Did P&G Say?

Commitments to cable channels will fall by as

much as 25% while spending on broadcast

networks will be cut around 5% [for the

2005-2006 season].

-The Wall Street Journal, 6/13/05