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Slide 1: Ten Questions Internet Execs Should Ask & Answer November 16, 2010 Web 2.0 Summit – San Francisco, CA mary.meeker@ms.com / scott.devitt@ms.com / liang.wu@ms.com www.morganstanley.com/techresearch Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
Slide 2: Question Focus Areas 1) Globality 2) Mobile 3) Social Ecosystems 4) Advertising 5) Commerce 6) Media 7) Company Leadership Evolution 8) Steve Jobs 9) Ferocious Pace of Change in Tech 10) Closing Thoughts 2
Slide 3: 1. Globality Do you know which players in which countries do what you do better (or at least differently) than you do? Do you study / implement it? 3
Slide 4: Top Internet Markets – 46% of Users in 5 Countries – China, USA, Brazil, India, Russia 2009 - 1.8B Global Internet Users, +13% Y/Y(1); 18.8T Minutes Spent, +21% Y/Y(2) Russia 60MM users; +31% Y/Y 42% penetration* USA 240MM users, +4% Y/Y 76% penetration* China 384MM users; +29% Y/Y 29% penetration* Brazil 76MM users, +3% Y/Y 39% penetration* India 61MM users; +18% Y/Y 5% penetration* Note: *Penetration is per 100 inhabitants. Source: 1) Internet user stats per International Telecommunications Union; 2) time spent data per comScore global 12/09. 4
Slide 5: Top Mobile Internet Markets – ~670MM 3G Subscribers (+37% Y/Y), CQ2 Rank Country 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 USA Japan Korea Italy UK Germany Spain Indonesia France Australia Poland China Brazil Taiwan Russia CQ2:10 3G 3G Subs Pene(MM) tration 136.6 106.3 38.8 34.3 29.5 26.5 24.7 19.2 18.8 16.7 15.4 14.5 13.3 11.3 9.6 48% 96 80 42 38 26 46 12 32 65 35 2 8 44 5 3G Sub Growth Y/Y 31% 12 15 28 34 30 22 57 32 31 27 941 148 69 81 Rank Country 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Malaysia Canada Saudi Arabia Turkey South Africa Portugal Sweden Netherlands Austria Israel Philippines Egypt Greece Singapore Romania CQ2:10 3G 3G Subs Pene(MM) tration 7.9 7.3 7.0 6.8 6.7 5.7 5.5 5.5 5.1 4.9 4.8 4.0 3.9 3.9 3.8 26% 32 17 11 14 36 45 28 46 51 6 7 20 55 13 3G Sub Growth Y/Y 32% 62 55 -33 15 25 33 29 36 82 38 25 41 20 Global 3G Stats: Subscribers = ~670MM Penetration = 14% Growth = 37% 5 Note: 3G includes CDMA 1x EV-DO and Rev. A / B, WCDMA, HSPA; Source: Informa WCIS+, Morgan Stanley Research.
Slide 6: Facebook & Tencent Learning From Each Other’s Playbooks Facebook  Largest Social Network in English-Speaking Countries – 620MM visitors, +51% Y/Y in 9/10  Real Identity – Sharing among real-world friends / pictures / events Unusually High Level of Global Innovation – Tencent  Largest Social Network in China – 637MM active IM users, +31% Y/Y in CQ3  Virtual Identity – $1.4B virtual goods revenue (from users customizing their avatars / purchasing game items…) in 2009, +94% Y/Y Real pictures & real names Virtual identity & customizable avatars Source: Facebook, comScore (global unique visitors for Facebook), Tencent. 6
Slide 7: 2. Mobile Ramping faster than any ‘new new thing’ – is your business leading or lagging? 7
Slide 8: The Likes of Which We Haven’t Seen Before iPhone + iTouch vs. NTT docomo i-mode vs. AOL vs. Netscape Users First 20 Quarters Since Launch 120 ~120MM+ Mobile Internet Apple iPhone + iTouch + iPad Ramp – 100 iPhone + iTouch + iPad Launched 6/07 Desktop Internet Netscape* Launched 12/94 Subscribers (MM) 80 60 ~32MM Mobile Internet NTT docomo i-mode Launched 6/99 Desktop Internet AOL* v 2.0 Launched 9/94 40 20 ~27MM ~9MM Q1 Q3 Q5 Q7 Q9 Q11 Q13 Q15 AOL Q17 Q19 Quarters Since Launch iPhone + iTouch NTT docomo i-mode Netscape 8 Note: *AOL subscribers data not available before CQ3:94; Netscape users limited to US only. Morgan Stanley Research estimates ~65MM+ netbooks have shipped in first 11 quarters since launch (10/07). Source: Company Reports , Morgan Stanley Research. Data as of CQ3:10.
Slide 9: Attackers (Apple & Google) Driving Market Excitement & Momentum Global Unit Shipment Share of Smartphones by Operating System, Symbian (Nokia) / BlackBerry (RIM) / iOS (Apple) / Android (Google) / Others, 1Q06 – 3Q10 100% Quarterly Smartphone Unit Shipment Share (%) Mobile Operating Systems – 6% 31% 15% Others* 80% 60% 7% 37% BlackBerry (RIM) Symbian (Nokia) 40% 62% 20% Android (Google) 25% 17% iOS (Apple) 0% CQ1:06 CQ4:06 CQ3:07 CQ2:08 CQ1:09 CQ4:09 CQ3:10 Note: iOS excludes iPod Touch and iPad shipments as they are not smartphones. *Others include Windows Mobile, Palm OS & WebOS, Linux and other proprietary smartphone OSes. Call outs on the left side represent market shares in CQ1:06; call outs on the right side represent market shares in CQ3:10. Source: Gartner. 9
Slide 10: Implies Very Rapid / Land Grab Evolution of Internet Access Global Unit Shipments of Desktop PCs + Notebook PCs vs. Smartphones, 2005 – 2013E 700 600 Global Unit Shipments (MM) 500 400 300 200 100 0 2005 2006 2007 2008 2009 Notebook PCs 2010E 2011E 2012E 2013E Smartphone > PC Shipments Within 2 Years – 2012E: Inflection Point Smartphones > Total PCs Desktop PCs Smartphones 10 Note: Notebook PCs include Netbooks. Source: Katy Huberty, Ehud Gelblum, Morgan Stanley Research. Data and Estimates as of 11/10
Slide 11: Japan Social Networking Trends Show How Quickly Mobile Can Overtake Desktop Internet Access – Mixi Mobile Page Views = 84% vs. 17% Four Years Ago Mixi’s (Japan’s Leading Social Network) Monthly Page Views, Mobile vs. PC, CQ2:06 – CQ3:10 30,000 25,000 Mobile Page Views Monthly Page Views (MM) 20,000 Desktop Page Views 84% 15,000 10,000 17% 5,000 83% 0 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 16% Note: Mixi is one of Japan’s leading social networking sites on PC and mobile with 22MM registered users as of 10/31/10. It monetizes mobile usage via sales of avatars, customized homepages and other premium services. Source: Company reports, Morgan Stanley Research 11
Slide 12: 3. Social Ecosystems Would you rather be Apple, Google or…Facebook? Will their future directions help / hurt your business? 12
Slide 13: Facebook / Apple / Google = Platforms of Different Types…Each with Rapid Innovation Facebook Apple iPhone / iTouch / iPad Social Networking 620MM users +51% Y/Y 550K+ Apps 500MM+ Downloads 120MM+ users +111% Y/Y 300K+ Apps 6.5B+ Downloads Mobile 940MM users +11% Y/Y Google CQ3: CPCs +2% Q/Q Paid Clicks +16% Y/Y Search Source: PC World, comScore (global user data for Facebook and Google as of 9/10), Facebook, Apple, Google (as of CQ3). 13
Slide 14: 4. Advertising Ripe for innovation – will your business benefit? 14
Slide 15: Media Time Spent vs. Ad Spend Still Out of Whack Internet / Mobile (upside…) vs. Newspaper / Magazine / TV (downside…) % of Time Spent in Media vs. % of Advertising Spending, USA 2009 50% Time Spent % of Total Media Consumption Time or Advertising Spending 40% 39% 30% 26% 20% 16% 10% 12% 9% 0% Print Radio TV Internet 13% Ad Spend 31% 28% ~$50B Global Opportunity Note: Time spent data per NA Technographics (2009), ad spend data per VSS, Internet advertising opportunity assumes online ad spend share matches time spent share, per Yahoo!. Source: Yahoo! Investor Day, 5/10. 15
Slide 16: Advertising Dollars Follow Eyeballs – Ad Revenue per User = $46 in 2009E vs. $0 in 1994E 1995E 2009E Global Internet Ad Revenue $55MM $54B $46 1.2B Ad Revenue per User $9 Global Internet Users 6MM Source: Global online ad revenue per Juniper Communications (1995), ZenithOptimedia (2009). Internet users per MS estimate (1995) and comScore (2009). We note that comScore reports a lower global Internet user # than International Telecommunications Union. 16
Slide 17: Facebook’s 620MM Users (+51% Y/Y) + Under-Monetized ‘Like’ Connections Offer Significant New Ad Opportunities Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 # of People Who Like Top 20 Brands / Products This (Millions) Texas Hold’em Poker (Zynga) 27.2 Facebook 25.2 YouTube (Google) 19.6 Starbucks 16.9 Coca-Cola 16.7 Mafia Wars (Zynga) 14.4 Oreo (Kraft) 13.2 Skittles (Mars) 12.4 Red Bull 11.1 Disney 10.3 Victoria’s Secret (Limited Brands) 9.1 Converse All Star 8.8 iTunes (Apple) 7.9 Windows Live Messenger (Microsoft) 7.6 Pringles (P&G) 6.7 iPod (Apple) 6.6 ZARA 6.5 NBA 6.0 Starburst (Mars) 5.9 Dr Pepper 5.8 Equivalent TV Shows* American Idol NCIS ------The Good Wife Glee ---Fringe ----Scrubs Vampire Diaries TV CPM Range ($) ~$30 ~$25 ~$20 Note: Facebook’s user figure reflects global unique visitors in 9/10, per comScore. Top 20 brand / product pages ranked by # of people who opted in to ‘like’ the page, excludes ‘people’ (like Vin Diesel / Lady Gaga) and ‘activities’ (like ‘I ♥ Sleep’). Data as of 17 11/10/10. *Equivalent TV shows based on # of total viewers during the 2009 – 2010 season. Source: Facebook, Nielsen Media Research, comScore.
Slide 18: Twitter’s 102MM Users (+74% Y/Y) Increasingly in Touch with Brands + Media Players Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Top 20 Brands Oprah CNN Breaking News New York Times Google E! Online The Onion People Magazine Time Magazine NBA Mashable Martha Stewart Whole Foods NPR InStyle Magazine NFL BBC Click Zappos! Good Morning America Woot CBS News # of Twitter Followers 4.5MM 3.6MM 2.7MM 2.6MM 2.5MM 2.4MM 2.2MM 2.2MM 2.1MM 2.1MM 2.0MM 1.8MM 1.8MM 1.8MM 1.8MM 1.8MM 1.8MM 1.7MM 1.6MM 1.6MM 18 Note: Twitter user figure reflects global unique visitors to Twitter.com in 9/10, per comScore. Top 20 brands ranked by # of followers, excludes celebrities like Ashton Kutcher and Britney Spears. Data as of 11/05/10. Source: TwitterCounter.com, comScore.
Slide 19: Online Ad CPM Dislocation? Share of Total USA Online Display Ad Units + CPM, by Top Publisher Categories – 3/10 Retail Business / Finance Lifestyles Online Gaming Sports News / Information eMail Entertainment Portals Social Networking 0% 5% 10% 15% 20% 2% 2% 2% 2% 3% 8% 10% 11% 21% 27% 25% 30% $2.59 $10.41 $2.72 $2.70 $6.35 $5.63 $0.89 $4.53 $2.69 $0.55 $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 Share of Total US Online Display Ad Units CPM ($) Source: comScore presentation “Insights into Online Display Advertising Growth” (6/10). 19
Slide 20: Apple / Google / Yahoo! / Facebook / Twitter / Others Say ‘Watch This Space!’ AdAge Top 25 Advertising Campaigns in Twentieth Century Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Volkswagen Coca-Cola Marlboro Nike McDonald's DeBeers Absolut Vodka Miller Lite Beer Clairol Avis Federal Express Apple Computer Alka-Seltzer Pepsi-Cola Maxwell House Ivory Soap American Express U.S. Army Anacin Rolling Stone Pepsi-Cola Hathaway Shirts Burma-Shave Burger King Campbell Soup Commercial Think Small The pause that refreshes The Marlboro Man Just do it You deserve a break today A diamond is forever The Absolut Bottle Tastes great, less filling Does she...or doesn't she? We try harder Fast talker 1984 Various ads Pepsi-Cola hits the spot Good to the last drop 99 and 44/100% Pure Do you know me? Be all that you can be Fast, fast, fast relief Perception. Reality. The Pepsi generation The man in the Hathaway shirt Roadside signs in verse Have it your way Mmm mm good Ad Agency Doyle Dane Bernbach D'Arcy Co. Leo Burnett Co. Wieden & Kennedy Needham, Harper & Steers N.W. Ayer & Son TBWA McCann-Erickson Worldwide Foote, Cone & Belding Doyle Dane Bernbach Ally & Gargano Chiat/Day Jack Tinker & Partners; Doyle Dane Bernbach; Wells Rich, Greene Newell-Emmett Co. Ogilvy, Benson & Mather Proctor & Gamble Co. Ogilvy & Mather N.W. Ayer & Son Ted Bates & Co. Fallon McElligott Rice Batton, Barton, Durstine & Osborn Hewitt, Ogilvy, Benson & Mather Allen Odell BBDO BBDO Year 1959 1929 1955 1988 1971 1948 1981 1974 1957 1963 1982 1984 1960s, 1970s 1940s 1959 1882 1975 1981 1952 1985 1964 1951 1925 1973 1930s Source: Advertising Age. Where are the Great Online Ads? 20
Slide 21: 5. Commerce ’Wal-Mart in your pocket’…location-based services…group buying power…flash sales… deep discounts…transparent pricing…real-time alerts / ratings…virtual goods...immediate gratification… Products must be fast + easy + fun. Have you ever seen ‘constant improvement’ in products like we are seeing now? Is your business keeping pace? Do humans want everything to be like a game? 21
Slide 22: Online at ~5% of USA Retail, Mobile Should Get to Same Level Much Faster USA eCommerce % Share(1) of Total Retail Sales, CQ3:00 – CQ4:12E 7% eCommerce Penetration 4% in CQ2:10 Online Commerce Gaining Share vs. Offline – eCommerce as % of Total Retail Sales 6% 5% 4% 3% Mobile eCommerce Penetration? 2% 1% 0% Q3:00 Q3:01 Q3:02 Q3:03 Q3:04 Q3:05 Q3:06 Q3:07 Q3:08 Q3:09 Q3:10 Q3:11 Q3:12 eCommerce Penetration Linear Trendline (y=0.094x + 0.9895, R^2=0.9599) Note: (1) Adjusted for eBay by adding back eBay US gross merchandise volume; Source: US Dept. of Commerce (CQ4:09), Morgan Stanley Research. 22
Slide 23: Mobile Revolutionizing Commerce – With Constant Product Improvements  Location-Based Services – Enable real-time physical retail / service opportunities  Transparent Pricing – Instant local + online price comparison could disrupt retailers  Discounts – Invitation-only time-based selective sales gaining traction  Immediate Gratification – OTA (over-the-air) instant digital product + content delivery Location-Based Services Priceline.com iPhone App Finds hotel deals in your area Transparent Pricing ShopSavvy Android App Comparison shopping among online + local stores Discounts Gilt iPhone App Designer handbags Up to 70% Off Immediate Gratification iTunes Store on iPhone Music / video / apps delivered wirelessly Source: Company Reports, Morgan Stanley Research. 23
Slide 24: 6. Media What does the extraordinary ramp in on-demand video usage mean for your business? 24
Slide 25: Streaming Video Gaining Material Market Share of Internet / Mobile Usage North America Downstream Fixed-Access Peak Hour* Traffic Share by Application, 9/10 Normalized Aggregate Peak Traffic Profile Other Traffic HTTP Netflix YouTube BitTorrent Flash Video RTMP 0% 5% 6% 6% 10% 15% 20% 25% 30% 10% 8% 23% 21% 26% North America Mobile Peak Hour* Traffic Share by Application, 9/10 vs. 1/10 100% 80% 60% 27% 40% 20% 0% Jan 2010 Sep 2010 Real-Time Entertainment Secure Tunneling Social Networking Other 36% 41% 10% 6% 4% 18% 10% 8% 3% 6% Streaming Video Other Web Traffic 32% Downstream Traffic Share during Peak Hours, by Application (9/10) Web Browsing P2P Filesharing Gaming Real-Time Communications Streaming Video Up to ~37% of Internet Traffic During Traditional “TV Hours” Mobile Video = 41% of Peak Hour Traffic, Up from 27% in January Note: *Peak hours are the periods during which bandwidth utilization is heaviest. They typically occur in the evening and last 3-5 hours. (e.g., peak hours for Netflix = 8-10pm). RTMP stands for real-time messaging protocol (Instant messaging). Realtime entertainment represents streamed / buffered audio and video content. Source: Sandvine Fall 2010 Global Internet Phenomena Report, Morgan Stanley Research. 25
Slide 26: YouTube Content Growth Accelerating (+2x Y/Y) – 35 Hours of Content Added Every Minute Hours of YouTube Content Uploaded per Minute, 6/07 – 11/10 Hours of YouTube Content Uploaded per Minute 40 30 20 10 0 6/07 12/07 6/08 12/08 6/09 12/09 6/10 Hours Uploaded per Minute Source: YouTube blog, Morgan Stanley Research. 26
Slide 27: 7. Internet Company Leadership Evolution Shocking changes over just 6 years… are you prepared for next half decade of change? 27
Slide 28: Global Public Internet Companies – Significant Changes Over Last 6 Years Top Global 15 Publicly Traded Internet Companies by Market Value – 2010 vs. 2004 2010 Market Revenue Rank Company ($MM) Region Value ($B) 1 Apple USA $290 $46,709 197 23,612 2 Google USA 3 Amazon.com 76 24,508 USA 4 Tencent 41 1,822 CHN 5 eBay 40 8,727 USA 6 Baidu 40 641 CHN 7 Yahoo! 22 6,460 USA 21 2,941 8 Yahoo! Japan JPN 9 Priceline.com 21 2,338 USA 10 Salesforce.com USA 15 1,241 11 Rakuten 10 3,204 JPN 12 Alibaba.com 10 568 CHN 13 Akamai 9 860 USA 14 Netflix 9 1,670 USA 8 1,062 15 NHN KOR Total $809B $126B 2004 Market Revenue Region Value ($B) ($MM) USA USA USA USA JPN USA USA JPN USA USA CHN KOR JPN KOR JPN $71 50 52 38 33 22 16 9 3 2 3 2 2 1 1 $304B $3,271 3,189 3,575 4,188 1,101 8,279 6,921 445 846 134 157 280 357 253 85 $33B Rank Company 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 eBay Google Yahoo! IAC/Interactive* Yahoo! Japan Apple Amazon.com Rakuten Monster WebMD Shanda NCSoft Index NHN For-side.com Total 2 of 2010 Top 15 Companies (Alibaba, Baidu) Went Public Post 2004 Note: 2010 Market value data as of 11/11/2010; 2004 data as of 11/11/2004. 2010 Revenue is latest calendar year revenue (C2009A) Source: FactSet. 28
Slide 29: 8. Steve Jobs What’s his ‘secret sauce?’ Does your company have it? 29
Slide 30: Steve Jobs – ‘…mind of an engineer and the heart of an artist…’ Larry Ellison (June 2004): Steve Jobs is the most brilliant person in our industry, and what is most remarkable about Steve, I think, is his incredible aesthetic sense. He has the mind of an engineer and the heart of an artist — that's a very unusual combination, an enormous advantage when you do consumer products. Look at the iPod...I think the iPod is a beautiful design and I think the iMac is a brilliant design. He's done a tremendous amount of innovation on the integration of hardware design and software design. Bill Gates (May 2007): …We build the products that we want to use ourselves. And so he’s [Steve Jobs] really pursued that with incredible taste and elegance that has had a huge impact on the industry. And his ability to always come around and figure out where that next bet should be has been phenomenal. Apple literally was failing when Steve went back and re-infused the innovation and risktaking that have been phenomenal. Note: Ellison quote from interview with Walt Mossberg & Kara Swisher at AllThingsD: D2 Conference, June 2004. Gates quote from interview with Steve Jobs, Walt Mossberg & Kara Swisher at AllThingsD: D5 Conference, May 2007. Source: AllThingsDigital, www.peoplesoft-planet.com 30
Slide 31: 9. Ferocious Pace of Change - What’s Next in Tech? When do consumers / enterprises & incumbents / attackers need you? 31
Slide 32: Mobile Connectivity Drives New Ways to Do LOTS of Things Faster / Better / Cheaper from Palm of Hand  More Connected – Real-time connectivity / 24x7 / in palm of hand…  More Affordable – Wi-Fi nearly ubiquitous in many developed markets…for many / 3G tiered pricing lowers adoption barrier…  Faster – Near-zero latency for boot-up / search / connect / pay...  Easier to Use – User Interface revolution + location awareness provide something for nearly everyone…  Fun to Use – Social / casual gaming / reward-driven marketing…  Access Nearly Everything – Music / video / documents / ‘stuff’ in cloud...  Longer Battery Life – Hours of continuous usage… 32
Slide 33: Unusually High Level of Innovation from Incumbents  Apple – iPad / iPhone / iTouch / iTunes / Multi-Touch Input /  Google – Android / Chrome / YouTube / Display Advertising / Web Apps / Instant + Voice Search  Amazon.com – Kindle / EGM (Electronics & General Merchandise) Sales / Mobile Apps / AWS (Amazon Web Services)  Tencent – Virtual Goods  Nintendo / Sony / Microsoft – Motion Sensors (natural gaming input)  PayPal – Mobile + Digital Goods Payments  Netflix – Streaming Content  Salesforce.com – Chatter (real-time enterprise collaboration platform) 33
Slide 34: Unusually High Level of Innovation from New Attackers  Facebook – Real-time Communication / Social Graph / Credits  Zynga – Social Gaming / Virtual Goods / Offers (Reward-Driven Marketing)  Twitter – One-to-Many Real-Time Broadcast  OpenTable / Yelp / Foursquare / Shopkick – Location-Aware Mobile Services  Gilt / One Kings Lane / Rue La La – Time-based ‘Flash’ Sales  Groupon – Social Group Buying  Tapulous / Digital Chocolate / Booyah / Ngmoco:) – Social / Mobile Gaming  Pandora / Spotify – Personalized Music 34
Slide 35: ‘Disruptive Innovation’ – Clayton Christensen Christensen studied why great companies with smart managements and substantial resources consistently lost to ‘disruptors,’ companies with simpler, cheaper, and inferior products. - Michael Mauboussin (7/10) Two Ways Disruptive Innovation Can Happen Low-End Segment Strategy Disruptors introduce a product that is at the low end of the market and that is neither profitable for the incumbents nor in demand from the incumbents customers... This becomes a problem as the disruptors improve their offering and move up market, eventually encroaching on the core business of the incumbent, and doing so with a lower cost structure. Amazon.com / Netflix / PayPal… iPhone / iPad / Facebook… Non-Consumption Strategy Disruptors introduce a product that was unavailable to consumers before, effectively competing with non-consumption. Source: “Untangling Skill and Luck: How to Think About Outcomes – Past, Present, and Future” (7/15/2010). 35 Michael Mauboussin, Legg Mason Capital Management
Slide 36: 10. Closing Thoughts – Large companies do not typically support rapid growth rates of the magnitude that follow… will these trends continue?
Slide 37: Global Public Internet Leaders – Strong Q3 Trends… 1. Apple ($283B market cap, $20.3B in CQ3 revenue) - Momentum continued as revenue grew 67% Y/Y – iPhone units grew 91% Y/Y to 14MM, 4MM iPads shipped and Mac growth was a healthy 27% to 4MM. 80% / 65% of Fortune 500 companies have deployed (or are piloting) iPhones / iPads. User base of 50MM Macs; 61MM iPhones; 7.5MM iPads. 2. Google ($193B, $7.3B) - Momentum accelerated as search quality improved and mobile usage growth extended reach: Paid clicks up 16% Y/Y, cost-per-click up 3% Q/Q. New initiatives gaining traction: Display advertising and mobile at $2.5B and $1B gross revenue run rates. Android momentum continued to surprise on upside. Capex rose a hefty 59% Q/Q to $757MM as Google ramped investments in data centers / IT infrastructure. Base of 940MM average monthly unique users. 3. Amazon.com ($74B, $7.6B) - Revenue growth remained very strong at 39% Y/Y as EGM (electronics and general merchandise) powered up to 53% of revenue vs. slower growing media 2x Y/Y sales (+14% Y/Y). Operating margins compressed to 5.3% vs. 6.4% Y/Y owing to across-the-board investments in fulfillment (13 new fulfillment centers) / marketing / technology & content. Active customer growth remained robust (+23% Y/Y). Base of 121MM active customers. Note: Market cap data as of 11/12/10. Source: Company data, Factset, comScore (unique user data), Morgan Stanley Research. 37
Slide 38: …Global Public Internet Leaders – Strong Q3 Trends… 4. Tencent ($41B, $797MM) - Momentum continued as revenue rose 55% Y/Y, driven by IVAS (Internet Value Added Services) growth of +57% Y/Y (now ~79% of total sales) and MVAS (Mobile Value Added Services) growth of +56% Y/Y (13% of sales). Online game sales supplied the majority of IVAS growth (+67% Y/Y to 49% of total sales) as titles such as CrossFire and QQ Speed reached record usage levels (measured by concurrent users). Online ad revenue maintained healthy growth (+30% Y/Y) and continued to expand its advertiser base following the momentum gained during the World Cup in June and July. Base of 198MM average monthly unique users. eBay ($39B, $2.2B) - PayPal payment volume rose a healthy 26% Y/Y while users grew 16% Y/Y to 91MM as merchant services (off-eBay) continued to grow at a strong rate (+40% Y/Y) and crossborder transactions maintained a healthy level of overall activity (24% of total transaction value). Marketplace sold items growth accelerated to 13% Y/Y as demand in international markets continued to pick up and the US / UK / Germany (eBay’s largest markets) benefited from a pricing change instituted in each market over the past year. Base of 222MM average unique monthly eBay users and 90.5MM active PayPal users. customers increased 26% Y/Y (to 272K, <1% of total SMEs in China, leaving room for ample upside) and advertiser ARPU rose 41% Y/Y as large corporate customers continued to increase their online marketing spend. Operating margin (56%) improved 2ppts Q/Q and 12ppts Y/Y, owing to pricing power vs. search advertising competitors and fixed-cost leverage over bandwidth and infrastructure costs. Base of 185MM average monthly unique users. Note: Market cap data as of 11/12/10. Source: Company data, Factset, comScore (unique user data), Morgan Stanley Research. 5. 2x 6. Baidu ($39B, $337MM) - Paid search revenue growth accelerated to 76% Y/Y, as online advertising Y/Y 38
Slide 39: …Global Public Internet Leaders – Strong Q3 Trends… 7. Yahoo! ($22B, $1.6B) - Display advertising revenue rose 17% Y/Y (from recession compressed levels) as ad targeting continued to improve while search-related revenue declined 7% Y/Y as the transition to Microsoft algorithmic search during the quarter impacted paid click volume. Turnaround remains on track, but bolstering user engagement on sites is key to fend off usage time erosion to the likes of Facebook. Outlook for Asian investments / assets remains compelling. Base of 616MM average monthly unique users. priceline.com ($20B, $1.02B) - Gross bookings growth remained strong at 47% Y/Y and revenue growth continued to accelerate, reaching 37% Y/Y. International gross bookings, which increased 67% Y/Y (78% Y/Y on an FX-neutral basis), and hotel room nights (up 54% Y/Y) remained the two primary growth drivers for the company. Gross profit of $666MM (up 54% Y/Y, 67% margin) was driven primarily by international strength (international gross profit was $530MM, up 80% on an FX-neutral basis and represented 80% of total gross profit). Base of 23MM average monthly unique visitors. 8. 9. 2x Alibaba.com ($10B, $219MM) - Revenue growth remained strong at 40% Y/Y as international sales Y/Y (outside China) grew 33% Y/Y (58% of total) and paying member growth continued (30% Y/Y to ~751K). Value-added services (such as keyword bidding, premium placement, and online translations) contributed 25%+ of China Gold Supplier sales and 20%+ of TrustPass revenue, up from mid-teens a year ago, and continue to improve the value proposition for suppliers. Base of 42MM average monthly unique users. Note: Market cap data as of 11/12/10. Source: Company data, Factset, comScore (unique user data), Morgan Stanley Research. 39
Slide 40: …Global Public Internet Leaders – Strong Q3 Trends 10. Akamai ($9B, $254MM) - Revenue growth accelerated for the fourth straight quarter to 23% Y/Y as: 1) Media & Entertainment revenue (+26% Y/Y, 44% of total) posted strong numbers driven by increasing traffic volume from strengthening over-the-top video demand; and 2) eCommerce revenue (+24% Y/Y, 32% of total) also came in strong and should continue to grow as consumers shift retail spending online during the holiday season. Akamai’s continued investment in its unique network architecture position the company well to capitalize on the secular growth in online video, eCommerce, and cloud-based services. 11. Netflix ($9B, $553MM) - Very strong momentum as subscriber and revenue growth continued to accelerate – up 52% and 31% Y/Y, respectively…while subscriber acquisition cost and churn declined to their lowest levels in company history. We estimate subscriber level (at 17MM in CQ3) should surpass HBO’s USA subscriber base (MS forecast at ~30MM for YE C2012E) by CH1:12E. Netflix growth has been assisted by acceptance as a key video content source on Apple’s iPad and the company’s large and growing library of video content. 2x Y/Y Note: Market cap data as of 11/12/10. Source: Company data, Factset, comScore (unique user data), Morgan Stanley Research. 40
Slide 41: Something You Should be Thinking About that May Not be Top of Mind
Slide 42: USA Federal Government – Entitlement Spending + Interest Expense are Forecast to Exceed Revenue by 2025, per Congressional Budget Office Entitlement Spending + Interest Payments vs. Revenue as % of GDP, 1980 – 2050E 40% Total Revenue & Entitlement + Net Interest Payments as % of GDP Revenue 30% Entitlement Spending + Net Interest Payments 20% 10% 0% 1980 1990 2000 2010E 2020E 2030E 2040E 2050E Source: Congressional Budget Office (CBO) Long-Term Budget Outlook (6/10). Note that entitlement spending includes federal government expenditures on Social Security, Medicare and Medicaid. Data in our chart is based on CBO’s ‘alternative fiscal scenario’ forecast, which assumes a continuation of today’s underlying fiscal policy. Note that CBO also maintains an ‘extendedbaseline’ scenario, which adheres closely to current law. The alternative fiscal scenario deviates from CBO’s baseline because it incorporates some policy changes that are widely expected to occur (such as extending the 2001-2003 tax cuts rather than letting them expire as scheduled by current law and adjusting physician payment rates to be in line with the Medicare economic index rather than at lower scheduled rates) and that policymakers have regularly made in the past. 42
Slide 43: Near Term Good News
Slide 44: Consumers Expect to Celebrate the Holiday Season in 2010 ;) Do You Plan to Celebrate a Major Winter Holiday This Year? 8% 92% Yes, Plan to Celebrate No, Do Not Plan to Celebrate Note: Survey asked 8,767 respondents whether they planned to celebrate Christmas, Hanukkah, and/or Kwanzaa this year. Source: BIGresearch / National Retail Federation (NRF) Consumer Intentions & Actions Survey, 10/12/2010. 44
Slide 45: Disclosure Section… The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. As used in this disclosure section, "Morgan Stanley" includes Morgan Stanley & Co. Incorporated, Morgan Stanley C.T.V.M. S.A. and their affiliates as necessary. For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), 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 indirect compensation in exchange for expressing specific recommendations or views in this report: Mary Meeker. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst or strategist (or a household member) owns securities (or related derivatives) in a company that he or she covers or recommends in Morgan Stanley Research: Mary Meeker - Amazon.com (common or preferred stock), eBay (common or preferred stock), Yahoo! (common or preferred stock). Morgan Stanley policy prohibits research analysts, strategists and research associates from investing in securities in their sub industry as defined by the Global Industry Classification Standard ("GICS," which was developed by and is the exclusive property of MSCI and S&P). Analysts may nevertheless own such securities to the extent acquired under a prior policy or in a merger, fund distribution or other involuntary acquisition. As of October 29, 2010, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Amazon.com, Blue Nile Inc, Digital River Inc, Google, GSI COMMERCE, Mercadolibre Inc., Netflix Inc, OpenTable Inc., Vistaprint N.V., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Ancestry.com Inc., Digital River Inc, eBay. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Amazon.com, Ancestry.com Inc., Digital River Inc, eBay, Google, GSI COMMERCE, Netflix Inc. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Amazon.com, Ancestry.com Inc., Blue Nile Inc, Dice Holdings, Inc., Digital River Inc, eBay, Google, GSI COMMERCE, Mercadolibre Inc., Netflix Inc, OpenTable Inc., TechTarget, Inc., Vistaprint N.V., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Amazon.com, eBay, Google. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Amazon.com, Ancestry.com Inc., Blue Nile Inc, Dice Holdings, Inc., Digital River Inc, eBay, Google, GSI COMMERCE, Mercadolibre Inc., Netflix Inc, OpenTable Inc., TechTarget, Inc., Vistaprint N.V., WebMD Health Corp., Yahoo!. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Amazon.com, Digital River Inc, eBay, Google, Netflix Inc, OpenTable Inc.. An employee, director or consultant of Morgan Stanley (not a research analyst or a member of a research analyst's household) is a director of Yahoo!. Morgan Stanley & Co. Incorporated makes a market in the securities of Amazon.com, Ancestry.com Inc., Blue Nile Inc, Dice Holdings, Inc., Digital River Inc, drugstore.com, eBay, Google, GSI COMMERCE, Mercadolibre Inc., Netflix Inc, OpenTable Inc., Overstock.com Inc, Shutterfly Inc, TechTarget, Inc., Vistaprint N.V., WebMD Health Corp., Yahoo!. 45
Slide 46: …Disclosure Section… The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions. STOCK RATINGS Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. 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. Global Stock Ratings Distribution (as of October 31, 2010) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equalweight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively. Coverage Universe Stock Rating Category Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total Count 1122 1158 121 393 2,794 % of Total 40% 41% 4% 14% Investment Banking Clients (IBC) Count 413 411 22 103 949 % of Total IBC 44% 43% 2% 11% % of Rating Category 37% 35% 18% 26% Data include common stock and ADRs currently assigned ratings. 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 received investment banking compensation in the last 12 months. 46
Slide 47: …Disclosure Section… 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. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to 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. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months. 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, as indicated below. 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, as indicated below. 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, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Important Disclosures for Morgan Stanley Smith Barney LLC Customers Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest. 47
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