Tài liệu Nothing But Net 2009 Internet Investment Guide 2 docx

Figure 6: Technology Penetration in the US 2008 as labeled 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% Subscribers Mobile Internet Users 0 50 100 150 200 250 300 Usage M Penetration Sour

• Sales of virtual goods, which can further the depth of the user experience

on a social site;

• A model that exposes a site to the classifieds or eCommerce markets, both

of which are gaining market share from their offline counterparts; and

• Paid premium memberships or selling a la carte paid features (such as

the ability to post more or higher-quality photos)

Several sites are already pursuing a variety of these approaches (both LinkedIn and Classmates, e.g., sell premium memberships) We expect much more

experimentation as the market continues to mature

Mobile Is Long-term Interesting, but Near-term Challenging

With 84% of Americans using mobile phones (CTIA), we firmly believe the mobile market is a promising opportunity Given this level of reach and better mobile Internet technologies and hardware, we think this medium is becoming attractive to advertisers As a result, Google, Yahoo!, and MSN are strategically focusing on establishing market share in this industry

Figure 6: Technology Penetration in the US (2008)

as labeled

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Subscribers

Mobile Internet Users

0 50 100 150 200 250 300

Usage (M) Penetration

Source: CIA Government Stats (http://www.cia.gov/cia/publications/factbook/index.html) (Feb 2008); International Telecommunications Union (http://www.itu.int/ITU-D/ict/statistics); CIA Government Stats

(http://www.cia.gov/cia/publications/factbook/index.html) (Mar 2008) for Vietnam and Hong Kong mobile phone data, "OECD Broadband Statistics to June 2007", OECD; www.point-topic.com; mybroadband.co.za; Hong Kong and India government statistics; European Travel Commission; www.bezeq.co.il; Santiago Times newspaper; Nielsen Mobile data, JPMorgan Estimates

However, although mobile phone penetration is high, the mobile search market is in the early adoption stage In 1Q’08, only 15.6% of wireless subscribers were using mobile Internet services, according to Nielsen Mobile data Even within this small subset of mobile Internet users, usage drastically trails that on PCs Nielsen Online reports that the PC Internet user visits more than 100 domains per month, whereas mobile Internet users visit 6.4 individual websites per month, on average

We think mobile Internet adoption will not accelerate until the introduction of better phones and technologies 3G networks perform up to 6x faster than prior mobile Internet networks (Nielsen), which we think will greatly improve the user experience and make it more comparable to that on a PC Additionally, new phones such as the iPhone have improved the size and resolution of the screens However, we note that

smart phone technology has not yet become the norm and uptake of mobile Internet likely has a ways to go

Additionally, we find it unlikely that advertisers will quickly be adopting mobile advertising In addition to not having the scale and reach of the Internet, mobile advertising is difficult, as it involves dealing with multiple ad networks and mobile service providers and creating ads that can be viewed on small screens Furthermore,

we think advertisers will cut back on experimental models of ad spend in the face of this economic recession

M&A: Slow in 1H’09, but Could Pick Up in 2H

We believe M&A activity is likely to remain quite slow in the first half of the year as companies and management teams try to understand the scope and length of the economic downturn

Further, we think sellers are likely to be resistant to sales at reduced valuations, and may prefer stock transactions that expose them to upside in the event of an eventual turnaround

Additionally, we think companies are likely going to exercise caution in parting with any cash on their balance sheets – whether for acquisitions or for share buybacks

We have already seen some of this caution manifest itself this year, when the ten largest companies in the Internet/media space (see table below) spent 66% of their TTM Free Cash Flow on share buybacks (compared to the equivalent figure of 126%

a year ago.) The companies remained relatively acquisitive, although two of the largest acquisitions were originally announced in 1H’07 (News Corp.’s $5.1B cash payout for Dow Jones and Google’s $3.2B cash payout for DoubleClick) Excluding those deals, cash acquisitions would have been relatively flat Y/Y, at 28% of free cash flow, in line with the equivalent figure a year ago

Table 2: At Largest Internet and Media Companies, Buybacks Less Popular

$ in millions

FCF Cash Acquisitions Cash Buybacks

Total (3Q’08 TTM) 40,390 49% 66%

Total - year ago (3Q’07 TTM) 38,853 28% 126%

For CBS and MSFT, estimates

used in this section are from J.P

Morgan analysts Michael Meltz,

CFA and John DiFucci,

respectively

To the extent acquirers are willing to part with cash, we expect them to have the resources: large Internet and media companies continue to generate significant cash flows At the four large-cap Internet companies, we are modeling a significant deceleration in Y/Y FCF growth for F’09: from 36% in F’08E, we expect only 12%

Y/Y FCF growth at the four largest Internet firms in our coverage Including the Media universe, the respective expectations are for 13% growth in ’08 and 5% in ’09

Including Microsoft, J.P Morgan estimates call for nearly $40B in FCF generated in the broader Internet space

Table 3: We Project $10B+ in FCF at Large Internet Companies

$ in millions

All excluding MSFT 21,196 23,954 25,171

Large-Cap Internet 6,994 9,537 10,652

Source: Company reports and J.P Morgan estimates

Note: For Disney, News Corp., fiscal year data used rather than calendar year; MSFT CY’08 FCF impacted by a $3.1B cash tax payment

We continue to see three key factors as motivating factors for M&A activity:

• Traffic Developing high-traffic sites is difficult, and larger companies are often

willing to pay for sites that have proven an ability to generate traffic

• Technology Companies that develop a technology that is difficult or

uneconomical to replicate are often targets for acquisitions; such companies may also generate traffic but the technology is often a motivator for the buyer

• Transactional Companies with a proven track record of revenue and sales

generation can make attractive targets, as well; an example of a transactional-focused acquisition is the 2007 purchase of Mezimedia by ValueClick

We Think an IPO Market Recovery Is More Likely in 2010

The IPO market was virtually nonexistent through most of F’08, with Rackspace as the lone significant deal in the Internet and Internet-related sector; compared to 13 such deals in F’07 (see chart below)

Table 4: Internet and Related IPOs, F’07 and F’08

Units as indicated

Pricing Date Issuer Name Symbol Amt ($M) Mkt cap ($M) % mcap Offering Price Price, 12/30 Performance

Source: Company reports, FactSet, J.P Morgan estimates

We think the market climate is unlikely to moderate significantly in the near term in order for the IPO window to reopen soon Given the lead time involved in most deal activity, we think it is therefore more likely that it will not be until 2010 that the IPO market starts to show signs of a recovery

Our Top Picks

We think the significant declines in share prices in the stock market create opportunities to buy the best positioned companies at a reasonable valuation In our coverage universe, we think Google (Price Target $430), Amazon (Price Target $65), Priceline (Price Target $86), Baidu (lead analyst Dick Wei; Price Target $300), and MercadoLibre (Price Target $24) are the best positioned global Internet companies and offer the best risk/reward return for investors Please see the appropriate company sections for a detailed analysis of our thesis

Dot.Khan’s Top Ten Things to Watch for in

2009

1 Potential search deal likely between Yahoo! and Microsoft

2 Net Neutrality should become an important mainstream issue

3 Performance-driven advertising should continue to rise

4 Challenges in monetizing video advertising should persist

5 Mobile usage should continue its strong growth momentum, but mobile advertising will likely be challenging this year

6 Amazon’s low pricing strategy should continue to bring value seeking customers

7 Possible bankruptcies in brick-and-mortar retail should create opportunities for eCommerce companies

8 CPMs should remain under pressure

9 Consolidation activities could potentially resume during 2H’09

10 Promotional activity in the OTA space should increase

U.S Sector Outloooks

2009 Search Advertising Outlook

As macroeconomic weakness bled into the advertising market, we reduced our Search Advertising Market Forecast twice in 2008 We are now further revising our most recently updated estimates (published 11/3/2008) We believe global paid search revenues will reach $33.2B in 2009, down from the $39.6B expected in Nothing but Net 2008 We think the search market growth rate will decelerate given the following factors:

• Overall ad budget weakness;

• Moderation in keyword price inflation; and

• Possible decrease in the volume of highly monetizable searches

However, in the long term, we think the search market industry will benefit from the changes that result from this recession We think the rate of adoption of performance-based advertising over more traditional forms, especially newspapers, has recently increased and that these shifts will be sticky Furthermore, we think Internet users will use search more for comparison shopping and that they will become more comfortable responding to ads

Global Search Expected to Grow 12% in F’09

On the back of 34% Y/Y growth in F’08, we forecast that global paid search revenues will grow 12% in 2009 From a metrics standpoint, we believe query volumes will grow 24% in F’09, while RPS will decline 9% We anticipate a climb

in search usage as consumers become more price-conscious and engage in comparison shopping; however, we think monetization will be pressured, as decreased ad budgets will likely result in less bidding for keywords We continue to see personalized search and vertical search as hot topics Beyond 2008, we expect the global paid search market to grow at a 19% CAGR through 2011

Table 5: J.P Morgan’s Global Search Advertising Revenue Forecast

units as indicated

Global 2003 2004 2005 2006 2007 2008E 2009E 2010E 2011E ’08-’11E CAGR

Number of Queries (M) 142,017 220,128 323,827 441,796 585,395 760,474 939,917 1,119,430 1,308,646 19.8% RPS (per 1,000 searches) $19.04 $23.42 $28.17 $33.58 $37.58 $38.81 $35.28 $37.00 $37.65 -1.0%

Global Search Forecast ($M) 2,704 5,156 9,121 14,835 21,999 29,511 33,158 41,417 49,277 18.6%

Source: J.P Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS

US Search Expected to Grow 10% in F’09

We are now modeling 10% Y/Y growth in F’09, down significantly from 2008’s 23% growth rate Broken down by metrics, we are modeling US query volume growth of 19% Y/Y in 2009 (a minor deceleration from the 24% we observed in

2008), driven by an increase in the number of searches conducted per user and a slight increase of 2.5% in the domestic Internet population

On the monetization front, we expect the domestic RPS to reach only $75.33 per

1000 searches in 2009, down from $81.59 in 2008 (a 7.7% decline) We expect this RPS decline to be driven by decreases in advertisers’ budgets, which should lead to lower keyword bids

Table 6: J.P Morgan’s US Search Advertising Revenue Forecast

Units as indicated

United States 2006 2007 2008E 2009E 2010E 2011E 08-'11E CAGR

Number of Queries (M) 114,896 144,080 177,938 211,746 245,626 277,557 16.0% RPS (per 1,000 searches) $74.86 $81.65 $81.59 $75.33 $81.84 $84.94 1.3%

% Clickthrough Rate 26.2% 27.3% 28.0% 27.0% 27.5% 28.0% 0.0%

$ Revenue / Click $0.46 $0.47 $0.47 $0.45 $0.48 $0.48 0.7%

US Search Forecast ($M) 8,602 11,764 14,518 15,951 20,102 23,576 17.5%

Source: J.P Morgan estimates, Company reports, comScore, Nielsen//NetRatings, IDC, and IWS

Our Proprietary Research Shows…

Market Share Shifts Are Likely to Continue

In November, the J.P Morgan Internet Team surveyed 766 US residents to determine Internet usage behavior Our market research confirmed the trends reported by comScore Among survey participants, Google was the dominant search engine, with 59.0% of participants listing it as their most frequently used search engine, up from 54.6% in last year’s survey Yahoo! remained second among participants, with 20.0% of participants using it most frequently, down from last year’s 21.8% market share among our survey participants MSN, Ask, and AOL trailed with 7.7%, 6.6%, and 2.0% of participants using them most frequently, respectively

Figure 7: Most Frequently Used Search Engine

% of participants

AOL, 6.6%

Google, 59.0%

MSN, 7.7%

Yahoo, 20.0%

Other, 3%

Don't Use / Don't Know , 2%