Morgan Stanley · NYSE:MS
Morgan Stanley — The Kelsey Group: Interactive Local Media 2004
49 slides from Morgan Stanley's conference presentation, November 2004
Slide 1: Internet Trends
Internet Trends The Kelsey Group: Interactive Local Media 2004 Mary Meeker mary.meeker@morganstanley.com November 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 tha
Slide 2: Outline
Outline • Global Basics • Recent Trends • Where we Are • High Level Online Ad Trends • A Few Thoughts on Search • Your Questions 2
Slide 3: Global Basics
Global Basics Morgan Stanley
Slide 4: N. America = 26% of Internet Users, was 46% in 1998
N. America = 26% of Internet Users, was 46% in 1998 Latin America Rest of North America Asia Rest of Asia 5% World 7% 26% Pacific World Pacific 9% 6% Latin America 3% Japan 25% 7% Europe 28% North America 46% Japan 8% Europe 28% 1998: 147MM Internet Users 2003E: 751 MM Internet Users Source: Morgan
Slide 5: Technology Adoption… Not all Made in the USA
Technology Adoption… Not all Made in the USA • China Internet – 87MM+ users; #2 in world, likely #1 within 5 years; more than 70% of Internet users under 30 • S. Korea – Broadband penetration of 70%+ is higher than any other country • Shanda Networking – 1.7MM peak concurrent online gamers in CQ3:04
Slide 6: Wireless Messaging Becoming More Important
Wireless Messaging Becoming More Important Mobile Mobile Internet Phone to Installed Phones Users Internet PCs Country (MM) (MM) User Ratio (MM) China 207 59 3.5 : 1 29 US 141 162 0.9 : 1 198 Japan 79 53 1.5 : 1 49 Germany 60 34 1.8 : 1 36 UK 49 32 1.5 : 1 24 Italy 49 20 2.5 : 1 12 South Korea 32 26
Slide 7: Recent Trends
Recent Trends Morgan Stanley
Slide 8: Top Global Internet Market Cap Leaders
Top 5 Global Internet Market Cap Leaders eBay + Google + Yahoo! + Yahoo! Japan + Amazon.com • $ 2B = market value at pre-2000 IPO • $178B = market value at Nasdaq peak – 3/10/00 • $ 32B = market value at Nasdaq trough – 10/9/02 • $231B = market value at 11/3/04 Note -Google included after the compan
Slide 9: Strong Financial Results - CQ3
Strong Financial Results - CQ3 Google 19% Q/Q (101% Y/Y) net revenue growth to $503MM with $280MM in operating income Yahoo! 8% Q/Q (84% Y/Y) net revenue growth to $655MM with $215MM in operating income eBay 4% Q/Q (44% Y/Y) net revenue growth to $806MM with $273MM in operating income 9
Slide 10: Broad-based e-Commerce Growth - CQ3
Broad-based e-Commerce Growth - CQ3 eBay CQ3 Gross Merchandise Volume (GMV) Growth 61% Y/Y – $11B – Motors 41% – 3 – Consumer Electronics 23% – 3 – Computers 68% – 2 – Clothing / Accessories 29% – 2 – Books / Movies / Music 17% – 2 – Collectibles 55% – 2 – Home / Garden 43% – 2 – Sports 26% – 1 – To
Slide 11: eCommerce Share Gains Continue
eCommerce Share Gains Continue (All Figures US$ in Billions) C1999 C2000 C2001 C2002 C2003 CQ2:04 Total US Retail Sales $2,868 $3,072 $3,163 $3,230 $3,400 $919 Y/Y Change -- 7% 3% 2% 5% 8% Total US Retail eCommerce Sales* $15 $28 $35 $44 $56 $16 Y/Y Change -- 87% 22% 29% 26% 23% % of Total US Retail
Slide 12: Strong User & Usage Growth - CQ3
Strong User & Usage Growth - CQ3 eBay 48% Y/Y listings growth (31%Y/Y - US; 75% Y/Y - non-US) 38% Y/Y active user growth to 52MM 55% Y/Y active PayPal user growth to 17MM Yahoo! 35% Y/Y page view growth 28% Y/Y active registered user growth to 157MM Penetration still low into 800MM+ base of Internet
Slide 13: Strong Monetization Growth - CQ3
Strong Monetization Growth - CQ3 eBay 7.4% from 7.1% Y/Y increase in US take rate, 11.0% from 10.6% Y/Y increase including PayPal Yahoo! $2.17 from $1.38 Y/Y increase in marketing services revenue per 1,000 pages delivered 13
Slide 14: Outlook for Solid User Growth
Outlook for Solid User Growth 02-05E 1998E 1999E 2000E 2001E 2002E 2003E 2004E 2005E CAGR Total Internet Users (MM) 147 229 341 485 609 751 872 976 17% North America 68 93 122 156 176 198 221 242 11% Europe 41 68 102 136 169 210 249 269 17% Asia/Pacific 13 30 56 100 141 187 217 246 20% Japan 11 17 2
Slide 15: Outlook for Strong Usage Growth
Outlook for Strong Usage Growth C2000 C2001 C2002 C2003 CQ2:04E Global Broadband Subscribers (000's) 13,477 31,933 56,093 88,194 106,704 Y/Y Growth -- 137% 76% 57% 47% North America 7,174 13,948 21,075 29,036 33,776 Y/Y Growth -- 94% 51% 38% 38% Europe 1,287 4,118 9,589 17,555 23,160 Y/Y Growth -- 2
Slide 16: Usage Growth Likely Paced by Innovation
Usage Growth Likely Paced by Innovation • Broadband • User experience • Search • Personalization with more effective targeting • User-generated content (RSS, blogs, reviews, images, audio…) • Music • Short- and long-form video • Local • Accessibility (including mobile devices and desktop) 16
Slide 17: Basic Thesis…
Basic Thesis… • 10-15% annual global Internet user growth • 20-30% usage growth • 30%+ monetization growth 17
Slide 18: Things to Watch…
Things to Watch… • Development of user-generated web services platforms. At risk of oversimplifying: eBay = e-commerce Google = search and ad targeting Yahoo! = content serving, etc… Microsoft = etc… • Korea broadband / mobile… • Music video monetization… • Healthy ecosystem… 18
Slide 19: Broadband Impact on Internet Usage Patterns
Broadband Impact on Internet Usage Patterns • In South Korea, the country with world’s highest broadband penetration (70%+), always-on, high- speed internet connections have changed media consumption patterns • Korean TV channels allow users to download shows for ~$1 • In 2003, e-commerce comprised
Slide 20: Online Advertising is Undermonetized…
Online Advertising is Undermonetized… <15% of music videos (at 300MM per month in 10/04) on Yahoo! LAUNCH have ads preceding them, implying significant opportunity for expansion of highly targeted ads… Source: Morgan Stanley Research, Yahoo! (9/04). 20
Slide 21: …Online Advertising is Undermonetized…
…Online Advertising is Undermonetized… High Volume of Sponsored Links 21
Slide 22: …Online Advertising is Undermonetized
…Online Advertising is Undermonetized Low Volume of Sponsored Links 22
Slide 23: …Online Advertising is Undermonetized
…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 Targeted, billboard opportunity in the 1950s? Relevant Ad NYTimes.com
Slide 24: Where we Are
Where we Are Morgan Stanley
Slide 25: Google's Mission is a Very Big Idea
Google’s Mission is a Very Big Idea To organize the world’s information and make it universally accessible and useful. 25
Slide 26: Search / Find / Obtain (SFO) Getting Easier
Search / Find / Obtain (SFO) Getting Easier Search for “TiVo” Obtain Find Source: Morgan Stanley Research, Yahoo!, Amazon.com, TiVo (9/04). 26
Slide 27: eBay Has Expanded SFO Market
eBay Has Expanded SFO Market eBay (One Website) vs. All U.S. Newspapers (1,468 Dailies) Annual 700 Classified Ads (MM) 602 600 500 427 Listings (MM) eBay (US) All US Newspapers 400 320 300 238 200 144 145 146 141 123 127 122 120 100 33 4 0 1997 1998 1999 2000 2001 2002 2003 27
Slide 28: …Why Shouldn't Same Trends Occur in Local?
…Why Shouldn’t Same Trends Occur in Local? $16.0 14.5 13.8 13.9 14.0 13.4 12.7 US Directories Revenue ($B) 12.0 12.0 11.4 10.0 8.0 6.0 4.0 2.0 0.0 1997 1998 1999 2000 2001 2002 2003 Source: Robert Coen, Universal McCann 28
Slide 29: Again, Why Shouldn't Same Trends Occur in Local?
Again, Why Shouldn’t Same Trends Occur in Local? Yellow Pages Direct Mail Search Usage 30-40MM references 11MM pieces read 300MM searches per day per day per day Leads Generated 25-35MM phone calls 2MM responses 150MM leads per day per day per day Market Size $14B $49B ~$3B Targeting You seek leads
Slide 30: High Level Online Ad Trends
High Level Online Ad Trends 30
Slide 31: Internet Ad Spend at $120 Per Home vs. $898 for Newspapers?
Internet Ad Spend at $120 Per Home vs. $898 for Newspapers? 2003E Advertising Ad Spending / Medium Spending ($B) Households (MM) Household ($) Promotions $97 99 $976 Newspapers 45 50 898 Classifieds 15 55 289 Direct Telephone 85 99 863 Direct Mail 48 99 483 Broadcast TV 43 99 429 Radio 20 60 328 Cab
Slide 32: Younger Demographic Spends More Time Online vs. Other Media
Younger Demographic Spends More Time Online vs. Other Media 20 17 16 14 12 12 8 8 6 4 0 Books & Phone (Cell & Radio TV Internet Magazines Landline) Source: Veronis Suhler Stevenson (2003), Yahoo! (5/04). Youth defined as age 17 and under. 32
Slide 33: Internet Estimated to Gain Most Media in Media Consumption, 2003-2007E
Internet Estimated to Gain Most Media in Media Consumption, 2003-2007E 20% 16.4% 15 10 5 1.8% 0 (5) (1.9% ) (1.6% ) (1.1% ) (0.9% ) (5.3% ) (10) Rec. Music TV News- Magazines Radio Cable Internet papers Source: Veronis Suhler Stevenson (2003). 33
Slide 34: Gap Between Internet Consumption and Ad Spend is Large
Gap Between Internet Consumption and Ad Spend is Large US Media Usage to Ad Spending Ratios 5.0x 4.7x 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Newspapers Magazine TV Cable TV Radio Internet Media Usage Source: SRI-Knowledge Networks, Fall 2003. Ad Spending Source: Universal McCann, (6/03); Internet A
Slide 35: Impressive Y/Y Acceleration in US Online Ad Growth
Impressive Y/Y Acceleration in US Online Ad Growth (US$ in Billions) 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 Q2:04 Revenue $2.1 $1.9 $1.8 $1.8 $1.6 $1.5 $1.5 $1.5 $1.6 $1.6 $1.7 $1.8 $2.2 $2.3 $2.4 Y/Y Change +19% -3% -12% -9% -23% -19% -21% -18% -4% +7% +
Slide 36: A Few Thoughts on Search
A Few Thoughts on Search Morgan Stanley
Slide 37: Improving User Experience Creates Opportunities…
Improving User Experience Creates Opportunities… • 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 37
Slide 38: …Improving User Experience Creates Opportunities…
…Improving User Experience Creates Opportunities… As eBay and buyers / sellers became smarter, the online marketplace improved… eBay Listings, Gross Merchandise Volume (GMV) • As buyers, sellers and eBay became smarter about expanding and improving eBay’s user 350,000 $9,000,000 experience, volume a
Slide 39: …Improving User Experience Creates Opportunities…
…Improving User Experience Creates Opportunities… Improvements in natural search (85% of clicks…) Greater R&D spend Increasing the number of documents crawled Improving natural-language processing, intent-based results Improving algorithms that determine the relevancy of results Increasing amounts o
Slide 40: …Improving User Experience Creates Opportunities…
…Improving User Experience Creates Opportunities… Improvements in sponsored search More nuanced campaign control Improved keyword matching technology More bidders, greater volume Increased keyword coverage Advertisers’ greater financial incentive to improve relevancy An efficient, high- volume marke
Slide 41: …Improving User Experience Creates Opportunities
…Improving User Experience Creates Opportunities 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… 41
Slide 42: Revenue Per Search (RPS) Components
Revenue Per Search (RPS) Components RPS = Coverage X Click-through Rate X Price Per Click # Searches that Total # Clicks on Total Amount Show Ads Ads Received from Advertisers RPS = X X Total # Searches # Searches that Total # Clicks on Show Ads Ads Total Amount Received from Advertisers RPS = Total
Slide 43: Revenue Per Search Trends…
Revenue Per Search Trends… Number of Sample April 03 Price Æ Unique Terms Words Term March 04 Price 1-2 50K “Credit Card” $1.45 Æ $1.73 2-3 20MM “APR Credit Card” $0.95 Æ $1.84 “Credit Card 3+ 600MM Fee No $0.10 Æ $1.52 Interest Transfer” • Ad inventory increases as searchers enter more specific (lo
Slide 44: …Revenue Per Search Trends…
…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
Slide 45: …Revenue Per Search Trends
…Revenue Per Search Trends Common Bidding Range • Fewer words Price Per Click • More expensive • Lower conversions Tail • More descriptive phrases • Lower cost • Higher predictability 1-word 2-3 word 3-5 word 5 word+ Length of Query • Keyword price decreases as query length increases, initially • Bu
Slide 46: First Closing Thought
First Closing Thought In our view, the combination of competition, innovation and user demand for new and improved services should drive strong usage and monetization growth over the next few years. Every company won’t win, however, overall market growth should be strong… 46
Slide 47: Final Closing Thought
Final Closing Thought People have very little intuition for what it will mean when the top 40% of US households, based on income, have half a dozen computers, all of them connected to the Net, all of them with "instant on." They just don’t know how important a part of our daily life the online world
Slide 48: Disclaimer
Disclaimer 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
Slide 49: Disclaimer
Disclaimer Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is availabl
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