Education & Training Services Knowledge Enterprises

23 May 2000

Michael T. Moe, CFA Director of Global Growth Research The Knowledge Web (1) 415 676-3570 [email protected] Part 1: People Power – Fuel for the New Economy Senior Internet Analyst, Global Coordinator (1) 212 449-0773 [email protected]

Technology is the Driver of the New Highlights: Economy and Human Capital is its Fuel The Internet’s Capability to Deliver a Total Human Capital Solution Creates a Powerful Investment Opportunity

Merrill Lynch & Co. Global Securities Research & Economics Group Global Fundamental Equity Research Department

RC#60214529 The Knowledge Web – 23 May 2000

Knowledge Enterprises Group

Michael T. Moe, CFA Director of Global Growth Research (1) 415 676-3570 [email protected]

Education Services Global Internet Research

Kathleen Bailey Henry Blodget Vice President Senior Internet Analyst, Global Coordinator (1) 415 676-3572 (1) 212 449-0773 [email protected] [email protected]

Neil Godsey Kirsten Campbell Assistant Vice President Assistant Vice President (1) 415 676-3574 (1) 212 449-3113 [email protected] [email protected]

Michael B. Armstrong Industry Analyst (1) 415 676-3585 [email protected]

Business & Employee Services

Thatcher Thompson Director (1) 212 449-8787 [email protected]

Chandy Smith Assistant Vice President (1) 212 449-0841 [email protected]

"Albert Einstein"™ Licensed by the Hebrew University of Jerusalem, Represented by the Roger Richman Agency, Inc., Beverly Hills, CA 90212 www.albert-einstein.net"

2 The Knowledge Web – 23 May 2000

Introduction to the e-Knowledge Industry

The new economy moves at a pace never seen before. The new providing continuing education, employment opportunities economy is a knowledge economy based on brainpower, ideas and relevant information, will be knowledge nerve centers and entrepreneurism. Technology is the driver of the new for vertical knowledge communities. economy, and human capital is its fuel. The knowledge Colleges and universities are the most wired community economy is people-centric. Our economy has evolved from on the Web, with over 90% of college students accessing manufacturing-intensive to labor-extensive. Fundamental to the Internet, 52% of them daily. Students spend nearly 19 success in the new economy is how companies obtain, train and hours per week on the Internet, 84% of the time pursuing retain knowledge workers. The knowledge enterprise industry academic activities. College students currently spend $105 is over $2.2 trillion. We expect the online component to grow billion annually, with $1.5 billion of that online. Higher ed from $9.4 billion to $53.3 billion by 2003, a 54% CAGR. hubs provide educators and e-commerce companies access Ubiquitous PCs and high-speed bandwidth will facilitate access to this very compelling demographic. to knowledge anytime, anywhere. The Internet democratizes The Internet creates one economy and one market. As knowledge, increasing access to it, lowering its cost and large as the online higher education market is in the U.S., ultimately improving its quality. We believe combining the the global opportunity is significantly greater. Unlike the “richness” of an offline experience and the “reach” that only the U.S. where post-secondary education is relatively Internet provides creates a network effect that allows scale available, access to world-class post-secondary institutions knowledge enterprises to be born. Moreover, we see significant in many parts of the world is limited. Currently, there are potential advantages that offline operators can achieve by 84 million students enrolled in higher education leveraging their experience and brand online. worldwide. Global demand for higher education is e-Commerce has forced all traditional businesses to forecasted to reach 160 million by 2025 − if online compete at Internet speed. In a 4% unemployment learning captures even half of this growth, there would be economy with 65% of all the new jobs created requiring 40 million students for online education. We predict that skills, 70% of Fortune 1000 CEOs are saying that finding in the next five years, there will be global virtual qualified workers is a major issue for growth. “Time-to- universities with potentially millions of students enrolled. competency” is a bottleneck or a strategic advantage We project that the online higher education market will depending on how effective an organization is at finding grow to $7 billion by 2003 in the U.S. alone. and training knowledge workers. Domestic online The number of K-12 schools connected to the Internet has corporate learning is expected to grow from $1.1 billion in climbed from 35% in 1994 to 96% today. Today’s kids are 1999 to $11.4 billion in 2003, a 79% CAGR, and online − − staffing and recruiting, critical functions of human capital the Internet Generation Generation i and are as comfortable on a computer as on a bicycle. With 53 million management, is projected to grow from $5.8 billion in schoolchildren, three million teachers and 23 million 1999 to $28 billion in 2003, a 48% CAGR. families, the K-12 marketplace encompasses a huge number The information revolution that began with the birth of the of potential users. The Internet is the world’s greatest PC is really the knowledge revolution. e-Commerce is to library and gives a student in Minot the same access to the knowledge revolution what the railroads were to the knowledge as a student in Manhattan. Key for improvement industrial revolution. We think enterprises building in learner outcome is getting parents involved − the home- “knowledge tracks,” or infrastructure, into the corporate school connection − and email has already proven to be an market, K-12 community, and higher education spaces are effective communication tool between parents and teachers. poised to enjoy explosive growth. The Internet is all about disproportionate gains to the Integrating quality educational content with leaders of a category. The gigantic opportunity has not testing/assessment and certification programs is the new st been lost on investors, with over $3 billion in venture education paradigm for the 21 century. In the knowledge capital funds flowing into knowledge enterprises in the economy, assessment is the currency with which all skills past fifteen months alone. By focusing on knowledge are valued. The four engines of the new economy – enterprises that contain the 4 P’s (People, Product, computers, telecommunications, healthcare and Potential and Predictability) and other key differentiating instrumentation – employ approximately 50 knowledge factors, notably the network effect outlined in this report, workers per 100 employees and are growing. These we hope to identify the Yahoo!s from the yahoos and technology-intensive industries are growing 3-6 times as provide outsized investment returns for what we see as an fast as economy-wide job growth. Career vortals, outsized opportunity.

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Fast Facts: The New Economy • The pay gap separating a high school graduate from a • At the end of 1998 there were approximately 88 college graduate was 50% in 1980. Today, it has Internet stocks. Currently, there are approximately reached 111%. Looked at another way, a 30-year-old 400 with nearly a half trillion dollars of market cap. male with a high school diploma earns just two-thirds • Approximately 50% of the total Internet market cap is of what he earned 25 years ago. Even so, only 21% of accounted for by the five largest Internet companies, American adults over the age of 25 have a bachelor’s providing evidence for the belief that, on the Internet, degree or better. the winners “take all.” • In 1980, the price-to-book ratio of the ten largest • Studies have shown that effective management of publicly traded companies in the U.S. was 1.2x. human capital can improve shareholder value by up to Today, the price-to-book is 12.1x, or ten times greater. 30%. This multiple expansion correlates directly with the increased productivity of a company’s intangible • By our estimates, the e-knowledge market will reach assets – its human capital. $53.3 billion by 2003 from $9.4 billion in 1999, growing at a CAGR of 54%. • On average, each employee at the leading “New Economy” companies is “worth” $38 million based on • Reflecting the transformation of technology in our market cap-per-employee. In contrast, each employee economy, in 2000, skilled jobs will represent 65% of at the leading “Old Economy” companies is worth all jobs. This is expected to expand to 85% by 2005, about $689,000, or less than 2% of employee value at up from just 20% in 1950. the New Economy companies. • Knowledge Services – education and corporate • funding in knowledge enterprises learning for the new economy – is a $740 billion amounted to over $3 billion since January 1999, or industry in the U.S. and a $2-trillion industry globally. about triple the total invested in the previous 9 years. • Web-based corporate learning should enjoy explosive • At the end of 1999, more than 196 million people growth, measuring $11.4 billion by 2003, up from were using the Internet worldwide. The number of $550 million in 1998, an 83% CAGR. global Internet users is expected to more than triple to • By 2002, technology-based training will capture the 638 million by 2004, a 27% CAGR. majority of dollars for IT training, at 55% versus the • The “free agent” mindset of today’s knowledge worker 45% share captured by instructor-led methods. is evidenced by the fact that the average person entering • In 1996, 44% of students enrolled in higher education the workforce today will work for between 8 and 10 programs were adults over 24 years of age, up from different employers versus 4 to 6 a decade ago. Only 28% in 1970. 15,000 businesses currently recruit online, but this figure is expected to increase to 124,000 by 2003. • The ratio of students to computers in our nation’s K- 12 schools is rapidly improving, falling from 16-to-1 • Worldwide, the Internet economy is expected to in 1992 to approximately 6-to-1 in 1999. mushroom from $361 billion in 1998 to more than $2.8 trillion in 2003. • Nearly every K-12 school in the country (96%) has at least one Internet-linked computer. To date, 51% of • In 1999, nearly 720,000 IT positions went unfilled. classrooms have Internet-connected computers. Today, one of every five IT jobs remains unfilled, and nearly 75% of new openings fail to receive interested • The number of K-12 students with Internet access has and qualified candidates. grown from virtually zero in 1994 to 10 million in 1996 and is projected to grow to 40 million by 2002. • Worldwide business-to-business (B2B) commerce dwarfs B2C commerce in both size and growth. Total • 47% of 16-22 year-olds are on the web and control B2B Internet revenue is expected to top $2 trillion in $37 billion in spending. 40% have bought and paid 2004, up from $80 billion in 1999, a 91% CAGR. for something online. By 2003, 62% of 16-22 year- olds will be on the web. • Firms are stepping up their e-commerce outsourcing initiatives as they move from building stand-alone • College students spend nearly 19 hours per week on sites to Internet-enabled supply chains and customer the Internet, with 85% of their time spent on academic service systems. The result is a rising median pursuits. outsourcing budget, from $750,000 in 1999 to a • The domestic broadband market will expand to 2.3 projected $1.5 million in 2001. million homes this year, up 200% from approximately • The amount spent on online advertising is expected to 750,000 in 1998. By 2004, we expect broadband to increase tenfold from $3.3 billion in 1999 to $33 reach 48% of Internet users, or 30 million households. billion in 2004, a 58% CAGR.

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CONTENTS

n Section Page

Part 1: Introduction to the 3 Knowledge Economy

1. Executive Summary and Thesis 9

2. Price-to-Opportunity: The New Valuation Metric 15

3. The Four P’s 22

4. Mind Over Matter: Human Capital in the Knowledge Economy 31

5. The Emerging New Economy 36

6. The Technology Revolution 45

7. e-Commerce: The Current e-Business Wave 53

8. Advertising Exploding Online 56

9. The Coming Bandwidth Tidal Wave 60

10. “Kingmakers” will Determine the Winners 65

Part 2: Generation i The K-12 Market 75

11. Generation i – @ Home, @ School, @ Play 77

12. Generation i – the K-12 Education Market 78

13. Kids with Clout: K-12 Marketplace is Huge 84

14. Investment Opportunity 86

15. Today’s Children Are Web Savvy “Clickerati” 87

16. K-12 Education Is Ripe for a R*e*volution 96

17. The K-12 E-Education Landscape 106

18. Linking Homes and Schools – The Next Online Land Grab For 107 e-Portals & Hubs

19. Learning Redefined – Content Goes Digital 115

20. e-Commerce 125

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n Section Page

21. Infrastructure 131

22. Supplemental Services 143

23. Issues in K-12 e-Learning 149

24. The Empire Strikes Back? Publishing & Media Companies vs. 153 Web Upstarts

25. Appendix 1 165

Part 3: Higher Web – 167 Universities Online

26. Higher Web – Universities Online 169

27. The World Wide Web of Higher Education 170

28. The Market Opportunity 178

29. The Global Opportunity 181

30. Infrastructure – “Webifying” the University 184

31. Community and Commerce 193

32. E-Hubs – All Roads Lead to the E-Hub 201

33. Universities Online 207

34. The Corporate Market Opportunity 216

35. Appendix 2 223

Part 4: Corporate e-Learning – 225 Feeding Hungry Minds

36. Corporate e-Learning: Feeding Hungry Minds 227

37. Corporate e-Learning 228

38. Size of the Market 236

39. The Corporate e-Learning “Net-scape” 242

40. Content 261

41. Assessment 273

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n Section Page

Part 5: Human Capital 291 Management – People Power

42. Human Capital Management: People Power 293

43. Trends & Predictions 294

44. Human Capital Management 296

45. Countering the “Brain Drain” 298

46. The Industry “Net-Scape” 301

47. The Net Shakes Up Human Capital Management 308

48. The Human Capital Management Landscape 314

49. Investable Themes 322

50. Select Company Profiles 323

51. Appendix 3 352

7 The Knowledge Web – 23 May 2000

Introduction to the Knowledge Economy

8 The Knowledge Web – 23 May 2000

1. Executive Summary and Thesis

Technology is the driver of the “Take our twenty best people away, and I can tell you that Microsoft would New Economy, and human become an unimportant company.” capital is its fuel. – Bill Gates

When the puck goes in the net, all the sticks go in the air. Likewise, attributing what or who deserves the credit for the incredible economic boom we are experiencing is a crowded stage. , , the fall of the Berlin Wall and, of course, the Internet are all lead actors amongst the cast of thousands in the New Economy script. Technology is the driver of the New Economy, and human capital is its fuel. In today’s world, knowledge is making the difference not only in how an individual does, but also in how well a company does and, for that matter, in how well a country does. While the future possibilities of the knowledge economy look both exciting and, at the same time, daunting, the transformation to a knowledge economy is now evident. • Most striking—the dramatic pay gap between those with education and those without has more than doubled in less than 20 years. Looked at In today’s knowledge-based another way, the purchasing power of a 30-year-old man with a high-school diploma has dropped by over one-third over the past two decades. global marketplace, human capital has replaced physical • Also significant—our analysis illustrating a seismic shift in how the capital as the source of market values companies, discounting traditional analysis of earnings competitive advantage. derived from physical capital and replacing it with analysis of earnings power derived from human capital. • Finally, the structural changes that have occurred in our economy mean that the new jobs being created today are service and skill-based jobs rather than manufacturing jobs. In 1950, unskilled jobs constituted 60% of all jobs, with professional and skilled jobs representing the remainder. Fast forward the clock to today, and it is expected that 65% of all new jobs created will be skilled jobs and that by 2005 skilled jobs will represent 85% of all new jobs created. Fundamental to the investment opportunity is the significant demand imbalance for knowledge workers versus the supply of skill-based jobs. In today’s knowledge-based global marketplace, human capital has replaced physical capital as the source of competitive advantage. A key result of the confluence of technology and the Internet Economy is the need for better, faster and smarter workers. The reality of a 4% unemployment rate in the U.S., the “free agent” mindset of the most talented workers, and the fact that only 21% of the U.S. adult population has a college degree is making this task more difficult than The truly revolutionary impact ever before. e-Commerce forces even traditional businesses to operate at Internet of the Internet is just beginning speed, with “time-to-competency,” now a major factor determining the to be felt. In the old economy, competitiveness of all companies. geographic distance needed to The truly revolutionary impact of the Internet is just beginning to be felt. In the be mastered to shop, be serviced old economy, geographic distance needed to be mastered to shop, be serviced or to or to learn. In the new learn. In the new economy, distance has been eliminated. We are rapidly economy, distance has been evolving into one economy and one market. eliminated. We are rapidly We see the e-knowledge market being the next major growth phase of the Internet, evolving into one economy and following huge business and investment opportunities in business-to-consumer one market. (B2C) e-commerce and business-to-business (B2B) commerce and services.

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Evolutionary Phases of e-Business

Growth e-Knowledge

B2B Commerce: VerticalNet, CommerceOne

B2C Commerce: .com At no previous time has human capital been so important, Growth of Internet Market Content: meaning finding, attracting and Yahoo!, retaining knowledge workers Access: will be mission-critical , functions – and high growth AOL sectors – in the New Economy.

1992 1994-51995-6 1998-9 2000 Time

Source: Lynch Global Growth Group

At no previous time has human capital been so important, meaning finding, developing and retaining knowledge workers will be mission-critical functions – and high growth sectors – in the new economy. Accordingly, we look at the continuum of human capital solutions holistically – a Knowledge Web – and believe the most important companies will have an appreciation for and/or involvement in a comprehensive solution. We believe those companies that can link different elements of the human capital value chain – stretching from recruiting to assessment to training and through retention – while leveraging the Internet’s capabilities to deliver a total solution, will be the big winners.

The Knowledge Services Continuum: The Human Capital Value Chain

Find & Recruit Assess Train TestCertify Retain

Source: Merrill Lynch Global Growth Group

Unleashing the Killer App The death of distance and the compression of time have powerful implications in the knowledge-based economy. The biggest investment ideas are often where there is a problem – and the bigger the problem, the bigger the opportunity. There is no bigger problem in the global marketplace today than how to obtain, train and retain knowledge workers. Seventy percent of Fortune 1000 CEOs cite the ability to attract and keep adequately skilled employees as a major issue for growth and competitiveness. Given that essentially all of the 20 million net new jobs that were created in the past 20 years were from small and mid-sized companies, obtaining, training and retaining talent is even more critical to what has become the growth engine of the new economy.

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“The killer app for the next decade is talent acquisition and retention.”

— John Doerr Kleiner, Perkins,Caufield & Byers

“The next big killer application for the Internet is going to be education.”

— John Chambers, CEO, Cisco Systems

Techies are the heroes of the Nowhere is the importance of people more evident than with technology New Economy: they influence professionals, or “techies.” Techies are the heroes of the New Economy: they the spending of $1 trillion of influence the spending of $1 trillion of annual purchases; they are mission-critical for any organization; and they are in extremely short supply. In fact, there are annual purchases. currently 700,000 open IT jobs, or one-third of the total of all IT jobs, with the shortage expected to more than double in the next five years. Compounding the complexity of dearth of IT professionals is that Moore’s Law is alive and well making IT skills obsolete at the blink of an eye. Fast-forward the clock five years and, unfortunately, the supply of students coming out of America’s schools doesn’t promise much relief. Twelfth-graders in U.S. schools in the most recent international comparisons finished dead last and next to last in the key new economy subjects of math and science, respectively. Twelfth-graders in U.S. schools Hence, the fundamental and massive problem of global competitiveness and in the most recent international obtaining knowledge workers reaches all the way down to the K-12 level. As the comparisons finished dead last human capital demand funnel is triggered, global corporations need to more effectively recruit knowledge workers and provide lifelong learning for their and next to last in the key new employees and create supply for the future by improving the K-12 education economy subjects of math and system. The Internet acts as a major enabler linking corporations to people, science, respectively. providing management systems, anytime/anywhere learning and a catalyst to help revolutionize a failing primary education system.

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The Human Capital Demand Funnel

Global Corporations

Demand for Knowledge Workers

Internet-Based Employee Solutions

E-Cruitment

E-Human Capital Solutions

E-Corporate Learning

Better K-12 & Higher Ed Solutions

Source: Merrill Lynch Global Growth Group

What’s a Mother to Do? The Information Revolution is really the Knowledge Revolution, and the Internet Favorite Bookmarks of is to the Knowledge Revolution what the railroad was to the Industrial Revolution. Michael Milken, Chairman & CEO The Internet has the potential to “democratize” knowledge and learning, of Knowledge Universe increasing the access, lowering the cost and improving the quality. www.knowledgeu.com Communication of rich information has historically required proximity or www.oncology.com dedicated channels. Key to realizing the potential of the Internet is to www.nci.nih.com reconceptualize how knowledge is obtained and leverage the advantage of the www.interactive.wsj.com medium. By combining “richness” and “reach,” e-knowledge enterprises can drive www.tasteforliving.com utilization, leading to a network effect and monetization.

“A high growth strategy for the New Economy needs to create more inclusive politics, a new learning society and opportunities available to all.” – The Long Boom Peter Schwartz, Peter Leyden and Joel Hyatt

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Online Human Capital Solutions – Combining Richness and Reach

Network Optimal Effect = Monetization Local Physical One-to-One Interactivity Companies providing online human capital solutions have

the potential to bring together Richness Global both richness and reach, Virtual creating a powerful and Mass Market revolutionary user experience. Isolated

Reach

Source: Merrill Lynch Global Growth Group

Enormous Market Opportunity Add it all up, and we see a gigantic opportunity for companies that provide scale solutions to the most vexing problem facing our global economy. The ubiquitous nature of PCs combined with the power of the Internet are both catalysts and enablers revolutionizing what is already a $2 plus-trillion market. Currently there The ubiquitous nature of PCs is approximately $14 billion of market capitalization for the “born on the web” combined with the power of the knowledge enterprises and $20 billion of market capitalization when we include Internet are both catalysts and “clicks and bricks.” Our estimates are for the U.S. online market opportunity for enablers revolutionizing what is knowledge enterprises to grow from $9.4 billion in 1999 to $53.3 billion in 2003 already a $2 plus-trillion representing a CAGR of 54%. Providing additional fuel, venture capitalists have invested over $3 billion in the knowledge enterprise industry since January 1999. market.

Huge and Growing Market Opportunity U.S. Online Market Size U.S. Addressable CAGR: Human Capital Solutions Market (2000E) 1999E 2003E 1999E-2003E Learning Sectors (excludes Pre-K) K-12 $375 billion $1.3 billion $6.9 billion 52% + Higher Ed $250 billion $1.2 billion $7.0 billion 55% + Corporate + Gov’t Learning $110 billion $1.1 billion* $11.4 billion* 79% Total Learning Sectors $735 billion $3.6 billion $25.3 billion 63% + Recruiting & Staffing $75 billion $5.8 billion $28.0 billion 48% Total Human Capital Solutions $810 billion $9.4 billion $53.3 billion 54% Source: Merrill Lynch Global Growth Group, IDC, Forrester, Jupiter, Training Magazine *Online figures include corporate learning only. They exclude the government learning market. Our estimates are for the U.S. online market opportunity for Given the size of the problem, the necessity to solve it, and the momentum of the knowledge enterprises to grow worldwide web, we see the e-knowledge industry having explosive growth. The aggregate market growth of the learning sectors is estimated to grow from $3.6 from $9.4 billion in 1999 to billion in 1999 to $25.3 billion in 2003, or a CAGR of 63%. Representing even $53.3 billion in 2003 more potential for growth, the corporate learning market is expected to grow from representing a CAGR of 54%. $1.1 billion in 1999 to $11.4 billion in 2003 or a CAGR of 79%.

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Publicly Traded e-Knowledge Enterprise Companies % Price IPO Price Appreciation Sales Price / Sales Ticker Company Date Subsector 5/15/00 Mkt. Cap. Since IPO 2000E 2001E 2000E 2001E B2B eLEARNING CTRA Centra Software 03-Feb-00 Corp. Learning $7.69 $178.7 (45.1%) $16.1 $28.3 11.1x 6.3x CLKS CLICK2LEARN.COM 12-Jun-98 Corp. Learning 12.00 176.6 9.1% 42.8 59.7 4.1 3.0 DTHK DigitalThink 25-Feb-00 Corp. Learning 24.75 813.0 76.8% 19.1 37.0 42.6 22.0 ECLG eCollege.com 15-Dec-99 Higher Ed 4.88 67.6 (55.7%) 15.3 NA 4.4 NA ELOQ Eloquent 17-Feb-00 Corp. Learning 8.13 137.5 (49.2%) NA NA NA NA RVDP RiverDeep 09-Mar-00 K-12 26.00 709.3 30.0% 22.0 45.0 32.2 15.8 SABA Saba Software (D-1-1-9) 07-April-00 Corp. Learning 18.75 804.5 25.0% 28.9 63.6 27.8 12.6 SKIL SkillSoft Corporation 05-Feb-00 Corp. Learning 13.50 169.9 (3.6%) 16.2 42.5 10.5 4.0 SMTF SmartForce plc (D-1-1-9) 13-Apr-95 Corp. Learning 43.13 2,328.8 978.1% 152.5 255.8 15.3 9.1

B2C eLEARNING LTWO Learn2.com, Inc. 20-Oct-94 Corp. Learning $2.28 $116.3 (77.2%) $50.0 NA 2.3x NA SKDS SmarterKids.com 23-Nov-99 K-12 2.63 50.8 (81.3%) 40.0 91.0 1.3 0.6x NETS YouthStream Media Networks 03-Apr-96 Higher Ed 7.06 189.4 (41.3%) NA NA NA NA

EDUCATION TECHNOLOGY / INFRASTRUCTURE LSPN Lightspan 10-Feb-00 K-12 8.06 349.0 (32.8%) 62.9 88.9 5.5 3.9 NTWO N2H2, Inc. 30-Jul-99 K-12 $4.44 $98.3 (65.9%) $24.3 NA 4.0x NA NLCS National Computer Syst. (C-2-1-7) 15-Apr-86 K-12 51.19 1,638.3 485.0% 748.8 861.1 2.2 1.9x SCIL Scientific Learning Corp (D-1-1-9) 22-Jul-99 K-12 16.13 169.2 0.8% 26.2 65.5 6.4 2.6 IZAP ZapMe! Corporation (D-1-1-9) 20-Oct-99 K-12 2.91 127.1 (73.6%) 36.0 123.7 3.5 1.0

ECRUITING / HUMAN CAPITAL SERVICES CBDR Careerbuilder 12-May-99 Human Cap Serv. $2.34 $55.5 (82.0%) $31.0 $60.9 1.8x 0.9x EWBX EarthWeb, Inc. (D-2-1-9) 11-Nov-98 Human Cap Serv. 14.88 145.2 6.3% 64.0 102.0 2.3 1.4 HHNT HeadHunter.NET 19-Aug-99 Human Cap Serv. 11.50 123.9 15.0% 25.1 NA 4.9 NA HOTJ HotJobs.com Ltd. 10-Aug-99 Human Cap Serv. 7.50 237.9 (6.3%) 46.3 70.2 5.1 3.4 KFRC kforce 15-Aug-95 Human Cap Serv. 12.38 577.9 295.4% 901.2 1,141.3 0.6 0.5 NIKU Niku Corporation 29-Feb-00 Human Cap Serv. 22.75 1,570.8 (5.2%) NA NA NA NA OPUS Opus360 Corporation 07-Apr-00 Human Cap Serv. 4.50 224.0 (55.0%) 11.1 33.0 20.2x 6.8x TMPW TMP Worldwide (D-2-1-9) 13-Dec-96 Human Cap Serv. 58.81 5,287.1 740.2% 881.0 1,023.1 6.0 5.2 TJOB topjobs.net plc 28-Apr-99 Human Cap Serv. 5.88 47.0 (51.0%) 7.8 21.9 6.0 2.1 HIRE Webhire 23-Jul-96 Human Cap Serv. 6.00 87.1 (45.5%) 26.6 NA 3.3 NA

CLICKS & BRICKS LEARNING AND HUMAN CAPITAL SERVICES APOL Apollo Group (C-1-1-9) 06-Dec-94 Higher Ed. $27.56 $2,076.1 1,591.0% $652.9 $783.5 3.2x 2.6x DV DeVry (C-1-1-9) 24-Jun-91 Higher Ed. 27.44 1,909.2 2,095.0% 562.5 646.9 3.4 3.0 HSII Heidrick & Struggles International 27-Apr-99 Human Cap Serv. 41.00 788.4 192.9% 523.0 659.0 1.5x 1.2x KFY Korn/Ferry International 11-Feb-99 Human Cap Serv. 22.00 810.6 57.1% 568.7 625.6 1.4x 1.3x LTRE Learning Tree Int’l (D-2-2-9) 06-Dec-95 Corp. Learning 49.06 1,062.0 513.3% 216.8 242.8 4.9 4.4 POSO ProsoftTraining.com 06-Dec-96 Corp. Learning 15.06 277.4 653.1% 22.4 24.6 12.4 11.3 POVT Provant (D-3-2-9) 29-Apr-98 Corp. Learning 5.06 106.2 (61.1%) 217.0 NA 0.5 NA SLVN Sylvan Learning Syst. (D-2-1-9) 15-Dec-93 K-12 12.50 636.9 155.6% 356.1 391.7 1.8 1.6

PUBLISHERS H Harcourt, Inc. May-69 Education Publish. $37.00 $1,913.6 702.6% $2,329.5 $2,562.5 0.8x 0.7x HTN Houghton-Mifflin Sep-84 Education Publish. 39.81 1,209.6 451.4% 947.3 1,089.4 1.3 1.1 LSE:PES Pearson plc NA Education Publish. 33.00 20,136.6 NA 3,725.0 4,083.0 5.4 4.9 SCHL Scholastic Feb-94 Education Publish. 46.69 754.7 107.5% 1,248.9 1,373.8 0.6 0.5 TOC Thomson Corporation NA Education Publish. 33.29 20,725.8 NA 6,327.2 6,959.9 3.3 3.0 Median: $313.2 12.0% 4.0x 2.8x Total: 68,887.8 Total w/o Clicks & Bricks or Publishers: 11,193.6 (5.7%) 4.9x 3.2x Total eLearning & Education Infrastructure: 8,124.3 (3.6%) 5.5x 4.0x (US$ in millions, except per share; fully-diluted shares used for all relevant calculations; all historical prices are split-adjusted)

14 The Knowledge Web – 23 May 2000

2. Price-to-Opportunity: The New Valuation Metric We have watched in awe and delight the unprecedented velocity of market value created by the Internet economy. Five years ago, the Internet didn’t even register as a blip in terms of market value in U.S. capital markets. Today, Internet companies represent a combined half trillion dollars out of $15 trillion with corresponding valuations at stratospheric heights. Five years ago, the Internet didn’t even register a blip in In this report, we introduce a new valuation metric – price-to-opportunity – that terms of market value in U.S. we believe makes Net valuations more comprehensible, at least in the framework of three of the primary forces driving the new economy. The first of these is the capital markets. Today, Internet unprecedented improvement in and adoption of technology and the Internet, best companies represent a combined captured by Moore’s Law. The second force is dictated by Metcalfe’s Law. half trillion dollars out of Companies leveraging the power of the Internet, with its anytime, anywhere, $15 trillion. anyone access, have the opportunity to expand at exponential growth rates as users build. Third is the winner-take-all environment that provides disproportionate gains to category killers in their respective segments. We believe that e-knowledge enterprises that successfully leverage this opportunity and receive these outsized valuations will possess certain key characteristics: • An ability to capitalize on Metcalfe’s Law, the Network Effect; • A service based on the unique advantages of the Internet − or made possible due to the Internet − to deliver knowledge. For example, given that we learn most through highly interactive experiences, successful companies will not simply repurpose educational content, but re-think the entire delivery of education; • A service that expands both the reach and richness of learning and human capital solutions through the Internet’s capabilities; • A business model based on recurring revenues, low customer acquisition costs or high lifetime customer value (or both), revenues from multiple sources and high gross margins; The Internet will “democratize” • A strong management team and backers, able to function at the rapid fire pace knowledge, increasing access, of the evolving Internet economy. lowering the cost and The network effect is all about rapidly building utilization by the delivery of improving the quality. highly relevant content and services to accessible markets.

An Instant History of the Internet Business:

1996: Great profits propheted 1999: Great prophets profit 2003: The great profit, greatly

– Po Bronson, author

15 The Knowledge Web – 23 May 2000

e-Knowledge Network Effect

E-Knowledge Network Effect

Users Content & Services

*OREDO /HDUQLQJ &RUSRUDWLRQV &RXUVHV

.QRZOHGJH -REV5HFUXLWLQJ :RUNHUV E-Knowledge 6FKRROV Enterprises $VVHVVPHQW 7HDFKHUV

&ULWLFDO 6WXGHQWV ,QIRUPDWLRQ 3DUHQWV

Source: Merrill Lynch Global Growth Group

The correlation between the productivity of a company’s intangible assets – its intellectual and human capital – and the need to pay those assets a competitive wage is clearly illustrated by the close relationship between rising price-to-book ratios and the rising income gap. The market perceives the value of human capital, assigning significantly greater value to knowledge workers than others. The Internet is all about The Internet is all about disproportionate gains to the winners in each category. disproportionate gains to the For example, the five largest Internet companies ranked by market cap account for winners in each category. The nearly 50% of the half trillion dollars of total Internet-company market capitalization. The ten largest Internet companies account for 62%. Clearly, the five largest Internet companies market believes the Net is a “winner-take-all” playing field. ranked by market cap account for nearly 50% of the half Pre-Net, it took a company decades to reach a $1-billion market value, if it ever trillion dollars of total Internet- reached that milestone. In startling contrast, Yahoo! went public in 1996 with a market cap of $347 million, and today it is $66 billion; Amazon.com had its IPO company market capitalization. in 1997 with a market cap of $366 million, and currently its market cap is $18 billion; AOL went public in 1992 with a market cap of $62 million, and today it is at $137 billion. Internet Capital Group, with a market value today of almost $11.5 billion, did not exist five years ago.

New Economy Companies 2000E 2000E Year Value at Number of Market Cap / Market Price / Price / Founded IPO ($M) Employees Employees Cap ($B) Sales Book Yahoo! 1994 $347 1,992 $32,932,099 $65.6 63.7x 73.3x Amazon.com 1995 $366 7,600 $2,378,616 $18.1 7.0x 42.6x Priceline 1998 $2,277 373 $29,818,961 $11.1 10.4x 44.4x Ariba 1996 $983 386 $41,829,016 $16.1 92.9x 56.6x CMGI 1996 $23 1,594 $10,125,025 $16.1 21.3x 4.0x Internet Capital Group 1996 $984 70 $164,736,813 $11.5 N/A 26.5x 1994 $471 594 $13,367,778 $7.9 52.7x 32.0x America Online 1985 $62 12,100 $11,314,552 $136.9 20.3x 21.9x Average: $38,312,857 38.3x 37.6x Median: $21,593,370 21.3x 37.3x Source: FactSet, Securities Data Corp Market Cap data as of April 24, 2000

16 The Knowledge Web – 23 May 2000

Another stunning contrast between old and new economy companies is the comparison of market cap-per-employees and price-to-book ratios. New economy companies enjoy phenomenal valuations based on these metrics. Each employee at Yahoo!, for example, is “worth” nearly $33 million. Each employee at Priceline is “valued” at $30 million. On average, each employee at the leading new economy companies in the table above is worth $38 million. The best companies are in a war for talent, realizing that brainpower drives market value in the new economy. In contrast, each employee at Disney is valued at $743,530, and each employee at GM is valued at just $141,682. On average, each employee at the leading old economy companies is worth “only” $689,020, or less than 2% of employee value at the new economy companies.

Old Economy Companies Year Number of Market Cap / Market Cap 2000E 2000E Founded Employees Employees ($B) Price/Sales Price/Book General Electric 1876 340,000 $1,531,351 $520.7 5.9x 13.0x Wal-Mart 1962 910,000 $282,542 $257.1 1.4x 10.6x General Motors 1908 388,000 $141,682 $55.0 0.3x 2.7x McDonalds 1955 314,000 $154,062 $48.4 3.3x 5.1x 3M 1902 70,549 $521,355 $36.8 2.2x 5.8x Exxon Mobil 1882 120,000 $2,289,025 $274.7 1.3x 4.4x Disney 1918 120,000 $743,530 $89.2 3.6x 3.8x Phillip Morris 1854 137,000 $360,945 $49.4 0.6x 3.2x Boeing 1916 197,000 $176,687 $34.8 0.7x 3.1x In the old economy, price-to- Average: $689,020 2.1x 5.7x Median: $360,945 1.4x 4.4x book was a useful valuation Source: FactSet, Securities Data Corp metric, as it was physical Market Cap data as of April 24, 2000 capital that companies leveraged into earnings power. In the old economy, price-to-book was a useful valuation metric, as it was physical What matters in the new capital that companies leveraged into earnings power. What matters in the new economy, however, is human economy, however, is human capital. capital. “WE ARE IN A GREAT WAR FOR TALENT. Century 21: Age of the Great War for Talent. Talent = Wealth. Period. It’s the word – according to Tony Blair. And Cisco CEO John Chambers. He is in the talent acquisition mode. ALL THE TIME. Says he buys companies – typically start-ups – to get the best talent at a price of $2 million or so per employee. Just like the NBA! The Blair-Chambers dogma will rule! Talent is a fabulous word – a million miles from employee.” —Tom Peters, Forbes ASAP, February 21, 2000

In 1980, the price-to-book of the ten largest companies in the U.S. was 1.2x. Today, the price-to-book is 12.1x, or 10x greater. One could argue that this is a clear sign of a wildly inflated equity market; we believe, however, that it’s more reflective of the fact that, in the knowledge economy, the key asset driving corporate value is intangible: Intellectual and human capital. These stark contrasts are summarized in the following table.

Two Different Worlds Old Economy Co.’s New Economy Co.’s Market Cap/Employee $689,020 $38,312,857 Price/Sales 2.1x 38.3x Price/Book 5.7x 37.6x Source: FactSet, Securities Data Corp Market Cap data as of April 24, 2000 17 The Knowledge Web – 23 May 2000

The correlation between the productivity of a company’s intangible assets – its intellectual and human capital – and the need to pay those assets a competitive wage is clearly illustrated by the close relationship between rising price-to-book ratios and the rising income gap. The market also perceives the value of human capital, assigning significantly greater value to knowledge workers than others.

Human Capital is Replacing Physical Capital as the Primary Productive Asset

Salary Gap Between High School and College Graduates Median Price-to-Book for 10 Largest Companies

111% 12.1x 120% 14.0x

100% 12.0x 10.0x 80% 50% 8.0x 60% 6.0x 40% 4.0x 1.2x

20% 2.0x

0% 0.0x 1980 2000 1980 2000

Source: U.S. Census Bureau, Compustat, Merrill Lynch Global Growth Group

n Evaluating the Valuations The speed at which market value has been created and the valuations associated with many Internet companies (i.e., 20x price to sales for a leading Internet company is fairly normal, versus 20x earnings in the Old Economy as represented by the Dow Jones Industrials) are unparalleled in history. Many market pundits call this “a bubble ready to burst,” speculating that perhaps 75% of today’s public Internet companies will be out of business in five years. While we are in the camp that agrees that there is speculative excess reflected in the market valuations of many Internet companies (with a corresponding obliteration of capital being a reality if business performance does not pan out), we also believe that changes in the global marketplace are unprecedented in speed, scope and significance. The resultant opportunities are extraordinary, in our opinion. To put some figures behind this powerful tailwind to the Internet economy, business-to-consumer (B2C) Internet opportunities are expected to grow at a 55% CAGR from $31 billion in 1999 to $274 billion in 2004. Business-to- business (B2B) activity is projected to dwarf this total, rising from $80 billion to $2 trillion during the same period, a 91% CAGR.

“To swim a fast hundred meters, it’s better to swim with the tide than to work on your stroke.” — Warren Buffett

18 The Knowledge Web – 23 May 2000

e-Commerce Projected to Explode

Worldwide B2C e-Commerce Worldwide B2B e-Commerce

$300 $274 $2,500 $2,027 $250 % $2,000 55 1% $200 $178 9 $1,500 AGR GR $1,140 $150 C $116 A $1,000 C ($ B illio n s) ($ B illio n s) $617 $100 $78 $51 $320 $31 $500 $50 $15 $167 $35 $80

$0 $0 1998 1999E 2000E 2001E 2002E 2003E 2004E 1998 1999E 2000E 2001E 2002E 2003E 2004E

Source: Merrill Lynch, IDC, Forrester Research, Jupiter Communications

Due to the unique disproportionate advantages a leading Internet company has in its category as a result of the network effect, operating leverage, global reach and viral growth, the valuation metrics used to determine current share price are necessarily different. However, these valuations ultimately reflect how all companies are valued by discounting future cash flow to the present. Hence, in the same way that growth companies are based on “futures,” the most appropriate metric for evaluating a dominant Internet company, in our opinion, is price-to- opportunity rather than the conventional metrics of price-to-earnings or the newer The most appropriate metric for – but too simplistic – price-to-sales. evaluating a dominant Internet company is price-to-opportunity. “In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well.”

– J. Kenfield Morley, Some Things I Believe In a simplified top-down analysis of an old economy company, investors look at both the size and growth rate of the industry in question, as well as the company’s market share and operating margin. They then calculate a future earnings stream based on their assumptions and discount it back to the present using an appropriate risk-adjusted rate, thus deriving the company’s theoretical market value.

New View of Human Capital and Learning in Our Knowledge-Based Economy Old Economy New Economy Wages Ownership/Options Four-Year Degree Forty-Year Degree Learning As Cost Center Learning as #1 Source of Competitive Advantage Help Wanted Talent Needed Learner Mobility Content Mobility In the new economy, education Distance Education Distributed Learning has become critical for both Resume Competence individuals and employers. Employee Talent Physical Capital Human Capital One-Size Fits All Tailored Programs Geographic Institutions Brand Name Universities & Celebrity Professors Just-in-Case Just-in-Time Source: Merrill Lynch Global Growth Group

19 The Knowledge Web – 23 May 2000

The Internet alters this analysis, ultimately leading to a theoretical market value based on the size of the opportunity. Here, investors calculate the size of the industry and estimate its growth based on industry factors, as well as account for the growth of the Internet – the “Net Effect” – which is a powerful megatrend cutting across all industries. A primary “Net effect” is disintermediation – the virtual elimination of time and distance between buyer and seller. Coupled with disintermediation is a tremendous opportunity for scalability, where one company can seize control of a market in less time than ever before. Both of these forces are rocket-fueled by the network effect, as dictated by Metcalfe’s Law, inherent in some Internet companies’ business models. Combined, these three “Net effects” – disintermediation, scalability and the network effect – create a winner-take-all competitive environment in which speed kills.

“Speed is God, and time is the devil.” – Silicon Valley saying

Net/e-Commerce Market Caps In this environment, gross margin becomes an even more important metric, as the Market Value ($mm)* Net affords tremendous operating leverage to the winner. All this leads to the size B2C of the opportunity, discounted back to today, from which current valuations can be Access $156,619 applied. Hence, “the new new thing” in many respects is “the old old thing,” the Content $122,879 value of an enterprise is its future cash flow discounted back to the present. Commerce $62,976 Total B2C $342,474 The outsized nature of a category killer’s market share opportunity creates a Infrastructure $114,261 winner-take-all environment on the Internet. The global reach afforded by the B2B $40,713 Net, coupled with the viral potency of Metcalfe’s Law, fuels the race to market Total: $497,448 dominance at speeds never seen before. Source: Factset and Merrill Lynch Internet Research * Data as of April 25, 2000 “Price to Opportunity” is the Appropriate Valuation Metric on the Internet Old Economy New Economy Valuation Metric: Valuation Metric: Price/EPS or Price/Book Price to Opportunity

Size of Industry Size of Industry

Growth Rate of Growth Rate of Industry Industry & Internet Disintermediated: “The new new thing” in many Market Share Winner Take All respects is “the old old thing,” the value of an enterprise is its future cash flow discounted Operating Margin Gross Margin Based on Opportunity back to the present. Discount Rate Discounted at 35% Future Earnings Size of Opportunity Back to Today Stream Discounted Discounted to Today

Market Value Market Value

Source: Merrill Lynch Global Growth Group

20 The Knowledge Web – 23 May 2000

We have already seen this valuation metric applied to category killers on the Internet, which enjoy premium multiples vis-à-vis their trailing competitors. Yahoo!, for example, is priced at 59x its 2000 sales estimate, or at a 474% premium to other aggregators/portals. Likewise, EBay is priced at 48x 2000 estimated sales, or at a 1425% premium to its peers.

The Internet is All About Disproportionate Gains to the Leaders Leader’s Leader’s Price/2000E Premium to Category Leader(s) Comparables Sales Comps Online Aggregators/Portals Yahoo! Goto.com, Lycos, .com, theglobe.com, women.com 58.9x 474% Online Service Providers AOL Juno, Earthlink/Mindspring, Prodigy, Concentric Network, @Home 13.6x 294% Technology Vortals CNET Intraware, pcOrder 11.0x 191% Healthcare Vortals Dr. Koop 8.7x 505% Internet Software Ariba Net Object, Net Perceptions, Sterling Commerce, Backweb, Marimba 83.5x 598% Commerce – Principal Model Amazon, Priceline Barnesandnoble.com, beyond.com, Cdnow, , Egghead, 7.3x 1405% Onsale, Value America, uBid Commerce – Agent Model EBay Autobytel.com, Autoweb.com, Cheap Tickets, Preview Travel, Rowecom, 48.0x 1425% Ticketmaster Online-City Search, Tickets.com Source: Merrill Lynch Global Growth Group

“We are drowning in information and starving for knowledge.” — Rutherford D. Rogers

21 The Knowledge Web – 23 May 2000

3. The Four P’s To try to determine which Internet knowledge enterprises will be the category killers in their respective areas, we have created an analytical and conceptual framework, starting with the Four P’s, to evaluate attractiveness. This framework reflects our belief that there are certain key fundamentals critical to identifying the premier e-knowledge enterprise companies. To this end, we focus on four principles of growth stock investing, which we call the Four P’s: People, Product, Potential and Predictability.

People More than half of our More than half of our investment focus is on the people running the business. investment focus is on the There is no shortage of interesting business ideas, particularly on the Internet people running the business. where barriers to entry have been considerably reduced. Therefore, the ability to execute is the key. Obviously, no Internet company has a long history, but their management teams or advisors usually do. changed its business model four times in four years and still wound up a phenomenal success. The reason, in our view, was extraordinary leadership able to adjust on the fly at Internet speed and make the right decisions. Whether in a country, a company or even a sports team, one “world-class” individual with vision and leadership skills often makes the difference. Amazon.com, Yahoo!, Starbucks, AOL, EDS and Wal-Mart are but a few examples of the truly great business success stories that were largely the result of the dreams, skills and leadership of one entrepreneur: , Tim Koogle/, Howard Schultz, Steve Case, Ross Perot and Sam Walton, respectively.

“The thing that has constrained us for the last fours years has always been people bandwidth. Just having enough smart, hard-working, talented, passionate people to execute against our vision.” – Jeff Bezos, CEO, Amazon.com

The premium placed on strong management is greater in the New Economy than ever before, while the evaluation of management has increased in complexity. We believe the new economy “Kingmakers” can provide a beacon to investors seeking We search for companies strong management teams. As discussed later in this report, Kingmakers are holding leadership positions powerful partners who can lend credibility, experience and relationships to within the segments of the e- netrepreneurs. Potential Kingmakers include venture capital firms, Wall Street knowledge enterprise industry, investment banks, management consulting firms and other enterprise-wide proprietary products, services, relationship managers, technology companies, partners and customers. The technology or niches that set support of these constituencies can make or break the future of an Internet them apart from the knowledge enterprise. competition or, better yet, “one- of-a-kind” businesses that have Product no real competition. There are Internet companies, and there is an Internet economy, but the Internet is not an industry. It’s a megatrend that cuts across all industries. We search for companies holding leadership positions within the segments of the e-knowledge enterprise industry, proprietary products, services, technology or niches that set them apart from the competition or, better yet, “one-of-a-kind” businesses that have no real competition.

22 The Knowledge Web – 23 May 2000

Having a “claim to fame” is critical to us because we believe that the Internet does not allow for “me, too” companies to be relevant for very long. We also look for companies that leverage the full power of the Internet, which are often “born on the web” companies built with the Internet in mind as a growth platform. We further believe that significant opportunities exist for “clicks and bricks” companies if they can operate with the mindset and speed of an Internet company and also leverage the assets of their historical business. Leading New Economy venture investors such as Accel Partners, Benchmark Capital and Kleiner, Perkins have seen this opportunity and made significant investments to leverage offline Favorite Bookmarks of James W. assets online. Breyer, Managing Partner, Accel Partners In today’s world of innovation supernovas, big-bang-business ideas and speed-of- www.take5.real.com – RealNetworks light information flow, we need a telescope to measure the future potential and www.cybertimes.com – New York Times new growth perspectives to project the rate at which these universes will expand. www.economist.com Our philosophy of trying to identify the ultimate winners may cost us some short- www.amazon.com term opportunities because we ignore companies that temporarily are in a vogue www.myyahoo.com space. Net Darwinism, however, shows that only the fittest ultimately survive, and we want to invest in companies that not only survive, but will also thrive during their corporate evolution. To determine if a company has a leadership position in its space and really has a “claim to fame,” we analyze various metrics. These metrics serve as both measurements to market position as well as “signs on the highway” to help correlate critical milestones for success. The key metric, which is driven by many of these other metrics, is the Network Effect. Once the Network Effect kicks in, market leadership is magnified, as are barriers to competition.

In today’s world of innovation Internet Human Capital Solutions Company Scorecard supernovas, big-bang-business Rule Explanation Importance ideas and speed-of-light Metcalfe’s Law: Each new member, supplier, and user of the network adds 20 information flow, we need a The Network Effect exponential value. telescope to measure the future Viral Growth Creating grassroots, must-use, infectious applications is 10 potential and new growth essential to being the leader. perspectives to project the rate New Rules Throw out the old ones: think differently, your competitor is 10 at which these universes will your partner; make more by giving it away; business is 24/7. expand. Customer Acquisition Cost Obtaining users of the network balanced against lifetime value 10 & Lifetime Value of that user. Speed On the Internet, being first is key. Old economy: turning 10 business around like a battleship. New economy: need to be able to turn like a jet ski. Brainpower The enterprise with the smartest people wins. 10 One Market (Reach) Time, space and distance are eliminated; think one economy, 10 one market. Brand is Key In a just-in-time world, brands are a shortcut and provide an 10 assurance. Brands are everything in the e-Knowledge space and the Internet. Power of Free In the land grab to establish leadership, “free” is a potent 5 In the old economy, turning a motivator. business around is like turning Click, Click, Click versus The Internet is quick, interactive and collaborative. Creating 5 a battleship. In the new Read, Read, Read an offering tailored to the Internet is key. Just reading a bunch of text or a book online doesn’t work. economy, one needs to be able Total: 100 to turn it like a jet ski. Source: Merrill Lynch Global Growth Group

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Potential We want to find companies with a meaningful market potential – smaller companies that can become big ones. “Open-ended” growth stories with long legs, where there is no real limit to how big a company could become, are especially attractive to us. On the Net, it’s winner-take-all, exponentially increasing the potential of growth companies. Potential has been scaled upward, leading to astronomical valuations based on traditional pricing metrics, but which are more understandable when viewed in the context of the aforementioned price-to-opportunity metric.

“I skate to where the puck is going to be, not where it has been.” – Wayne Gretzky

The core of e-Knowledge, the In The Book of Knowledge, we identified six key megatrends that propelled the Internet, will “democratize” knowledge services market forward. Demographics, the Internet and technology, learning, providing greater globalization, consolidation, branding and outsourcing are having a significant access at lower cost, ultimately impact on how and why we gain knowledge. These same megatrends are at work improving quality. in the e-knowledge market, creating a powerful tailwind for growth. Six Megatrends Impacting the Knowledge Enterprises Market

C

o

n

s o

l t i e d n a r t e i B o t n n r I a n d i s ng ic ph ra og em D

e-Knowledge Globalization Enterprise Outsourcing

Source: Merrill Lynch Global Growth Group

• Internet – The core of e-Knowledge, the Internet, will “democratize” learning, providing greater access at lower cost, ultimately improving quality. Ubiquitous PCs combined with high-speed bandwidth will facilitate engaging anytime, anywhere learning and human capital management. Online learning should become the new "killer application" for the Internet, providing attractive growth potential for e-knowledge enterprises that can effectively marry learning, technology and electronic commerce. Today’s kids are the Internet • Generation – Generation i – Demographics –In today’s knowledge-based economy, the pay gap between those with a college education and those without has more than doubled in the and are as comfortable on a last 20 years. Put another way, the purchasing power of a 30-year-old man computer as a bicycle. with a high-school diploma has dropped by over one-third over the past two decades. Lifelong learning is now required for economic longevity, and the successful e-knowledge enterprise will provide individuals with the ability to gain the skills necessary to survive and thrive in the New Economy. Today’s kids are the Internet Generation – Generation i – and are as comfortable on a computer as a bicycle. Each demographic group, from Generation i to the early retirees of the Baby Boom, will experience a growing economic need to continue to access education throughout a lifetime. 24 The Knowledge Web – 23 May 2000

• Globalization – Approximately 30% of S&P 500 revenue comes from outside of the United States. The Internet creates one market and one economy. In today’s global knowledge-based economy, corporations need consistent, multi-lingual learning resources that are accessible anywhere, anytime. The successful e-knowledge enterprise will provide employees and individuals with quality education and skills that are universally relevant and accessible regardless of their time zone, uniquely combining richness and reach. Less directly, but perhaps more important for the U.S worker, is the fact that globalization has enabled economic specialization like never before. For the workers of developed nations, this has further heightened the need for continuous lifetime learning. The Internet creates one market • Branding – Brands are key to both the Internet and Knowledge Enterprises. and one economy. The winners in the space will build strong brand names known for unique state-of-the art learning experiences where individuals can access first rate content in an engaging, interactive virtual environment conveniently from the home or the desktop. Established brands – those of prestigious universities, for example – will find both potential in and a challenge from the Internet.

“The most valuable Web brands – including Yahoo!, Amazon.com, and E*Trade – are not product brands. They are brands for a complex set of services – solutions – that help people cut through the clutter and perform a series of tasks.” —Evan I. Schwartz Digital Darwinism

• Outsourcing – In today’s fast-changing market environment, the corporate incentive is to focus on core competencies and outsource everything else. Application service providers (ASPs) represent classic outsourcing and are expected to enjoy explosive growth. Customers trade the headache and cost of purchasing software and hardware, dealing with implementation and obsolescence risk and managing internal IT for a single contract and a flat monthly fee. ASPs providing corporations with highly scalable human capital A company’s ability to management services are likely to benefit from the critical solutions they “communitize” and then provide and an efficient business model. “monetize” users to maximize • Consolidation – While consolidation used to be the hallmark of a mature lifetime value is particularly industry, this is no longer the case, particularly in technology, where small critical in determining the start-up companies are acquired for their technology and, as important, for potential for that enterprise. their talented people. Acquiring a competitor is often faster and easier than hiring and training scarce computer programmers, sales people and leaders. Being a net consolidator, an acquiror can add value-enhancing features to its network, aggregate complementary communities and accelerate the network effect. As niche players find it difficult to access or re-access the capital markets, more consolidation should occur. A company’s ability to “communitize” and then “monetize” users to maximize lifetime value is particularly critical in determining the potential for that enterprise. We look for high gross and long-term operating margins. These are indicators of the strength of the business model and correlate to the price-to-sales multiples investors are willing to pay. In general, the higher the gross and operating margins, the higher the price-to-sales multiples.

25 The Knowledge Web – 23 May 2000

Correlation Between Revenue Multiple and Gross Margin

110x ARBA

100x

INKT 90x

YHOO 80x

70x

60x EBAY SWCM 50x WEBM BVSN VIGN 40x 2001 Revenue Multiple 2001 Revenue 30x SCNT AOL 20x BWAY VIAN 10x CMDX PCLN AMZN WBVN RAZF 0x 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Gross Margin

Source: Merrill Lynch Global Growth Group

Predictability We look for companies with a robust revenue stream driven by subscriptions, software or technology licenses, advertising, e-commerce, services or, preferably, a combination of all five. Specifically, we like to see predictable and growing Historically, great growth streams of recurring revenue and visible business models that ensure attractive stocks, in general, and Internet operating margins. stocks, in particular, look Sustainable competitive advantages, including barriers to entry, economies of expensive to start and become scale and scope, an industry leadership position and proprietary technology and even more expensive over time. content, are the keys to predictable success. The ability to exploit the network Conversely, mediocre growth effect is usually a sure way to capture the leadership position in a space. Support and Internet stocks generally from strategic partners, customers and financial backers is usually critical to start relatively inexpensive and success, as well. The right combination of visibility, scalability and profitability leads to a superior business model which corresponds to outsized usually get less expensive. valuation of leaders in the e-knowledge enterprise space. Given the nascent stage of the e-knowledge market, determining the fifth P, Price, or what the correct valuation should be, is challenging. Valuations have been and will likely in the near term to continue to be driven by the size of the market opportunity, demand imbalance for stock, sequential growth and sentiment. Historically, great growth stocks, in general, and Internet stocks, in particular, look expensive to start and become even more expensive over time. Conversely, mediocre growth and Internet stocks generally start relatively inexpensive and usually get less expensive. Hence, it is our belief that if we find a premier e-knowledge enterprise that truly has P’s one through four, the best advice is to take a deep breath, close your eyes and hold on for the ride.

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The Knowledge Web: Unleashing the Killer App

$2 Trillion+ Global Knowledge Market Moore’s Metcalfe’s Law Law The Human Capital Drives The Network Effect Valuation Transistors per Microprocessor

Utility e-Knowledge Talent = Wealth +=+ Processing Power Enterprise 4% Unemployment Opportunity Rapid Skills Obsolescence Time Users

Source: Merrill Lynch Global Growth Group

27 The Knowledge Web – 23 May 2000

Conversation with Gary Becker: Development of Human Capital and the Internet February 21, 2000 Gary Becker was awarded the 1992 Nobel Prize in Economics for his work in human capital theory and the application of economics to crime and punishment and other innovations in labor economics. He is currently a Professor at The University of Chicago (in both Economics and Sociology) and is a regular columnist for Business Week magazine. He also serves as a member of UNext.com’s Board of Directors. Recently, we had the privilege of speaking with Mr. Becker about the knowledge-based economy and the profound impact the Internet has on the development of human capital.

Michael Moe: You published your first work on human capital in the early 1960’s. Since that time the importance of human capital and the value of education have only become more pronounced. What are some of the observations you could make today about human capital, the knowledge economy and some of the trends that we’re seeing, as well as the importance of education and the statistics behind that?

Gary Becker: Right. Well throughout the 20th century, human capital has been important. By human capital, I mean the knowledge and skills that men and women acquire through education, on the job training or other types of schools and other types of learning. It can take many different forms. In previous centuries, economies were based on manpower, strength, some machinery but not really so systematically on knowledge.

That changed in this century and has especially become more and more prominent, I would say, in the last 25 years. One objective measure of that is the earnings advantage of higher education, a college education in the United States compared to say, a high school education. That gap on the average for the typical college and high school graduates was about 40% as early 1970’s. It actually was stationary for a while in 1970 and has really exploded in the last 25 years.

So the gap between a typical high school graduate and college graduate now is more like 70-75% rather than 40%. There has been an enormous increase and the obvious explanation for that has been that while you’ve noticed the supply of higher educated people was growing in the United States, the demand for people with skills has been growing even faster. So the earnings advantage of this scarce resource namely, educated knowledge, has become greater and greater.

That’s the most dramatic feature but it shows up in other ways as well: more skilled people on the job; their earnings advantage increasing relative to less skilled people; and a recognition by people that education is more valuable. A larger fraction of both men and women, of different races and ethnic groups, has been continuing onto higher education since the early 1980’s, reflecting the fact that they perceive that this is more of a knowledge economy and they have to really improve their knowledge base.

MM: What do you predict looking out over the next 10 to 20 years in terms of the pay gap and the importance of knowledge and education?

GB: Well, I think there is no evidence that the importance of education is going to decline over this period. If anything, it’s going to continue to increase. What happens to the pay gap really depends on how rapidly the supply of educated people increases compared to demand. If we get a rapid increase in supply, that will prevent the pay gap from increasing much if at all.

On the other hand, if it increases only slowly, I anticipate we’ll still see a somewhat slower increase than we had in the 80’s and 90’s but some further increase.

MM: What do you see the Internet’s impact being in terms of increasing the access to education?

GB: Well, the basic process of teaching has not changed for over 2000 years. We’ve had, up until the growth of the Internet, teachers standing up in front of a bunch of students and lecturing to them with some give and take.

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The Internet has the potential to be the first major change in this process since Socrates, I believe. What it means is that somebody can be in their office or at their home tuning into an instruction, having a give-and-take with the instructor.

The instructor would give feedback and answers tailored to the individual. Even though they were at a distance and they are not physically interacting with their fellow students, they can interact with them through the Internet, through chat rooms and the like. This provides the possibility, which is becoming an actuality of enormous increase, in the flexibility of the access to, not only higher education, but to retraining and additional investment in one’s human capital. People can do that without having to go on-site to some learning center, which may be far removed or difficult for them to get to from either their home or workplace.

Therefore, it economizes on their time. It adds greatly to their flexibility – when they can acquire this knowledge. I think it’s going to have great potential, particularly with education of workers and other adults and also for people who want to obtain a higher education degree. Also, I believe it already is filtering down to a much greater use to K-12 education, as well.

MM: What kind of global impact will this have?

GB: Well, it means, for example, that I could be giving a course in economics and my students could be in Singapore, Zimbabwe, Buenos Aires, Barcelona, as well as in the United States. So once you go to the Internet, you’re no longer constrained by physical presence. Your market is the globe.

These students also have flexibility. They can be taking a degree offered at the University of Chicago with some courses taught at Stanford and other courses taught at Columbia put together for their own degree as subject to, of course, the approval of these institutions. So it’s going to give both the teacher access to an enormous market and the students much access to a variety to teachers who are not constrained to be at one particular institution.

MM: We talk about some of the advantages that the Internet brings. What are some of the major disadvantages of the Internet that need to be solved to really create a value added-learning experience?

GB: Well, there are several, and some of them we’ll find out more about as we proceed further. One obvious one that people always bring up is the fact that there is clearly some advantage to direct physical interaction with instructor and students. That is the challenge to the Internet. I don’t think there will ever be a perfect substitute for that, but the challenge is to try to reduce the disparity by having more direct interaction, not only through video, direct access with instructors and possibly with other students, but also with ease of communication. This way, students don’t feel that they are sitting isolated in front of a computer. They feel they are really part of a class, maybe a class that extends around the world, but a class where they can directly communicate with other students and with their instructor.

MM: You look at the opportunity for UNext and obviously the potential is very exciting. What is your exact involvement with UNext and what do you see the opportunity for it to be?

GB: I’ve been involved from the beginning in the formation of the company. The major person has been of course, Andy Rosenfield, but I’ve been one of the people involved. I’m on the board now of the company. I’ve made some presentations on behalf of the company. So they have me on a video and here and there on some things but I haven’t prepared a course or anything for the company. That may come in the future.

I think there is an enormous potential for UNext and for profit-making. UNext’s market will be two-fold. I think the first and major part in the beginning certainly will be through companies; employees of companies who sign up with UNext for instruction in a particular type of, say, finance, maybe in options markets or cost accounting or whatever it may be.

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Ultimately, the hope is that UNext will also be dealing with individuals. For this we have a university. So we hope to be and expect to be a degree granting institution that people, maybe starting out with companies taking these courses, can use toward a bachelors or a masters degree.

MM: What are some things that need to happen for UNext to realize its enormous opportunity?

GB: Well, two things mainly. One is to get a bigger portfolio of courses that we have to offer. As we learn more, and as we are in this business longer, we are trying out these courses, but the feedback that we will get from the early courses will be enormous in helping us to restructure and to better meet the individual needs of different students in the same course. Certainly, getting a larger portfolio of courses would be very important.

The second thing is essentially that most on-the-job-training or company-sponsored training is clearly taking place on-site at the company. A little bit has taken place through companies financing high level employees to go get MBA degrees and executive training programs and the like. What they have to be convinced of is that there are great advantages for them not to be directly involved in providing their own courses [for the remaining majority of employees] but to contract out a much larger fraction of them to a company like UNext who can, by specializing in it, provide much greater talent. Affiliation with major universities can do a much better job in providing access to their employees, in particular, by having their employees do most of this study over the Internet so that they can economize on how much lost work-time they incur.

I think this is a selling job that we have already started to do, and I think this will be an obstacle to get companies thinking along these lines. If we can overcome that obstacle, I think we are well on our way.

MM: My last question, I think you’ve talked about, but how important do you think the Internet is going to be for the advancement of and the importance of human capital?

GB: I think it’s going to be extremely important as you take a long-run perspective. I think its main challenge, let’s say at the university levels, is not going to be to the Chicagos, the Stanfords, the Harvards, the Yales, the Columbias and other top schools. We have 3,000 colleges and universities [in this country], and I think the Internet will be a very effective and very tough combination for the middle and lower tier schools. So, I think that’s one direction it’s going to spread.

The second role of the Internet, which may turn out to be even more important, would be in a knowledge economy. You don’t finish your learning when you graduate from high school or even from an university, or get an advanced degree, an MBA or Ph.D. It’s a lifelong process. Nothing is going to rival the effectiveness, the cost-effectiveness in terms of saving people’s time, for this means of continuing the learning process of individuals, through the Internet. I think it’s going to capture a good share of that market and a significant share of the education market at lower levels.

MM: Any other comments you’d like to leave?

GB: I’m an enthusiast obviously. I’ve not only worked in the area of human capital, I’ve taught for 40 years. So, for me personally to see these two interests come together – teaching and the importance of human capital – by a new technological medium, namely the Internet, is really a fantastic opportunity aside from my involvement with UNext. I’m really optimistic not only about UNext but with many other companies that will eventually be quite successful at taking advantage of the fact that we are in a knowledge-based economy. People have to continue to learn. Some of it will continue to go on on-site, but with the new technology available there is no reason why we have to any longer think that most of it be on-site rather than through this medium.

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4. Mind Over Matter: Human Capital in the Knowledge Economy Throughout history, whether in pre-industrial or industrial times, great nations developed based on their access to physical resources or their ability to surmount physical barriers: England and Spain crossed the oceans, Germany turned coal and The advent of the personal iron into steel, and the United States exploited a wealth of agricultural and computer, the Internet and the industrial resources to become the world’s breadbasket and industrial superpower. electronic delivery of The advent of the personal computer, the Internet and the electronic delivery of information have transformed information have transformed the world from a manufacturing, physically-based the world from a economy to an electronic, knowledge-based economy. Whereas the resources of manufacturing, physically- the physically-based economy are coal, oil and steel, the resources of the new, based economy to an electronic, knowledge-based economy are brainpower and the ability to acquire, deliver and process information effectively. knowledge-based economy.

“We spend all our time on people. The day we screw up the people thing, this company is over.” — Jack Welch

With some of the greatest developments in new technologies arriving late in the 20th century, widespread optimism surrounding the 21st century has yielded futurists predicting a period of rapid growth at the magnitude of the industrial revolution, if not greater, with the advent of the knowledge-based economy. In this new economy, knowledge workers form the cornerstones of successful businesses, emerging industries and economic growth. In this new environment, however, the labor force is presented with an unprecedented challenge as it must now gain and continuously upgrade its skills. Companies are increasing R&D expenditures, and employees must continue to “upgrade” their skills in order to keep pace with the innovation. Case in point, the number of patents being issued in the United States is almost twice the amount granted only ten years ago, and the pace of patent applications is accelerating.

Patent Applications & Grants in the U.S. (000s) In this “new economy,” knowledge workers form the 300 cornerstones of successful businesses, emerging industries 250 and economic growth. In this new environment, the labor 200 force is presented with an unprecedented challenge as it 150 must now gain and continuously upgrade its skills. 100

50

0

4 998 1978 1980 1982 198 1986 1988 1990 1992 1994 1996 1 Applications Granted

Source: The Economist

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While the future possibilities of the knowledge economy look both exciting and, at the same time, daunting, we believe the transformation to a knowledge economy is already evident. • Most striking—the dramatic pay gap between those with education and those without has more than doubled in less than 20 years. • Also significant—our analysis illustrating a seismic shift in how the market values companies, discounting traditional analysis of earnings derived from physical capital and replacing it with analysis of earnings power derived from human capital. In today’s economy, companies’ earnings power rises due to • Finally, the structural economic changes that have occurred mean that returns on human capital. new jobs being created are service and skill-based jobs rather than Companies, in turn, are manufacturing jobs. rewarding employees with their “productivity wages”, or risk Growing Pay Gap Rewards Knowledge Workers losing them to competitors. In today’s economy, companies’ earnings power rises due to returns on human capital. Companies, in turn, must reward employees with their “productivity wages” or risk losing them to competitors. The result is that the earnings power of knowledge employees rises in the job market. Those without the necessary education, however, do not reap similar rewards. Accordingly, we have seen the income gap between those with a bachelor’s or higher degree and those with just a high school education widen significantly, and we expect this trend to continue as long as the marketplace continues to reward knowledge-intensive companies.

Widening Pay Gap Between High School and College Graduates

111%

120%

100% 80% 50% In 1980, the pay difference 60% between someone who had a 40% high school education and a 20% college education was 50%. 0% Today it is over 100% and 1980 1998 growing.

Source: 1980: U.S. Census Bureau 1998: ML Global Growth Group Research

Moreover, the computer is replacing many “left brain” task-oriented jobs, as it performs these functions faster, cheaper and better. A significant challenge and opportunity is the necessity to create knowledge workers from today’s existing labor pool.

“Capital is accessible, and smart strategies can simply be copied. The half- life of technology is growing shorter all the time. For many companies today, talented people are the prime source of competitive advantage.” — Ed Michaels, Director, McKinsey & Co.

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Recognition of Human Capital Driving Market Valuations of Knowledge Enterprises Growth companies today are dependent on human capital. Those companies that have created growth by leveraging their “off balance sheet” human capital assets have, in turn, seen their share prices rewarded with higher valuations. It is illustrative to look at valuations of the largest ten companies in the old economy and compare them with the largest ten companies in the new economy.

Those companies that have Human Capital is Replacing Physical Capital as the Primary Productive Asset created growth by leveraging their “off balance sheet” 10 Largest Companies by Market Capitalization Median Price-to-Book human capital assets have, in 13x 12.1x turn, seen their share prices Top 10 - 1980 Top 10 - 2000 rewarded with higher 11x 1. IBM (2.4x) 1. General Electric (12.5x) valuations. 2. AT&T (0.7x) 2. Cisco Systems (29.2x) 3. Exxon (1.4x) 3. Intel (13.4x) 4. Schlumberger (6.9x) 4. Microsoft (12.6x) 9x 5. Mobil (1.3x) 5. WalMart (11.6x) 6. Chevron (1.5x) 6. Exxon Mobil (4.3x) 7. Atlantic Richfield (2.1x) 7. AT&T Corp (3.1x) 8. Oracle (64.2x) 7x 8. General Electric (1.7x) 9. General Motors (0.8x) 9. Citigroup (4.5x) 10. Royal Dutch Petroleum (0.8x) 10. IBM (10.5x)

5x

3x

1.2x 1x 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Source: Compustat, Merrill Lynch Global Growth Group

In the old economy, price-to-book was a useful valuation measure, as it was physical capital that companies leveraged into earnings power. What matters in the new economy, however, is human capital. In 1980, the price-to-book of the largest companies in the U.S. was 1.2x. Today the price-to-book is 12.1x, or ten times greater.

“There is a clear relationship between the effectiveness of a company’s human capital and the creation of superior shareholder returns." — Watson Wyatt Human Capital Index Study

By 1950, 40% of the American workforce was employed in the manufacturing sector and as a Growth Jobs Are Knowledge and Service Jobs result, productivity increased During the industrial revolution, the labor force was already equipped with the fifty-fold. skills to enter into manufacturing sector employment, where the assembly line merely required the theory of work organization to be put into practice. Workers were required to do no more than perform specific tasks, and later operate specialized machinery that performed the actual work. Nonetheless, the changes that this innovation brought were enormous. By 1950, 40% of the American workforce was employed in the manufacturing sector and, as a result, productivity increased fifty-fold. Workers accrued the majority of the benefits — half in the form of sharply reduced working hours and the other half in a twenty-five-fold increase in real wages.

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Flip-Flop From Manufacturing Economy to Service Economy (% of Total Employment)

Since 1950, employment in the 45% manufacturing sector has fallen Services Manufacturing 38.9% from nearly 40% of total 40% 35.4% employment to less than 18% 35% currently, while service sector employment has risen from less 30% than 14% to more than 35%, 25%

essentially flip-flopping from 20% where it had been in 1950. 17.7% 15% 13.7%

10%

5%

0%

Source: Bureau of Labor Statistics

The rise of the knowledge worker, those succeeding the industrial worker, began 50 years ago with roots in the GI Bill, the “Management Revolution” and the rise of the services sector. Since 1950, employment in the manufacturing sector has fallen from nearly 40% of total employment to less than 18% currently, while The extensive adoption of service sector employment has risen from less than 14% to more than 35%, information technology is now essentially flip-flopping from where it had been in 1950. creating the need for a highly During this period, demands for an educated workforce grew. Increased skilled knowledge-based competition from abroad, and particularly from emerging economic regions, has economy. resulted in continued substitution in the manufacturing sector away from workers and toward technology, increasing the productivity of remaining workers. Domestically, the service sector has attracted the more highly skilled workers away from the manufacturing sector. Lower-skilled factory jobs have been absorbed by less developed countries.

“Today with the emergence of the information age, the strength of a country is based on knowledge. National greatness will arise not from our natural resources or our factories, but from our people – people with new ideas and skills.”

— Michael Milken, Fueling America’s Growth, Education, Entrepreneurship and Access to Capital

Just as gains in manufacturing productivity, greater access to higher education and an affluent middle-class fueled the transition from a manufacturing to a services- based economy, the extensive adoption of information technology is now creating the need for a highly skilled knowledge-based economy. While service sector job Knowledge jobs such as IT, growth has been growing overall, the more technology-intensive industries have health and business services, on experienced the most rapid growth. In fact, traditional services sector the other hand, are growing 3-6 employment, retail and wholesale trade, , and leisure services, times as fast as economy-wide has experienced slower job growth than the total job market. Knowledge jobs such as IT, health and business services, on the other hand, are growing 3-6 times job growth. as fast as economy-wide job growth.

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Industry Job Growth 1988-1998, CAGR

Computer & Data Processing Services 8.2% Personnel Supply Services 8.1% Management & Public Relations Services 6.8% Residential Care Services 6.2% Business Services 5.7% Social Services 4.9% Motion Pictures 4.7% Child Day Care Services 4.5% Offices & Clinics of Medical Doctors 3.8% Engineering and Management Services 3.4% Educational Services 3.2% Engineering & Architectural Services 2.1% Private Nonfarm Payrolls 1.7% The resulting demand for an Retail & Wholesale Trade 1.4% educated workforce, brought Hotels and Lodging Services 1.3% about by the pervasiveness of Finance, and Real Estate 0.9% technology in today’s Manufacturing -0.3% businesses, presents a sizeable -10% -5% 0% 5% 10% 15% challenge for today’s workers. Source: Bureau of Labor Statistics

The growth of the knowledge workforce heralds the potential for far greater opportunities for today’s workers, companies and the economy. The resulting demand for an educated workforce, however, also presents a sizeable challenge for today’s workers. With rapid technological advances and the continued proliferation of computers and the numerous applications that are required to be mastered, employers are demanding more from their current and prospective employees.

Projected Employment by Educational Level Required, 1996-2006

Postsecondary vocational training

Moderate-term on-the-job training

Long-term on-the-job training

Work experience in related occupation

Short-term on-the-job training

Master’s degree

Coming generations of workers Work experience plus bachelors or higher must accomplish far more in First professional degree terms of educational attainment and companies will have to Doctoral degree invest heavily in training if “the Associates degree greatest boom in history” is to Bachelor’s degree become a reality. All occupations

0% 5% 10% 15% 20% 25% 30%

Source: Bureau of Labor Statistics

The challenge to workers, companies and economies in realizing this practically open-ended economic growth opportunity (where we are limited only by “grey matter”, that is, brainpower) is in preparing today’s workforce for tomorrow’s jobs. Coming generations of workers must accomplish far more in terms of educational attainment, and companies will have to invest heavily in training if “the greatest boom in history” is to become a reality. As a consequence, we believe this dynamic will be accompanied by a significant growth in the knowledge services industry, creating tremendous growth opportunities for investors.

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5. The Emerging New Economy We believe the Internet will have a greater effect on the way we do business than anything we’ve seen in the past 500 years. Standing on the shoulders of the inventions of electricity, the telephone and the PC, the Internet will advance the power of the individual to a degree not seen since the invention of the printing press. The Internet – like the printing press – is a Great Democratizer. This emerging new economy represents a tectonic upheaval in our It vastly improves the access, commonwealth . . . It has its own distinct opportunities and its own new rules. quality and speed of Those who play by the new rules will prosper; those who ignore them will not. information, enabling the —Kevin Kelly individual to develop knowledge New Rules for the New Economy like never before. The Internet – like the printing press – is a Great Democratizer. It vastly improves the access, quality and speed of information, enabling the individual to develop knowledge like never before. As with any democratizing force, the Internet will propel power toward the individual, devolving it away from the institution. Technology platforms and the Internet have created tremendous opportunities for new business and education paradigms, ushering in a new economy driven by knowledge and access to information.

The Emergence of a New Economy

Technology platforms and the Old Economy New Economy Internet have created A Skill Lifelong Learning Labor vs. Management Teams tremendous opportunities for Business vs. Environment Encourage Growth new business and education Security Risk-Taking paradigms, ushering in a “New Monopolies Competition Economy” driven by knowledge Job Preservation Job Creation and access to information. Wages Ownership, Options Plant, Equipment Intellectual Property National Global Status Quo Speed, Change Standardization Custom, Choice Top-Down Distributed Hierarchical Networked Regulation Public/Private Partnerships Zero Sum Win-Win Sues Invests Standing Still Moving Ahead Source: John Doerr; Kleiner, Perkins, Caufield & Byers

Where the resources of the Where the resources of the physically based economy were coal, oil and steel, the physically based economy were resources of the new, knowledge-based economy are brainpower and the ability to coal, oil and steel, the resources effectively acquire, deliver and process information. Those who are effectively of the new, knowledge-based educated and trained will be the ones who will be able to survive economically and thrive in our global, knowledge-based economy. Those who don’t will be economy are brainpower and rendered economically obsolete. the ability to effectively acquire, deliver and process information.

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What is an “Internet Company” The Internet is a powerful force – a global “mega-trend” – affecting all commerce. It is more like the emergence of the printing press, the telephone or the computer than an industry in and of itself. In addition to commerce, the Internet should continue to change the way people communicate, research, shop, spend their leisure time and learn. A rapidly growing number of companies covering every potential nook and cranny of the business world operate primarily or exclusively on the Net, but most have an analog in the offline world. For example, Amazon.com is in many ways a To compete successfully on the Barnes & Noble or Wal-Mart in cyberspace (or at least is becoming so). AOL has Net, companies must be, above a lot of similarities to cable television, although notably a super-deluxe and highly all things, entrepreneurial to interactive cable offering. eBay is essentially an online auction house or flea the core. market without geographic boundaries. Since it’s very difficult to be all things to all people, the Internet may be a polarizing force pushing companies to either end of a spectrum and gradually eliminating companies in the middle. On one end of the spectrum will be highly focused, premium content and services, while on the other will be all- encompassing, value-priced content and service.

The Internet Metamorphosis Offline Caterpillar The Net’s Metamorphosing Characteristics Dot.com Butterfly Functions Functions Mail/Fax /Telephone/FedEx Digitization of Information/Convenience Email Junk Mail Customization/Access "One-to-one" marketing Video Rental Zero Marginal Cost, "Byte-Sized" Information Video On Demand Library Info as a Digitized, Accessible Commodity Search Engines Catalog Interactivity (online catalog)

Companies Companies Bookstores, five & dimes Anytime, Anywhere/Unlimited Selection Amazon.com Auction houses/flea markets Frictionless, Ubiquitous Commerce eBay National print newspapers Instantaneous/Information Democratizer Drudge Report Network news Interactivity/Anytime Access to Information ESPN.com, CNN.com Wall Street brokerage firms Power Devolves to the Consumer Merrill Lynch Direct, E*Trade The local newspaper Interactivity/Zero Marginal Cost Content CitySearch/Sidewalk.com Source: Merrill Lynch Global Growth Group

Corporate America Has Changed Dramatically Net companies must view While catalyzing a sea change in the way we interact with one another and change as an opportunity transact business, the Internet has at the same time caused an explosion in the instead of a threat, competition growth of a new type of company. The old rigid corporate structure is anathema in the Internet Age. To compete successfully on the Net, companies must be, above as a potential partner rather all things, entrepreneurial to the core. They must view change as an than the enemy, and the opportunity instead of a threat, competition as a potential partner rather than business plan as a work in the enemy, and the business plan as a work in progress rather than a ball and progress rather than a ball and chain limiting choices. chain limiting choices. It is interesting, but perhaps not surprising, that the changes caused by the Internet in business, communications, learning, etc., have their parallel in the corporate structure and culture of Internet companies. The Net is The Great Democratizer, devolving power from institutions to individuals. The same shift in power has occurred in many companies.

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Front-line employees are now much more empowered to make and execute decisions. They also have a much greater vested interest in the outcome of their actions since many are now compensated with stock and options, whose value is dependent on the success or failure of the business. Thus, a whole new corporate culture has evolved, and it’s not limited to Silicon Valley. Companies nationwide are more agile, employees are more involved and the pace of business has increased from a trot to a gallop. A key result of the confluence of technology and the Internet How the World Has Changed Economy is the need for better, Corporate Characteristic Traditional Brick & Mortar Dot.coms faster and smarter workers. Decision-Making Executive Suite Front Lines Org Structure Hierarchical Flat Communication Voicemail/Memo Email/Cell Phone Compensation Salary Options Employee Status Worker Owner

Attitude Risk-Averse Bungee-jumping thru corporate America Status of IT Staff Back Office/Admin Heroes Status of Management To Be Obeyed To Be Consulted Brainpower to Assigned Task Adequate Right On Target “Our competition is… …the enemy.”…a potential partner.”

Culture Dress Code Suit & Tie No nudity (except on the late shift) Diversions Company Softball Team/Gym In-house Gameroom/Kegs on Fridays Pets in the Office Against Protocol Just don't let them sleep on the pool table Business MPH Please Drive Carefully Pedal to the Metal Relationship to Others Afraid to step on toes Super-Confident/Brash Beverage of Choice Black coffee/white foam cup Triple Skinny Latte Regular Working Hours 9-to-5 9-to-5 (am-to-am) Source: Merrill Lynch Global Growth Group

A key result of the confluence of technology and the Internet Economy is the need for better, faster and smarter workers. Precisely because power has devolved to the front lines and businesses are in a state of constant change, the workforce must be more capable than in the past. At no previous time has human capital been so important, meaning finding, attracting, hiring, training and retaining knowledge workers will be mission-critical functions in the New Economy. At no previous time has human capital been so important, If you could connect your computer to a vast network of information, how meaning finding, attracting, would you use this service? hiring, training and retaining A. Gather valuable scientific information. knowledge workers will be B. Improve my education. mission-critical functions in the C. Demonstrate my complete lack of personality by spending countless hours New Economy. typing inane and often obscene sentence fragments that can be viewed by people just like me in “real time”.

If you answered “C” above, what should that service be called?

A. Computer chat. B. I’m a moron and I’ll prove it. C. Good-bye savings account. – Scott Adams The Dilbert Principle

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Five Business Models on the Internet We segment online companies into five species of business model. These divisions are useful in understanding how companies can make money on the Internet, but we emphasize that they are not mutually exclusive. A growing number of companies derive revenue from more than one of these models.

Five Business Models on the Internet Model Description 1. Access Companies that sell or provide dial-up and/or dedicated network connections or other network management services. Business models can be based on monthly fees, or can be provided for free under a contractual agreement. Free access may include free PCs for classrooms as well as connectivity and is typically covered through advertising (examples: ZapMe! Corporation in the K-12 arena and Campus Pipeline in the higher education area). 2. Content Companies that provide what you see when you go online. This includes both “portals,” which organize and provide access to content created by other companies, and “destinations,” which create specialized content (K-12 field trips, university courses, etc.). The typical business model is based on advertising, sponsorship, subscription fees and e-commerce. (examples: ClassroomConnect in the K-12 space, Pensare and UNext in the higher education area and SmartForce and Ninth House in corporate learning.) 3. Commerce Companies that sell merchandise, or facilitate the matching of buyers and sellers. The typical business model resembles that of a catalog retailer or auctioneer, although as the industry develops it will likely begin to encompass advertising as well. Commerce companies operate in business-to-consumer (B2C) and business-to-business (B2B) arenas. In e*learning, commerce is seen as an important means of covering the costs of free content and monetizing traffic, particularly in K-12 where advertising can be a sensitive issue. (examples: SmarterKids.com in the K-12 area and Textbooks.com in the higher ed. space and Saba in the corp. learning space.) 4. Software Companies that sell software that facilitates inter- or intra-enterprise communication and commerce. The typical business model is composed of software license fees, software maintenance fees, consulting services and, increasingly, software hosting and operation services. Learning information systems and training management systems are two evolving software forms. (examples: Scientific Learning in the K-12 space and Saba in the corporate learning area.) 5. Services Companies that provide a wide variety of services necessary in the online ecosystem, including hosting, application rental, transaction processing, information databasing, consulting, design and implementation. The typical business model is based on “per- click” transaction fees, time-and-materials fees or subscription fees. (examples: National Computer Systems in the K-12 area and Thomson in the corporate learning industry.) Source: Merrill Lynch Internet and Global Growth Research

Favorite Bookmarks of John Chambers, CEO of Cisco Systems, www.cisco.com – Customer satisfaction is my personal passion as well as a top company priority. The website serves as our primary interface to customers. www.nasdaq.com – This website provides latest stock price and market cap for Cisco as well as many of our competitors. www.cnnfn.com – I look here for latest and breaking financial and industry news which could potentially impact the business. www.amazon.com – I use this site for personal reasons – to order reading materials for myself and my family as well as to order gifts.

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The Human Capital Keiretsus The business “keiretsu” has proven particularly powerful in the Internet economy, with its focus on partnerships and the network effect. This model has been successfully followed by leading venture capital firms such as Kleiner, Perkins, as well as by what have become two of the ten largest Internet stocks, Internet Capital Group and CMGI. These two companies, with multi-billion dollar market capitalizations, are structured to emphasize the cross-pollination of ideas, management expertise, technological innovations and access to capital. These Internet conglomerates act as incubators and holding companies for various Internet businesses and concentrate their investments in that sector. In that both have partial or complete ownership in more than 50 companies, these publicly traded Internet keiretsus spread their exposure risk among multiple companies. The potential for the success of the business keiretsu is no less in the knowledge services industry, where content, community and commerce all converge around the critical ingredient to the New Economy – acquiring and leveraging human capital.

The Kaplan Keiretsu Kaplan, Inc., a wholly owned subsidiary of The Washington Post Company, is a provider of educational and career services for individuals, schools and businesses. Kaplan has helped transform the for-profit education industry, setting professional standards in an era of educational innovation and has broadened the global reach of educational service companies through technological advancement. The following list provides a brief description of Kaplan’s many interests in the education area:

The Kaplan Human Capital Keiretsu (a division of The Washington Post) Company Name Company Description Kaplan Test Prep and Offers online and center-based test preparation services for secondary, college, graduate, and professional school admissions Admissions Kaptest.com Offers online test preparation and admissions services for college, graduate and professional school bound students Kaplan International Provides test preparation services to international students, including TOEFL Kaplan Publishing Publishes titles in test preparation, admissions, education, career development and life skills and software for college and graduate school entrance exams

KaplanCollege.com Offers hundreds of online professional and higher education courses, certificate and degree programs for career acceleration in nine areas, including Nursing, Education, Criminal Justice, Real Estate, Legal Professions, Law, Management, General Business and Computing/Information Technology Concord School of Law The first major institution offering a Juris Doctor (JD) degree earned wholly online via state-of-the-art technology, preparing students to be on the cutting edge of 21st century law theory and practice Criminal Justice Offers courses in police work, private security, and corrections Education Offers courses that address the career goals of professional teachers with an emphasis on real-world knowledge and skill development Legal Professions Offers courses designed to help students advance their career in the legal industry such as paralegals and legal nurse consultants Nursing Offers courses to help students meet licensure requirements Real Estate Offers a selection of courses that address the career goals of residential real estate professionals Computing/IT Enables students to learn how to use today’s most popular software applications and advanced technologies, as well as acquire general computer skills General Business Offers courses in everyday business skills such as finance, business writing, customer service, etc. Management Offers courses in management, i.e. leadership skills, dealing with conflict, negotiation strategies, managing a virtual team, communication, work/life balance, interviewing and hiring and diversity training

Kaplan Professional Provides educational and training solutions to companies and individuals in the financial services, insurance, real estate, health, law, and information technology industries Dearborn Supplies educational and training solutions in financial services, insurance, real estate, health, law and information technology industries Self-Test Software Offers exam simulation software and preparation for technical certifications Perfect Access/CRN Delivers customized software education and consultation for law firms and businesses Schweser's Study Provides preparation services for the Chartered Financial Analyst (CFA) exam Program/AIAF Kaplan Professional Provides assessment, recruitment, and training for the call center industry Call Center Solutions

40 The Knowledge Web – 23 May 2000

The Kaplan Human Capital Keiretsu (a division of The Washington Post) (Continued) Company Name Company Description SCORE! Learning, Inc. SCORE! Educational SCORE!’s after school educational centers for students in grades K to 12 Centers ESCORE.com Provides educational services and customized resources for children newborn to age 18 and their families SCORE! Prep Provides in-home, one-on-one tutoring for high school academic subjects and standardized tests Harvard Project Zero Weekly Reader Corp. Instructional Fair Group kaplan.com Portal to all of Kaplan’s Internet businesses

Kaplan Ventures The investment arm of Kaplan, Inc., takes minority positions in education and career service companies including Apollo International, Jobscience, Apex Learning Inc. and Blackboard. Pearson is also a minority stakeholder in Blackboard, Inc.

BrassRing, Inc. Provides recruiting and hiring management services for businesses and individuals under several business units (listed below) BrassRing Systems Provides integrated hiring solutions that enable organizations to dramatically accelerate their hiring processes. BrassRing Systems currently offers two product lines, Express and Joboo. Express A unique blend of software and services that improves the hiring process by outsourcing resume procurement and processing Joboo Transforms a company’s recruitment web site by automatically and accurately reflecting open positions available BrassRing.com A technology and career portal, designed specifically for the high technology professional BrassRing Career Events Provides technology-oriented physical career events in North America, Canada and Europe with vertical markets in healthcare, sales/marketing and general/professional sectors BrassRing Campus Focuses on young adults with up to five years of work experience, providing a national database of entry level positions High Technology Careers The nation’s largest and most comprehensive technical recruitment publication, with a subscription base of 150,000+ and Magazine distribution of over 300,000 people nationwide, serving an audience of career-conscious technical professionals Jobs America Produces general hiring events and career fairs across the nation

41 The Knowledge Web – 23 May 2000

The Kaplan Keiretsu

% Equity stake Apollo Jobscience Int’l m Minority stake Kaplan P Partnership Ventures Apex Blackboard 100% Learning

m

Kaplan, Inc.

m Kaplan Kaplan Test, m BrassRing, Inc. Kaplan Professional Prep, & SCORE! College.com Kaplan Admission Learning Int’l Perfect BrassRing Access/ Dearborn Campus CRN Nursing SCORE! BrassRing P Concord Educational Systems Law School SCORE! Centers Schweser Kaplan Kaptest.com Prep Study SelfTest Publishing High Tech Program/ Sofware Career AIAF Express Real Estate P Criminal collegeclub.com eSCORE.com Justice Professional Newsweek P Call Center Solutions Jobs Alloy Online P America Simon & Schuster Harvard Joboo Computing/IT Project Zero Education Peterson’s Embark.com Encore Software Weekly BrassRing Reader Corp Career Click2Asia.com BrassRing.com Events General HighWired.com Business Instructional Legal Fair Group Professions

Westech eFrenzy AOL Expo Corp. Management MBANET.net Sallie Mae

Source: Merrill Lynch Global Growth Group.

42 The Knowledge Web – 23 May 2000

Knowledge Universe Keiretsu Knowledge Universe (KU) invests in, incubates and operates companies that build human capital by helping individuals and organizations realize their full potential. KU owns a portion of more than 30 diverse companies, organized into three operating groups: The Knowledge Universe Business Group: assists companies in improving their effectiveness and productivity in the areas of business to business commerce and content, consulting, staffing and employment. Key investments include UNext.com, eMind.com and knowledgeplanet.com. The Knowledge Universe Consumer Group: gives people the tools and services to make their lifestyles more productive. The group contains companies in the areas of healthy living, nutrition, cancer news and information, career and personal growth, interactive learning opportunities and multimedia services. The Knowledge Universe Learning Group: provides learning enhancement products from birth through graduate school. These products include interactive education products, technology-based educational products, technology resources and training for teachers, and interactive Web sites for children, parents and grandparents. Key investments are Leapfrog Toys, KidsEdge and TeacherUniverse.

The Knowledge Universe Keiretsu

AnswerSmart.com

Spring eMind.com

KidsEdge.com UNext.com

Selected Knowledge Knowledge Universe KnowledgePlanet.com Beginnings Portfolio Companies

Nextera LeapFrog Enterprises

Teacher Productivity Universe Point Int’l

Knowledge Universe’s strategy for growing these companies is similar to that of other leading Internet players, namely, leveraging technology investments, customer relationships and marketing expertise across portfolio companies; providing strategic guidance; and promoting direct collaboration among sister companies. In addition, we expect it to continue to acquire or develop additional companies that will fill strategic positions in this knowledge web.

43 The Knowledge Web – 23 May 2000

The Knowledge Universe Human Capital Keiretsu Company Name Company Description Lexecon A law and economics consulting firm that provides corporations and law firms with academic quality economic analysis Nextera Enterprises An international consulting firm focused on strategic development and execution, operational effectiveness and IT Productivity Point Int’l Provides learning technology solutions, certification programs and customized training to corporations and governments Sibson & Co. A strategy and human capital consulting firm helping clients more effectively implement their business strategies Spring Europe’s largest consulting, recruitment and education/training company – also provides services for career management TEC Worldwide An international membership organization dedicated to increasing the effectiveness and enhancing the lives of CEOs Knowledge Health Invests in growing health-related companies Knowledge Learning Operates community-based and corporate-sponsored early childhood education centers throughout the U.S. LeapFrog Developer of children’s interactive educational products and books that establish a learning style that is fun and engaging Nobel Learning Communities Operates a nationwide network of private preschools, elementary and middle schools; schools for challenged children; corporate sponsored schools; specialty high schools and charter schools Advance Online Provides Web-based global training solutions for the chemical, utility, construction and environmental engineering fields AnswerSmart.com Developer of a complete resource for basic business reference, how-to information and tools for business knowledge Community of Science A collaborative network of more than 400,000 scientists & 700 universities to promote science and accelerate its research eMind.com A B2B e-learning provider for vertical markets Ent. Media Ventures An incubator and venture capital firm that invests in a wide variety range of fast-growing Web-based companies Hoover’s An Internet based service where people conduct research, learn and buy business products and services KnowledgeBroadcasting Developer of Internet-based broadcast channels in a variety of business areas KnowledgePlanet.com Developing an B2B e-learning marketplace MeansBusiness Provides business ideas, theories and methodologies – selected from the best books in business management Mshow.com Provides interactive broadcasting technologies, enabling businesses and individuals to communicate with customers NetNext Internet incubator ProPoint.com An online corporate learning management system, delivering workforce performance management solutions KnowledgeKids Network Provides educational products and services to families and kids Nibblebox Builder of an online entertainment destination that brings together creative students with industry leading film talent Oncology.com The No. 1 online cancer resource for healthcare professionals, patients, their families and entire cancer community Tasteforliving.com Provides the most current thinking about healthy eating, nutrition and lifestyle, including a wide variety of recipes Teacher Universe Creates technology rich solutions for improving the quality of life and work for teachers worldwide UNext.com Provides transforming, life enhancing educational opportunities to people around the world TeckChek Provides vendor-independent information technology skills assessment featuring an exam library of advanced technologies

Other Keiretsus highlighted later in this report include Chase Capital, Pearson PLC and Arcadia Partners.

44 The Knowledge Web – 23 May 2000

6. The Technology Revolution Technology has transformed our society and economy, having a profound impact on America’s corporations. This impact is explicit in the increased investment in technology over the past three decades. In 1970, approximately 5% of corporate capital expenditures were for computer and data processing equipment aimed at improving the productivity of human capital. By 1997, nearly 50% of capital expenditures by corporations were high-tech related.

Technology has become so Technology Expenditures Dominate Capital Spending essential to corporations that

tech expenditures have grown 50% from 5% of total capital 45% 40% spending by corporations in 35% 30% 1970 to nearly 50% today. 25% 20% 15% 10% 5% 0% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997

Source: Bureau of Economic Analysis

A glance at the stock market shows the heights reached by the technology sector in our economy. Both the proliferation of technology companies and the valuations applied to them have skyrocketed this decade, as the market has perceived technology’s importance to the future of the world economy. Publicly traded technology companies are now valued at $3.8 trillion and represent one quarter of the S&P500.

The PC has achieved Technology is the Fastest Growing Segment of our Economy remarkable penetration

compared to other $3,790 $4,000 Market Value of Technology Sector - 1992 vs Today $3,775 technological innovations in the ($ in Billions) U.S., reaching a 25% market $3,500 share in 15 years. $3,000

$2,500 % 45 R $1,864 $2,000 G CA $1,500 $1,018 $1,000 $779 $488 $327 $500 $195 $243

$0 1992 1993 1994 1995 1996 1997 1998 1999 Apr-00

Source: FactSet

But even more dramatic has The PC and the Internet have been primary drivers of this growth. The PC has been the wildfire rate of achieved remarkable penetration compared to other technological innovations in adoption of the Internet, which the U.S., reaching a 25% market share in 15 years, versus 35 years for the has reached 25% of the telephone and 30 years for the microwave. But even more dramatic has been the wildfire rate of adoption of the Internet, which has reached 25% of the population population in only seven years. in only seven years.

45 The Knowledge Web – 23 May 2000

Years To Attain 25% Market Share

54 Years

46 Years 44 Years

35 Years 34 Years 30 Years 26 Years 22 Years 15 Years 13 Years 7 Years PC VCR

The number of worldwide Radio Phone Cellular Internet Oven Airplane Household Electricity Television Telephone Internet users is expected to Microwave Automobile skyrocket to 638 million users

in 2004, up from 14 million Source: Milken Institute in 1995.

The Internet Speeds the Technology Revolution The explosion in Internet usage, achieving the most rapid rate of technological adoption ever experienced in this technology-hungry century, will continue. As evidence, the Strategis Group reported that the number of adults using the Internet in the U.S. surpassed 100 million in late 1999. Worldwide, the number of online users is expected to skyrocket from nearly 14 million at the end of 1995 to nearly 638 million by 2004. The growth rate of non- U.S. users is expected to be greater than that in the United States. The number of non-U.S. Internet users is expected to more than triple between 1999 and 2004, a 30% CAGR. The number of users in the U.S. is expected to grow from 81 million in 1999 to 212 million in 2004, a 21% CAGR. The number of adults using the “Wealth in the new regime flows directly from innovation, not optimization; that Internet in the U.S. surpassed is, wealth is not gained by perfecting the known, but by imperfectly seizing the 100 million in late 1999. unknown.” – Kevin Kelly New Rules for the New Economy

Millions of Users Will Continue to Flock to the Internet

Projected Growth in Worldwide Online Users: 1995-2004

700

600

500

400

300 International Users

Millions of Users of Millions 200

100 U.S. Users

0 1995 1996 1997 1998 1999E 2000E 2001E 2002E 2003E 2004E

46 The Knowledge Web – 23 May 2000

Projected Growth in Worldwide Online Users: 1995-2004 CAGR: (Millions) 1995 1996 1997 1998 1999E 2000E 2001E 2002E 2003E 2004E ‘99-‘04 United States 9.7 23.2 38.9 62.8 80.8 103.1 126 148.6 176.8 212.2 21% YoY Change 139% 68% 61% 29% 28% 22% 18% 19% 20% % of Total 70% 61% 45% 44% 41% 40% 38% 37% 35% 33%

International 4.2 15.0 47.9 79.4 115.3 153.3 201.3 250.0 325.4 425.6 30% YoY Change 257% 219% 66% 45% 33% 31% 24% 30% 31% % of Total 30% 39% 55% 56% 59% 60% 62% 63% 65% 67%

Worldwide 13.9 38.2 86.8 142.2 196.1 256.4 327.3 398.6 502.2 637.8 27% YoY Change 175% 127% 64% 38% 31% 28% 22% 26% 27% Source: International Data Corporation; The Online Nation: 1998 US Internet User Survey and Merrill Lynch Internet Research estimates. IDC’s Internet User Survey sampled 2,102 US Households and examined ownership of electronic devices, PC and online penetration, e-commerce in the home and workplace, online activities, home pages and non- online households. Table projects the number of users accessing the Web (users may share or use multiple devices). Users accessing the Web at home and at work are counted only once.

The number of U.S. households The number of U.S. households online is expected to more than double from online is expected to more than nearly 30 million at the end of 1998 to nearly 70 million by the end of 2002. As a double from nearly 30 million percentage of total households, this trend represents an increase from 30% to 64%. By 2002, 90% of homes are expected to have PCs and 64% are expected to be at the end of 1998 to nearly 70 online. million by the end of 2002.

“It has been said that if you place an infinite amount of monkeys in front of one typewriter each, one of them will eventually write a literary masterpiece. The Internet has proven that this is not the case.” – Anonymous

A Majority of U.S. Households Will Soon Be on the Net

Projected Growth in U.S. Online Households: 1995-2002

120

100

80 Total U.S. Households 60

40 Millions of Users of Millions

U.S. Online 20 Households

0 1995 1996 1997 1998 1999E 2000E 2001E 2002E

47 The Knowledge Web – 23 May 2000

Projected Growth in U.S. Online Households, 1995-2002

CAGR (Millions) 1995 1996 1997 1998 1999E 2000E 2001E 2002E ‘95–‘02 Households with 33.2 38.7 44 48.2 53.5 59.6 67.1 74.8 12% PCs/NCs* YoY Change 16.6% 13.7% 9.5% 11.0% 11.4% 12.6% 11.5% % PC Penetration 34% 39% 44% 48% 52% 58% 64% 71%

Online Households 9.4 15.2 20.6 29.8 39.5 49.4 58.5 67.6 33% YoY Change 61.7% 35.5% 44.7% 32.6% 25.1% 18.4% 15.6% % of Total Households 10% 15% 21% 30% 39% 48% 56% 64% Internet usage is spreading % of PC Households 28% 39% 47% 62% 74% 83% 87% 90% from the highest income Source: International Data Corporation; The Online Nation: 1998 US Internet User Survey. Veronis, Suhler & Associates earners to the general Communications Industry Forecast; October 1998, Electronic Industries Association, U.S. Bureau of the Census, Odyssey Ventures, Find/SVP and Merrill Lynch Internet Research estimates. IDC’s Internet User Survey sampled 2,102 population. As PC and Internet US Households and examined ownership of electronic devices, PC and online penetration, e-commerce in the home and access prices continue to drop, workplace, online activities, home pages and non-online households. this trend should continue. *NCs are network computers that are non-PC devices. As would be expected, early home Internet adopters tended to be toward the upper end of the income spectrum. A profile of online consumers in 1998 revealed that the median annual income of Internet consumers was $60,400, well above the national median of $38,900. In 1999, however, this profile shifted lower, indicating that Internet usage is spreading from the highest income earners to the general population. As PC and Internet access prices continue to drop, this trend should continue.

Internet Usage Spreading to Lower Income Groups

Profile of Internet Consumers Based on Median Household Income

$60,400 $70,000 $51,270 $60,000

$50,000 $38,900

$40,000

$30,000 Internet access in schools is also bounding forward, driven $20,000

by its compelling value $10,000 proposition and policies to $0 promote Internet connectivity. General Adult Population* 1999 Online Consumers 1998 Online Consumers Internet access is now in 96% Source: Roper Starch Worldwide of schools, up from just 3% in * Based on Roper Reports data 1994. Internet access in schools is also bounding forward, driven by its compelling value proposition and policies to promote Internet connectivity. Internet access is now in 96% of schools, up from just 3% in 1994. Research and database company Quality Education Data expects nearly every school to have Net access by the end of the 1999-2000 school year. To date, 51% of classrooms have Internet- connected computers, and the student-to-computer ratio has declined to 6-to-1.

48 The Knowledge Web – 23 May 2000

Students per Computer Declining And Internet Connectivity Increasing

18 16 120% 16 96% 14 100% 14 Classrooms Schools 89% 82% 12 11 80% 10 65% 65% 10 9 60% 50% 51% 8 7 66 35% 6 40% 27% 4 20% 14% 8% 2 3% 0 0% 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00

Source: Quality Education Data for Students-Per-Computer. 1999-2000 figure is estimate from Market Data Retrieval. Internet Connectivity from U.S. Department of Education, National Center for Education Statistics through 1996-97. 1997-98 actual and 1998-99 estimate from Quality Education Data. QED and N2H2 estimate that every school will have Net access by the end of the 1999-2000 school year.

Demographics Of Internet Users Evolving Higher income individuals, who typically have greater access to the Internet from home, continue to be the heaviest users. As PC prices continue to plunge and free or value-priced ISPs proliferate, we expect greater percentages of lower income groups to migrate online rapidly. Broadband technology should speed this migration, as Internet content and usage begins to look and feel more like that on television with which the broader population is familiar.

Broadband technology should Persons Using the Internet, by Income and Location (1998) speed migration to the Internet, as content and usage begins to 60

look and feel more like that on 50 television with which the broader population is familiar. 40

30 Percent

20

10

0 Under $5,000- $10,000- $15,000- $20,000- $25,000- $35,000- $50,000- $75,000+ $5,000 9,999 14,999 19,999 24,999 34,999 49,999 74,999

At Home Outside Home Any Location

Source: National Telecommunications and Information Administration (Department of Commerce)

Older users are becoming more prevalent on the Internet, although they still are under-represented relative to their percentage of the total population. People between the ages of 35-49 – roughly the Baby Boomer cohort – account for the largest group of Internet users according to a recent study by AOL/Roper Starch.

Internet User Profile by Age 1999 Online Consumer 1998 Online Consumer Age Group General Adult Population Population Population 18-24 13% 12% 13% 25-34 19% 20% 21% 35-49 32% 40% 43% 50+ 36% 26% 22% Source: The America Online / Roper Starch Study; December 1999. Roper Starch Worldwide conducted this research via telephone among 1,000 home Internet / online subscribers over 18 years of age. 49 The Knowledge Web – 23 May 2000

Urban whites and Asians are the heaviest users of the Internet, with nearly twice the percentage of each ethnic group online as blacks or Hispanics. These adoption rates are similar to adoption trends in other new technologies.

Percentage of Persons Using the Internet by Ethnic Group and Location

45

40

35

30

25

20 Percent

15

10

5

0 White non Hispanic Black non Hispanic AIEA non Hispanic API non Hispanic Hispanic

US Rural Urban Central City

Source: National Telecommunications and Information Administration (Department of Commerce)

The majority of Internet users Right now, most users access the Internet for relatively simple tasks, such as in a recent survey said they sending email, reading news and doing basic research. The majority of Internet already use the Internet to users in a recent survey said they already use the Internet to research, gather product information and access news. In other words, they use the Internet to research, gather product learn. Most of what these users have done so far is simply gather information by information and access news. reading. In other words, they use the Internet to learn. Most Net Users Already Learn Online

Percentage of People Saying They Regularly…

Research 92%

Communicate with Friends 88% Product Information 73%

Hobby Information 70% News 70% Instant Messages 56%

Entertainment 50%

Communicate with Co-Workers 48% Sports 46%

Games 44%

Purchase 42%

Chat 36% Stocks 36%

Track Portfolio 35% Travel Reservations 35%

Music 31% Meet People 22%

Banking 17% Trade Stocks 14%

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

Source: The America Online / Roper Starch Study; December 1999. Roper Starch Worldwide conducted this research via telephone among 1,000 home Internet / online subscribers over 18 years of age.

50 The Knowledge Web – 23 May 2000

Percentage of U.S. Persons Using the Internet Outside the Home by Type of Use (1998)

60

50

40

30 Percent 20

10

0 E-mail Info Search Do Job Related Take Courses Job Search Tasks

Source: National Telecommunications and Information Administration (Department of Commerce)

Broadband technology will Nearly 40% of users, both at home and otherwise, say they use the Internet to take propel more interactive and courses, but this usage is usually limited to basic research at present. Going content-rich Web experiences. forward, broadband technology will propel more interactive and content-rich Web experiences. Companies in the learning space will be primary beneficiaries of this, as they will be able to deliver richer content and more engaging experiences to their user base.

Percentage of U.S. Persons Using the Internet at Home by Type of Use (1998)

80

70

60

50

40

Percent 30

20

10

0 E-Mail Info Search Check New s Take Courses Do Job Shop, Pay Job Search Games/ Related Tasks Bills Entertainment

U.S. Persons

Source: National Telecommunications and Information Administration (Department of Commerce)

“Nothing you can’t spell will ever work.” – Will Rogers

51 The Knowledge Web – 23 May 2000

The Digital Divide

“Opportunity for all requires something else today – having access to a computer and knowing how to use it. That means we must close the digital divide between those who've got the tools and those who don't.” – President Bill Clinton, State of the Union Address, February 2, 2000

Access to computers and the Internet and the ability to use this technology effectively are becoming increasingly important for full participation in America’s economic, political and social life. People are using the Internet to find lower prices for goods and services, work from home or start their own business, acquire new skills using distance-learning, and make better informed decisions about their healthcare needs or how to vote on issues affecting them and their communities.

Access to computers and the Internet has exploded in the past decade. Unfortunately, there is strong evidence of a "digital divide" – a gap between those individuals and communities that have access to these Information Age tools and those who don’t. In some instances, this divide is actually widening. A July 1999 report from the Department of Commerce, based on December 1998 Census Department data, revealed that:

• Better educated Americans are more likely to be connected. • Whites are more likely to be connected than African-Americans or Hispanics. • Rural areas are less likely to be connected than urban users. • In addition, data from the National Center for Education Statistics reveals a “digital divide” in our nation’s schools. As of the fall of 1998, 39% of classrooms in poor schools were connected to the Internet versus 62% for wealthier schools.

The digital divide has reached such proportions as to grab the attention of the President. In addition to providing access to information tools and resources, the Clinton Administration plans to help people acquire the skills they need to use technology, promote content and applications of technology that will help empower under-served communities and ensure that teachers can use technology effectively in the classroom.

The fallout resulting from the White House’s plans for a narrowed digital divide could be felt in many ways, but to e- learning companies, in particular, this objective represents a potential boon. Companies positioned to address the newly online are especially poised to benefit.

The Private Sector Is Narrowing the Divide The private sector is doing their part to bridge the digital divide, as well. Microsoft recently announced plans to support Intel’s Teach to the Future program by donating $344 million of software to the program. The Teach the Future program is an initiative to train more than 400,000 classroom teachers to use technology to improve teaching and learning. Intel has pledged to invest $100 million over the next three years in cash, equipment, curriculum development and program management to provide teacher-led, hands-on training in 20 countries. Other leading manufacturers have offered donations and discounts to make this the largest private industry effort help ensure that teachers are prepared to use technology in the classroom.

Ford Motor Co. also recently committed $300 million to ensure that their employees move into the 21st century with the technology they need. Over the next twelve months, the company plans to provide each current and future employee with a personal computer, printer and Internet access for only $5 a month. Hewlett-Packard will provide the computers and printers, and Uunet, a subsidiary of MCI Worldcom, will provide the Internet access.

52 The Knowledge Web – 23 May 2000

7. e-Commerce: The Current e-Business Wave Although the Internet has been in existence in one form or another for thirty years, it didn’t gain much appeal outside of academia or the IT world until this decade. As one might expect, the first online businesses were those that enabled access to the Net, such as Prodigy and AOL. Next came content companies. With businesses and consumers now able to access the Internet, the opportunity was there to create something for them to do with their Internet access.

n B2C e-Commerce Beginning approximately in 1995, e-commerce began to gain traction, spurred in large part by Netscape’s browser, which served as something like a secret decoder ring for Web surfers. B2C commerce took off first with companies like Amazon.com and Virtual Vineyards selling old economy products in the new economy way. B2C e-commerce, of course, has exploded since then – a trend projected to continue. B2C e-commerce is expected to grow from $31 billion in 1999 to $274 billion by 2004, a 55% CAGR. The U.S. will still generate more e-commerce than any other country, but its share of global e-commerce is expected to decline from 78% in 1999 to just 33% in 2004. International e-commerce will outpace that in the U.S. over the same period, growing at a stunning 93% CAGR versus “just” 31% in the U.S.

B2C e-Commerce is Exploding…

Global B2C e-Commerce Projections B2C e-commerce is expected to $300 grow from $31 billion in 1999 to $274 billion by 2004, a 55% $250 CAGR. International B2C Revenue $200

$150

($ Billions) $100

$50 U.S. B2C Revenue $- 1998 1999E 2000E 2001E 2002E 2003E 2004E

Estimated B2C e-Commerce: 1998-2004 CAGR: ($ Billions) 1998 1999E 2000E 2001E 2002E 2003E 2004E 1999-2004 United States $12.4 $24.2 $35.8 $48.1 $60.6 $75.0 $91.7 31% Yr/Yr Growth 95% 48% 34% 26% 24% 22% % Total 83% 78% 71% 62% 52% 42% 33%

International $2.5 $6.8 $14.9 $29.9 $55.9 $102.7 $182.5 93% Yr/Yr Growth 168% 119% 101% 87% 84% 78% % Total 17% 22% 29% 38% 48% 58% 67%

Worldwide $14.9 $31.0 $50.7 $78.0 $116.5 $177.7 $274.2 55% Yr/Yr Growth 107% 64% 54% 49% 53% 54% Source: Merrill Lynch, IDC, Forrester Research, Jupiter Communications 53 The Knowledge Web – 23 May 2000

n B2B e-Commerce B2B e-commerce is an awakening giant with a growth trajectory expected to exceed that of B2C commerce. Businesses from mom & pop shops to Fortune 500 companies have realized that the Internet is for real and will revolutionize many ways in which businesses interact with one another. Global B2B Internet commerce was just over $80 billion in 1999 and is expected to grow at a phenomenal 91% CAGR to top $2 trillion in 2004. This figure would make B2B e-commerce more than 7x the projection for B2C commerce. The U.S. will still represent the lion’s share of the market in 2004, but its percentage of the total should decline from approximately two-thirds in 1999 to one-half in 2004.

…But B2B e-Commerce is Growing Even Faster

Global B2B e-Commerce Projections

$2,500

$2,000

$1,500 International B2B Revenue

$1,000 ($ Billions)

$500 Global B2B Internet commerce U.S. B2B Revenue was just over $80 billion in $0 1999 and is expected to grow at 1998 1999E 2000E 2001E 2002E 2003E 2004E a phenomenal 91% CAGR to top $2 trillion in 2004.

Estimated B2B e-Commerce: 1998-2004 CAGR: ($ Billions) 1998 1999E 2000E 2001E 2002E 2003E 2004E 1999-2004 United States $24.9 $50.3 $97.3 $174.7 $346.6 $632.9 $1,053.0 84% Yr/Yr Growth 102% 94% 79% 98% 83% 66% % Total 70% 63% 58% 55% 56% 56% 52%

International $10.6 $30.1 $69.8 $145.5 $270.5 $506.7 $973.7 100% Yr/Yr Growth 183% 132% 108% 86% 87% 92% % Total 30% 37% 42% 45% 44% 44% 48%

Worldwide $35.5 $80.4 $167.1 $320.2 $617.1 $1,139.6 $2,026.7 91% Yr/Yr Growth 126% 108% 92% 93% 85% 78% Source: Merrill Lynch, IDC, Forrester Research, Jupiter Communications

Not surprisingly, e-commerce has been and should continue to be heavily weighted toward transactions involving hi-tech products, such as computing and electronic devices. These products were some of the first to be sold online, and online users have a natural predilection toward buying products related to their use of the computer and Internet. By 2003, nearly 40% of computing and electronics products sold in the U.S. are expected to sell on the Internet. B2B market makers, such as Ventro (f.k.a., Chemdex) and Commerce One, are driving sales of raw materials and other unfinished goods.

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U.S. B2B e-Commerce Revenue ($Billions) Industry 1998 2003E Computing and electronics $19.7 $395.3 Motor vehicles $3.7 $212.9 Petrochemicals $4.7 $178.3 Utilities $7.1 $169.5 Paper and office products $1.3 $65.2

Shipping and warehousing $1.2 $61.6 Food and agriculture $0.3 $53.6 Consumer goods $1.4 $51.9 Pharmaceutical and medical $0.6 $44.1 Aerospace and defense $2.5 $38.2

Construction $0.4 $28.6 Heavy industries $0.1 $15.8 Industrial equipment $0.1 $15.8 Total $43.1 $1,330.8 Source: Forrester Research

Worldwide, the Internet economy is expected to mushroom from $261 billion in 1998 to more than $2.8 trillion in 2003. e-Commerce will account for nearly half of this amount, with business and IT infrastructure accounting for the remainder.

Worldwide Internet Economy by Segment: 1998-2003 ($ billions)

$3,000 $2,826

$2,500

$2,000 $1,728 1%% : 661 RR: AGG $1,500 CCA $1,115

$1,000 $730 $477 $500 $261

$0 1998 1999 2000 2001 2002 2003

Commerce $50 $111 $218 $398 $774 $1,317 IT Infrastructure 110 176 239 320 401 592 Business Infrastructure 101 190 273 397 553 917 Internet Economy total $261 $477 $730 $1,115 $1,728 $2,826

U.S. percent of total 62% 57% 56% 55% 54% 50%

Source: IDC n Human Capital Solutions Providers Will Benefit Those providers of human capital solutions via the Internet should enjoy tremendous opportunities over the coming years. Companies directly targeting consumers will face a large, fragmented market, while B2B solutions providers will be competing for a slice of a $2-trillion B2B e-commerce market. Human capital solutions providers have barely scratched the surface of this enormous market.

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8. Advertising Exploding Online The amount spent worldwide on online advertising is expected to mushroom from $3.3 billion in 1999 to $33.1 billion in 2004, a 58% CAGR. The United States will continue to drive the lion’s share of this market, growing from $2.8 billion in 1999 to $22.2 billion in 2004, a 51% CAGR. International online advertising will grow as a percentage of the total, increasing from just 16% in 1999 to 33% in 2004, reflecting the more rapid growth in Internet usage and e-commerce internationally. Companies that can capture and aggregate large and/or highly attractive demographic groups will benefit most from the expanding web advertising pie. The amount spent worldwide on online advertising is expected to Internet Advertising Providing a Rapidly Growing Revenue Stream mushroom from $3.3 billion in Worldwide Internet Advertising: 1998-2004 1999 to $33.1 billion in 2004, a 58% CAGR. $35 $30

$25 International Internet Advertising $20

$15 ($ billions) $10 U.S. Internet Advertising $5

$0 1998 1999E 2000E 2001E 2002E 2003E 2004E

Worldwide Internet Advertising: 1998-2004 CAGR: ($ Billions) 1998 1999E 2000E 2001E 2002E 12003E 2004E 1999-2004 United States $1.3 $2.8 $5.4 $8.7 $12.6 $17.2 $22.2 51% Yr/Yr Growth 119% 91% 62% 45% 37% 29% % Total 84% 84% 82% 79% 75% 72% 67%

International $0.2 $0.5 $1.1 $2.3 $4.1 $6.9 $10.8 83% Yr/Yr Growth 115% 115% 98% 80% 68% 58% % Total 16% 16% 18% 21% 25% 28% 33%

Worldwide $1.5 $3.3 $6.5 $10.9 $16.7 $24.1 $33.1 58% Yr/Yr Growth 118% 95% 68% 52% 45% 37% Source: Forrester Research, The Web Advertising Pie Expands

The amount of time that users Pure number of eyeballs captured is important. Those sites with large numbers of spend online is expected to users will be able to drive an advertising revenue stream based on their reach. This jump nearly 50% from seven “breadth” model is similar to that on television or the radio. It will be marked by high volume but low conversion rates. hours per week in 1998 to ten hours per week in 2003. The amount of time that users spend online is expected to jump nearly 50% from seven hours per week in 1998 to ten hours per week in 2003. Increased usage, coupled with more interactive and targeted advertising functionality, should drive conversion rates significantly higher and provide valuable streams of revenue to companies that can deliver highly focused eyeballs to advertisers.

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Media Consumption

15.6 16

14 12.6

12 10.0

10

7.1 8

6 4.0 Hours per Week 3.4 4

2

0 TV Radio Newspapers Magazines Online 1998 Online 2003

Source: Jupiter Communications, The Reinvention of Traditional Advertising; Merrill Lynch Internet Research

The Internet enables detailed customization and specialization, however, and those sites that capture a highly focused demographic group by delivering relevant, engaging content will also be able to drive a healthy advertising revenue stream. This “depth” model will be marked by lower volume but higher conversion rates.

By 2004, however, online Effective CPM Rate (Cost per Thousand Impressions) advertising is expected to grow to nearly $200 per capita, or $4.80 $5.00 13% $4.50 three times magazine GR $4.20 $4.50 CA advertising and nearly twice $3.70 radio advertising. $4.00 $3.20 $3.50

$3.00 $2.60

$2.50

$2.00

$1.50

$1.00

$0.50

$- 1998 1999 2000 2001 2002 2003

Source: Jupiter Communications, The Reinvention of Traditional Advertising; Merrill Lynch Internet Research

As Internet adoption and usage grow, the amount of advertising dollars spent per capita in the U.S. will continue to grow along with it. At an estimated $40 per capita in 1999, online ad spending trails traditional media outlets, such as magazines, radio, newspapers and television. By 2004, however, online advertising is expected to grow to nearly $200 per capita, or three times magazine advertising and nearly twice radio advertising. We expect the ability to market to consumers on a highly focused, one-to-one basis will be a tremendous catalyst for online advertising, which will offer advertisers a vastly superior way to reach their audience than traditional media.

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U.S. Per Capita Advertising Spending ($ in billions) 1999E 2000E 2001E 2002E 2003E 2004E Online $40 $67 $94 $124 $160 $195 Magazine $56 $58 $60 $62 $65 $67 Radio $89 $92 $96 $100 $103 $108 Newspaper $335 $348 $362 $376 $391 $406 Television $258 $268 $279 $290 $301 $313 Source: Forrester, "The Web Advertising Pie Expands", August 1999, Merrill Lynch Internet Research

U.S. Internet ad spending is expected to grow to more than $22 billion by 2004 from just under $3 billion in 1999. As a percentage of total advertising spending, this jump represents an increase to 8.1% from 1.3%. that can deliver attractive demographic groups and rich user data will benefit most from this growth in online ad spending.

Internet Ad Spending Growing Rapidly

U.S. Internet Advertising Spending

In the future, we expect online $25,000 9.0% Spending % of Traditional Ad 8.0% advertising dollars to flow to $20,000 7.0% those sites that can deliver U.S. Internet 6.0% $15,000 performance, meaning Ad Spending 5.0% 4.0% transactions and customer data Percent of $10,000

Traditional Ad ($ millions) 3.0% exchange. Spend $5,000 2.0% 1.0% $0 0.0% 1999E 2000E 2001E 2002E 2003E 2004E U.S. Internet Ad $2,805 $5,358 $8,680 $12,587 $17,244 $22,244 Spending Percent of Traditional Ad 1.3% 2.4% 3.7% 5.1% 6.6% 8.1% Spend

Source: Forrester Research, "The Web Advertising Pie Expands," August 1999; Merrill Lynch Internet Research

The days of banner ads and cpm rates dominating online advertising are numbered, however. In the future, we expect online advertising dollars to flow to those sites that can deliver performance, meaning transactions and customer data exchange. As user data proliferates and becomes easier to manipulate, advertisers and websites will work together to integrate ads within the site content, creating a seamless experience for users. In this environment, advertisers will want to pay only for performance and will not be satisfied with simple click-throughs. This puts the onus on websites to “know their user” so that they can work with advertisers to develop the strongest content and interface to drive the greatest performance.

“Intuition becomes increasingly important in the new information society precisely because there’s so much data.” — John Naisbitt

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Online Advertising Dollars Expected to Shift Toward Performance-Based Metrics

1999E 2003E

Performance- Based 15%

Performance- CPM-Based Based 50% 50%

CPM-Based 85%

Source: Forrester Research, "Internet Advertising Skyrockets," August 1999; Based on surveys of 33 traditional and 17 Internet pure-play marketers

Advertising data from the fourth quarter of 1999 provides an interesting case study of how advertisers apportion their ad dollars online. The sites in the chart below have several things in common: 1) Most were early movers in their respective spaces, 2) most either aggregate a very large number of eyeballs (e.g., AOL, Yahoo!) or they capture a focused group of eyeballs (e.g., iVillage, SportsLine.com) and 3) they captured a significant share of ad dollars in 4Q99. One-to-one marketing technology enables these sites and their sponsors to target ads at particular users, wringing even greater value from the demographics. e-knowledge sites that deliver We think the same story will play out on a smaller stage within the various sectors highly relevant content that of the e-knowledge world. EarthWeb can deliver a large audience of IT drives repeat and extended professionals, a very attractive demographic group for IT vendors. e-knowledge sites that deliver highly relevant content that drives repeat and extended usage – usage – that is, stickiness – can that is, stickiness – can grab a slice of the expanding web advertising pie. grab a slice of the expanding web advertising pie. Volume and Quality of Eyeballs Captures the Ad Dollar

4Q99 Online Advertising Market Share ATHM LCOS DCLK TFSM 6% 5% 5% 2% YHOO 14% IVIL 1%

CNET 2%

GOTO 1%

AOL BOUT 30% 1%

WOMN SPLN 1% Other 1% 31%

Sources: Internet Advertising Bureau, Company Information and Merrill Lynch Internet Research estimates. The Internet Advertising Bureau’s (IAB) Ad Revenue Report is released quarterly and is based on data from more than 200 companies and 1,200 web sites. All surveys used in the report are conducted by the New Media Group of PriceWaterhouseCoopers.

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9. The Coming Bandwidth Tidal Wave A major catalyst for online learning that is looming just over the horizon is broadband technology, which offers download speeds exponentially faster than traditional dial-up access and is “always on.” These two features should vastly increase Internet usage and enable companies to offer much more appealing content and services, particularly in the online learning space.

“If you are amazed by the fast drop in the cost of computing power over the last decade, just wait till you see what is happening to the cost of bandwidth.”

—Andy Grove

The current drippy faucet of data that we receive over our Broadband – The Next Evolutionary Step telephone lines will soon The emergence of broadband technology is certain to be a powerful catalyst become a tsunami. This coming driving Internet neophytes to the Web and vastly enhancing the online experience data explosion will make of existing users. The current drippy faucet of data that we receive over our Moore’s Law seem puny by telephone lines will soon become a tsunami. This coming data explosion will comparison. make Moore’s Law seem puny by comparison. Broadband combines the best elements of the “lean-back” rapture of television with the “lean forward” interactivity of the Web. Broadband will also create evolutionary new opportunities for e-business. The big questions, however, are when and how.

n Broadband Providers Will Seek Differentiation… Since the “pipes” are essentially commodities, broadband providers will want to include value-added services with their Internet access service to entice consumers to sign up with them and remain a customer. User churn is an expensive problem for commodity-like telephony services, such as long distance and ISPs. Rather than waging a cutthroat battle like the one currently in progress between long distance providers, for example, broadband providers will invest in or form alliances with content providers in an attempt to differentiate themselves from other providers. One can think of these content providers as premium channels offered exclusively, or at least on a restricted basis, through a broadband provider.

Since the “pipes” are n …And Knowledge Services Companies Will Provide It essentially commodities, Education and other knowledge services companies should be highly sought-after broadband providers will want partners in this environment. Broadband offers them the opportunity to provide to include value-added services content-rich, television-quality educational offerings coupled with the interactivity with their Internet access afforded by the Internet. Kids are heavy users of the Internet in the home, making service to entice consumers to premium education channels a natural way of locking in consumers to a particular sign up with them and remain a service that provide a quality educational product. customer. Likewise, schools are being wired at a rapid pace, meaning that kids will also have access to these channels at school and could continue to use the service in the home through a premium broadband offering. The ratio of students to computers in our nation’s schools is rapidly declining, falling from 16-to-1 in 1992 to approximately 6-to-1 in 1999. Similarly, Internet connectivity is increasing rapidly at schools, in general, and the classroom, in particular. Today, more than 95% of schools are wired to the Internet, with over 50% of classrooms having access. Moreover, the number of K-12 students with access to the Internet has grown from virtually zero in 1994 to 10 million in 1996 and is projected to grow to 40 million by 2002.

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Therefore, online learning companies should partner with broadband providers and schools to provide educational products on the Internet that can be accessed from home and the classroom. Already, numerous broadband providers have invested in knowledge services with this very idea in mind.

Examples of Broadband Investments in Education Amount Date Company ($mm) Investors April 1998 Arista Systems $4.0 Safeguard Scientifics August 1999 Campus Pipeline $28.0 Dell Computer Corporation 1999 Classroom Connect $28.0 Media One February 1998 Cogito Learning Media, Inc $7.0 Vulcan Ventures, Allen & Co. April 1999 HyCurve $12.0 US Web/CKS Interactive Learning International Intel Corporation April 1999 JuniorNet $70.0 RCN Corporation 1999 Lightspan $32.0 Sony Corporation, Microsoft, Liberty Media Group, Comcast March 1998 Lightspan (FKA Curriculum Television) $20.6 Microsoft 1998 & 1999 Net Library $100.0 Liberty Digital NetSchools Vulcan Ventures December 1999 Ninth House Network $40.0 Chase Capital Partners January 1998 One Touch Systems, Inc. Intel Corporation Source: Venture One, Securities Data Corporation

n The Race to Widen the Pipes Online learning companies Broadband technology has been wrapped up in the classic chicken-and-egg should partner with broadband dilemma. Namely, what will come first: The enabling broadband technology or providers and schools to broadband content that demands improved technology? Until recently, it appeared that both the content and technology were developing simultaneously, yet provide educational products on tentatively. Now, however, it appears that the infrastructure battle is on and the the Internet that can be technology will pave the way for the content. accessed from home and the classroom. “The historical records show that humans have never, ever opted for slower.”

– Stephen Kern, historian

Cable companies, telco’s, satellite/wireless companies and ISPs are locked in an epic battle over standards, protocols, open access and kilobits per second. Digging through all the techno-jargon, though, the key statistic that stands out is that cable modem and telco ADSL services offer download speeds that are exponentially faster than traditional dial-up access.

Comparison of Home Internet Access Technologies Cost of Bandwidth Availability Hardware Monthly Fee Analog Modems 56 Kb Excellent $150 or less Free with Worldwide Internet access Cable Modems 5 Mb to 10 Mb (shared) Limited/Improving $300 or less $30-$60 over time DSL 128 Kb to 1.5 Mb Limited/Improving $300 or less $30-$500 over time ISDN 64 Kb or 128 Kb Good/Unavailable $250 or less $30-$100 in some areas Source: IDC’s Home Access Communications Options, February 1999; Merrill Lynch Internet Research 61 The Knowledge Web – 23 May 2000

Perhaps even more important, however, is the “always on” nature of broadband Internet service. With broadband, consumers can access the Net in the same way they use a television – or a refrigerator, for that matter. It’s right there just waiting to be used – always on, always ready, no connection time needed. In addition to anytime access, broadband offers anywhere access, as consumers will be able to access the Net in every room of their house using numerous different devices and appliances. Perhaps even more important, This improved convenience is great for consumers, but a double-edged sword for however, is the “always on” business. With broadband, they will have 24/7 access to customers, but the bar for nature of broadband Internet customer service expectations will increase substantially. service. As bandwidth capacity increases, online content will be enriched to include enhanced graphics and video. These improved features will drive more users online as the content becomes that much more engaging.

Exploding Bandwidth Capacity Will Meet the Demands of More Engaging Content

Kps per Action

7,880 10,000

1,800 1,000 1,000 300 300 120 100 Kps 25 10 10

2

1 Email Mess age Newsgroup/Chat F ile Attachment Web Acces s Graphics Voice Video Voice/F ax over Video over IP Access Attachment Attachment Attachment IP

Source: Merrill Lynch

n Expected Adoption Rates Broadband adoption is at the lower left-hand position of its expected S-shaped growth curve right now, and adoption rates appear ready to explode. By 2003, broadband is expected to account for 37% of U.S. online subscriptions, or 27.4 million total subscriptions. That’s up from just 800,000 broadband subscriptions at the end of 1998, when broadband accounted for less than one percent of total Internet subscriptions. Some date in between, probably in late 2001 or early 2002, will be the tipping point, and e-businesses must be ready for it if they want to grab the all-important early adopters. By 2004, we expect broadband to reach 48% of Internet users, “We’ll have infinite bandwidth in a decade’s time.” or 30 million households. —Bill Gates

The same dynamic network effects dictated by Metcalfe’s Law that have driven exponential growth in Internet usage will be in force during broadband adoption. That is, we believe as more consumers move to broadband, businesses will have greater incentive to produce broadband content and devices, which, in turn, will spur even more consumers to adopt broadband, starting the cycle over again. This virtuous cycle will be akin to throwing gasoline on the already blazing Internet-usage inferno. As convergence causes the Internet to look more like the television, we expect millions of consumers will begin using it for the first time, as it becomes less intimidating and more familiar to them.

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At the same time, existing users will delight in the revolutionary experience of broadband, using the Internet for everything from daily tasks, like checking the weather, to more engrossing activities, such as taking a real-time college course at a far-off university. High-speed interactivity will High-speed interactivity will seamlessly integrate Internet content, e-commerce seamlessly integrate Internet and online advertising creating a unique, all-encompassing experience that fully content, e-commerce and online engages the user. advertising creating a unique, Broadband Usage Expected to Explode all-encompassing experience

that fully engages the user. 80.0

70.0

60.0

50.0 Millions of 40.0 Subscribers Dial-up subscribers 30.0 Broadband subs. 20.0

10.0

0.0 1998 1999 2000 2001 2002 2003 Dial-up subscribers 24.0 41.3 46.0 48.3 47.0 45.3 Broadband subs. 0.8 2.6 5.8 11.0 18.8 27.4

Source: Forrester Research, “From Dial-Up To Broadband,” April 1999

Not only will broadband subscriptions increase, but we also believe total Internet usage will also increase once broadband is readily available. A recent Wall Street Journal survey found that 65% of respondents said that increased transfer speed Broadband has the potential to would lead them to increase their Internet usage. MediaOne recently completed a increase the level of direct study of Boston-area Internet users and found that broadband subscribers logged interaction between teacher and onto the Internet ten times as frequently as users with traditional dial-up access. instructor, solving one of the Broadband subscribers also spent on average 22.5 hours per week online, or nearly major challenges in five times as much time online as did dial-up users. implementing e-learning Broadband Drives Increased Internet Usage programs at the adult level. Moreover, the rich, engaging, Average Hours Spent Online (Boston Area) interactive media possible through broadband has 22.5 compelling use in classrooms at 25 all levels.

20

15

10 4.7 Hours Per Week 5

0 Broadband Users Dial-Up Users

Source: Media One, Boston Area Households Only

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Clearly, we believe that Clearly, we believe that knowledge services companies will be primary knowledge services companies beneficiaries of the coming bandwidth tidal wave. Broadband has the potential to will be primary beneficiaries of increase the level of direct interaction between teacher and instructor, solving one of the major challenges in implementing e-learning programs at the adult level. the coming bandwidth tidal Moreover, the rich, engaging, interactive media possible through broadband has wave. compelling use in classrooms at all levels.

"@Home’s service is all about a broadband, rich-media environment, and our churn rate is below the U.S. death rate."

– Mark Stevens, Excite@Home exec,

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10. “Kingmakers” Will Determine the Winners We believe two powerful groups will determine which knowledge services companies win. These “kingmakers” are investors, particularly Wall Street and venture capital firms, and enterprise-wide strategic relationship managers, including management consulting and enterprise-wide technology solutions providers. Investors will provide Wall Street and venture capital the best knowledge services companies with the capital they need to invest in the firms, perceiving the growing opportunities open to them, and the strategic relationship managers will open doors for demand for knowledge services, them by recommending their knowledge services to clients. will provide capital to those We note that the lines between these two groups have become blurred. Many of knowledge services firms the companies listed in the table below as strategic partners and consulting firms offering the best solutions to the now have venture capital arms, as well. Likewise, venture capital firms dispense biggest problems. much more than money, usually offering advice, networking opportunities and management expertise.

Examples of Important Kingmakers Venture Capital Strategic Partners Consulting Firms Accel Partners Cisco Andersen Consulting Arcadia Partners Bain Favorite Bookmarks of William Bessemer Venture Partners Dell Cambridge Savoy, President of Vulcan Charles River Ventures Gateway Deloitte & Touche Ventures Chase Capital Intel Ernst & Young www.ceoexpress.com Draper Fisher Kaplan Ventures IBM www.egreetings.com E.M. Warburg Pincus & Co. Knowledge Universe IXL Enterprises www..com GE Capital, Equity Capital Group Microsoft KPMG Peat Marwick Caufield & Byers Oracle McKinsey & Co. www.healthanswers.com PeopleSoft PriceWaterhouseCoopers Group SAP Scient Vulcan Ventures Sun Viant Source: Merrill Lynch Global Growth Group

Wall Street and Venture Capital In Silicon Valley and elsewhere, Wall Street and venture capital firms, perceiving the growing demand for investment capital comes with knowledge services, will provide capital to those knowledge services firms offering the best solutions to the biggest problems. As has been proven time and something else just as again on the Internet, it takes several rounds of significant capital infusions to important as the actual dollars, succeed online. Brand-building, perfecting the product offering and attracting the if not more so: A resume. best talent are three critical success factors demanding significant financial strength. As such, we believe investment groups will be kingmakers of knowledge services companies in the new economy.

"Student loans are a wonderfully cheap way to finance a startup.”

– Harvard MBA student Iggy Ioppe

In Silicon Valley and elsewhere, investment capital comes with something else just as important as the actual dollars, if not more so: A resume. Having the “right” financial backers can give a company a tremendous advantage in the competition for funding in future rounds, including the IPO, and on the competitive playing field. Potential clients, for example, will use a company’s roster of financial backers as a metric to help determine the likely success of the firm. They will at least partially base their selection of a particular product on their belief that the company will survive long-term. The “right” financial backing is one key to

65 The Knowledge Web – 23 May 2000

ensuring survivability. Venture capital investment in the knowledge services sector has skyrocketed in recent years. According to SDC, venture capital firms have invested nearly $2.2 billion in 1999, more than triple the total invested in the previous eight years. So far this year, venture capital firms have invested almost $800 million in the sector. We are now starting to see the fruits of these investments hit the public markets.

Venture Capital Investment in Knowledge Enterprise Companies Is Growing Rapidly ($millions)

$2,500 $2,220

$2,000 Venture capital investment in the knowledge services sector $1,500 has skyrocketed in recent years.

$1,000 $798

$500 $232 $154 $101 $179 $19 $10 $9 $29 $28 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000ytd

Source: Securities Data Corp., Venture Source. Through April.

n K-12 Venture Capital Investment In 1999, venture capitalists invested $469 million was invested in the K-12 space. Companies garnering the largest investments were Edison Schools ($60 million), FamilyEducationNetwork ($51 million), ZapMe! ($50 million) and Lightspan ($32 million). Edison, ZapMe! and Lightspan are now publicly traded companies. So far in 2000, investment has continued to pour into the sector. Venture capital firms have put $352 million into the space in 2000, including sizable investments in bigchalk.com ($55 million), Schoolpop ($48 million) and Highwired.com ($30 million).

We are now starting to see the n Higher Education Venture Capital Investment fruits of these investments hit In 1999, venture capitalists invested $270 million in the higher education sector. the public markets. netLibrary ($95 million), Embark.com ($39 million), VarsityBooks.com ($40 million) and Campus Pipeline ($25 million) won the largest support. As is the case in the K-12 space, venture capital has continued to flood in so far this year. In 2000, venture capital firms have invested $222 million in the higher ed space, or nearly as much as they did in all of 1999. Campus Pipeline has received another $55 million in private funding this year, and University Access ($42 million) have also won major financial backing. n Corporate Learning Venture Capital Investment Last year, venture capitalists invested nearly $1 billion in the corporate learning space, although we note that this figure includes $500 million in Knowledge Universe, alone. Two other notable corporate learning companies receiving large venture investments in 1999 were Saba ($50 million) and DigitalThink ($38 million), both of which conducted public offerings already in 2000. The spigot remains open so far in 2000, with venture capital firms putting $164 million into corporate learning companies this year. Ninth House ($40 million), TrainingNet ($34 million) and WebCT ($25 million) have received the most investment year- to-date.

66 The Knowledge Web – 23 May 2000 n Human Capital Management Venture Capital Investment Venture capital firms invested $478 million in the human capital management space in 1999. The largest financing went to Hire Systems ($79 million), Jobs.com ($72 million) and CareerBuilder.com ($48 million). So far in 2000, Jobs.com has raised another $8 million in private funding, and CareerBuilder has raised an additional $11 million. Personic ($18 million) and techies.com ($22 million) have also raised substantial sums from venture capital firms this year.

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Venture Capital in Knowledge Enterprises (1999 and YTD 2000) Amount Company Name ($mil) Firm Name K-12 (1999) Adaptive Learning Technology, Inc. $0.2 Murphree Venture Partners Advantage Schools, Inc. $26.4 Bessemer Venture Partners, Kleiner Perkins Caufield & Byers, Fidelity Ventures Ltd., Excelsior American Education Centers, Inc. $0.3 TL Ventures Aspen Youth Services, Inc. $0.8 Sprout Group, Frazier Healthcare, DLJ IV Athletes & Coaches Choice, Inc. $0.3 WSI Holding Corp. Other VC Firm BrainPlay.com (FKA Thunderbeam.com) $4.0 Sequel Venture Partners, Sevin Rosen Management Co. Cambridge Academies Inc. $15.0 E.M. Warburg, Pincus & Co., LLC. Centrinity (FKA: MC2 Learning Systems) $6.0 Canaccord Capital and Taurus Capital Markets ChildrenFirst Inc. $2.5 Carousel Capital, Burr Eagan, Deleage and Co., Lazard Frere and Co., and Individual Investors ChildU, Inc., $6.5 Group One Capital Classroom Connect $31.0 Brentwood Associates, Waller-Sutton Media Partners, L.P., Cambria Group, Media Technology Equity Partners, LP, MediaOne Group, Intel 64 Fund LLC, Hillman Company EDEX International Property Limited $0.9 St. George Development Capital Edison Schools $60.0 Vulcan Ventures, UBS Capital, Rothchild eduTest.com $0.5 Other VC Firm Epylon.com $5.8 Undisclosed Investor and Individual Investor e-school.edu Inc. $1.0 Austin Ventures, L.P. FamilyEducationNetwork $51.0 Harcourt, Josten’s, Intel, Sprout Group, the Morningside Group, AOL, DLJ Games2Learn.com (FKA: A Better Way $0.6 First Analysis Venture Capital, Apex Strategic Partners, Infrastructure & Environmental Fund III of Learning, LLC) KidsEdge $25.0 NA Highwired.com (FKA: Highwired.net) $7.0 Charles River Ventures and North Bridge Venture Partners JP Kids $7.0 Sutter Hill Ventures and H&Q Venture Associates JuniorNet $70.0 RCN Corp., Boston Capital Ventures, Euclid Partners, Dominion Ventures, Dominion Fund Learning Technologies, Inc. $0.8 Hambrecht & Quist Private Equity Lightspan Partnership (FKA: Curriculum $32.0 Accel Partners, Comcast Interactive Cap. Group, Corporate Investor, Kleiner Perkins Caulfield & Byers, Television) Liberty Media Group, Microsoft, Naussau Capital, L.L.C., Other VC Firm, Sony Corp., The Ignite Group MaMaMedia $35.0 NA Nest Entertainment, Inc. $0.3 Cornerstone Equity Investors, LLC, Prudential Private Equity Netschools $20.0 GE Capital, Vulcan Ventures and Cherry Creek Netschools Investors LLC New Century Education Corporation $0.3 Lepercq Capital Management, Inc. (AKA:Lepercq de Neuflize In) Shopforschool, Inc. $2.0 Delphi Ventures and Affinity Ventures SmarterKids.com, Inc. NA Advent International Corporation, RRE Investors L.P, Commonwealth Capital Ventures II, L.P., North Bridge Venture Partners III, L.P. TopTutors.com NA Idealab VoiceWeb Corporation $3.4 Sevin Rosen Fund, Canaan Partners ZapMe! $50.0 QuestMark Partners, Ares Management LLP, Gilat Satellite Networks Ltd., Sylvan Learning Systems, Inc. (NASDAQ: SLVN), and Headwater Capital, Lease financing by Hewlett Packard (NYSE: HWP), Hambrecht & Quist, Xerox (NYSE: XRX), Leasing Technologies International, Imperial Bank, Terminal Marketing and Transamerica Tutor.com $4.0 internet.com, garage.com, Norstar Capital, Individual Investors Total $469.4

K-12 (2000) Advantage Schools, Inc. $28.0 Credit Suisse First Boston, Bessemer Venture Partners, Kleiner Perkins Caufield & Byers, Fidelity Ventures Ltd., Chase Capital Partners, and Nassau Capital Apex Learning $20.0 Warburg, Pincus, Maveron Equity Partners, Vulcan Ventures, and Kaplan Bigchalk.com $55.0 Goldman Sachs Capital Partners II, Blumenstein/Thorne Information Partners II and Patricof & Co. Ventures ChildrenFirst Inc. $16.0 Carousel Capital, Burr Eagan, Deleage and Co., Lazard Frere and Co., and Individual Investors class.com $7.5 NA eduTest.com $0.3 NextGen Capital Edventions, Inc. $8.8 River Cities Capital Fund and M Group Inc Epylon.com $30.0 Highland Capital Partners, Intel and ITV/Infinity Highwired.com (FKA: Highwired.net) $30.0 Charles River Ventures, North Bridge Venture Partners, Broadband Ventures Group LLC, DHM Arcadia Partners, Comdisco Ventures, Longworth Venture Partners and Haebler Ventures IQMind $3.3 AsiaTech Ventures PowerSchool, Inc. $31.2 E.M. Warburg Pincus & Co., Group One, and Snider Capital

68 The Knowledge Web – 23 May 2000

Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Amount Company Name ($mil) Firm Name Project Achieve $15.0 The Sprout Group, Arcadia Partners and Jostens Inc Schoolpop, Inc. $41.0 Meritech Capital Partners, The Reader’s Digest Assn, Inc., Accel Partners, Chase H&Q, Wit Capital and Thomas Weisel Partners Schoolpop, Inc. $6.8 Accel Partners, Individual Investor Simplexis.com $30.0 Internet Capital Group, The Washington Post Company’s Kaplan, Inc., W.R. Hambrecht, Commerce One, Inc., Schoolhouse Partners Viviance $14.0 3i Group, Private Equity Holding AG Wasatch Interactive Learning $5.0 NA wwwrrr.com $11.0 North American Funds Total $352.8

Higher Education (1999) Academic Systems Corporation $0.2 Kleiner Perkins Caufield & Byers, Hambrecht & Quist Alta Colleges, Inc. $4.9 BCI Growth V, L.P. BlackBoard $12.2 Carlyle Venture Partners and Merrill Lynch KECALP, Aurora Equity Partners I, Novak Biddle Partners, L.P., Internet Capital Group Campus Pipeline $25.0 , Dell Computer, Jim Mattei, C.E. Unterberg Towbin, McKinsey and others Cenquest, Inc. (FKA:Amicus Interactive, Inc.) $4.5 Hummer Winblad Venture Partners, Sevin Rosen Fund VI, L.P. Cognitive Arts $15-20 NA Collegestudent.com $1.0 Abacus Ventures Convene.com $7.2 New Enterprise Associates, Kensington Value Fund and Podesta Education Investors EduPoint.com $3.7 Enterprise Partners IV, L.P. e-education, Ltd. (FKA: $0.2 Fidelity Venture Associates, Other VC Firm JonesKnowledge.com) Embark.com (FKA: SNAP Technologies, $39.0 Norwest Venture Partners, Morgan Stanley Dean Witter Ventures Fund, Morgan Stanley Ventures Fund, Inc. and CollegeEdge) Sienna , Doll Capital Mgmt., Itochu Canada, Ltd., Pon North America, Excite@Home, Vertex Technology Fund II, Recruit Co., Ltd. Of Japan netLibrary, Inc. $95.0 Sprout Group, Houghton Mifflin, McGraw-Hill, Liberty Digital Inc., Follett Corp., Blackwell Ltd., EBSCO, ABC-CLIO, Bain Capital, Berger New Generation Fund, Tango, and Weiss Peck & Greer LLC. NextEd Ltd. $0.6 Fidelity Venture Associates OnlineLearning.net (FKA: THEN) NA St. Paul Venture Capital, APV Technology Partners Pensare $7.0 General Electric Venture Capital Corp. (Gevenco), Associated Venture Investors III, L.P, Associated Venture Investors-Silicon Valley Partners, L.P., Media Technology Ventures, Battery Ventures IV, L.P., AIG SMARTHINKING.com $0.8 Paul Stephens of RS Investment Management and Steve Walker of Steve Walker & Associates Thinkwell Corporation $3.3 RHO Management, CenterPoint Venture Partners UNext NA Knowledge Universe, Thomas Pritzker University Access NA Arcadia Partners, Others VarsityBooks.com $40.0 Tribune Company and Carlyle Venture Partners, L.P. Versity.com $11.2 Venrock Associates, Piper Jaffray Technology Fund, Sigma Partners, Global Retail Fund, Other VC Firm and Individuals WebCT (FKA: Universal Learning $14.6 BancBoston Ventures, Boston Millennia Partners, CMG@Ventures, Kestrel Venture Partners Technology) Learning Express NA Allen & Co. and Individual Investors Total $270.4

Higher Education (2000) Achieva $15.0 Draper, Fisher, Jurvetson, Individual Investors Campus Pipeline $55.0 Meritech Capital Partners, American Express Financial Corporation, Hewlett-Packard Company and DRW Venture Partners Cogito Learning Media $20.0 Open to new investors Collegeclub.com $40.0 Seligman New Technologies Fund Egenda.com $5.0 Harron Capital, Gamma Investors, and Rose Glenn Capital Eduprise.com $18.0 Arena Capital Partners, Chase Capital Partners, Frontenac Company and Learning Tree International Medschool.com $12.0 Cornerstone Equity Investors IV, LP, Audax Private Equity Fund, L.P. OnlineLearning.net (FKA: THEN) $0.2 St. Paul Venture Capital, APV Technology Partners Pensare $12.3 GE Capital, Associated Venture Investors III, L.P, Associated Venture Investors-Silicon Valley Partners, L.P., Media Technology Ventures, Battery Ventures IV, L.P., AIG- Unspecified Fund Planet Alumni $2.5 Jostens, Inc. University Access $42.0 Investor AB, GE Equity and Pearson/FT Knowledge Total $222.0 69 The Knowledge Web – 23 May 2000

Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Amount Company Name ($mil) Firm Name Corporate Learning (1999) AbleSoft $2.0 CIP Capital, LP, Penn Janney Advisory Inc., Liberty Partners Acadio.com $3.0 Trans Cosmos and Individual Investors Avulet, Inc. $1.5 Onset III, Other VC Firm Brainbench $3.0 Lycos Ventures, L.P. Click2learn.com $10.0 Marshall Capital Management and Vulcan Ventures Cyberstate University $9.7 Novus Ventures, Sigma Partners, Compass Technology Ventures DigitalThink $37.7 ServiceMaster, Torstar, Walden Capital Management Corporation, Hambrecht & Quist Private Equity, Hambrecht & Quist Venture, Cambridge Technology Capital, Bankers Trust Technology Partners Docent $17.0 INVESCO Private Capital, Advanced Technology Ventures, Norwest Venture Partners, Comdisco Ventures, BancBoston Ventures, Arcadia Partners, Gilde Investment Management EHQ, Inc. $2.0 Flanders Language Valley Fund emind (Yipinet) $12.5 Knowledge Universe, Radar Reinfrank, and Co. Formanet $1.0 Flanders Language Valley Fund Global English $6.0 Mayfield Fund HealthStream $17.8 Scripps Clinic, Vanderbilt University, Morgan Stanley Dean Witter Venture Partners and Charles N. Martin, Jr., CEO of Vanguard Health System Horizon Live Distance Learning, Inc. $6.4 First Analysis Management Co., Argentum Capital Partners II, L.P., Early Stage Enterprises, L.P., Jefferson Capital Partners I, L.P. Hungry Minds $11.0 Stuart Skorman and dozen angel investors HyCurve, Inc. $0.8 Hambrecht & Quist Innovative Community Technology $3.0 First Analysis Venture Capital, Sequoia Capital Services iSong.com $30.0 Flynn Venture Partners, Undisclosed Venture Investor Janus Technologies $3.4 VentureBank@PNC, Edison Venture Fund and Individual Investors Jet Software (AKA Qarbon.com) $2.0 Flanders Language Valley Fund, Other VC Firm Knowledge Planet $20.0 Knowledge Universe, HarbourVest Partners LLC, KnowledgeSoft, Individual Investors Knowledge Universe $500.0 NA KnowledgeNet $16.5 Morgenthaler Partners, Sierra Ventures and Trinity Ventures LearnNow, Inc. $4.0 Pennsylvania Early Stage Partners, Other VC Firm MindLeaders (FKA: DPEC, Inc.) $3.0 River Cities Capital Fund II, L.P., Other VC Firm and Individuals MindLever.com $4.1 Alliance Technology Ventures II, Mid-Atlantic Venture Fund, North Carolina Enterprise Fund NetCertification Inc. $0.5 Mercury Ventures Ltd. Ninth House Network $9.0 HMI and Individual Investors notHarvard.com $6.6 TL Ventures, Austin Ventures Online Learning Network $1.3 Madrona Investment Group, Other VC Firm Paragon Solutions, Inc. $7.4 Mesirow Capital Partners VI, Bluestem Capital Partners II, L.P., Other VC Firm ProSofttraining.com $3.0 Hunt Capital Growth Fund II, Other VC Firm Pryor Resources, Inc. $156.0 Thayer Capital Partners, Patricof & Co. Ventures, Inc. Saba Software $50.0 Norwest Venture Partners, Advanced Technology Ventures, Invesco Private Capital, Comdisco Ventures, Credit Suisse First Boston, BancBoston Ventures, Arcadia Partners, Gilde Investment Management - Netherlands, Berkeley International Capital, Sequoia and CrossLink SightPath (FKA:ClearView Technologies) $8.0 Greylock Management, Intel Corporation SkillSoft Corporation $3.8 Warburg, Pincus Ventures L.P., Individuals, Other VC Firm Teach.com, Inc. $1.2 Partners, ARCH Venture Partners TechOnLine, Inc. $3.5 SCP Private Equity Partners, Other VC Firm TrainingNet, Inc. $14.4 Charles River Ventures, Bessemer Venture Partners, Blue Rock Capital, Individuals Vault.com, Inc. (FKA: VaultReport.com, $8.0 Deutsche Bank AG, American Lawyer Media Holdings, Inc., Ingram Industries Inc., Hollinger Ventures, Inc.) Other VC Firm Virtual Education $2.1 First Analysis Venture Capital (FKA:First Analysis Corp), Other VC Firm Total $1,001.9

Corporate Learning (2000) eMind (Yipinet) $14.0 Knowledge Universe, Radar Reinfrank, and Co. IBT Technologies, Inc. $6.4 Counsel Corp., Thomas Weisel Partners, Q Investments, Individual Investors KnowledgeNet $15.0 Berkeley International Capital, Morgenthaler Partners, Sierra Ventures and Trinity Ventures Ninth House Network $40.0 Chase Capital Partners, Merrill Lynch, Hambrecht and Quist, and Arena Capital, HMI and Individual Investors notHarvard.com $8.5 Austin Ventures, TL Ventures, Silicon Valley Bank, and individual investors 70 The Knowledge Web – 23 May 2000

Venture Capital in Knowledge Enterprises (1999 and YTD 2000) (Continued) Amount Company Name ($mil) Firm Name Parlo, Inc. $14.0 Goldman, Sachs & Co., Sevin Rosen Fund , RHO Management TechOnLine, Inc. $7.0 SCP Private Equity Partners, Other VC Firm TrainingNet Inc. $33.7 BCI Partners; Hikari Tsushin (Japanese Telecom Company, HLM Management, Sirios Capital and others WebCT (FKA: Universal Learning $25.0 Chase Capital Partners, Duke University, BancBoston Ventures, Boston Millennia Partners, Technology) CMG@Ventures, Kestrel Venture Partners Total $163.6

E-cruiting/Human Capital Management (1999) AdminiQuest $18.1 Sequel Venture Partners, Piper Jaffray Ventures Administaff $8.0 Pyramid Ventures, Texas Growth Fund Career Horizons $1.1 Corporate Venture Partners, Harvest Partners, European Development Capital, Noro-Moseley Partners Career Choices, Inc. $2.4 Lombard Investments, Inc. CareerBuilder.com $47.7 New Enterprise Associates, 21st Century Internet Venture Partners, TTC Ventures, ADP, FBR Technology Venture Partners L.P., GE Capital, GE , and Microsoft Careerstaff Unlimited $0.9 RS&Co., Bayview Fund c/o Robertson Stephens CRUEL WORLD (FKA: Career Central) $35.0 Softbank Technology Ventures, Individual Investors, IDG Ventures, Allen & Company Incorporated, Arthur Rock & Co., Technology Crossover Ventures, QuestMark Partners, Sycamore Ventures Guru.com $19.0 Greylock Capital, August Capital HotJobs.com $16.0 Generation Partners, Bessemer Venture Partners and Boston Millennia Partners Jobs.com $72.0 idealab Capital Partners, CBS Corporation, Individual Investors Hire Systems $79.0 Accel Partners, Washington Post Company, Tribune Company Hire.com $8.4 Murphree Venture Partners, Eos Ventures, G51, Crosspoint Venture Partners, Kleiner Perkins Caufield & Byers, TL Ventures Icarian $18.0 Wheatley Partners, H&Q Technology Fund, Fidelity Ventures, Kleiner Perkins, Presidio Venture Partners JobDirect.com $5.5 Canaan Partners, Scripps Ventures, Soros Fund Management Niku Corp. $40.0 Amerindo Investment Advisors, Charter , Essex Investment Management Company, LLC, Soros Private Equity Partners LLC, CNET, Inc. and TATA Consulting Opus360 $40.0 Safeguard Scientifics, CrossPoint Ventures, Odeon Capital, Cambridge Technology Ventures SkillsVillage $8.8 Atlas Venture, Individual Investors Techies.com $13.6 Omega Venture Partners , Norwest Venture Partners, Dain Rauscher Wessels Investors, and Winton Partners Techies.com $25.0 CNET, Red Hat, East Peak Partners LP, SI Investors, ZDNet, Norwest Venture Partners and Crosslink Capital, and Individual Investors Vivant NA Internet Capital Group, Associated Venture Investors WebHire.com $20.0 Softbank Capital Partners, Yahoo! Total $478.5

E-cruiting/Human Capital Management (2000) CareerBuilder.com $11.0 GE Capital Equity Capital Group, GE Pension Trust, New Enterprise Associates, 21st Century Venture Partners, Automatic Data Processing (ADP), TTC Ventures, and FBR Ventures Jobs.com $8.2 Adecco SA Personic $18.0 AIG Developed Markets Private Equity Fund, L.P, BancBoston, Battery Ventures, Technology Crossover Ventures Techies.com $22.0 J. & W. Seligman & Co., Winton Partners, Crosslink Capital, Norwest Venture Partners, Individual Investors, Ziff-Davis Publishing, CNET, Red Hat, SI Capital, Dain Rauscher Wessels Investors Total $59.2

1999 Total $2,220.2 YTD2000 Total $797.6

TOTAL(1999 and 2000YTD) $3,017.8 Source: Securities Data Corp., Venture Source, EduVentures.com, Company Press Releases

71 The Knowledge Web – 23 May 2000

Enterprise-Wide Strategic Relationship Managers Partnerships with management consulting firms and other enterprise-wide strategic relationship managers will be tremendous assets for many knowledge services companies. Having implemented ERP, sales force automation, JIT and other enterprise-wide solutions that leverage technology in recent years, companies and academic institutions will now turn their attention to enterprise- wide learning solutions, some of which will be able to work as solutions to existing enterprise management technology. Partnerships with management We believe these enterprise-wide strategic relationship managers will be consulting firms and other kingmakers of knowledge services companies in the New Economy. With the enterprise-wide strategic percentage of wired schools and institutions of higher learning approaching 100%, the need will arise to leverage the technological infrastructure they have put in relationship managers will be place. Management consulting firms, such as PriceWaterhouseCoopers and tremendous assets for many KPMG, are already building strong education-related consulting practices. knowledge services companies. Institutions will be relying on these consulting firms to help them choose and implement enterprise-wide learning solutions. To drive future growth, knowledge services companies should align themselves with these kingmakers. They should develop comprehensive solutions to the needs of their target market, make these solutions compatible with existing infrastructure and design them to be as easy to implement and use as possible. Knowledge services companies that are able to provide such solutions will be crowned by the kingmakers, who already have built a strong rapport with clients in search of enterprise-wide solutions. A recommendation from such a firm provides instant credibility for a knowledge services company.

Top-Performing IPOs 1999 was a phenomenal year in the IPO market by anyone’s standards. Looking at the top performing IPOs for 1999, it is apparent that the “usual suspects” play a major role in the success of target companies. Well-known venture backers Benchmark Capital, Kleiner Perkins and Crosspoint each invested in several of last year’s top IPOs, including four of the top five performers. As phenomenal as the numbers were for 1999, the stage is set for new records to be set in 2000. For instance, the total global dollar volume for the first quarter alone in 2000 was $32.1, breaking the old record of $10.8 billion in the first quarter of 1999. Furthermore, the average deal size for first the quarter of 2000 was $220 million, surpassing the combined average for all four quarters of 1999 at $191 million.

1999 was a phenomenal year in IPOs in 1999 by Industry ($ billion) the IPO market by anyone’s standards. As phenomenal as Banks, Brokers, Fin $1.6 Services the numbers were for 1999, the $6.7 $6.6 Telecommunications Computers stage is set for new records to $3.4 be set in 2000. Semiconductor

$17.3 Electronics

Internet Services

$19.2 Internet Software

$3.9 Media

$0.8 Retail $4.9

Source: IPO.com

72 The Knowledge Web – 23 May 2000

Top 25 Performing IPOs of 1999 Issue Ticker Split Adj Price Performance Rank Issuer Date Symbol Offer Price 3/31/00 Since IPO Investors 1 Brocade Comm Sys 5/24/99 BRCD 4.75 160.63 3,282% Crosspoint Venture Partners, Mohr Davidow Ventures, Bill Joy, LSI Logic, J.F. Shea & Co., JAFCO America Ventures, Bay Partners, US Information Technologies, Weiss, Peck & Greer Venture Partners, Norwest Venture Partners, Imperial Ventures, Andreas Bechtolsheim

2 Commerce One 7/1/99 CMRC 7.00 173.31 2,376% Canaan Partners, Bluewater Capital Management, Foundation Capital, WI Harper Group, European Technology Holdings, SAP America, RB Webber & Co., GE Capital, Equity Capital Group, RHO Management, Charter Growth Capital, Nexus Group, LLC, MSDW Venture Part., MCI, British Telecomm.

3 5/17/99 RBAK 11.50 283.44 2,365% Sequoia Capital, Accel Partners, Mayfield Fund, Kleiner Perkins Caufield & Byers, Lighthouse Capital Partners, Comdisco Ventures

4 Juniper Networks 6/24/99 JNPR 11.33 267.00 2,256% Kleiner Perkins Caufield & Byers, Benchmark Capital, New Enterprise Associates, Institutional Venture Partners, Crosspoint Venture Partners, Ericsson, Siemens AG, Newbridge Networks, UUNET Technologies, Inc., Lucent, AT&T Ventures, Qwest Com., Anschutz Family Investment, Northern Telecom, Corp. Enterprise Partners

5 Ariba 6/22/99 ARBA 11.50 220.00 1,813% Benchmark Capital, Crosspoint Venture Partners, Technology Crossover Ventures, Van Wagoner Capital Management, Amerindo Investment Advisors, DMG Technology, VISA International, PeopleSoft, Intel Corporation

6 VerticalNet 2/10/99 VERT 8.00 151.00 1,788% Koch Ventures, Internet Capital Group, Wheatley Partners, EnerTech Capital Partners, Lehman Brothers, Lambros LP

7 Vignette Corp 2/18/99 VIGN 9.50 177.94 1,773% Sigma Partners, Austin Ventures, Attractor Investment Management, Charles River Ventures, CNET, H&Q Venture Associates, LLC, Amerindo Investment Advisors, GS Capital Partners, Partech International, JGE Capital Management, MSDW Venture Part., Olympus Partners, Goldman Sachs Group

8 Phone.com 6/10/99 PHCM 8.00 146.94 1,737% ABN-AMRO Bank NV, BCE Mobile Communications, Bell Atlantic, CitiCorp, Greylock Capital, Itochu Technology, JK&B Capital, KLM Pension Foundation, Kyocera International, Inc., Matrix Partners, Nexus Group, LLC, Paribas Principal, Inc., Reuters Ltd, Siemens Mustang Ventures, Sienna Holdings, Sofinnova Ventures, Van Wagoner Capital Management, Weiss, Peck & Greer Venture Partners

9 TIBCO Software 7/13/99 TIBX 5.00 87.50 1,650% Reuters Ltd., Cisco Systems, Mayfield Fund

10 Internet Capital Group 8/4/99 ICGE 6.00 93.39 1,457% Comcast ICG, CPQ holdings, Internet Assets, Inc., Safeguard Scientifics, R.A.F. Ventures Inc.

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Top 25 Performing IPOs of 1999 (Continued) Issue Ticker Split Adj Price Performance Rank Issuer Date Symbol Offer Price 3/31/00 Since IPO Investors 11 Vitria Technology 9/16/99 VITR 8.00 113.13 1,314% ABN-AMRO Bank NV, BCE Mobile Communications, Bell Atlantic, CitiCorp, Greylock Capital, Itochu Technology, JK&B Capital, KLM Pension Foundation, Kyocera International, Inc., Matrix Partners, Nexus Group, LLC, Paribas Principal, Inc., Reuters Ltd, Siemens Mustang Ventures, Sienna Holdings, Sofinnova Ventures, Van Wagoner Capital Management, Weiss, Peck & Greer Venture Partners

12 Kana Communications 9/21/99 KANA 7.50 86.00 1,047% Amerindo Investment Advisors, Aspect Telecommunications, Benchmark Capital, Draper Fisher Jurvetson, , J.H. Whitney & Co.,

13 Purchasepro.com 9/13/99 PPRO 8.00 89.50 1,019% Jefferies & Company, Lexington Investor Group

14 Art Technology Group 7/20/99 ARTG 6.00 63.00 950% SOFTBANK Technology Ventures, Tudor Investment Corporation, Bain Capital, Individual Investors, Gemini Investors LLC, Wyndcrest Partners, GMN Investors

15 Foundry Networks 9/27/99 FDRY 12.50 126.00 908% Benchmark Capital, Compaq Computer Corporation, Greylock Capital, IBM, Intel Corporation, Netscape Communications, Novell, Oracle, SAP America

16 Silknet Software 5/5/99 SILK 15.00 141.50 843% Zero Stage Capital, CMGI @Ventures, BancBoston Ventures, Vertex Management Inc., Intel Corporation, JAFCO America Ventures, Goldman Sachs Group

17 E.piphany 9/21/99 EPNY 16.00 148.50 828% Information Technology Ventures, Kleiner Perkins Caufield & Byers, Discovery Ventures LLC, APV Technology Partners, KPMG Peat Marwick, Cambridge Technology Capital, L.P, VISA International

18 Liberate Technologies 7/27/99 LBRT 8.00 72.00 800% Edison Venture Fund, Poly Ventures, Kinetic Ventures

19 Agile Software Corp. 8/19/99 AGIL 10.50 75.13 615% Mohr Davidow Ventures, Sequoia Capital, Accel Partners, Integral Capital Partners, Charter Growth Capital, Glynn Ventures, H&Q Venture Associates, LLC, Needham Asset Management

20 F5 Networks 6/4/99 FFIV 10.00 71.06 611% Encompass Ventures, Britannia Holdings, Individual Investors, Cypress Partners, Menlo Ventures, IDG Ventures

21 Proxicom 4/19/99 PXCM 6.50 44.19 580% GE Capital, Equity Capital Group, General Atlantic Partners, FBR Technology Venture Partners L.P., Washington Post

22 10/28/99 AKAM 26.00 160.06 516% Polaris Venture Partners, Battery Ventures, Baker Communications, Trust Company of the West, Cisco Systems, Apple Computer, Microsoft

23 Digital Island 6/29/99 ISLD 10.00 60.06 501% Vanguard Venture Partners, Crosspoint Venture Partners, Bay Partners, HMS Investments, Crescendo Ventures, Stanford University, Cisco Systems, National Semiconductor, JAFCO America Ventures, Partech International,Japan Associated Finance Company, US Information Technologies, U.S. Growth Fund, Nippon Enterprise Development, Bass Associates, E*trade, Chase Capital Partners, Arbor Investors, L.L.C., Tudor Investment Corporation, Candle Corp., Merrill Lynch KECALP

24 Red Hat 8/11/99 RHAT 7.00 40.25 475% Benchmark Capital, Compaq Computer Corporation, Greylock Capital, IBM, Intel Corporation, Netscape Communications, Novell, Oracle, SAP America

25 Braun Consulting 8/10/99 BRNC 7.00 30.00 329% NA Source: SDC, FactSet. 1999 IPOs are ranked by price performance through 3/31/2000; current prices may differ materially due to recent market volatility.

74 The Knowledge Web – 23 May 2000

[EWBX] MLPF&S or one of its affiliates was a manager of the most recent offering of securities of this company within the last three years. [IZAP, POVT, SABA, SCIL] MLPF&S was a manager of the most recent public offering of securities of this company within the last three years. [APOL, EWBX, IZAP, LTRE, NLCS, POVT, SABA, SCIL, SLVN, SMTF, TMPW] The securities of the company are not listed but trade over-the-counter in the United States. In the US, retail sales and/or distribution of this report may be made only in states where these securities are exempt from registration or have been qualified for sale. MLPF&S or its affiliates usually make a market in the securities of this company. Opinion Key [X-a-b-c]: Investment Risk Rating(X): A - Low, B - Average, C - Above Average, D - High. Appreciation Potential Rating (a: Int. Term - 0-12 mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 - Reduce, 5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 - Same/Lower, 9 - No Cash Dividend. Copyright 2000 Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S). All rights reserved. Any unauthorized use or disclosure is prohibited. This report has been prepared and issued by MLPF&S and/or one of its affiliates and has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited, which is regulated by SFA; has been considered and distributed in Australia by Merrill Lynch Equities (Australia) Limited (ACN 006 276 795), a licensed securities dealer under the Australian Corporations Law; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Ltd, which is regulated by the Hong Kong SFC; and is distributed in Singapore by Merrill Lynch International Bank Ltd (Merchant Bank) and Merrill Lynch (Singapore) Pte Ltd, which are regulated by the Monetary Authority of Singapore. The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Additional information available. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). MLPF&S and its affiliates may trade for their own accounts as odd-lot dealer, market maker, block positioner, specialist and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. MLPF&S, its affiliates, directors, officers, employees and employee benefit programs may have a long or short position in any securities of this issuer(s) or in related investments. MLPF&S or its affiliates may from time to time perform or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. 75