PROGRESS REPORT for INTERNET and SOCIAL MEDIA

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PROGRESS REPORT for INTERNET and SOCIAL MEDIA April 16, 2012 PRISM PROGRESS REPORT for INTERNET and SOCIAL MEDIA Making diffuse information about the Internet and Social Media crystal clear IN THIS ISSUE: . Facebook Acquires Instagram . Uber . Facebook and Twitter Ads . Pinterest: Growth Slows . Google+ Redesigned Interface . Facebook: Groups for Schools . Mobile Apps: Viddy . Venture-backed Funding THE INFORMATION HEREIN IS ONLY FOR ACCREDITED INVESTORS AS DEFINED IN RULE 501 OF REGULATION D UNDER THE SECURITIES ACT OF 1933 OR Michael Pachter INSTITUTIONAL INVESTORS. (213) 688-4474 [email protected] Wedbush Securities does and seeks to do business with companies covered Yoni Yadgaran in its research reports. Thus, investors (212) 938-9924 should be aware that the firm may have a conflict of interest that could [email protected] affect the objectivity of this report. Investors should consider this report as only a single factor in making their 1000 Wilshire Blvd, • Los Angeles, CA 90017 investment decision. Please see page 213.688.8000 • www.wedbush.com 25 of this report for analyst MEMBER NYSE/FINRA/SIPC certification and important disclosure information. WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA ` About Wedbush Securities Private Shares Group The Private Shares Group of Wedbush Securities is a leader in providing research and trading to the rapidly growing industry of privately traded securities, with an emphasis on companies in the social media space. We assist companies in raising growth capital through traditional private placements and provide liquidity options for existing and former employees through tailored selling programs. We also work with venture capital, private equity and hedge fund investors to help them adjust their holdings in some of the most dynamic companies. We endeavor to understand the underlying industries of the private companies we trade, in order to help our clients make informed decisions about their investments. We provide discreet customized solutions for our institutional and accredited private clients through a team of professionals located in New York, Los Angeles and San Francisco. About Michael Pachter Michael Pachter is the Managing Director of Equity Research, providing coverage across the Digital Media sector, as well as the Head of Research for the Private Shares Group. He has been recognized as StarMine’s “Top Earnings Estimator” year after year and “Best on the Street” by the Wall Street Journal. Michael brings over 20 years of experience as a financial professional to the Private Shares Group, along with extensive knowledge across the social media sector in both public and private companies. Mr. Pachter holds an M.B.A. from the Anderson School at the University of California at Los Angeles, a juris doctor from Pepperdine University, an LL.M. in Taxation from the University of Florida, and a bachelor’s in Political Science from California State University, Northridge. About Yoni Yadgaran Yoni Yadgaran joined Wedbush from Bank of America Merrill Lynch. Originally covering Internet & E-commerce within Equity Research, he later moved on to help pioneer the Private Shares Group’s Research efforts. Yoni is a CFA level 3 candidate and received a B.B.A in Finance from Baruch College. Contact Wedbush Securities Private Shares Group: Michael Pachter Managing Director, Equity Research Kevin Cohen Head of Research, Private Shares Group Director of Trading, Private Shares Group (213) 688-4474 | [email protected] (213) 688-8089 | [email protected] Twitter: @michaelpachter Yoni Yadgaran Cyrus P. Pirasteh Research Associate, Private Shares Group Managing Director, Private Shares Group (212) 938-9924 | [email protected] Head of Equity Trading, Technologies & Operations (213) 688-6661 | [email protected] About Wedbush Securities Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking, equity research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks as a top liquidity provider for the NASDAQ, and was ranked #1 stock picker for 2010, and again in 2011 by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service, client financial safety, continuity, and advanced technology. (www.wedbush.com) 2 | Page WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA ` Facebook Acquires Instagram: Cheaper than the Alternative Facebook acquired the mobile photo-sharing platform, Instagram this week, for approximately $1 billion in stock and cash. The company had 13 employees as of the acquisition, who will continue to operate Instagram separate from Facebook. Facebook will provide Instagram’s small team with the engineering and infrastructure resources they need to maintain their recent growth, which we expect will accelerate with Facebook’s branding. The transaction is expected to close by the end of Q2:12, and CEO Mark Zuckerberg notes that it is unlikely that Facebook will make a habit of undergoing acquisitions of this magnitude, although we note the company holds more than $3 billion in cash and marketable securities. Late last week, Facebook acquired TagTile, a small startup that focuses on mobile customer rewards. The company’s prior acquisitions have been of a smaller magnitude, mostly with the intent on building out Facebook’s engineering talent, unlike its acquisition of Instagram. We believe the acquisition was driven by Instagram’s rapidly growing base of engaged users, as well as a mobile interface that Facebook thought would be hard to replicate in a short period of time. Facebook had launched a stand-alone app for messaging, which would likely serve as a template to how Instagram will operate going forward. The company notes that it will continue to enable Instagram users to share their photos on other services (Flickr, Twitter, Tumblr, Foursquare, etc.). The following chart compiles recent acquisitions by Facebook. The number of shares paid is our own estimate, and share values are based on the recent $40 per share private market auction price, provided by the Wedbush Private Shares Group. Shares Value ($40 P/S) Company Date "Acqu-hire" Product Millions $Millions Tagtile April 2012 No Mobile Customer Rewards $1,000 Instagram April 2012 No Mobile Photo Sharing Platform $1,000 GazeHawk March 2012 Yes Eye Tracking Technology Caffeinated Mind March 2012 Yes In-Browser File Transfer and Big Data 0.21 $8.49 Momentus Media February 2012 Yes Social App Design and Viral Marketing Gowalla December 2011 No Location-Based Social Platform 0.09 $3.60 WhoGlue November 2011 No Relationship-Management-Software MailRank November 2011 Yes Email-prioritization System Strobe November 2011 Yes HTML5 App-delivery Network Digital Staircase November 2011 Yes Image Editing App Friend.ly October 2011 Yes Social Q&A App 0.54 $21.79 Push Pop Press August 2011 No E-Books Optimized For iPads 0.08 $3.02 Sofa June 2011 Yes Software Design Apps Snaptu March 2011 No Online Services for Feature Phones 1.66 $66.38 Beluga March 2011 No Group Messaging Service 0.68 $27.25 Pursuit February 2011 Yes Recruiting Service Rel8tion January 2011 Yes Mobile Ad Targeting Tool 1.03 $41.20 Zenbe Mail October 2010 No Email Service 1.31 $52.37 Drop.io October 2010 Yes File Sharing Service 0.35 $14.00 Chai Labs August 2010 No Semantic Search Platform 0.29 $11.57 NextStop July 2010 Yes Mobile Location Service 0.59 $23.64 Hot Potato July 2010 Yes Social Activity Service 0.24 $9.52 Sharegrove May 2010 Yes Private Sharing Platform 3.63 $145.00 Divvyshot April 2010 Yes Group Photo Sharing Octazen February 2010 Yes Contact Importing Tool FriendFeed August 2009 No Online Sharing Service 11.05 $442.12 Parakey July 2007 No Web Operating System Source: Wedbush Securities, Company Data According to a report published by All Things Digital, Instagram raised $50 million at a $500 million valuation from Sequoia Capital, Thrive Capital, Greylock Partners and Benchmark Capital, less than a week prior to the acquisition. As we mentioned in earlier reports (http://bit.ly/HGQmfR http://bit.ly/IjlfAl ), the service launched its Android app last week, which had been downloaded over one million times within the first 12 hours. Within a week of launching, an additional four million users had installed the Android app, bringing total registered accounts to over 35 million. On Friday, Gamefeed, a site that integrates with Instagram’s API, reported that the service had passed 40 million users, 10 million of which had been added within the previous 10 days. 3 | Page WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA ` The following charts demonstrate the spike in the number of Instagram users who were connected to Facebook. Source:Appdata The purchase of Instagram makes eminent sense to us as a defensive move, as Facebook appears to recognize that its mobile offering is weak in relation to its competition. It is clear that time spent by users on mobile devices browsing photos is growing, and the online time-share that services like Instagram offer have been gaining share on mobile devices to Facebook’s detriment. Currently, Facebook has more users shifting to mobile, and users are becoming increasingly efficient in their browsing habits. We expect users to reach the point where they are consciously choosing from a multitude of services on which they can spend their free time. Inevitably, as “discretionary” time spent online on mobile devices (aimless browsing) approaches a peak, competitors like Instagram will have increasing value. We think that a purchase of a “competitor” without revenues addresses anti-trust concerns, as buying a service before it can be pointed to as a “real” competitor is likely easier than doing so at a later stage. Perhaps more importantly, we think that Instagram provides Facebook and entry point via mobile devices in markets where it has been historically weak. An estimate by Xyologic places Instagram’s iOS downloads at about four million in Japan, of 42 million installations globally.
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