2011 internet sector outlook jpmorgan

8/13/2019 2011 Internet Sector Outlook JPMorgan

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North America Equity Research

January 2011

Nothing But Net

2011 Internet Sector Outlook

Internet, Media & Entertainment

Imran KhanAC

Senior Analyst

-

[email protected]

J.P. Morgan Securities LLC

See the end pages of thi s presentation for analyst certification and important disc losures.

. . organ oes an see s o o us ness w compan es covere n s researc repor s. s a resu , nves ors s ou e aware a e rm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making theirinvestment decision.


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Over the ToSociale wor s

Retail Travel Publishing

TV Movies NewsMedia

The Bottom Line:

1

Companies that dont embrace these trends could find themselves in danger by the end of the decade.

Source: J.P. Morgan.


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2000 2010

1,320 1,258S&P 500 Index

,

97M 293MWireless Subscribers

. .

124M 240MInternet Users

a a ans n evenue

~$2B~$18B

US eCommerce

Amazon

.

(2 yrs old)

.

(F10 net rev)

Didnt Exist 500M+ Users

Google (Search)

Facebook (Social)

Founders working for PayPalMonetizing 100B views/yr

No Streaming Option~12M users streaming

YouTube

2

e x

Source: J.P. Morgan.


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2015 or

2020 look

like?

3Source: Viacom.


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.

Continued adoption of social media and its impact on existing businesses such as advertising,entertainment and eCommerce.

Increased smartphone penetration will further proliferate mobile web usage and app development andcould disrupt the way we shop, consume content and communicate.

Consumers embracing over the top video consumption. We think content owners, distributors and

own.

Monetization of mobile search is a critical factor for Googles growth.

r c mor ar re a ers mar e s are osses cou acce era e. ona y, we expec ma er a mar e

share shifts in countries such as China, where B&M brands are relatively weaker.

The online hotel business retains significant runway for international growth, and we expect an above-industr -avera e rowth rate in the se ment.

We expect more consolidation/M&A rather than share buybacks.

Despite its underperformance of the search market growth rate for most of the last ten years, we think.

We believe rapid internet and smartphone penetration growth will create many more exciting businessesoutside the US but we expect US companies to face major challenges in markets outside Western

Europe.

4

We expect a major effort by internet companies all over the world to woo local advertisers.


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Consumers embracing over the top video consumption. We think content owners and advertisers must.


US brick & mortar retailers market share losses could accelerate. Additionally, we expect material markets are s s n coun r es suc as na, w ere ran s are re a ve y wea er.

The online hotel business retains significant runway for international growth, and we expect an above-industry-average growth rate in the segment.


Despite its underperformance of the search market growth rate for most of the last ten years, we thinkdisplay should match search revenue growth in 2011.


Europe.

5

.


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Facebook Reach Now Comparable to Yahoo!, Google

In 2H10, users are for the first time spending more minutes on Facebook than on Yahoo! sites

Facebooks Expanding User Reach FB Minutes Surpass Yahoo!s

Users as % of US Internet

79% 79%84% 81% 70%40%

60%

80%

100% % of All US In ternet Minutes

12%9% 10%

6%

8%

10%

12%

14%

0%

20%

Yahoo Google Facebook

Aug-Oct '09 Aug-Oct '10

4% 5%4%

0%

2%

Yahoo Google Facebook

Aug-Oct '09 Aug-Oct '10

35%

40%

The Tollbooth at the Center of theInternet

Source: comScore, J.P. Morgan estimates. Source: comScore, J.P. Morgan estimates.

More than Half of Facebook Users Visit Site Daily

8%

13% 13%29%

38%

0%

5%

10%

15%

20%

25%

30% Social Networking Sites (PrimarilyFacebook) Are Becoming the Next-

Generation Web Platform

7

At least once a

day

Almost every day 1-2x a week 1-2x a month Never, ,potentially game-changing opportunities

Source: J.P. Morgan consumer survey.


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A Potential Threat to Googles Dominance?

~

ecosystem

Thus far, Google largely retaining its share, but Facebook gaining rapidly

We think Facebook Connect is helping drive this trend (see next slide)

Traffic to nytimes.com

25%25%

Traffic to Amazon Sites

15%

Traffic to eBay Sites

20.8% 20.4%

4.8%2.9%

0%

5%

10%

15%

20%

20.0% 19.6%

7.7%1.8%5%

10%

15%

20%

11.8% 11.4%

4.7%

2.6%5%

10%

Source: comScore.

Google, -2% Y/Y Facebook, +66%

Oct-09 Oct-10

Google, -2% Y/Y Facebook, +328%

Oct-09 Oct-10

0%

Google, -3% Facebook, +81%

Oct-09 Oct-10

8


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Global digital gaming market was almost $16B in 2009 and is expected to reach$20B in 2010, according to Electronic Arts; we believe social games, which are a

subset of digital, are growing significantly faster than the segment as a whole

Digital gaming grew at ~36% CAGR since 2004 and now represents 41% of the,

Key social gaming companies: Zynga, Playfish, CrowdStar, Playdom et al

More Frequent Facebook Visitors Also Play Games More Often

38%

54% play games

Almost every day

Use FB: At least 1x/day

6%

20%

1-2x a month

1-2x a week

Source: J.P. Morgan December 2010 consumer survey.

% of users pl ayin g soci al games, by frequ ency of FB visits

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Increased smartphone penetration will further proliferate mobile web usage and app development, andcould disrupt the way we shop, consume content and communicate.






Despite its underperformance of the search market growth rate for most of the last ten years, we thinkdisplay should match search revenue growth in 2011.


Europe.

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US Mobile Ad Spend Forecast

$2,549.5

(25%)

$2,036.8

(36%)$1,501.3

(36%)$1,102.4

(48%)$743.1$416.0

$1,500.0

$2,000.0

$2,500.0

$3,000.0

(30%)

$-

$500.0

, .

2009 2010 2011 2012 2013 2014

Source: emarketer, Sep 2010.

US Mobile Ad Spend Share by Format

20112012

2013

2014

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2009

2010

13

Source: emarketer, Sep 2010.


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We estimate that there are approximately 233M mobile phone users in the US, and smartphones

are becoming an increasingly large proportion of the mix

Smart vs. Nonsmart Phone Penetration

Smartphone Users,

18%

Non-smartphone

Users, 82%

Source: Nielsen 2010 Media Industry Fact Sheet.

Smart hone users are 3x more likel to browse the mobile web and to use a mobile a and 2x as

likely to send photos or videos (comScore)

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Opportunity Challenge

Search more searches less coverage

more targeted less transactional (eCommerce)

more product/place oriented application demand

News Sites reinstates the im ortance of a stron brand less s ace to ut ads

people download branded apps companies with lower brand recognition lesslikely to sell apps

Games more time spent multiple platform/device compatibility issues

hard to differentiate in crowded app market

Aggregators slow loading speed will make aggregatorsmore attractive to consumers

less coverage

time

aggregation

Video high demand for video content while

traveling

smaller screen

Coupons larger audience than print may be harder to track source for in-store use

can access for immediate demand

15

. . .


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Device proliferation is driving ubiquityAlthough a Majority Dont Read Much,

Prices falling as devices get better

A niche market can sti ll be a big market

~ ea + oo s per ear

49%

40%

50%

60%

We think the moneys in content

Content means more than just books

eBook success could threaten traditional

20%

9% 7% 6%10%

0%

10%

20%

30

0-10 books/yr 11-15 16-20 21-25 26-30 31+

retail

eBooks Penetration of Trade Print Is Growing Exponentially

910

Source: J.P. Morgan Internet Team December 2010 Survey.

3%4%

6%

8%

0.5% 0.6%1

0%

2%

2006 2007 2008 2009 2010

16

Source: Association of American Publishers; J.P. Morgan estimates. Note: 2010 estimate based on Jan-Oct data.

eBooks as %of Trade Print


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Amazon has marketedKindle aggressively, and

its brand awareness is up

to 76% 76%

45%

84%

20%

40%

60%

80%

0%

Kindle Nook iPad

Brand Awareness (Know the name & what it is)

Source: J.P. Morgan Internet Team December 2010 surveys.

15%

20%

25%

30% Compared to our mid-2009survey, significantly more

users said they either

7%

0%

5%

10%

Jul 2009 Dec 2010

% sa in the either own a Kindle or lan to bu one in the next 12 months

owned a Kindle or planned

to buy one in the next 12

months

Source: J.P. Morgan Internet Team July 2009 and December 2010 surveys.

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.

When the iPad came out, many investors feared it would be the end of the Kindle

These fears appear to have been misplaced: Kindle has sold well in recent quarters

We think the price difference is one key factor: $139 for the lowest-priced Kindle vs.

$499 for the lowest-priced iPad Our survey suggests people are happy with both: ~40% of iPad owners also

reported owning a Kindle

Another 23% of iPad owners plan to buy a Kindle in the next 12 months

Not mutually exclusive: Many of the iPad owners in our survey also reported owning Kindle

23%

40%

Plan to buy Kindle next 12 months

Also own Kindle

14%

0% 20% 40%

Don't know / Not sure what Kindle is

Percentage among iPad Owners in our Survey

18

Source: J.P. Morgan Internet Team December 2010 survey conducted by a third-party vendor; 1,002 total survey respondents.


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Despite its underperformance of the search market growth rate for most of the last ten years, we think

display should match search revenue growth in 2011.


Europe.

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-

Approximately 12M Netflix subscribers are taking advantage of streaming services

analyst to be sold in 2011), we think consumers appetite to view content in a broader range of ways is

growing rapidly

We think members of the younger generation are more willing and more open to consuming content fromalternative sources and on alternative devices

Our survey suggests as many as a quarter of pay TV subscribers would consider cutting the cord, andmost of them would do so even at the loss of live sports. Those who are already using Netflix Watch

The success of Netflix is attracting additional entrants into the space

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More than 25% would consider Over the Top Including 16% of those who are currentlysatisfied with pay TV lineup & pricing

Would you consider switching from Cable to Broadband Video?

75%

Among users who subscribe to a cable/satellite TV package


72%

25%

50%

0%

Yes No

63% of these would consider it even if i t meant losing access to live sport ing events


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Netflix Watch Instantly subscribers are more likely to consider dropping their cablepackages

Those who use Watch Instantly are more likely to considerswitching away from Cable

50%

75%


33%42% 47%

67% 58% 53%25%

Not a NFLX subscriber Never used streaming/tried once Stream at least 1-2x/month

Would consider dropping pay TV / don't have pay TV Would not considerSource: J.P. Morgan consumer survey.

Netflix subscribers are more likely to also be premium pay TV subscribers

(And premium pay TV subscribers are more likely to be Netflix subscribers)

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Online Video Advertising Market to Grow in 2011,

Viewing online videos has become the norm

Online Video Viewer Trends

thousands

20,000,000

30,000,000

, ,

165,000

170,000

175,000

180,000

,

0

, ,

Oct-

2009

Nov-

2009

Dec-

2009

Jan-

2010

Feb-

2010

Mar-

2010

Apr-

2010

May-

2010

Jun-

2010

Jul-

2010

Aug-

2010

Sep-

2010

Oct-

2010

155,000

160,000

Content ualit is im rovin

Source: comScore data oa nque ewers eos

Source: comScore data.

Ad formats are diverse; performance measures are limited but improving

Brand advertisers are increasingly adopting the model

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Al though Google has seen its desktop strength extend to the mobile device, the

15%

Searches coming from Mobile

question is: Can Google narrow this gap?

3%Revenue Coming from Mobile

Devices

0% 2% 4% 6% 8% 10% 12% 14% 16%

Source: J.P. Mor an estimates.

Note: 3% gross revenue includes AdMob and mobile display revenue.

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Europe.

26

.

C E i R b d S l M k t Shift


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eCommerce: Economic Rebound + Secular Market Shift =

Retail moving online less quickly than eCommerce penetration lags online advertisingadvertising

Amazon cont inues to gain market share;size is an entry barrier 4.8% 5.1% 5.4% 6.0%

6.4%8.2%

10.5%

3.6%3.9%

13.7%

5%

10%

15%

Mobile eCommerce could further hurt brick-and-mortar retailers

Inventory management

1.4% 1.8% 2.1%2.5%

3.4%2.9%

0%

2002 2003 2004 2005 2006 2007 2008 2009

eCommerce as % of all US retail Online as % of all US Advertising

Brick-and-mortar bankruptcies

Catalysts for international growth

Source: US Census Bureau, Magna Global, J.P. Morgan estimates.

Improvement of shipping infrastructure

Improved payment systems

Better fraud protection

Internet sales tax; in our view, probably theheadline risk

As eCommerce matures, private labels could

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Online Shopping Gaining Penetration

30%

40%

Question: How many times do you purchase items online per month?

20%

34%28%

13% 2% 1%3% 2%12%

36% 32%

15%

0%

10%

20%

' - - - +

Source: J.P. Morgan Internet User surveys, 2007 and 2010.

online

once/month 2007 2010

Higher-income Users Shop Online More Frequently

Question: How many times do you purchase items online, per month?

19%

41%

27%

35% 36%

16%

27%

34%

23%

20

30%

40%

50%

3% 1%2% 2%6% 6% 5%

0%

10%

Don't Shop

online

Buy less than

once/month

1-2x/month 3-6x/month 7-9x/month 10x+/month

29

Source: J.P. Morgan Internet User survey, 2010.

$0-$49K $50K-$99K $100K+


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.

Corporate travel becomes a bit of a,

headwind

OTAs gain market share from suppl iers

Hotels will l ikel be the most romisinExpedia,

Traveloc

ity, 22%

Expedia

raveoc

ity, 19%

growth opportunity

Priceline dominates domestic marketshare gains

riceline,

9%

Orbitz,

44%riceline,

11%

Orbitz,

Source: PhoCusWright US Online Travel Overview, Tenth Edition.

US Travel Market Forecast$ in Millions

2005 2006 2007 2008 2009 2010E 2011E 2012E

Total Travel Spend 233,000.0 256,000.0 269,000.0 274,000.0 233,000.0 256,300.0 269,115.0 282,570.8% online 28.3% 31.3% 32.7% 34.7% 38.6% 38.0% 40.0% 42.0%

Source: J.P. Morgan estimates, PhoCusWright, eMarketer, TIA.org, Jupiter and IPK International.

Online Leisure/Unmanaged Biz Travel Spend 66,000.0 80,000.0 88,000.0 95,000.0 90,000.0 97,394.0 107,646.0 118,679.7

Total Travel Spend Growth 9.9% 5.1% 1.9% -15.0% 10.0% 5.0% 5.0%Online Travel Spend Growth 21.2% 10.0% 8.0% -5.3% 8.2% 10.5% 10.3%

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International markets benefit from online penetration

European Travel Market Share by Channel European Online Leisure/Unmanaged Business

Priceline passes Expedia in European market share

Euros in Billions

175.5 148.9 146.7150

200

250

300Euros in Billions

45.9 42.339.6

20.518.630

40

50

65.3 66.4 73.40

50

100

2008 2009 2010

Online Leisure/Unmanaged Business Offline/Business

.11.813.4 12.1

4.43.1

5.2

010

20

Germany UK France Spain Italy Scandinavia

Total Market Online Leisure/Unmanaged Business

Source: PhoCusWright European Online Travel Overview, Sixth Edi tion. Source: PhoCusWright European Online Travel Overview, Sixth Edit ion

Europe Travel Market ForecastEuros in Millions

2006 2007 2008 2009 2010E 2011E 2012E

Total Travel Spend 228,800.0 240,800.0 240,800.0 215,300.0 220,682.5 231,716.6 243,302.5% online 21.2% 24.8% 27.1% 30.8% 33.3% 35.0% 36.0%Online Leisure/Unmanaged Biz Travel Spend 48,500.0 59,800.0 65,300.0 66,400.0 73,487.3 81,100.8 87,588.9

Total Travel Spend Growth 5.2% 0.0% -10.6% 2.5% 5.0% 5.0%

32

Source: J.P. Morgan estimates, PhoCusWright, eMarketer, TIA.org, Jupiter and IPK International.

n ne rave pen row . . . . . .


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Priceline Air and Hotel Volume Growth Hotel growth more robust at all three

14%

30%

16%

3% 4%44%

56% 60% 57%48% 54%

-3%

half, with Priceline especially strong.

Expedia Air and Hotel Volume Growth 2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10

Air (Tickets) Hotel (Nights)

Source: Company reports.

Orbitz Air and Hotel Revenue Growth

9%

13%27%

32%

22%

10%

26% 27% 23% 18%12% 14%

6%

' ' ' ' ' '

-24%

-10% -12%-26%

13%10%

-33%

8%5%

Air (Tickets) Hotel (Nights)


-31%

2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10

Air (Rev) Hotel (Rev)


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, ,healthy in 2011 as market conditions continue to improve

Cash generation remains solid:

The companies in our coverage universe, along with Microsoft and Apple, havenearly $150B gross cash on the balance sheet

Additionally, we believe the internet companies we cover retain significant room for leverage

Acquisitions driven by:

Technology: buy rather than build

Traffic: buy rather than develop virally

In our coverage universe, we believe the most attractive companies on these metrics areMercadoLibre and Netflix

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Europe.

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Consumers are seeking ubiquity

Ad Spend vs. Time Spent in 2003 and 2009

52%

40 %

50 %

60 %

31% 28%

39%

40%

50%

7%

27%

14%

23 %

8%

24%

3%

0%

10 %

20 %

30 %

Print R adio T V Online

12%16%

9%13%

0%

10%

20%

30%

Print R adio T V O nline

Our thesis on newspaper market share declines plays out

Source: SRI Knowledge Networks, Universal McCann 6/03, IAB 3/04 and Yahoo! 2010 Analyst Day presentation.

T im e S pe nt A d S pe nd T i m e S p en t A d S p en d

Newspaper Ad Spend Continues to Decline

44.9 46.7 47.4 46.6 42.2

34.7

24.8 22.9

1.9% 3.9% 1.5%

-1.7%-9.4% -7.8%-10.0%

0.0%

10.0%

30.0

40.0

50.0

-17.7%

-28.6%

-40.0%

-30.0%

-20.0%

2003 2004 2005 2006 2007 2008 2009 2010

0.0

10.0

20.0

38Source: NAA.org, J.P. Morgan estimates.

Newspaper ad spend % change


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While content consumption is growing, it is increasingly diff icult to reach TV viewers

TV Viewership Alternatives Grow

8:38Analog to digital

transitionNetflix launches

online streaming"Can Netflix kill premium cable

TV?" - Journal Enterprise

7:12

7:40

8:09

YouTube

launchedDVD formatlaunched

VOD

launchedHulu

"Bye-bye TV? YouTube debuts

live streaming" - Fortune

6:14

6:43

Hour:Min

Launch of HBO

Channel

Pay-per-view

launched

Blu-Ray Disc

launched

First TiVo DVR

HD television

launched

VHS

launched

launched

"Hulu Is An H-Bomb

Ready To Destroy

The TV Industry"-

5:16

5:45launched

Launch of DTHservice

Netflix

launched"TiVo May Be Disaster' forTV Industry" - Bloomberg

Source: Nielsen Media Research and J.P. Morgan.

4:19

:

1949 - 1950 1954 - 1955 1959 - 1960 1964 - 1965 1969 - 1970 1974 - 1975 1979 - 1980 1984 - 1985 1989 - 1990 1994 - 1995 1999 - 2000 2004 - 2005 2009 - 2010

TV Season

39

Thus, Cable and Internet advertis ing are gaining share


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2011 wil l likely be a year of innovation

Interactive brand sponsorships, which yield better content integration

Folding in purchase data for better targeting of branded ads

-

Time-based ads which leverage user engagement

Creative ad formats with real-time updating for better targeting

Challenges

Internet users have faced a large influx of inventory

Monetizing non-premium inventory

Current resurgence of interest in premium display advertising to

continue in 2011E as brand advertisers shift spend online

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J.P. Morgans International Graphical Advertising Revenue Forecast

Units as indicated

International 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 09-'14 CAGRInternet Population (M) 817 903 988 1,072 1,158 1,251 1,326 1,406 1,476 6.6%Pages Viewed / User / Day 37 38 39 40 41 43 45 46 48 3.8%Total Pages Viewed (B) 10,934 12,378 13,925 15,470 17,172 19,439 21,577 23,735 25,634 10.6%

RPM (per 1,000 pages) $0.73 $0.80 $0.82 $0.79 $0.82 $0.83 $0.83 $0.84 $0.85 1.5%

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

Int 'l Graphical Forecast ($M) 7,982 9,902 11,418 12,222 14,081 16,134 17,909 19,937 21,789 12.3%Y/Y Growth 28% 24% 15% 7% 15% 15% 11% 11% 9%

We expect the international graphical ad market to grow at a 12.3% CAGR from 2009 to 2014

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Advert isers likely to explore new search avenue

Domestic Explicit Core Search Market Share Apr -10 May-10 Jun-10 Jul -10 Aug-10 Sep-10 Oct-10

Google Sites 66.0% 66.4% 66.2% 65.8% 65.4% 66.1% 66.3%

Yahoo! Sites 16.9% 16.6% 16.7% 17.1% 17.4% 16.7% 16.5%

Source: ComScore data and J.P. Morgan estimates.

Microsoft Sites 10.8% 10.8% 11.0% 11.0% 11.1% 11.2% 11.5%Ask Network 3.8% 3.8% 3.8% 3.8% 3.8% 3.7% 3.6%AOL LLC 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.1%

International Explicit Core Search Market Share

Alibaba.com , 1.1Tencent, 0.7

Conduit.com, 1.1

e ay, .

Baidu.com, 7.9

Facebook, 2.3

Ask Network, 1.2

Yahoo! Sites, 7.6

Microsoft Sites, 3.5

44

, .

Source: comScore qSearch data. % of total worldwide searches


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We expect mobi le search usage to be the main driver of query volume growth

We expect higher levels of RPS in 2011 to be driven by stabil ization in advertisersbudgets, which should lead to higher keyword bids

J.P. Morgans US Search Advertising Revenue Forecast

Units as indicated

United States 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E09-'14CAGR

.Queries / Month / User 47 57 68 78 87 95 104 112 120 8.9%

Number of Queries (M) 114,896 144,080 177,938 208,188 236,293 264,648 293,759 323,135 348,986 10.9%RPS (per 1,000 searches) $74.86 $81.65 $81.59 $70.32 $70.14 $70.73 $71.64 $71.64 $72.22 0.5%% Coverage 62.8% 63.5% 62.0% 61.6% 61.2% 61.2% 61.5% 61.5% 62.0% 0.1%% Clickthrough Rate 26.2% 27.3% 28.0% 25.3% 25.4% 25.4% 25.6% 25.6% 25.6% 0.2%$ Revenue / Click $0.46 $0.47 $0.47 $0.45 $0.45 $0.46 $0.46 $0.46 $0.46 0.2%

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

US Search Forecast ($M) 8,602 11,764 14,518 14,639 16,573 18,718 21,044 23,148 25,203 11.5%Y/Y Growth 47% 37% 23% 1% 13% 13% 12% 10% 9%

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J.P. Morgans International Search Advertising Revenue Forecast

Units as indicated

International 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E09-'14CAGR

Internet Population (M) 817 903 988 1,072 1,158 1,251 1,326 1,406 1,476 6.6%Queries / Month / User 33 41 49 57 63 69 77 85 93 10.5%Number of Queries (M) 326,900 441,315 582,536 728,170 873,804 1,039,827 1,226,996 1,435,585 1,650,923 17.8%

per , searc es . . . . . . . . . .% Coverage 37.2% 38.3% 38.5% 38.5% 39.0% 39.0% 41.0% 41.0% 42.0% 1.8%% Clickthrough Rate 17.2% 18.4% 19.1% 19.5% 19.8% 19.8% 19.5% 19.8% 19.8% 0.3%$ Revenue / Click 0.30 0.33 0.35 0.31 0.31 0.32 0.33 0.33 0.33 1.3%

Int' l Search Forecas t ($M) 6,233 10,235 14,993 16,947 20,580 25,695 31,882 38,458 45,306 21.7%Y/Y Growth 90% 64% 46% 13% 21% 25% 24% 21% 18%

. . , , , , , .

We are now modeling F11 paid search revenue growth of 25% Y/Y, to $25.7B

e expec e n erna ona searc a mar e o grow a a . rom2009 to 2014

We think the largest driver will be query growth. While we expect the US to

experience query growth of 12% Y/Y in 2011, we believe international markets will

46

We Estimate the Global Search Advertising Market


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. ,

We continue to see personalized search and vertical search as hot topics

J.P. Morgans Global Search Advertising Revenue Forecast

Units as indicated

Global 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E

-CAGR

Internet Population (M) 1,020 1,113 1,205 1,295 1,385 1,482 1,561 1,645 1,719 5.8%Queries / Month / User 36 44 53 60 67 73 81 89 97 10.0%Number of Queries (M) 441,796 585,395 760,474 936,358 1,110,097 1,304,475 1,520,755 1,758,721 1,999,909 16.4%RPS (per 1,000

. . . . . . . . . .% Coverage 43.9% 44.5% 44.0% 43.6% 43.7% 43.5% 45.0% 44.8% 45.5% 0.8%% Clickthrough Rate 20.6% 21.5% 22.0% 21.3% 21.5% 21.4% 21.1% 21.3% 21.2% -0.1%$ Revenue / Click $0.37 $0.39 $0.40 $0.36 $0.36 $0.37 $0.37 $0.37 $0.37 0.2%

Global SearchForecast ($M) 14,835 21,999 29,511 31,586 37,153 44,413 52,925 61,606 70,509 17.4%

Y/Y Growth 63% 48% 34% 7% 18% 20% 19% 16% 14%Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS.

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Consumers embracing over the top video consumption. We think content owners and advertisers must

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Europe.

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Companies outside the US and Western Europe are generating robust revenue growth and creating

2008-2010E Revenue CAGR and Market Cap for Select Internet Companies

50%

16% 18%28%

39%

60%68%

25%

Source: J.P. Morgan estimates (MELI, Mail.ru), company reports, Bloomberg consensus for others; market cap based on 12/30/10 pricing.

0%

Yahoo! Japan Daum Group MercadoLibre Mail.ru Baidu Tencent

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Europe.

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US Local Advertising Spend by Medium in 2010ELocal online advertising is a small % of the

Magazines, 2%

Yellow Pages, 14%TV, 24%

Out-of-home, 6%overall market

In US, local advertising is an ~$82B

industry, with only ~15% of the total

Radio, 14%

Pure- la Internet,

,according to Veronis Suhler Stevenson

SMBs: Spenders of local advertising

Source: comScore data.

7%,

Traditional media sources

Pure-play internet players

Rapid changes in the advertis ing landscapecreate customer acquisition challenges

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Amazon

Priceline

MercadoLibre

ReachLocal

Other Overweight -rated U.S. internet stocks are Netflix, Google, Yahoo!, Shutterfly, QuinStreet,

MediaMind

Additionall J.P. Mor ans China internet anal st Dick Weis to icks are Tencent and NetEase

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The Bull Case: The Bear Case:

Positioned to take advantage of seculargrowth in eCommerce

Huge scale provides competitive advantage

Brick-and-mortar incumbents increasinglyaggressive in eCommerce space

Barriers to entry may be low

Still underpenetrated in many categories, esp.in Intl ramp-up can take years, and thus

operating margins should improve

Because online shoppers are so price-sensitive, margin expansion opportunities will

remain muted

row n ver ca s suc as ppare s ou

help gross margins

Prime is a customer retention tool that otherswill find difficult to re licate rofitabl

n a rap y evo v ng space, r s o one a se

step being quite costly

At scale, hard to maintain explosive growthrates indefinitel will multi le contract if

Fulfillment by Amazon enables continuedshare gains in third-party

growth slows?

within books; could threaten traditional

booksellers.

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International offers a secular growthopportunity: 80% of the companys gross

profit dollars come from the international

business, which we think is more sustainable

Company generates significant amount ofprofit in the Euro and other FX denominations.

Thus, volatility in the currency market could

adversely impact the share price.

and will experience an above-average growth

rate

Modest take rate increases as emerging

Domestic growth pressured by competitionfrom other OTAs and suppliers

Increasing competition in the international

Continued ADR recovery

Domestic market share gains, aided by the

markets

.

Margins should expand as the companycontinues to benefit from improved advertising

efficiency

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We think local will be a key area of growth inthe next two years

Expansion into additional markets (in 45 cities

Rapid buildout and rapid growth leaveminimal room for error in execution

In an evolving space, competition can come

IMC sales force (nearly 700 now) can keepgrowing, is a key barrier to entry

,sites have gone from almost zero to billion-

dollar revenue run rates

Sales-driven model may limit room for marginro uc expans on prov es cross-se

opportunities, which will raise IMC productivity

As sales force matures, productivity benefitfrom a reater resence of ex erienced IMCs

expansion

Growing size of Upperclassman IMC forceshould help margins, as Underclassman

training expenses should grow less quickly

We see 40% revenue growth in F11E and38% in F12E, with improving profitability

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Tech & Clearance should remain an attractivevertical (23%E Y/Y growth in F11)

Finance segment to benefit from increased

Overall recruitment market remains tough

Continental Europe and the Middle East stillshowing signs of weakness

Energy vertical has a lot of potential (weexpect energy revenues to reach $13M by the

end of 2011)

Fairly competitive business

EBITDA margins of 40+% in 2011E

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PayPal is a one-of-a-kind brand in onlinepayments and has established itself as the

one likely winner in the space

PayPal is a lower-margin business thanMarketplaces, and the latter still generates

most of the revenue

, ,gaming all present incremental growthopportunities for PayPal TPV

Marketplaces should benefit from continued

other sites innovate more quickly; burdened

by need to maintain certain features to retain

near-monopoly in auctions

growth in eCommerce

Auctions business is stable, but fixed-pricebusiness can grow faster as company

Search on eBay site remains an area of

concern

Secular shift is to a multichannel environment ,

deals, etc.)

Uniquely well-positioned to facilitate small-

volume cross-border trade

offsets secular gains from eCommerce growth

PayPal take rates may decline as larger

merchants are a bigger piece of the pie

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International growth should remain healthy,aided by increased penetration in the APAC

region (we are modeling F11 Intl gross

bookings growth of 18% Y/Y)

Potential increased competition frombooking.com in the US

Role of GDSs: Possible renegotiation of direct

Continued expansion of TripAdvisor

G&A leverage and operational efficienciesshould help margins

Increase selling and marketing spend couldcreate margin pressure

Healthy FCF generation

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Strong search revenue growth: 1% netrevenue growth in Googles search revenue

generates an estimated $0.35 EPS for the

company

Increasing competition from social networkingsites emerging as a big threat to Googles

traffic, and mobile applications which let users

bypass search

Display offers a strong incrementalopportunity: we think the overall display

business will contribute an incremental $1.2B,

Increased government scrutiny with regard tofuture acquisitions and business practices

Growth of non-text display products could,

Mobile will drive search usage: over the past2 years, search queries from mobile havegrown 5x at an accelerating pace

create margin pressure as the display

business margins are significantly lower thanthe companys overall margins

Improved international online and ad spendpenetration

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Match business (25% of revenue and 71% ofOIBA) will be the largest driver of the stock

ServiceMagic should continue to see healthy

Market remains competitive for Ask.com, aslarge search players continue to make

innovations to the space

,likely stabilize as investment levels becomesteadier in 2011

Distributed and proprietary toolbars and

development expenses could create

headwinds

Remain cautious on the long-term outlook ofdestination websites driving query growth the toolbar business

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Publisher-neutral platform is appealing tocustomers

Highly scalable business model: uses low

Largest competitors are parts of largeadvertising players such as Google and

Microsoft

offers a strong margin expansion opportunity

Platform customers to comprise over half oftotal revenue by the end of 2011E

adversely affect the stock price, as roughly

70% of revenue comes from international

markets

As the revenue grows, the company shouldsee leverage from sales and marketing and

R&D

Limited visibility into advertisers budgets

creates challenges

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~60M installed base of NFLX-ready devicesthat reach the TV is a multiple of any other

competitor

Extremely competitive space, with virtually allother players possessing deep pockets

If studios refuse to play ball, model could be

second-to-none recommendation engine,

crucial for monetizing long tail of catalog

Spent over $1B on Marketing since 06 to

If content costs go up too much, margins maynot improve

establish premium consumer brand; high

customer satisfaction

Streaming carries lower fulfillment cost, fixed

w even ua y ecome a ec n ng

business, with deleverage on costs

International opportunity very uncertain ossible investments wont a off

and for more investment in content

International opportunity could be a positive

catalyst

Valuation leaves minimal room for error

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International growth will be aided by a strongperformance from ebookers (we are modeling

15% intl gross bookings growth in F11)

Continued challenges in reaching the brandidentity and inventory scale of Expedia and

Priceline

hotel business

Upcoming migration of HotelClub to the globaltechnology platform

investment phase

American Airlines dispute and renegotiatingthe role of GDSs

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Financial services vertical represents a largemarket opportunity (5x size of education

market)

Regulatory changes in the education sectorcould create headwinds

Acquisitions represent a large portion of the

as the company laps the reduction of spend

from DeVry

Other verticals a longer-term catalyst

identify and complete strategic acquisitions, or

successfully integrate acquisitions it does

make, it could adversely affect the business

(including home services, medical and B2B)

20% EBITDA margin is sustainable

Third-party publishers drive the majority of

QNSTs traffic, yet QNST has only limitedoversight and control over their operations

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Current share price does not reflect the fullasset value: we see at least ~$7.4B

($5.51/share) in value from Yahoo! Japan and

Alibaba (does not include the private assets of

Display business facing increasingcompetition, especially from Google and

social networking sites

Alibaba Group, such as TaoBao)

Search comps will be easier once Yahoo! lapsthe discontinuation of paid inclusion

Uplift in RPS from the Microsoft search

alliance

Continued margin expansion, part of which

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Other Companies Recommended in This Presentation (and priced as of market close on

NetEase (NTES/$36.76/Overweight), Tencent (0700.HK/HK$168.90/Overweight)

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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates

and/or subsidiaries (collectively J P Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and


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and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMS and/or its affiliates and

the analysts involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated.Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future

. .

into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to

particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMS

distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries

based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute

transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

Other Disclosures last revised January 1, 2011.

Copyright 2011 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistribut ed without the written

consent of J.P. Morgan.

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