Ue with the Shift of Internet Usage to Mobile Stems from the Uncertainty As to How Far Google Or Apple Would Be Willing to Extend Their Tax on App Revenues

May 14, 2012

PRISM

PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Making diffuse information about the Internet and Social Media crystal clear

IN THIS ISSUE:

. Rovio 2011 Financials . comScore: U.S. Mobile Usage . Facebook Amends S-1 . Facebook Acquires Glancee . Facebook Launches App Center

THE INFORMATION HEREIN IS ONLY FOR ACCREDITED INVESTORS AS DEFINED IN RULE 501 OF REGULATION D UNDER THE SECURITIES ACT OF 1933 OR Michael Pachter INSTITUTIONAL INVESTORS. (213) 688-4474 [email protected] Wedbush Securities does and seeks to do business with companies covered Yoni Yadgaran in its research reports. Thus, investors (212) 938-9924 should be aware that the firm may have a conflict of interest that could [email protected] affect the objectivity of this report. Investors should consider this report as only a single factor in making their 1000 Wilshire Blvd, • Los Angeles, CA 90017 investment decision. Please see page 213.688.8000 • www.wedbush.com 14 of this report for analyst MEMBER NYSE/FINRA/SIPC certification and important disclosure information.

WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

About Wedbush Securities Private Shares Group

The Private Shares Group of Wedbush Securities is a leader in providing research and trading to the rapidly growing industry of privately traded securities, with an emphasis on companies in the social media space. We assist companies in raising growth capital through traditional private placements and provide liquidity options for existing and former employees through tailored selling programs. We also work with venture capital, private equity and hedge fund investors to help them adjust their holdings in some of the most dynamic companies. We endeavor to understand the underlying industries of the private companies we trade, in order to help our clients make informed decisions about their investments. We provide discreet customized solutions for our institutional and accredited private clients through a team of professionals located in New York, Los Angeles and San Francisco.

About Michael Pachter

Michael Pachter is the Managing Director of Equity Research, providing coverage across the Digital Media sector, as well as the Head of Research for the Private Shares Group. He has been recognized as StarMine’s “Top Earnings Estimator” year after year and “Best on the Street” by the Wall Street Journal. Michael brings over 20 years of experience as a financial professional to the Private Shares Group, along with extensive knowledge across the social media sector in both public and private companies. Mr. Pachter holds an M.B.A. from the Anderson School at the University of California at Los Angeles, a juris doctor from Pepperdine University, an LL.M. in Taxation from the University of Florida, and a bachelor’s in Political Science from California State University, Northridge.

About Yoni Yadgaran

Yoni Yadgaran joined Wedbush from Bank of America Merrill Lynch. Originally covering Internet & E-commerce within Equity Research, he later moved on to help pioneer the Private Shares Group’s Research efforts. Yoni is a CFA level 3 candidate and received a B.B.A in Finance from Baruch College.

Contact Wedbush Securities Private Shares Group:

Michael Pachter Managing Director, Equity Research Kevin Cohen Head of Research, Private Shares Group Director of Trading, Private Shares Group (213) 688-4474 | [email protected] (213) 688-8089 | [email protected] Twitter: @michaelpachter

Yoni Yadgaran Matt McGrath Research Associate, Private Shares Group Director of Client Strategies (212) 938-9924 | [email protected] (213) 688-6632 | [email protected]

Cyrus P. Pirasteh Managing Director, Private Shares Group Head of Equity Trading, Technologies & Operations (213) 688-6661 | [email protected]

About Wedbush Securities

Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking, equity research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks as a top liquidity provider for the NASDAQ, and was ranked #1 stock picker for 2010, and again in 2011 by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service, client financial safety, continuity, and advanced technology. (www.wedbush.com)

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Rovio

Rovio, the mobile game developer behind the Angry Birds franchise, reported 2011 financials last week. The company generated revenues of €75.4 million ($106.3) million for the year, with 30% from consumer products. The segment generates most of its revenue through the sale of Angry Birds-branded toys that are priced between $5 – 105. The company has over 200 licensing partners for its branded products, and according to Reuters, the consumer products segment continued to increase share of revenue generated in Q1:12. The remaining 70% of revenue was generated from a mix of paid downloads of Angry Birds (Angry Birds: Classic, Rio, Seasons), in-app mobile and social virtual goods, and advertising. According to Reuters, Rovio had generated $10 million in revenue in 2010, plans to release several new titles this year, and is preparing for an initial public offering in Hong Kong or New York. The company will be releasing a title outside its Angry Birds franchise this year, and is working on an animated feature film as well.

The $74.4 million generated from games (paid downloads, virtual goods and ads) in 2011 suggests that Rovio’s mobile ad performance was weaker than we previously reported. In an earlier note (available here: http://bit.ly/HbCto0) we estimated that the company had generated $32 million from cumulative mobile downloads (using data published by Xyologic), leaving only around $42 million from virtual goods and ads combined. We previously estimated that Rovio generated close to $4 million per month in incremental ad revenue, although the company’s report now suggests that its ad revenue was materially lower. We also posited that if Rovio was selling virtual items to 40% of iOS users, as it had claimed, the company would have generated at least an incremental $27 million from virtual goods sales. Rovio reported that its games had been downloaded 648 million times by the end of 2011, and the company this week announced that Angry Birds had seen over 1 billion downloads to date.

Angry Birds Xyologic Download Estimates (Millions) Downloads Net Download Revenues Platform Cumulative Jan. 2012 % U.S. Price Cumulative Jan. 2012 iPhone Paid Original 16.6 1.8 49% $0.99 $11.50 $1.2 Rio 4.0 0.7 47% $0.99 $2.80 $0.5 Seasons 5.1 1.0 49% $0.99 $3.50 $0.7 iPhone Free Original 21.2 5.4 57% - - - Rio 12.0 2.9 48% - - - Seasons 9.4 3.1 46% - - - Android Free Original 56.1 1.5 46% - - - Rio 23.1 0.6 41% - - - Seasons 32.4 1.4 48% - - - iPad Paid Original 2.3 0.4 48% $4.99 $7.96 $1.2 Rio 1.4 0.2 45% $2.99 $2.89 $0.5 Seasons 1.8 0.3 45% $1.99 $2.49 $0.5 iPad Free Original 11.9 2.6 43% - - - Rio 5.9 1.1 42% - - - Seasons 4.7 1.0 41% - - - Windows Phone Original 0.46 0.05 35% $2.99 $0.96 $0.1 Total 208.3 23.9 48% $0.22 $32.11 $4.63 Source: Wedbush Securities, Xyologic

Rovio reported an operating margin of 64% (€48 million or $67.6 million). The company recently launched it fourth title, Angry Birds: Space, which likely drove heavy marketing by Rovio prior to its release, and the company’s headcount grew from 28 to 224 employees in 2011. The company recently opened offices in Tampere and Shanghai, and will be hiring as many as 30 employees for its Stockholm office this year.

Rovio reports 200 million monthly active users (MAUs) across the various Angry Birds platforms. Rovio’s single title on Facebook, which was released in February, has grown to over 23 million MAUs and 2.9 million daily active users (DAUs). Angry Birds for Facebook is the sixth most popular game on the social network, ranked by MAUs, and the only title among the top seven that is not published by Zynga. The title is also the only top hit to have gained MAUs over the past month, although we note that engagement and DAUs have fallen off substantially. The issue Rovio faces is the lack of inherent social dynamics in its games, which prevents users from continuing to play the game once they have cleared the included levels. Without an engaged audience, Rovio is likely to have difficulty monetizing its games to the extent that Zynga has,

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although the ability to charge for app installations, which Facebook will soon launch, provides the company a channel for monetizing its games that will supplement the sale of virtual goods. This week the company attempted to add a social element to Angry Birds on Faceook by releasing a “Share & Play” option so that users can embed a level of the game into their Facebook timelines or offsite webpages that can be played instantly. Players can also challenge their Facebook friends to beat their top scores in the game.

Angry Birds On Facebook 30 (Millions)

MAU DAU DAU/MAU (%) 25

0 Feb. '12 Mar. '12 Apr. '12 May. '12

Source: Wedbush Securities, Appdata

In August, Bloomberg reported that Rovio planned to raise capital at a $1.2 billion valuation. Since then, we have seen estimates of valuation at over $9 billion, although last week’s figures don’t appear to come close to supporting this number. Funzio, which GREE acquired for $210 million earlier this month, was generating revenue at a $60 million annual run-rate when it was acquired, which implies a revenue multiple of about 3.5x. Zynga, which generated $1.14 billion in revenues in 2011, currently trades at a 6x revenue multiple, ex cash. Rovio’s 2011 revenue of $106 million, dependence on one-off payments for app downloads, revenue concentration on a single product, and lack of social engagement suggests the company will have trouble justifying reported valuation estimates.

TechCrunch recently reported that Rovio had purchased the IP for Casey’s Contraptions from Snappy Touch and Mystery Coconut. The title is a physics-based puzzle game for the iPad, and will be re-launched by Rovio for Android and iOS devices this summer. Note that prior to launching Angry Birds, Rovio had released over 50 games.

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Top Social Game Developers MAU DAU (DAU/MAU) Developer May 2012 Apr 2012 Dec 2011 m-o-m % ∆ May 2012 Apr 2012 m-o-m % ∆ May 2012 Apr 2012 Zynga 267.8 236.2 215.7 13% 57.5 50.9 13% 21% 22% King.com 45.4 37.0 22.5 23% 11.0 9.6 16% 24% 26% wooga 45.0 45.1 34.3 0% 9.6 10.3 -7% 21% 23% Electronic Arts 44.5 46.6 57.3 -5% 8.9 9.4 -5% 20% 20% Telaxo 25.8 21.8 13.8 18% 1.7 1.8 -5% 6% 8% Playdom 23.9 19.7 17.9 21% 4.2 3.5 21% 18% 18% Rovio 23.4 22.3 - 5% 2.9 3.4 -15% 12% 15% Tetris Online 16.6 16.7 8.8 -1% 3.8 3.9 -3% 23% 23% Social Point 12.8 12.6 8.0 2% 2.1 1.9 11% 16% 15% MindJolt 12.7 9.0 9.4 41% 1.2 1.2 0% 10% 14% Peak Games 11.1 6.3 7.5 76% 4.8 1.1 352% 43% 17% RockYou! 10.4 3.2 4.9 230% 1.0 0.3 198% 10% 11% Geewa 10.2 8.9 - 15% 2.1 1.9 10% 21% 22% Source: Wedbush Securities, Appdata

Top Social Games MAU DAU (DAU/MAU) Game Developer May 2012 Apr 2012 Dec 2011 m-o-m % ∆ May 2012 Apr 2012 Dec 2011 m-o-m % ∆ May 2012 Apr 2012 Dec 2011 CityVille Zynga 39.7 42.8 49.5 -7% 6.0 7.4 10.4 -19% 15% 17% 21% Texas HoldEm Poker Zynga 36.1 36.3 30.3 -1% 6.9 7.3 6.2 -5% 19% 20% 20% Draw Something Zynga 33.9 35.7 - -5% 9.2 13.4 - -31% 27% 38% - FarmVille Zynga 24.1 26.3 30.4 -8% 4.5 5.2 6.8 -13% 19% 20% 22% CastleVille Zynga 23.6 25.9 - -9% 5.3 6.2 7.6 -15% 22% 24% - Angry Birds Rovio 23.4 22.3 - 5% 2.9 3.4 - -15% 12% 15% - Hidden Chronicles Zynga 23.3 27.6 - -16% 5.0 6.1 - -18% 21% 22% - Bubble Witch Saga King.com 21.4 19.3 7.6 11% 6.3 6.4 3.1 -2% 29% 33% 41% Diamond Dash wooga 19.1 18.0 10.8 6% 4.3 4.4 2.6 -2% 23% 24% 24% Words With Friends Zynga 18.4 20.0 11.6 -8% 6.7 7.8 5.4 -14% 36% 39% 47% Zynga Slingo Zynga 16.1 15.9 - 1% 3.6 4.1 - -12% 22% 26% - Tetris Battle Tetris Online 16.0 16.1 6.6 -1% 3.7 3.8 2.3 -3% 23% 24% 35% The Sims Social Electronic Arts 15.9 16.8 33.7 -5% 2.8 2.8 5.9 0% 18% 17% 18% Empires & Allies Zynga 11.9 12.8 19.0 -7% 1.6 1.8 3.6 -11% 13% 14% 19% Bubble Island wooga 10.8 11.6 9.7 -7% 1.9 2.3 2.2 -17% 18% 20% 23% Source: Wedbush Securities, Appdata

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comScore: U.S. Mobile Usage

comScore published a report that quantified mobile traffic generated by the 106 million smartphone users over 18 years old in the United States. comScore utilized a panel of over 10,000 people who installed its software on their mobile devices. In March, the report found that about 82% of time spent consuming media by users on a smartphone is done through mobile apps. comScore’s metric encompassed only iOS, Android and RIM devices, which together account for the vast majority (we estimate close to 95%) of mobile traffic.

In March, Google was estimated by comScore to have been visited by 97% of the 97 million unique visitors measured, and the site shared similar characteristics with general Internet traffic, where 81% of mobile time spent was facilitated through an pp, and the remaining 19% is spent using a mobile browser. Facebook had a similar mix of 80% share of time spent coming from apps, and the social network has penetrated 80% of the smartphone population, having reached 78 million mobile users in the United States. U.S. Smartphone Unique Visitors: March 2012 (Millions) 120

97 100 94

78 80 66

60 44 39 38 40 29 28 27 27 26 25 24 24 23 20

0 Total Google FacebookYahoo! Amazon WikimediaApple Cooliris AOL eBay Zynga Twitter Rovio Weather Ch.MicrosoftESPN

Source: Wedbush Securities, comScore Zynga, Twitter and Rovio shared similar characteristics, with 27 million, 26 million and 25 million mobile unique visitors, respectively, in March, and received nearly all (96 – 99%) of their mobile traffic through apps. Share of Mobile Time Spent on App (vs. Mobile Browser) : March 2012 (Millions)

100% 100% 100% 100% 97% 96%

90% 86% 82% 82% 81% 80% 80% 75% 70%

60% 53% 53% 50% 43% 40%

30%

20% 18%

10%

0% Total Cooliris Apple Zynga Twitter Rovio Amazon eBay Google Facebook Yahoo! Weather Ch.AOL ESPN Microsoft

Source: Wedbush Securities, comScore

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Penetration among unique users is typically between 45 – 50% of smartphones for top U.S. online destinations. Outliers include AOL and Microsoft, which have lagged competing mobile content providers with smartphone penetration of 25% and 13%, respectively, and ESPN and Twitter at the other end of the spectrum, with respective penetration of 62% and 64%.

Smartphones Penetration of U.S. Unique Visitors: March 2012 (Millions) 70% 64% 62% 60%

50% 49% 50% 47% 45% 45% 43% 41% 39% 40% 38%

30% 25%

20% 13%

10%

0% Twitter.comESPN Google Facebook Apple Wikimedia Weather Ch.Total Amazon eBay Yahoo! AOL Microsoft

Source: Wedbush Securities, comScore

Facebook, which comScore estimates had 159 million U.S. unique visitors in March, is accessed through a smartphone by 49% of its users.

Total U.S. Unique Visitors: March 2012 (Millions) 250 224

200 190 179 175 159 150

110 106 100 86 81 71 54 50 40 38

0 Total Google Microsoft Yahoo! Facebook AOL Amazon Wikimedia Apple eBay Weather Ch. Twitter.com ESPN

Source: Wedbush Securities, comScore

On average, comScore reports that 80% of mobile time spent online is facilitated by apps. The top app for iPhone and Android users are Apple’s iTunes (33 million unique visitors) and Google’s Android Market (53 million), which have penetrated 99% and 93% of users on their respective platforms in March. About 33% of U.S. mobile Facebook users access the site from an iPhone device and we estimate another 46% use Android devices.

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Top iPhone Apps: U.S. Unique Visitors (Millions) March 2012 Top Android Apps: U.S. Unique Visitors (Millions) March 2012 0 5 10 15 20 25 30 35 0 10 20 30 40 50 60

Total 33 Total 53

Apple iTunes 33 Android Market 50

Google Maps 30 Google Search 45

Facebook 26 Google Maps 40

YouTube 26 Gmail 38

Yahoo! Weather 23 Facebook 37

Yahoo! Stocks 21 Cooliris 29

Pandora Radio 10 YouTube 25

Weather Ch. 9 Google News & Weather 24

Temple Run 7 Angry Birds 16

Words With Friends 7 Words With Friends 13

Source: Wedbush Securities, comScore

Within social networking, Twitter is the second-most trafficked service after Facebook, with 26 million U.S. unique visitors in March. About 64% of Twitter’s total users access their accounts with smartphones, and penetration of about 25% of smartphone users. comScore reported that the average U.S. smartphone user on Twitter spent 114 minutes on the service in March, compared to only 20 minutes spent by non-mobile users.

U.S. Smartphone Unique Visitors: March 2012 U.S. Smartphone Users: Average Minutes Per Visitor 90 (Millions) 500 March 2012

78.0 441 80 450

400 70 350 60 300 50 250 ` ` 40 200 30 25.6 150 146 114 20 100 68 53 10 7.6 7.5 5.5 50 4.5 13 0 0 Facebook Twitter LinkedIn Pinterest Foursquare Tumblr Facebook Twitter LinkedIn Pinterest Foursquare Tumblr

Source: Wedbush Securities, comScore

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Facebook Amends S-1

Facebook amended its S-1 last week, highlighting the potential negative effect of mobile adoption cannibalizing easier to monetize desktop usage. The company pointed to the growth of mobile DAUs, with user growth outpacing advertising growth. This metric is good evidence of Facebook’s emphasis on user experience over short-term revenue gains. Rolling out mobile advertising slowly while ramping mobile usage rapidly is consistent with Facebook’s mission of connecting the world, and we believe that the newly launched sponsored stories ad product serves as an acceptable compromise that should serve both to maintain the user experience and allow for revenue growth.

According to a report published by Marin Software, advertisers continued to increase advertising spend allocations on social ads, particularly within the Facebook ad market, which provides both social and traditional display ads. We believe that Facebook’s social ad products address the cluttered user interface (UI) problem caused by too many display ads, providing significant monetization potential through a less obtrusive medium. Over the last 12 months, Marin reports that the share of Facebook ad spend on it social ad product grew from 5% to 23% in the United States. Marin projects that share to increase to 50% by the end of 2012. According to Marin, over the last year, cost per click (CPC) of U.S. social ad products grew 86% vs. a 15% decline for marketplace ads. Click-through rates (CTR), which are a proxy for engagement with ads, grew by 50% over the past year for Facebook social ads. On a global basis, social ads on Facebook experienced a 20% growth in CTRs, 26% increase in CPCs, and 51% increase in CPMs.

According to Marin Software, the average CTR for Facebook ads in the U.S. is about .06%, CPCs are about 50¢, and CPMs are close to 32¢. This compares to a report published by Marin for Q1:12 paid search ad performance in the U.S., which, on average, achieved CTRs of 2.21% and CPCs of 76¢ for regular computer traffic. The maximum CPM for paid search ads is significantly higher than the rate for Facebook ads ($16.80 vs. 32¢) due to the lower CTRs that Facebook ads generate.

Mobile paid search CPCs are 30% lower than traditional desktop CPCs, which contributed to Google’s latest quarterly earnings miss. We believe that despite the discount warranted by smaller screen sizes for display ads and intent differentials for search, the value of geo-targeted ads will help Facebook gap pricing differences and avoid being negatively impacted by the shift to mobile web usage. The current gap between mobile and desktop CPCs arises from lower competition among advertisers bidding on mobile ad inventories, as well as significantly higher CTRs that mobile ads experience. Higher mobile CTRs are partially a result of enhanced targeting carried out in campaigns by mobile advertisers. For example, Google provides Click to Call ads for mobile searches, which makes clicking an ad the easiest medium to contact a merchant that a consumer is searching for.

While we believe demand by advertisers will increase for both mobile search and display ad products, higher CTRs will cause CPMs to remain cheap on a relative basis, with aggregate revenue benefiting from incremental volume. Facebook’s sponsored stories product has potential to monetize at a premium to regular display ads, due to a user’s inadvertent concentration on the ad as they scroll through their newsfeed and the added relevancy of both social and location based enhancements.

Facebook Ad Pricing CTR CPC CPM U.S. 0.06% $0.50 $0.32 UK 0.04% $0.75 $0.27 Eurozone 0.06% $0.22 $0.14 Israel 0.05% $0.34 $0.16 India 0.13% $0.09 $0.12 Hong Kong 0.04% $0.38 $0.15 Singapore 0.03% $0.72 $0.19 Australia 0.04% $0.77 $0.30 March 2012 U.S. Paid Search Computers 2.21% $0.76 $16.80 Smartphones 5.15% $0.53 $27.30 Tablets 3.05% $0.60 $18.30 Source: Wedbush Securities, Marin Software Source: RKG

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Globally, about 54% of Facebook’s 901 million monthly active users accessed the site with their mobile devices, although we note that a large share of mobile usage was driven by lower-end feature phones.

Facebook: Global Mobile MAUs (Millions) 600 60%

Mobile Pentration 488 500 50% 432

400 376 40%

325 288 300 30% 245

196 200 20% 155 129 101 100 75 10% 50 35

0 0% Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12

Source: Wedbush Securities, comScore

While companies such as Google and Facebook have had difficulty monetizing smartphone users in developed countries, monetization on feature phones is several orders of magnitude more difficult, due to the feature phone’s smaller display. Difficulty monetizing mobile usage contributes to declining average revenues per user (ARPU) as Facebook penetrates less-developed markets where mobile devices are the cheapest medium to connect to the Internet.

$3.5 Facebook Quarterly ARPU

$3.0

$2.86 $2.5

$2.0

$1.77 $1.40 $1.5

$1.21 $0.87 $1.0

$0.76 $0.53 $0.5 $0.31 $0.37 $0.16 $- Q1:10 Q2:10 Q3:10 Q4:10 Q1:11 Q2:11 Q3:11 Q4:11 Q1:12 Global North America Europe Asia Other Source: Wedbush Securities, Company Filings

Another potential issue with the shift of Internet usage to mobile stems from the uncertainty as to how far Google or Apple would be willing to extend their tax on app revenues. With mobile usage, Facebook’s platform is layered on top of a mobile OS, and the company may have difficulty refusing to pay something to Google or Apple (if asked) with an increasing percentage of its usage coming from mobile.

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Facebook Acquires Glancee

Facebook recently acquired Glancee, a mobile app developer launched in 2010, which helps users meet new people by leveraging their Facebook social graphs and mobile devices’ GPS. Glancee’s three founders will be joining Facebook, and terms of the deal were not disclosed. Users sign into Glancee using their Facebook accounts, and Glancee displays nearby users who have reflected similar interests on their Facebook profiles. The app shows users what they have in common with a stranger nearby, and allows them to contact that individual through a chat feature. The app shares a user’s location in the background, and users can choose to be notified through push notification when a close profile match is in proximity.

Facebook did not disclose if Glancee would be rebranded or if the team would be incorporated into one of Facebook’s existing product divisions, although we believe the latter is more likely. Facebook acquired Gowalla, another location based service, at the end of 2011, allowing users of Facebook’s mobile app to check-in to locations. A Nearby tab on Facebook’s app allows users to see a stream of their friends’ most recent check-ins, although it doesn’t provide the information of those who aren’t connected to the user. Users of Glancee do not consciously check-in, but instead the app constantly broadcasts the user’s location.

While we don’t expect the average Facebook user to find the concept of meeting strangers or sharing their information publicly appealing, there is an opportunity for Facebook to add discovery element revolving around a user’s location and social graph. Glancee’s underlying location signaling technology likely was a motivator for Facebook’s acquisition.

Source: Company Site

According to a report published by Read Write Web, Glancee had been downloaded only 30,000 times to date, and has about 20,000 users running the app passively. According to data from Appdata, Glancee only has 4,000 DAUs and 30,000 MAUs. Highlight, which is an app that is very similar, has about 4,000 DAUs and 80,000 MAUs. A large portion of Glancee’s initial active user growth is a result of temporary traction gained during the South by Southwest conference in March.

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Facebook Launches App Center

This week, Facebook announced that it would be launching a central destination for easier discovery of apps that leverage its platform. Facebook’s App Center will use metrics that include user ratings and engagement, in order to determine if an app can be published. This indicates an attempt by Facebook to model its service after Apple’s App Store, instead of Google’s Play Store, which has less stringent guidelines for developers and is difficult to navigate. An important addition for Facebook is the ability for social app developers to charge for the instillation of a Facebook app. Until now, developers such as Zynga could not charge for their latest Facebook title, and instead were restricted to in-app purchases of virtual goods. The App Center will be customized for each individual Facebook user, and Inside Facebook reports that there will be similar categories to Google and Apple’s app stores, ranking apps by top grossing, recommended, and trending.

Source: Company Site

We believe there is potential for incremental revenue for Facebook, as a number of non-gaming apps have rapidly gained traction by leveraging Facebook’s social graph. However, Facebook will direct would-be downloading users to the App Store or Play Store if an app requires an installation directly on a mobile device. This will limit paid Facebook installations to desktop or in-browser apps. Note that the App Center will not bar non-Facebook-specific apps, and native mobile apps that utilize Facebook’s Connect login feature will be featured as well.

Examples of quickly growing apps leveraging Facebook include video sharing apps Viddy and Socialcam. Viddy last week raised $30 million in venture funding from NEA Ventures, Goldman Sachs, Khosla Ventures, and Battery Ventures. The company had previously raised $6 million in February from Battery Ventures, Greycroft Ventures, and Qualcomm. Viddy has over 2.4 million DAUs and 36.1 million MAUs, while its larger competitor Socialcam has grown to over 8.2 million DAUs and 41.8 million MAUs, according to Appdata.

Socially driven traffic tends to be inherently volatile. As soon as a user’s friends stop using a social app, or if usage is no longer considered trendy, users can very quickly lose interest as the utility provided drops exponentially. An example are a few social news apps, which allowed a user to see what their friends were reading or watching from a particular news source. Usage of the Guardian’s, Washington Post’s, and Yahoo’s version of this app grew to DAUs of 580,000, 4.1 million, and 5.9 million, respectively, before peaking simultaneously. From that point the Guardian’s, Washington Post’s, and Yahoo’s app had an 84%, 94%, and 12% decline in DAUs respectively, according to data published by Appdata.

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2012 Video Sharing Apps: Socialcam vs. Viddy 45 (Millions)

40 Socialcam (MAU) Socialcam (DAU) Viddy (MAU) Viddy (DAU) 35

Apr. 01 Apr. 08 Apr. 15 Apr. 22 Apr. 29 May. 06

Source: Wedbush Securities, Appdata

2012 Social Reader Apps (Millions)

45 WP Reader (MAU) WP Reader (DAU) Yahoo Social Bar (MAU) Yahoo Social Bar (DAU) 40

Sep. 25 Oct. 25 Nov. 25 Dec. 25 Jan. 25 Feb. 25 Mar. 25 Apr. 25

Source: Wedbush Securities, Appdata

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Covered Companies Mentioned in this Report (priced intraday May 14, 2012)

COMPANY TICKER RATING PRICE PRICE TARGET FACEBOOK FB OUTPERFORM $44.00 ZYNGA ZNGA OUTPERFORM $7.84 $17.00 APPLE AAPL OUTPERFORM $564.28 $800.00

IMPORTANT DISCLOSURES

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

The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated by WS’ investment banking activities.

ANALYST CERTIFICATION I, Michael Pachter, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.

Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ112.pdf

INVESTMENT RATING SYSTEM Outperform: Expect the total return of the stock to outperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. Neutral: Expect the total return of the stock to perform in-line with the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months. Underperform: Expect the total return of the stock to underperform relative to the median total return of the analyst’s (or the analyst’s team) coverage universe over the next 6-12 months.

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

Rating Distribution Investment Banking Relationships (as of March 31, 2012) (as of March 31, 2012) Outperform:59% Outperform:13% Neutral: 35% Neutral: 2% Underperform: 6% Underperform: 6%

The Distribution of Ratings is required by FINRA rules; however, WS’ stock ratings of Outperform, Neutral, and Underperform most closely conform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS’ stock ratings are on a relative basis.

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Capital Markets Disclosures as of May 14, 2012

Company Disclosure FACEBOOK 1 ZYNGA 1 APPLE 1

Research Disclosure Legend 1. WS makes a market in the securities of the subject company. 2. WS managed a public offering of securities within the last 12 months. 3. WS co-managed a public offering of securities within the last 12 months. 4. WS has received compensation for investment banking services within the last 12 months. 5. WS provided investment banking services within the last 12 months. 6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within the past 12 months. 10. The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks. 11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.

Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding and assuming the risks involved.

Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their value causing losses that may equal your original investment.

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WEDBUSH | PROGRESS REPORT for INTERNET and SOCIAL MEDIA

Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.

Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investor’s own objectives, experience, risk tolerance, and resources.

The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information.

This information is not intended to be or should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein.

This firm, Wedbush Securities, its affiliates, officers, employees, members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise.

The information and expressions of opinion contained herein are subject to change without further notice.

The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm.

Any reference to past performance is not a guarantee of future results.

Supporting documentation will be furnished upon request for any claims, comparisons, recommendation, statistics or other technical data. Additional information with respect to the information contained herein may be obtained upon request.

Applicable disclosure information is also available upon request by contacting the Business Conduct Department at (213) 688-8090. You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.

RESEARCH DEPT. • (213) 688-4505 • www.wedbush.com EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000

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