PROGRESS REPORT for INTERNET and SOCIAL MEDIA

January 18, 2012

PRISM

Making diffuse information about the Internet and Social Media crystal clear

IN THIS ISSUE:

 Google’s Search+  Facebook Ad Trends  Boxee  Hulu

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 22 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, Equity Research providing coverage across the Digital Media sector and 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 over a year ago 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 Tom Wyman Managing Director, Equity Research Managing Director, Private Shares Group Head of Research, Private Shares Group (415) 613-1454 | [email protected] (213) 688-4474 | [email protected] Twitter: @michaelpachter

Yoni Yadgaran Kevin Cohen Research Associate, Private Shares Group Director of Trading, Private Shares Group (212) 938-9924 | [email protected] (213) 688-8089 | [email protected]

Cyrus P. Pirasteh Managing Director 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, equities research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks a top liquidity provider for NASDAQ, and was ranked #1 stock picker for 2010 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)

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Google+ Search

Google‟s Search product was integrated with Google+ last week under a new campaign titled “Search plus Your World”. Users of Search, who are logged into their Google+ profile, began seeing personalized results in addition to existing search results. An icon ( ) appears next to personalized results, and clicking a second icon ( ), which appears on top of the search page, toggles off the new feature. New results include photos, brands, comments and posts that have been shared or uploaded by a user and their connections on Google+. Results also include individuals on Google+ who are associated with a search term. Photos that return for a search also include uploads that are private and therefore not accessible without being logged into Google+. Images which have been uploaded to Google+ or Google‟s Picasa photo service will be shown first when an individual has been tagged. Google also customizes results based on earlier search interactions, as well as existing and suggested connections on Google+. Beyond personalized results from its own services, Google previously integrated personalized content from third party sites including Quora, WordPress, and Twitter. Regular search results are returned with only the icon, while image results include the name of the person influencing the result. By setting the intensity of interactions between a user and their connections on Google+ (users can Ignore, Block, and Remove connections), users can enhance the relevance of the personalized search feature. Personal results can also be permanently turned off by changing search settings. On the right of usual results, Google returns the relevant profiles of users that are associated with the searched term, allowing a user to immediately add relevant individuals to their Google+ circles while still on the search page.

Source: Company Site

The prominence of query results from Google+ has not been well received by services like Twitter, which have seen their own indexed content lose prominence in query results. Google pointed out that Twitter, in particular, had refused to renew its partnership (which expired July 2011), under which Twitter gave Google special access to its “fire hose” of data that Google had used for its Real-time Search product. We note that although Twitter‟s partnership had expired, Google continued to display publicly accessible and crawl-able content in its search results. Microsoft‟s Bing had renewed its contract with Twitter in September 2011, extending its access for what AllThingsDigital reported was a $30- million-a-year fee (100% fee increase from the previous contract). When a user is not logged into their Google+ profile, Google will still return individual profiles or pages on Google+ that are relevant to a search query. This has been a point of dispute from an antitrust perspective, as to whether or not Google has overstepped its rights as the dominant player in search, offering favored results to its own social network (as opposed to Facebook, etc.), in instances where the excuse of lack of access to a user‟s personal data no longer applies (because the user is not logged in). A search for “Facebook” on Google shows the level of the dispute, as Mark Zuckerberg‟s never-used Google+ account is displayed prominently in the column to the right of search results.

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Source: Company Site Data from Alexa shows that a little less than 10% of Twitter‟s traffic comes from Google, while the same percent of Twitter users leave directly back to Google. We note that the new “People and Pages” results replace the area on the results page that previously was designated for ads. This means that, to a large degree, placement for sites like Twitter will not be heavily impacted by the new feature. A quick search shows that over 3.3 billion Twitter pages are indexed by Google, fueling concern by Google‟s critics who are calling for inclusion of Twitter and other sites, and marginalizing Google‟s claim that its search engine lacks access to sufficient content from Twitter and others.

Undoubtedly, the new integration is a big win for Google+, and if executed correctly, an enhancement to Google‟s Search product. Many users who signed up to Google+ do not return to the service frequently, and continue to use Facebook as their primary social network. Frequent interactions with Google+ will help increase traffic to the service, and brands on the platform will have another incentive to build a Google+ presence in order to gain precious placement on search results. Acknowledging that Facebook‟s social networking dominance will be difficult to overcome, Google has consistently iterated Google+ in tandem with continued integration of existing products. Following the integration of Search last week, Google launched an update to its Google+ video solution called Hangouts, adding screen-sharing capabilities and a larger screen size. The Google+ iOS app was updated as well, allowing users to join Hangouts directly from the Google+ Messenger product.

Source: Company Site

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Following the controversy that was sparked by the Google+/Search integration, the FTC reportedly expanded its existing antitrust investigation in Google to encompass Google+. Google maintains that the changes serve to enhance user experience, pointing out that Google is not the only search engine available, and users can easily switch to another engine with the click of a button. A report released last week by Comscore shows Google has increased it share of U.S. core search queries to 66.1% in December 2011 from 64.3% a year earlier. Over the same period, Yahoo‟s share shrank from 18.8% to 16.2%, while Microsoft‟s Bing product grew share from 12% to 13.8%. We note that taking into account Yahoo‟s partnership with Microsoft by combining share of the two platforms, there was, in fact, only a marginal decline to 30% market share from 31% a year earlier.

25,000 Share of Total U.S. Search Queries (Millions) 80%

20,000 70%

60%

15,000

50%

10,000 40%

30%

5,000

20%

- 10% Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Total Core Search Queries Google Yahoo Microsoft Yahoo & Microsoft Source: Wedbush Securities, Comscore A report published by Efficient Frontier provided insight into Google‟s outsized share of search spend, in addition to some interesting data on Facebook‟s growing ad offering. Using Q4‟10 as a benchmark with a value of 100%, the report indicated total U.S. and UK industry search spend increased 14% year-over-year, while return on investment (ROI) stagnated.

U.S. & U.K. Search Spend 120% 114%

100% 100% 85% 80% 79% 80% ROI

60%

40%

20%

0% 4Q10 1Q11 2Q11 3Q11 4Q11

Source: Wedbush Securities, Efficient Frontier

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Google grew both spend share and click share in 2011, receiving 81.1% of search ad spend in 4Q:11, up from 80% the year before. Because the search spend market now consists of only two significant players, Google‟s 1.1% market share gain translated into the same amount of spend share lost by Yahoo/Bing, that saw its share drop from 20% to 18.9%. Google grew click share by 2.5%, from 81% in 4Q‟10 to 83.5% as of 4Q‟11.

Google: Share of Spend & Clicks Yahoo & Bing: Share of Spend & Clicks 84% 25%

83% 20% 82%

15% 81%

80% 10%

79% Spend Share Click Share Spend Share Click Share 5% 78%

77% 0% 4Q10 1Q11 2Q11 3Q11 4Q11 4Q10 1Q11 2Q11 3Q11 4Q11 Source: Wedbush Securities, Efficient Frontier

Yahoo/Bing saw its cost per click (CPC) rise by 16% y-o-y, while Google‟s CPC fell by 2% over the same period. Efficient Frontiers points out that Yahoo/Bing‟s clicks are worth more, with revenue per click that are on average 14% higher than Google‟s, and an ROI that is 9% larger than advertising through Google. Mobile accounted for nearly 8% of search spend, and is projected to grow to between 16% and 22% of total spend by 2012 according to projections by Efficient Frontier. Google‟s Android mobile OS platform gives the search company a significant advantage in mobile search, reflected by a 96.2% share of mobile search spend.

Cost Per Click Trends Mobile Share of Search Spend 120% 9%

8% 115% 7% 110% 6%

105% 5%

100% 4% 3% 95% 2% Google Yahoo/Bing 90% 1%

85% 0% Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 4Q10 1Q11 2Q11 3Q11 4Q11

Source: Wedbush Securities, Efficient Frontier

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Facebook Ad Trends

Following a decline in share of biddable online ad spend in Q3:11(falling from 1.8% in Q2 to 1.1% in Q3), Facebook grew quickly in Q4:11, ending the year with 2.7% share of total spend. Brands have utilized advertising on Facebook to acquire a fan base that can be repeatedly engaged through posts and offers. Brands tracked by Efficient Frontier have grown their Fan base by 120% over the last 15 months, a trend that will likely continue as brands fine-tune their developing social media strategies.

Facebook: Share of Biddable Online Ad Spend Fan Base Acquisition Growth For Brands On Facebook 3.0% 250%

2.5% 200%

2.0% 150% 1.5%

100% 1.0%

0.5% 50%

0.0% 0% 4Q10 1Q11 2Q11 3Q11 4Q11 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Source: Wedbush Securities, Efficient Frontier

Our own survey procured similar results, with 67.4% of participants claiming to have “Liked” a brand on Facebook as of December, up from 46.8% a year earlier.

Percentage Of Facebook Users Who Have "Liked" A Brand On 80% Facebook

70% 67.4% 64.6% 65.9% 58.9% 60% 51.1% 50% 46.8%

40%

30%

20%

10%

0% Sep '10 Nov '10 Apr '11 Jun '11 Sep '11 Dec '11

Source: Wedbush Securities, Decision Metrics

Efficient Frontier projects Facebook‟s share of online advertising will grow to 5% by the end of 2012. For perspective, IAB reported U.S. online ad spend has consistently grown y-o-y since the beginning of 2010; reaching $7.9 billion in Q3:11, up 22% y-o-y.

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Y-o-Y Growth Of U.S. Online Ad Revenue ($Billions) $9 30% $7.9 $8 $7.7 $7.4 $7.3 25% $7 $6.5 $6.3 $6.2 20% $5.9 $6 $5.5 $5.4 $5.5 15% $5 10% $4 5% $3 0% $2

$1 -5%

$- -10% Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11

Source: Wedbush Securities, IAB

Another report published this week by TBG, found that average CPC for Facebook only grew 1% sequentially between Q3 and Q4 of 2011 in the five major markets tracked (Canada, France, Germany, UK and U.S.), with the United States showing the strongest growth (CPC prices for Facebook increased by 10%) and the UK the weakest (an 11% decline). Average cost per thousand impressions (CPM) increased 8% sequentially, and 23% from Q1:11. Click through rates (CTR) increased by 18% between Q1 and Q4:11, and 7% sequentially. Finance had the largest share of impressions served in Q4:11, having increased share to 18% from 13% in the previous quarter. The category, which was one of 18 tracked by TBG, accounted for 61% of impressions in Offsite campaigns, although CPC was 2x the price of average clicks and has CTR values that were 48% lower than average Q4 CTR values.

Source: TBG

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Boxee

Boxee is a New York based startup which utilized existing software from Xbox Media Center (XBMC), to build a service that integrates with a variety of online resources to provide a web-driven media hub for a consumer‟s TV. Users can choose to download Boxee‟s software onto their computer for free, or purchase a Boxee Box, which is a set-top box manufactured by D-Link and sold for $180. The Boxee Box is a device that attaches to a user‟s TV screen and eliminates the need for a computer. Boxee pulls content from Last.fm, Youtube, Pandora, MTV Music, CNN, Spotify, and many other 3rd party sources onto a central platform that users can easily navigate. Users only pay for the initial purchase of the Boxee Box, and do not pay any subscription fees aside from their Internet bill. The ease of use that Boxee provides has helped the company maintain its position as a leader in the convergence of Internet and TV. The company was founded in 2007, following the founder‟s prior experience programming off of XBMC, which is open source software developed for Xbox that allowed users to play digital content on their TV. From inception, Boxee‟s team has continued to work on expanding the amount of content that the company‟s software provides. The startup has raised $26.5 million in funding from Spark Capital, Union Square Ventures, General Catalyst Partners, Softbank, and Pitango Venture Capital. Boxee has around 40 employees, which is up slightly from the 34 the company had as of its March 2011 Series C. As of the company‟s Series B round in 2009, which reportedly valued the company at $25 to $ 30 million, Boxee had yet to generate any revenues. By December 2009, the company had grown to over 600,000 users from 300,000 in March and 100,000 in January (when it had entered beta). A little more than a month later the company announced it had added over 150,000 users, saw three million apps launched on its platform, and had 1.5 million TV episodes streamed, since entering beta a little more than a month earlier.

Boxee: Employee Job Functions Per Linkedin Series A – November 17, 2008 - $4M Spark Capital $2M Union Square Ventures $2M Series B – August 12, 2009 - $6M Sales 13% General Catalyst Partners $4M R&D Spark Capital $1M Exec. 37% Union Square Ventures $1M 19% Series C – March 1st, 2011 - $16.5M Pitango Venture Capital General Softbank NY & Admin. General Catalyst Partners 31% Spark Capital Union Square Ventures Source: Company Site, Wedbush Securities, Linkedin

The first version of Boxee was released for Mac OS users in 2008, and a Windows version was launched a year later. There are over two million Boxee users as of November, up from 1.4 million reported in December 2010. Users utilize the service to access thousands of TV shows and movies in a central location. Boxee also provides users with hundreds of apps that utilize services from third-party services (Facebook, Pandora, Flickr etc.). New episodes of a users‟ favorite TV show can automatically be added to their queue, in addition to manually adding anything that users come across by browsing both on and off Boxee. A large rental library (more than 10,000 movies) is accessible as well, allowing users to choose from new releases on Vudu (owned by Walmart), Netflix's Watch Instantly library, and foreign films on MUBI.

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Source: Company Site

An iPad app can be downloaded for free on iTunes, providing similar functionality to the set-top box. Users can also stream videos from their iPad to their TV using the service.

Source: Company Site

Boxee‟s model is a threat to existing content providers. Its service provides a cheap alternative to cable, and grows as a threat every time it increases its utility. As the amount of content freely available on the web continues to grow, services like Boxee begin to seem viable by consumers as a potential replacement to cable. According to the company, nearly 50% of its user base purchased Boxee as an alternative to cable, while the other half uses Boxee as a complementary service. Online streaming services that rely on ad revenue can suffer when users utilize Boxee, because they are not exposed to display ads on the original content provider‟s site. Hulu, which counts NBC, ABC, and Fox as stakeholders, was originally featured on Boxee before content partners forced the streaming site to block Boxee from serving its content in 2009. Boxee attempted to circumvent Hulu‟s request through a variety of technical maneuvers that included configuring its platform to emulate a Mozilla Firefox web browser. According to D-Link‟s web site, the company is in talks with Hulu to potentially offer Hulu+ integration, which we believe makes sense, considering Hulu does not depend on traditional display ad revenue. The company has partnered with other services that include Netflix and Vudu, to a large degree because their business model is subscription based (as opposed to ad based), and to use Netflix on

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Boxee a user would have to be a paying member of Netflix. Boxee users can also find and download torrents directly to their Boxee account, which may be a legal issue if the recently tabled piracy legislation (SOPA) is ultimately passed. Users can also play their own local content by attaching their hard-drive to their Boxee Box, and can also browse the web directly from the Boxee platform. The software supports a large number of media formats, and the release of a new hardware add-on last week will allow users to watch live TV shows as well (sold for $50). The company points out that 89 of the top 100 TV shows are broadcasted and don‟t require cable for access.

Source: Company Site

Last week, Boxee announced that it was updating its Facebook app to reflect a partnership with Facebook that would allow Boxee users to share what they are watching on Facebook directly with their friend‟s Ticker and Newsfeed, as well as their own Timeline. Using the new live TV capabilities allows users to see which of their Facebook friends who use Boxee are watching a particular TV show in the platform‟s program guide. If given permission (the new feature is opt-in), Boxee will automatically share what a user is watching with Facebook after two minutes of streaming. Users can also share content with their Twitter and Tumblr accounts, in addition to a number of other social networks. The service further utilizes Facebook by displaying videos that are shared on a users Facebook account directly on Boxee for instant viewing. Boxee also maintains an internal network of Boxee users, who share and recommend content they like.

At its core, Boxee remains a software company, and is focused on expanding its service to additional platforms, while adding content to its existing offering. The company announced a partnership earlier this month with Iomega, who will begin embedding Boxee in its Network Attached Storage (NAS) devices, which facilitate sharing across multiple devices on a user‟s network. A few days later, the company announced it had partnered with Viewsonic, and would be embedded in an upcoming TV. Boxee released a new software update for PC and Mac users recently, noting that it would no longer be publishing software updates for desktop users; shifting all of the company‟s focus towards building its embeddable and mobile software. We believe that Boxee‟s growing user base provides the company with several avenues it can explore to generate revenues, including charging a cut of videos purchased on its platform, licensing fees from companies that embed their software, and serving ads on its platform. Boxee‟s competitors include Apple, Google, Logitech, Sony, Western Digital and Roku.

Boxee Box Apple TV Roku XDS Player Logitech Revue Retail Price $180 $100 $100 $100 Resolution 1080p 720p 1080p 1080p SD Card Slot X Wireless-N Networking X X X X Keyboard QWERTY remote Full Keyboard USB Ports 2 0 1 2 Hulu Plus coming soon X X Netflix X X X X Amazon VOD X X VUDU X iTunes X YouTube X X X X MLB.tv X X NHL GameCenter Live X X Pandora X X X Twitter X X Facebook X X X Flickr X X X X Picasa X X Source: Wedbush Securities, Company Site

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Hulu

Hulu is another example of the shift of entertainment from traditional media to the web. The company offers a free and paid model (Hulu+), allowing users to watch hundreds of TV shows and full-length movies online. Hulu‟s free version limits many current season shows to the last five episodes, while an $8 per month subscription eliminates such restrictions. Paying members are allowed access to the service from mobile devices, set-top boxes, and gaming consoles (free version only allows access for computers). Additional benefits for subscribers include access to a larger variety of content, limited advertising, and higher definition video quality. Hulu was founded in March 2007, and is jointly owned by NBC, News Corp, Disney, Providence Equity Partners, and Hulu employees. A $100 million investment by Providence Equity in 2007 gave Hulu the capital necessary to partner with 15 cable networks, four large studios (Fox, MGM, Sony, and Universal), and two major broadcast networks (Fox and NBC) within a year of launch. The company exited private beta in November 2010, after having launched in 2008. We estimate the company has close to 400 employees, the large majority of which are based in Los Angeles.

Using Hulu, users can share a video or customized clip through a number of methods including e-mail, embedding videos on other websites, and posting to social networks.

Source: Company Site

Hulu integrated with Facebook Connect in July 2011, allowing users to comment on individual moments in a video and send them to their Facebook friend‟s Newsfeed. When a friend clicks on the shared posting, the video will begin streaming from the exact point which was meant to be shared. In September, Hulu launched a Facebook app which facilitates streaming directly to Facebook called “Hulu on Facebook”. With the app, users could access any content from Hulu while still on Facebook.

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Source: Company Site

According to Appdata, Hulu‟s Facebook app has 1.6 million monthly active users. The app‟s daily usage has seen significant declines over the past week, with daily active users dropping from 400,000 to 180,000. We are at a loss to explain the declines.

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Source: Company Site

The company lists 343 content partners, including Starz, Syfy, A&E, and the History Channel. Content offerings on Hulu‟s free site grew 40% in 2011, and content offerings on Hulu+ grew by over 105% from 2010. Hulu+ is also the only online video subscription service which offers current season content from five of the six largest broadcast networks in the United States. Hulu partnered with Miramax in June 2011, giving Hulu+ users access to hundreds of additional films, as well as 15 films which Hulu can choose each month to offer through its ad-supported service. In October 2011, Hulu entered a five year contract for rights to stream current season episodes from CW‟s Television Network. Hulu+ users were granted access the five most recent episodes the day after an episode airs, while regular users wait eight days. During the same month Hulu partnered with Univision through a multi-year contract, gaining rights to current-season primetime programming, which are made available the day after airing. Last week Hulu announced it would launch its own original series titled “Battleground”, which will be available for both Hulu+ and non-subscribed users.

From inception, Hulu has served ads for over 1,000 brand advertisers, allowing the company to leverage its dual- revenue streams (subscriptions and ads) to remain profitable in an environment of rising content costs. As of Q2:11, Hulu was paying $8 per subscriber per month in content costs. Hulu believes it can afford to pay 50% more in content licensing fees per subscriber relative to competing services (Netflix, Amazon etc.), and still maintain profitability. As a result, Hulu has projected it will spend $500 million on content in 2012. Last week, Hulu reported revenues of $420 million for 2011, up 60% from $263 million in 2010 and $108 million in 2009. We note that Hulu had projected full year 2011 revenues of $500 million at the end of both Q1:11 and Q2:11, and expected to pay out $300 million to content providers as of Q1:11. The company passed 1.5 million paying subscribers this month, and expects subscriptions to account for half the company‟s revenues in 2012. Hulu increased the installed base of Hulu+ compatible devices to 200 million from around 75 million at the beginning of 2011.

$450 1.60 Hulu: Revenue ($Millions) $420 Hulu+: Paid Subscribers (Millions) 1.49

$400 1.40

$350 1.20 1.11

$300 $263 1.00 0.88 $250 0.80 $200 0.60 0.51 $150 $108 0.40 $100 0.25

$50 0.20 $25

$0 0.00 2008 2009 2010 2011 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11

Source: Wedbush Securities, Company Site

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Hulu‟s ad model revolves around serving video formatted advertisements before and during streaming of its content. Ad Selector is a feature that Hulu began including in its video ads in 2008, allowing users to choose which ad they would like to watch, choosing between a variety of either three different ads from the same brand, or a single ad from three different brands. The company found that 66% of users participated in choosing which ads they wanted to watch, and that choice driven ads were two times as effective relative to traditional pre-designated ads. A second feature, Ad Swap, launched this October, and gives viewers the capability of switching out of an unappealing ad to another they felt was more relevant. A study by Hulu found that the feature increased unaided brand recall and purchase intent by 93% and 35% respectively. The same study found that brand favorability improved by 27%, stated relevancy increased by 46%, and aided recall increased by 54%.

Change In Effectiveness Metrics When Using Ad Swap 100% 91% 90%

80%

70% 58% 59% 60%

50% 43%

40% 34% 30% 31% 30% 23% 22% 20% 15%

10%

0% Unaided Recall Aided Recall Brand Favorability Purchase Intent Stated Relevancy

Source: Wedbush Securities, Company Site

On Hulu+, we counted 929 different TV shows (33% are in HD), and 1,854 movies (40% are in HD). On Hulu‟s free service, we counted a little more than 1,500 free TV shows with full episodes available on Hulu, and an additional 1,550 full length films. Animation seems to be the most popular genre for free TV shows on Hulu, accounting for 24% of shows which have full length episodes available.

Primary Genre: Free TV Shows With Full Episodes

Food 6% Reality Other 7% 19% New s 8%

Action 9% Animation 24% Comedy 13% Drama 14%

Source: Wedbush Securities, Company Site

We estimate there are about 950 free films on Hulu that have been released since 2000. The lag between release and availability is reflected in the chart on the right.

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Release Dates: Free Full Length Films Release Dates: Free Full Length Films 1000 180 947

900 160 154

800 138 140 700 120 110 600 99 100 92 500

80 400 68 62 300 60 51 221 51 43 42 37 200 40 112 85 100 52 40 61 37 13 20 0 2000- 1990- 1980- 1970- 1960- 1950- 1940- 1930- 1900- 0 2011 1999 1989 1979 1969 1959 1949 1939 1929 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Source: Wedbush Securities, Company Site

Data from Comscore shows continued growth in Hulu‟s monthly U.S. unique viewers, but declining time spent on the site per viewer. Unique viewers grew by 25% y-o-y, from 25 million to 31.2 million; remaining flat sequentially. Average time spent every month on Hulu dropped substantially from 236.4 minutes in December 2010, to 181.2 minutes a year later (23% decline).

Hulu: U.S. Total Unique Viewers (Millions) 35 240

Minutes Per Viewer 31.3 31.2 28.5 30 29.2 230 27.3 27.5 27.1 26.2 26.7 26.4 25.0 25.0 25 24.4 220

20 210

15 200

10 190

5 180

0 170 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

Source: Wedbush Securities, Comscore

Monthly ad minutes served has grown 43% y-o-y, to 621 million minutes in December.

700 Hulu: U.S. Total Video Ad Minutes (Millions)

650

600

550

500

450

400

350

300 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

Source: Wedbush Securities, Comscore

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Comscore estimates about 1.5 billion video ads were served in December 2011, up 38% y-o-y and 13% sequentially. Frequency of ads served per viewer remained relatively stable, growing only 3% y-o-y to 46.1 ads per viewer.

Hulu: U.S. Total Video Ads Served (Millions) 1,600 60 1,494 Frequency (Ads Per Viewer) 1,361 1,400 1,320 1,266 1,321 55 1,151 1,131 1,200 1,139 1,110 1,081 1,081 1,002 996 1,021 50 1,000 963

800 45

600 40

400 35 200

0 30 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11

Source: Wedbush Securities, Comscore

Looking at other major U.S. video sites in December, it is obvious that Google‟s YouTube platform makes it the leader by an enormous margin. Of the 181.7 million U.S. Internet users last month, 157.2 or 87% visited Google sites to watch a video. In terms of trajectory, Hulu was the only site reported on by Comscore which grew users in the double digits y- o-y (up 25%).

U.S. Total Unique Viewers (Millions) 180

160 157.2

140

120

100

80 53.7 53.3 60 45.8 42.0 41.1 40.4 40 31.2 27.8 26.7 20

0 Google VEVO Yahoo! Viacom Facebook Microsoft AOL Hulu Amazon Turner Sites Digital

Source: Wedbush Securities, Comscore

The average Internet user watched 23 hours online in December, up 60% y-o-y. Google owned sites—namely YouTube— accounted for 34% of that time (almost 8 hours), having experienced 67% y-o-y growth in minutes per viewer (MPV). Hulu, Microsoft and Vevo experienced MPV y-o-y declines of 23%, 28% and 26%, respectively, while AOL, Yahoo, and Facebook managed to both substantially grow MPV, increasing time spent watching videos on their sites by 145%, 61%, and 55% respectively.

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U.S. Monthly Minutes Per Viewer 500 471.9 450

400

350

300

250 181.2 200

150

100 57.5 68.0 61.0 55.1 44.8 50 27.3 23.9 17.4 0 Google Hulu VEVO Yahoo! Viacom AOL Microsoft Turner Facebook Amazon Digital Sites Source: Wedbush Securities, Comscore

The number of videos available on top U.S. sites grew 43.5 billion, 50% of which is attributed to YouTube.

U.S. Videos (Millions) 25,000

21,898

20,000

15,000

10,000

5,000

801 588 777 631 506 451 239 212 0 Google VEVO Hulu Yahoo! Microsoft Viacom AOL Facebook Turner Digital Source: Wedbush Securities, Comscore

Of an estimated 7.1 billion video ads served in December, of which Hulu accounted for 1.5 billion or 21%, growing 38% y-o-y. Two emerging platforms that provide video ad offerings, are Tremor Media, which offered 942 million video ads in December (up 87% y-o-y), and BrightRoll, which experienced 150% y-o-y growth, and served 872 million video ads.

U.S. Videos Ads Served (Millions) 1,600 1,494

1,400

1,200 1,116

1,000 942 872

800

600 496 456 400 330 311 310 298

200

0 Hulu Adap.tv Tremor BrightRoll Specific Videology AOL Undertone Auditude Microsoft Video Media Source: Wedbush Securities, Comscore

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Social Media Cartoon of the Week

Source: Caltech

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Headlines in Social Media

Airbnb Brings Its Apartment-Sharing Service to Android: http://dthin.gs/zpNmPt Amazon: Lovefilm to offer streaming access to ABC's TV On Demand service in UK: http://bit.ly/AsjCFx AppDynamics Lands $20M From KPCB: http://bit.ly/AbUEbB Apple almost 25 percent of computer market, if iPads are counted: http://bit.ly/yzBhEH AppTap: Mobile App Search And Recommendations Startup AppTap Raises $4 Million: http://bit.ly/wcL6bv Bessemer Leads $21M Round In Cloud-Based Email Delivery Service SendGrid: http://bit.ly/A31Kwe Bionic Panda raises seed funding for Android mobile games: http://bit.ly/waByTT Blabla Car: Accel Leads $10M Round In European Airbnb For Car Ride-Sharing, BlablaCar: http://bit.ly/xOKAap Boxee's Live TV joins the Facebook Open Graph party: http://bit.ly/yDIQ4w Brainient Raises $1.8 Million To Scale Video Ad Performance Platform: http://bit.ly/zvnnt7 Camera+ continues to be profitable, makes $5.1M: http://bit.ly/yp7Ess comScore Releases December 2011 U.S. Online Video Rankings: http://bit.ly/y7m3SM comScore Releases December 2011 U.S. Search Engine Rankings: http://bit.ly/xvGzu6 DeNA Continues China Push, Partners with NetDragon: http://bit.ly/AweEN3 Digital Chocolate snags VPs from Nokia, announces Android apps and Army Attack for iOS: http://bit.ly/yELMwS Disney's Playdom Publishes Third-Party Social Game Title Triple Town: http://dthin.gs/zSM2S8 eBay Predicts Mobile Commerce Will Grow 60 Percent in 2012: http://dthin.gs/xvvTD5 Electronic Arts Debuts Facebook Version Of Risk Game: http://bit.ly/wimT6b Fab.com Acquires FashionStake After Seven Months of Rapid Growth: http://dthin.gs/xASZkx Facebook Ad Performance Improved In 2011, Study Says: http://bit.ly/wPQAtT Facebook And Google Tussled Over Search Results: http://bit.ly/wp5tCU Facebook brings its commenting platform to mobile http://bit.ly/xqSL8m Facebook Could Hit 1 Billion Users This Summer, But Its Social Market Share May Be Declining: http://bit.ly/Av0PkE Facebook Engineers Annoyed As The Place Gets Flooded With Sales And Marketing Types: http://bit.ly/wArY0Y Facebook Finds Quieter Ways to Complain About Google's Search+: http://dthin.gs/xklYaq Facebook Flips The Switch On Suggested Events Feature: http://bit.ly/wiM6B4 Facebook Has A Full-Time Team Of 30 Fighting Spam And Hackers: http://bit.ly/ylHszE Facebook May Account For 5% Of Online Ad Spending This Year: http://bit.ly/z7rKWz http://bit.ly/AjAiXQ Facebook Ready for Big Time?: http://on.wsj.com/xw41S1 Facebook Ready for the Big Time?: http://dthin.gs/xu2Zoh Facebook Will Have One Billion Users By September: http://bit.ly/zItCVa Facebook: „Listen With‟ Button Debuts In Chat Sidebar: http://bit.ly/zPqo3S http://bit.ly/zBtp6C http://bit.ly/zcrFlG Facebook: Developers Get Ready To Tell Facebook About Every "Action" You Take: http://dthin.gs/xXkIcX Facebook: Indian Court Threatens Facebook: http://bit.ly/Ae8xvZ Facebook: Lawmakers press Homeland Security on Internet monitoring: http://bit.ly/yZIGl5 Facebook: Mark Zuckerberg Lists The Companies He Admires, Microsoft Doesn't Make It: http://bit.ly/xmyxrY Facebook:„Listen With‟ Button Debuts In Chat Sidebar: http://bit.ly/zPqo3S Foursquare brings its 'Explore' recommendations to the web: http://bit.ly/wSgRb5 http://bit.ly/wXUece Foursquare brings its 'Explore' recommendations to the web: http://bit.ly/wSgRb5 FTC includes social network Google+ in antitrust probe: http://bit.ly/wdAl5H GetGlue bags $12 million: http://bit.ly/zK3sYc Gidsy: Ashton Kutcher Invests In Gidsy, An Airbnb For Travel Experiences: http://bit.ly/xI0n1y Google accused of stealing info from rival Kenyan business database: http://bit.ly/xIB3Nv Google adds VMware‟s co-founder Diane Greene to its Board of Directors: http://bit.ly/wbTnPm Google Renews Push in China: http://on.wsj.com/wS6kJX Google TV to get annual upgrades; recommendations likely in 2012: http://bit.ly/y0Sji6 Google updates Google+ hangouts with a new look and screen sharing: http://bit.ly/xiRLWW http://bit.ly/ygWTVg Google: Here‟s how to turn off personalized Google Search results: http://bit.ly/A0s3Yj Google: More Than 1,000 Man-Years Have Gone Into Developing Google Search: http://bit.ly/AisFVw Google: YouTube player adds Netflix-like storyboard feature for easier navigation: http://bit.ly/yZiyn1 Grooveshark launches HTML5 mobile app to get around being banned in app stores: http://bit.ly/wX6amQ

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Grooveshark launches HTML5 webapp for streaming music in barebones beta: http://bit.ly/whf2zZ Groupon rival pulls back on deals effort: http://bit.ly/xodfKS Hulu revenue up 60 percent in 2011, to $420 million: http://bit.ly/xLJGvY Hulu to Create New Shows: http://on.wsj.com/wI7cnD Hulu to drop $500M on content in 2012, more than it earned in 2011: http://bit.ly/zwntWb Hulu: "Soft" Ad Sales Ding Hulu's 2011 Growth: http://dthin.gs/wvk4un Hulu's First Scripted Show Has A Trailer, And It Looks Awful: http://bit.ly/x1ZuUC InMobi: Smartphone Ad Impressions Up 488% In 2011, Tablets Up 771%: http://bit.ly/yvlLeH International Game Technology acquires DoubleDown Casino maker for $500 million: http://bit.ly/xBo4T9 Jumio Raises $25.5 Million: http://bit.ly/z0R3JN Kapost Raises $1.5 Million So Big Brands Like L'Oreal Can Become Media Companies: http://bit.ly/z9uTJS Kwaga Raises $1.55M For „Email Assistant‟ WriteThat.Name: http://bit.ly/zsFcqA Letao‟s 4th Round of Funding Brings in Another $30 Million: http://bit.ly/ArqYaR Microsoft Execs Taunt Google On Twitter: http://bit.ly/xz0cvH MySpace Isn‟t Dead In The US, It‟s Just Getting Closer To Zero Users… As Twitter, G+ Grow: http://bit.ly/zmejnf Ngmoco teams up with Glu Mobile, ropes Gun Bros into Mobage: http://bit.ly/yRfjof OnLive Cloud Desktop app now available for download on the iTunes App Store: http://bit.ly/AvcIZB OnLive streaming games officially coming to Google TV: http://bit.ly/A1jAHf OnLive: PowerPoint, Word, Excel for the iPad: http://on.wsj.com/A4nEUv PopCap: People Who Cheat In Social Games Are More Likely To Cheat In Real Life: http://bit.ly/A8UYTl Qunar Considering US IPO: http://bit.ly/y0c8fe Rdio streaming music comes to Germany: http://bit.ly/yTHLXO Renren Expands, Adds a Pinterest-like Social Pinboard: http://bit.ly/AvbtIn Shazam Offers Its Own Player That Streams Music Lyrics: http://on.wsj.com/zHktu7 ShopKeep Raises $2.2 Million for Web-based iPad Cash Register: http://on.wsj.com/zlCgOd Sony‟s Music Unlimited Service To Land On iOS This Quarter: http://bit.ly/x8do7T SOPA: U.S. online piracy bill headed for major makeover: http://bit.ly/xHBGsN Splunk Files to Go Public: http://on.wsj.com/xx9DBW StrikeAd Strikes £2 Million Second Round From DFJ Esprit To Expand: http://bit.ly/xRurse Study: Blogs More Influential Than Social Networks When Women Buy Consumer Electronics: http://bit.ly/yEnhHJ Symantec Buys LiveOffice for $115 Million: http://dthin.gs/y8Kino Turntable.fm Founder Is "Flattered" By Facebook Imitation: http://bit.ly/ycAxAp Twitter Denied Data To Google And Bet On Itself: http://bit.ly/w1rI6v Twitter Lawyer Is Outraged Over This Google Search Results Page: http://bit.ly/zZG1YR Twitter's Other Tactic For Holding Onto Talented Employees: http://bit.ly/wodvLl Urban Airship To Shutter SimpleGeo Services In March, With Factual Picking Up The Slack: http://bit.ly/zuKNQY WalkScore rates cities on walkability, gets $2M: http://bit.ly/w2sJ6H YouTube teases Channels partners including Stan Lee, 'CSI' creator, Rainn Wilson, and more: http://bit.ly/xwJF3Q Zappos: 24 million customer accounts hacked at Zappos: http://bit.ly/yo5fU2 ZocDoc adds ex-senators to its board: http://bit.ly/yq0LB1 Zynga Acupuncture Ain‟t So Bad After All: http://bit.ly/wVB5sb Zynga CEO: Staff stock renegotiation 'probably wasn't a good idea': http://bit.ly/yZggd7 Zynga Dealt a Strong Hand: http://on.wsj.com/w5ERa8 Zynga: Words With Friends Actually Saved A Guy's Life: http://bit.ly/w1HiKu Zynga's Twitter becomes useful, gives away free in-game items: http://bit.ly/xNI7ax

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

IMPORTANT DISCLOSURES

The information contained herein is intended for accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors. WEDBUSH SECURITIES Wedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to the other stocks in the analyst‟s coverage universe (or the analyst‟s team coverage).*

Rating Distribution Investment Banking Relationships (as of December 31, 2011) (as of December 31, 2011) Outperform:60% Outperform:12% Neutral: 35% Neutral: 1% Underperform: 5% Underperform: 0%

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Capital Markets Disclosures as of January 18, 2012

Company Disclosure APPLE 1

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

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