January 2004 Spotlight Report

Portal Plays: Strategies & Developments of the ‘Big Three’ Ben Macklin, Senior Analyst [email protected]

Impetus: Over the last 12 months AOL lost 2 million subscribers, and its advertising revenue fell 42%. MSN posted its first- ever profit in 2003, but it also lost 11% of its subscriber base.Yahoo! shelled out $1.9 billion in 2003 to acquire Inktomi and Overture, while revenues grew 44% during 2003. Google dominates search, but for how long? What are the portals up to?

Worldwide Revenues for Select Portals, 2002 & 2003 Issues & Questions (in millions and % growth) How have the portals fared over the last 12 months, and 2002 2003 Growth what strategies are they employing for their future? AOL $6,772.0 $6,444.0 -4.8% MSN (1) $1,309.0 $1,558.0 19.0% Why is search so important? Yahoo! $667.3 $961.2 44.0% What premium content and services are the portals offering? TerraLycos (2) $550.6 $460.2 -16.4% CNET Networks $169.2 $172.3 1.8% How is broadband adoption changing the landscape? RealNetworks $136.5 $148.3 8.6% Total $9,604.6 $9,744.0 1.5% Is Google the next Netscape? Total without AOL $2,832.60 $3,300.00 16.5% Note: as of the nine months ending September 30, 2002 & 2003; (1) MSN Analysis revenues were not made a separate revenue category for Microsoft until Search, Find, Obtain (SFO).This is the new evolution of the Q3 2002 (Q1 2003 for Microsoft's financial year), the 2002 figure is therefore an estimate based on the Q3 & Q4 2002 released revenues. (2) Internet, according to Mary Meeker at Morgan Stanley,and the *Converted from € Euros to $US on 18th November 2003. Revenues as at a constant exchange rate between 2002 and 2003 shows total revenues evidence would suggest she is right. US Internet users are now only declined 1% over the period. using the Internet as a place to satisfy not only their Source: eMarketer, company reports, December 2003 054238 ©2003 eMarketer, Inc. www.eMarketer.com communication needs but also their desires for information, knowledge, entertainment, shopping, love and even lust. If A. The ‘Big Three’ Dominate 2 there is a poster-child for the new SFO-era, it is Apple’s iTunes. B. A Changing Landscape 4 Internet users can search a vast catalogue of music for free, C. Portal Revenues 5 find the music they want, and obtain it immediately,for a price. D. Online Advertising 7 The ‘big three’ are attempting to translate this model across all E. Premium Content & Services 12 information, commerce and entertainment channels, and they F.Yahoo! 14 have an opportunity to generate revenue every step of the way. G. AOL (Time Warner) 15 Meeker’s SFO-era could equally be called the IDG-era – instant H. MSN 16 digital gratification. I. Terra Lycos 17 J. Real Networks 18 K. What Future for Google? 19 Implications for your business 20 Related Information & Links 21

The Source for Internet and E-Business Research and Analysis A. The ‘Big Three’ Dominate

Nearly every US Internet user has some Top 10 Online Brands among US At-Home & At-Work Internet Users, June 2003 (unique audience in relationship with at least one of three online thousands and time per person) brands,AOL, MSN and Yahoo! Nielsen//NetRatings Unique audience Time per person (hrs:min:sec) reported that in June 2003, MSN was the most 1. MSN 83,844 1:58:07 popular online brand, with a unique audience of 2. Yahoo! 82,852 2:32:37 3. Microsoft 79,755 0:34:17 83.8 million Internet users, closely followed by 4. AOL 68,228 8:41:06 Yahoo! and Microsoft with 82.9 million and 79.8 5. Google 44,229 0:26:28 6. eBay 39,304 1:44:54 million respectively.AOL, with 68.2 million came in 7. Amazon 35,582 0:16:55 fourth, seemingly losing ground with its rivals. 8. Real 32,376 0:33:05 9. Lycos Networks 31,077 0:15:53 More recent data from comScore Media Metrix, which measures 10. MapQuest 25,456 0:12:13 unique visitors from home, work and university locations, shows Source: Nielsen//NetRatings, July 2003 051124 ©2003 eMarketer, Inc. www.eMarketer.com the ‘big three’ attracted almost exactly the same number of visitors in October 2003, at 109 million. eBay was ranked fourth at Top 10 Web Properties Visited by US Home, Work and 62.5 million and Google sites came in fifth with a unique audience University Internet Users, October 2003 (in half that of the top three parent companies. thousands) Unique visitors One of the anchors upon which the ‘big three’ draw and maintain 1. MSN-Microsoft Sites 109,334 their online audience is through e-mail and instant messenger (IM) 2. Yahoo! Sites 108,673 services.AOL continues to have the most popular e-mail and IM 3. AOL Time Warner Network 108,394 services, while Yahoo! Mail and MSN Hotmail vie neck-and neck 4. eBay 62,454 for second place, according to September 2003 data from 5.Google Sites 58,209 Nielsen//NetRatings. 6. Terra Lycos 53,527 7. About/Primedia 41,816 Top 10 Telecom/Internet Web Sites among US 8. Amazon Sites 37,297 At-Home and At-Work Internet Users, Week Ending 14 September 2003 (unique audience in thousands, 9. Gator Network 34,604 active reach and time per person) 10. Excite Network 26,444 Unique Active Time per Note: Total Internet users=150,178,000 audience reach person Source: comScore Media Metrix, November 2003 (hrs:min:sec) 054252 ©2003 eMarketer, Inc. www.eMarketer.com AOL Instant Messenger 30,913 31.60% 1:15:15 AOL Email 20,694 21.15% 0:38:25 Instant Messaging (IM) Users in the US, by Provider, 2003 (as a % of respondents) Microsoft Passport 16,157 16.52% 0:01:55 Yahoo! Mail 15,876 16.23% 0:28:40 AOL 60% MSN Hotmail 15,587 15.93% 0:25:27 MSN 45% MSN Messenger Service 13,409 13.71% 0:32:31 Yahoo 37% Yahoo! Messenger 9,362 9.57% 0:53:31 Earthlink 4,760 4.87% 0:35:18 Source: America Online/Opinion Research Corporation, June 2003 Yahoo! Address Book 3,904 3.99% 0:03:15 050500 ©2003 eMarketer, Inc. www.eMarketer.com Comcast 3,259 3.33% 0:17:29 Note: NetView traffic figures now incorporate AOL Proprietary Channels The ‘big three’ are also among the most popular destinations for and Internet Applications Tracking with regular Web traffic data. This data cannot be trended against data from before 10 November 2002 nearly every major vertical content category online including Source: Nielsen//NetRatings, September 2003 news, sports, music, movies, games, entertainment, finance, 052743 ©2003 eMarketer, Inc. www.eMarketer.com travel, careers, weather,directory information, maps, and more.

eMarketer Spotlight Report: Portal Plays 2 A.The ‘Big Three’ Dominate

News & Information Online Shopping

Top 10 News and Information Sites among US Top Shopping Portal Sites among US At-Home and At-Home and At-Work Internet Users, October 2003 At-Work Internet Users, August 2003 (unique audience (unique audience in thousands, active reach and time in thousands) per person) Yahoo! Shopping 15,145 Unique Active Time per audience reach person AOL Shopping 7,451 (hh:mm:ss) About Network 27,381 20.1% 0:10:48 MSN Shopping 4,943

CNN 21,227 15.6% 0:32:00 Source: Nielsen//NetRatings, October 2003 MSNBC 20,596 15.1% 0:23:39 052901 ©2003 eMarketer, Inc. www.eMarketer.com Weather Channel 18,685 13.7% 0:11:57 Yahoo! Get Local 18,197 13.4% 0:11:32 Top 10 Multi-Category Commerce Sites among Yahoo! News 17,431 12.8% 0:31:23 At-Home Internet Users in the US, Week Ending 10 August 2003 (unique audience in thousands, active AOL News 15,499 11.4% 0:43:04 reach and time per person) Time Inc. Publications 11,544 8.5% 0:06:40 Unique Active Time per WeatherBug 10,216 7.5% 0:26:52 audience reach person NYTimes.com 9,056 6.7% 0:33:56 (hrs:min:sec) Source: Nielsen//NetRatings, October 2003 eBay 14,821 16.96% 0:47:20 054253 ©2003 eMarketer, Inc. www.eMarketer.com Amazon 9,058 10.36% 0:08:14 Yahoo! Shopping 2,882 3.30% 0:04:33 DealTime 2,122 2.43% 0:02:57 Online Entertainment AOL Shopping 2,010 2.30% 0:04:30 Wal-Mart Stores 1,705 1.95% 0:06:00 Top 10 Entertainment Web Sites among At-Home Target 1,433 1.64% 0:05:43 Internet Users in the US, Week Ending 14 September Bizrate.com 1,232 1.41% 0:02:57 2003 (unique audience in thousands, active reach and time per person) Buy.com 994 1.14% 0:02:24 Sears 985 1.13% 0:08:55 Unique Active Time per audience reach person Note: NetView traffic figures now incorporate AOL Proprietary Channels (hrs:min:sec) and Internet Applications Tracking with regular Web traffic data. This data CANNOT be trended against data from before November 10th, 2002. Windowsmedia 5,749 5.88% 0:07:07 Source: Nielsen//NetRatings, August 2003 Yahoo! Games 4,750 4.86% 0:47:10 051945 ©2003 eMarketer, Inc. www.eMarketer.com ESPN 4,680 4.78% 0:22:42 Yahoo! Sports 3,850 3.94% 0:18:09 EA Online 3,796 3.88% 1:18:41 Local Information AOL Music Channel 3,423 3.50% 0:12:30 eUniverse 3,132 3.20% 0:07:07 Top 10 Directories/Local Guide Sites among US Internet Users*, 2003 (in thousands of unique NFL Internet Network 2,974 3.04% 0:17:45 audience and time per person) MSN Entertainment 2,938 3.00% 0:03:24 Unique audience Time per person AOL Entertainment 2,835 2.90% 0:10:29 (hrs:min:sec) Note: NetView traffic figures now incorporate AOL Proprietary Channels Yahoo! Get Local 17,267 0:10:10 and Internet Applications Tracking with regular Web traffic data. This data cannot be trended against data from before 10 November 2002 Superpages.com 7,688 0:06:56 Source: Nielsen//NetRatings, September 2003 Switchboard.com 5,193 0:07:54 052744 ©2003 eMarketer, Inc. www.eMarketer.com Time Warner Cable 4,726 0:18:51 Citysearch 4,177 0:08:25 Yahoo! People 4,039 0:03:22 SMARTpages 3,457 0:04:52 Whitepages.com 3,130 0:06:29 MSN Yellow Pages 2,536 0:01:05 Government Guide 2,480 0:13:14 Note: *both work and home Source: Nielsen//NetRatings, May 2003 054023 ©2003 eMarketer, Inc. www.eMarketer.com

eMarketer Spotlight Report: Portal Plays 3 B. A Changing Landscape

While the ‘big three’ have dominated the US Internet access & communications Internet landscape almost since the Net’s Advertising, marketing & e-commerce inception, the emergence of new broadband Premium content & services technologies has created a new playing field, Household Internet Metrics in the US, 2000-2005 (in which has spawned new players and new millions and as a % of total households) business models. 2000 2001 2002 2003 2004 2005 Dial-up 41.8 45.6 46.5 46.2 45.4 43.3 Broadband 4.1 11.2 17.2 24.2 30.3 36.5 No longer does AOL seem the indomitable force it once was in the Online households 45.9 56.8 63.7 70.4 75.7 79.8 dial-up era, and its inability to adapt to the new broadband Total households* 105.5 107.0 108.5 110.0 111.5 113.1 environment has made it look vulnerable to its competitors.While Household penetration 43.5% 53.1% 58.7% 64.0% 67.9% 70.6% it is too early to write AOL’s obituary,one thing that is certainly Note: *Total households in 2000 is 105.5 million as recorded by the US dying is dial-up Internet access. eMarketer estimates that the top Census Bureau. Following years are eMarketer estimates based on 1.4% yearly growth three US ISPs,AOL, MSN and Earthlink (which is battling United Source: eMarketer, March 2003 Online for the number three slot), lost 3.2 million dial-up 048277 ©2003 eMarketer, Inc. www.eMarketer.com subscribers between them over the last 12 months, with AOL losing 2 million of those.The very foundations upon which AOL Broadband Households in the US and Worldwide, 2002-2005 (in millions) and other dial-up ISPs built their businesses are eroding. 2002 Broadband will be in 36.5 million US homes by the end of 2005, up 17.2 from 24.2 million in 2003, according to eMarketer’s estimates. 57.2

Worldwide, there will be over 154.3 million broadband households 2003 in 2005, up from 57.2 million in 2002. 24.2 86.2 The impact of broadband is clearly seen when comparing the Internet usage of a dial-up user with a broadband user.Data from 2004 30.3 In-Stat/MDR shows that broadband users spend nearly twice as 117.7 long online per month and view more than twice the number of Web pages than dial-up users.What’s more, other data shows 2005 36.5 that broadband users spend more money online than dial-up 154.3 users as well. US Worldwide The future growth opportunities for the portals will not be in Source: eMarketer, November 2003 providing Internet access. Dial-up Internet access is now available 054242 ©2003 eMarketer, Inc. www.eMarketer.com at $9.95 per month, broadband access is edging below $30 per month and mobile and wireless Internet access is becoming Internet Usage in the US, by Access Speed, February widespread across the country,making profit margins for ISPs 2003 razor thin.The growth opportunities for the portals will be in Dial-up DSL Cable modem satisfying the information, commerce and entertainment needs of Web pages viewed hourly 35 65 69 Internet users. Weekly hours online 10.93 16.81 19.76 Monthly hours online 47.36 72.84 85.63 AOL Time Warner’s recent move to drop AOL from its name may Web pages viewed monthly 1,658 4,735 5,908 seem cosmetic, but it is actually symbolic of the new broadband Source: In-Stat/MDR, June 2003 era the US is entering.Time Warner,the king of content, is taking 050219 ©2003 eMarketer, Inc. www.eMarketer.com over the reins from a dying dial-up ISP.Content, it seems, is now sitting at the head of the table.

Each of the ‘big three’ is heading in that direction, but they are not there yet, and the outcome of the battle between them that will begin in earnest in 2004 is anything but certain.What we can say for certain, however,is that despite coming from different origins,AOL, MSN and Yahoo! are currently pursuing revenues along remarkably similar paths:

eMarketer Spotlight Report: Portal Plays 4 B. A Changing Landscape C. Portal Revenues

“Broadband consumers use all digital Worldwide revenues in the first nine months of services more heavily than dial-up 2003 for six of the largest US portals totaled $9.7 consumers, they enjoy more PC-based billion, up only 1.5% from the same time in 2002. entertainment, communication and commerce, and they also spend more money If one excludes AOL revenues, however,portal revenues in the on online entertainment and commerce.” remaining five companies actually grew, 16.5% with Yahoo! James Brancheau, vice president for GartnerG2, October 2003 achieving the greatest growth of the companies examined, at 44%.

Despite AOL’s recent downturn, the company still completely dwarfs its competition and made up 66% of total revenues of the six portals analyzed and generated four times more revenue than its next nearest rival. It experienced a decline in revenue growth of 4.8% primarily as a result of a significant fall in advertising revenue. In contrast, MSN and Yahoo! achieved significant revenue growth over the last 12 months, largely as a result of growth in online advertising and marketing.

Terra Lycos, which is focusing more of its resources on the Spanish speaking market, experienced a revenue decline of 16% over the preceding 12 months in US dollar terms, but this result was adversely affected by currency fluctuations.At a constant exchange rate ( to $) during the 2002/2003 period, revenues for Terra Lycos only fell 1%, according to their financial reports.

CNET Networks, a vertical portal concentrating on personal technology,e-business and games content reported a 1.8% increase in revenues over the last 12 months.

Real Networks, the leading broadband portal online, reported 8.6% revenue growth over the period.

Worldwide Revenues for Select Portals, 2002 & 2003 (in millions and % growth) 2002 2003 Growth AOL $6,772.0 $6,444.0 -4.8% MSN (1) $1,309.0 $1,558.0 19.0% Yahoo! $667.3 $961.2 44.0% TerraLycos (2) $550.6 $460.2 -16.4% CNET Networks $169.2 $172.3 1.8% RealNetworks $136.5 $148.3 8.6% Total $9,604.6 $9,744.0 1.5% Total without AOL $2,832.60 $3,300.00 16.5% Note: as of the nine months ending September 30, 2002 & 2003; (1) MSN revenues were not made a separate revenue category for Microsoft until Q3 2002 (Q1 2003 for Microsoft's financial year), the 2002 figure is therefore an estimate based on the Q3 & Q4 2002 released revenues. (2) *Converted from € Euros to $US on 18th November 2003. Revenues as at a constant exchange rate between 2002 and 2003 shows total revenues only declined 1% over the period. Source: eMarketer, company reports, December 2003 054238 ©2003 eMarketer, Inc. www.eMarketer.com

eMarketer Spotlight Report: Portal Plays 5 C. Portal Revenues

“Search/Find/Obtain (SFO) is becoming a Leading US Internet Service Providers, by Number of Subscribers, 2002 & 2003 (in millions and % growth) global reality and may become the next 2002 2003 Growth ‘killer application’ of the Internet.” Mary AOL 26.7 24.7 -7.5% Meeker, Investment Analyst, Morgan Stanley, October 2003 MSN 9.0 8.0 -11.1% United Online (1) 4.8 5.2 8.3% Internet Access Earthlink 4.8 5.0 4.2% AOL is lumped with it; MSN wants to get rid of it and Yahoo! can’t Comcast 3.3 4.9 48.5% get enough of it. So is the tale of the Internet access business for SBC Yahoo! DSL (2) 1.9 3.1 63.2% the portals. RoadRunner (3) 2.2 3.0 36.4% Note: as of the nine months ending September 30, 2002 & 2003; (1) In September 2003,AOL reported 24.7 million US Internet access Includes free and paid subscribers; (2) Neither SBC nor Yahoo! specifies exactly how many SBC Internet access customers are SBC Yahoo! subscribers, down 2 million from 12 months earlier.Similarly,MSN customers. (3) Owned by AOL Time Warner Source: eMarketer, company reports; ISP-Planet, 2003, November 2003 shed 11.1% of its Internet access subscribers over the same 054240 ©2003 eMarketer, Inc. www.eMarketer.com period. More defections from both providers are likely over the next 12 months. Internet and Portal Access Subscription Packages for AOL, Yahoo! and MSN, November 2003 Earthlink, meanwhile, was able to attract more broadband Bring your Dial-up/Month Broadband/Month subscribers than the number of departing dial-up subscribes and own access reported a 4.2% net subscriber increase between September 2002 (BYOA) and September 2003, clearly showing that it is possible to AOL 9.0 $14.95 Netscape Basic $9.95 Varies but Time (proposed) or Full Warner Cable is transition from being a dial-up ISP to a broadband ISP.It recently access $23.90 $44.95 began offering a discount dial-up service for $10.97 per month MSN 8.0 $9.95 $9.95 with 6 month $26.95 - $99.00 commitment or $21.95 with a six-month contract. SBC Yahoo! (2003/2004 $15.95 with 6 month From $26.95 Cut-priced (and free) Internet access provider United Online launch) commitment or $21.95 reported 5.2 million subscribers in September 2003, up from 4.8 Source: eMarketer, December 2003 054237 ©2003 eMarketer, Inc. www.eMarketer.com million at the same time in 2002.Approximately half of United Online subscribers are paying subscribers, and the cut-priced ISP In 2003,AOL and MSN began offering a bring your own access is now the third largest in the country. (BYOA) product which allows anyone with Internet access to News reports in late 2003 suggest that AOL will launch a Netscape use exclusive AOL or MSN content and services for a monthly branded dial-up Internet access offering at $9.95 per month in fee.Yahoo! has announced its intention to launch a similar early 2004, and it is currently offering a PC and color printer for service shortly. $299 with a one year commitment to its dial-up $23.90/month Internet access revenues made up nearly 90% of AOL revenues in product.AOL, MSN, United Online and Earthlink are all now trying Q3 2003, a figure that has increased over the last 12 months to attract the remains of the low-end Internet access market, if despite its falling subscriber base. In contrast, MSN access indeed there are any remains to be had. revenues as a percentage of total revenues fell from 68% to 60%. The fastest growing Internet access provider in the US in 2003 was Yahoo! which has only just recently expanded its services to SBC Yahoo!, reporting 63% growth in its broadband product. SBC include Internet access, generates less than 20% of it revenues and Yahoo! partnered together in 2002 to offer a co-branded dial- from Internet access. up and DSL Internet service, and the partnership is proving to be a AOL’s falling advertising revenue and its reliance on Internet winner.With SBC Yahoo! offering DSL at $26.95 per month, access (primarily dial-up) revenues puts it in a perilous position if it compared to MSN’s full dial-up product at $21.90 and AOL’s at is unable to stem the tide of churn and get a piece of the $23.90, it is little wonder AOL and MSN subscribers are leaving in broadband pie.While 24.7 million subscribers is still a massive droves.Yahoo! has also formed a similar partnership with British subscriber-base, if it continues to lose subscribers at the current Telecom in the UK, and early indications suggest this is also rate, in five years time it will only have 10 million subscribers. proving a success.With these partnerships,Yahoo! is using Internet access as a Trojan Horse to expose Internet users to its premium content and services, as well as diversifying its revenue base. It is also allowing access providers like SBC and BT to differentiate their broadband products from their competitors.

eMarketer Spotlight Report: Portal Plays 6 D. Online Advertising eMarketer estimates that approximately one third US Online Advertising Spending, by Vehicle, 2003-2005 (in millions) (36%) of all US online advertising spending went 2003 2005 to the ‘big three’ portals in 2003. Paid search $2,070 $2,967 Rich media $1,035 $1,806 Despite all indications that online advertising rebounded in 2003 Display ads (banners) $2,001 $1,677 after two poor years,AOL experienced a 41.6% decline in Classified $1,104 $1,548 worldwide advertising revenue, according to its latest financial Slotting fees $345 $344 release.While AOL has stated that this was a result of several long- E-mail $276 $172 term contracts coming to an end, its rivals, MSN and Yahoo!, both Referrals $69 $86 experienced advertising revenue growth of over 40% during the Total (in billions) $6.9 $8.6 same period. In fact, MSN and Yahoo! now both generate more Source: eMarketer, December 2003 revenue from advertising than AOL, which is a massive change 054249 ©2003 eMarketer, Inc. www.eMarketer.com from 2002, when AOL generated more online advertising revenue US Online Paid Search Spending, 2000-2005 (as a % of than the two other portals combined. total online advertising spending)

AOL’s impact on the US online advertising sector continues to be 2000 1.3% significant, but despite its negative effect, eMarketer estimates 2001 4.2% online advertising spending will total $6.9 billion in 2003, up from 2002 15.4% $6.0 billion in 2002, a 14.8% growth across the sector. 2003 30.0%

For more information on online advertising spending, see 2004 32.5% eMarketer’s Online Advertising Spending spotlight report at 2005 34.5% http://www.emarketer.com/products/report.php?ad_spend_jan04 Source: eMarketer, December 2003 One area of significant advertising growth has been in paid search, 054250 ©2003 eMarketer, Inc. www.eMarketer.com which eMarketer estimates will total $2 billion in 2003 and make up 30% of total online advertising spending, surpassing banner For more information on search, see eMarketer’s ads for the first time.The rise of paid search, which made up only upcoming spotlight report on the topic, coming out in 1.3% of US online advertising spending in 2000, has made search early 2004 one of the most, if not the most, important component of advertising and marketing revenue for the ‘big three.’ It has also Search & Ye Shall Find made the partnerships the portals have with the major search Search is the first component of the three-part process (SFO) that engines, increasingly important. portals want to dominate and generate revenue from. Search has Online Advertising and Marketing Revenues for grown in significance over the last two years not only because of Select Portals Worldwide, 2002 & 2003 (in millions and its stand-alone revenue potential but because search is more % growth) often than not the launching pad for all Internet activity.If the 2002 2003 Growth portals can dominate search, then they also have the potential to AOL $998.0 $583.0 -41.6% dominate “find” and “obtain” and ensure that the customer never MSN (1) $421.0 $624.0 48.2% leaves the confines of their network. Yahoo! $455.1 $654.0 43.7% Terra Lycos(2) $271.5 $118.0 -56.5% Internet search has moved beyond simple Web searches for CNET Networks (3) $129.8 $135.0 4.0% information. Internet users now use the Net to search for Real Networks $4.8 $4.5 -6.3% information, entertainment and goods and services across a vast Total $2,280.2 $2,118.2 -7.1% range of categories. Some of the specific key search categories Total without AOL $1,282.2 $1,535.5 19.8% the portals and others are targeting are: Note: as of the nine months ending September 30, 2002 & 2003; (1) eMarketer approximation; (2) Includes e-commerce revenue and reflects a Information search: audio/video, directions/maps, images, currency conversion from Euros to $US on 18 November 2003. At a constant €Euro over the 2002/2003 period, advertising and e-commerce jobs, news, people, weather and the Web. revenue only fell 47%; (3) Includes all Internet revenue the vast majority of which comes from advertising and marketing. Entertainment search: games, personals/dating, movies, Source: eMarketer, company reports, November 2003 music, sport and adult content. 054239 ©2003 eMarketer, Inc. www.eMarketer.com

eMarketer Spotlight Report: Portal Plays 7 D. Online Advertising

Goods & services search: multi-category shopping, personal Share of Total Searches on Leading Search Engines technology,software, travel and used goods. among Internet Users* in the US, August 2003

US Bancorp Pipper Jaffray estimates that there were 245 million Google searches conducted by US Internet users each day in 2002, and 32.0% this will rise to 320 million by 2007.The investment firm estimates Yahoo! that 65% of searches are for information, 20% are for 26.0% entertainment and 15% are commerce-specific searches.Across AOL all searches, 35% are commercial in nature, according to US 19.0% Bancorp, equating to a figure of over 80 million daily searches. It is MSN this segment of searches, and the users conducting them, that 17.0% have become particularly appealing to the portals and all online Ask commerce sites. 2.0% Overture Google is currently the online destination where the majority of 1.0% Internet users go to search the Web, according to comScore Media Metrix, with 32% of Web searches conducted from that site in AltaVista 1.0% August 2003.Yahoo! is the next most popular search destination with 26%, followed by AOL at 19% and MSN at 17%. Only 6% of Lycos searches are conducted outside of Google and the ‘big three’ 0.4% destinations, according to comScore Media Metrix. CNET 0.2% Google powers the main algorithmic search engines within Yahoo! AllTheWeb and AOL and therefore powers 76% of all US Web searches, 0.2% according to comScore Media Metrix. MSN currently uses Inktomi Others and LookSmart as its main search engine providers. 2.0%

Number of Searches per Day in the US, 2002 & 2007 (in Note: *includes home, work and university users millions) Source: comScore qSearch, October 2003 054234 ©2003 eMarketer, Inc. www.eMarketer.com 2002 245 Percent of Total US Web Search Results Powered by 2007 320 Select Search Providers, August 2003 Source: US Bancorp Piper Jaffray, March 2003 054236 ©2003 eMarketer, Inc. www.eMarketer.com Others 4% MSN Ask 17% 2%

Google* 76%

Note: *Google provides results to Yahoo! and AOL. Source: comScore qSearch, October 2003 054235 ©2003 eMarketer, Inc. www.eMarketer.com

eMarketer Spotlight Report: Portal Plays 8 D. Online Advertising

The Search Matrix uses Overture (Yahoo!) as its main provider of paid search listings and will do so until at least 2005, which seems less than ideal There has been a flurry of merger,acquisition and partnership for Microsoft. activity related to search in 2003. Here is a sample of some of the key plays: AOL uses Google for both its algorithmic and paid search listings in the US but uses Overture (Yahoo!) as its paid search provider January 2003: Yahoo! buys Inktomi, a search-technology in Europe, which also does not seem ideal for AOL. provider and a Google competitor,for $235 million. Google is likely to IPO in early 2004 and some commentators are February 2003: Overture purchases AltaVista in a $140 million speculating that it could generate between $15 billion and $25 cash-and-stock transaction. billion. Does Google want to go head to head with the ‘big three’ April 2003: Overture completes its purchase of the Web search and become a portal, of sorts? There will be further discussion unit of Fast Search & Transfer (FAST)—a Norwegian developer of on this subject later in this report. enterprise search and real-time filtering technologies—for $70 million in cash. Search Engine Providers of the Major Online Portals April 2003: Google acquires Applied Semantics, a producer of in the US, 2003 software applications for semantic text processing and online Algorithmic search Paid search advertising; this is expected to help Google strengthen its search Google Google Google and advertising programs, notably its fast-growing content- AOL Google Google Yahoo! Google (till 10/04); Inktomi in future? Overture targeted advertising offering. MSN Looksmart/Inktomi Overture July 2003:Yahoo! announces its intention to acquire Overture for Lycos AllTheWeb (Overture) Overture $1.63 billion in cash and stock.The deal means that Yahoo! will AltaVista AltaVista (Overture) Overture own the leading paid-search provider as well as Inktomi and Alta Ask Jeeves Teoma Google Vista properties. Source: SearchEngineWatch.com, May 2003 054244 ©2003 eMarketer, Inc. www.eMarketer.com October 2003: Microsoft and Overture announce they will extended their search distribution agreement in the US and UK to “Search is a central part of Yahoo’s user June 2005.With Yahoo!’s acquisition of Overture, MSN is in the unenviable position of needing to rely on a competitor for their experience and business strategy.The search technology,and therefore the vast bulk of their revenue. [Overture] acquisition furthers Yahoo’s objective of becoming the leading end-to- October 2003: Google signs a four-year distribution and revenue end integrated search provider, combining sharing agreement with About.com and acquires pay-per-click assets capable of generating, distributing advertising network Sprinks. and monetizing search results.” Yahoo! press October 2003: The Financial Times reports Google may IPO as release, July 2003 early as March 2004.

October 2003:The New York Times reports that Google rebuffed “We are serious about search. We are already Microsoft’s offer to purchase it. working on search technology in the US, November 2003 – AOL acquires Singingfish, a multimedia and there’s an MSN bot [software robot] search engine providing access to audio and visual files from out there crawling sites. You can draw your across the Web. own conclusions.” Robin Kellett, search business As we move into 2004, the search landscape looks like this: manager for Microsoft’s MSN UK, October 2003

Yahoo!’s acquisition of Overture and Inktomi means that it has the search assets for a complete algorithmic and paid search package. It will not need Google come November 2004, when its current Google contract runs out.

Microsoft reportedly wanted to buy out Google, but its offer was rejected. Microsoft is developing its own in-house search technology to compete with Google and Yahoo!. MSN currently

eMarketer Spotlight Report: Portal Plays 9 D. Online Advertising

“What we’re trying to do is pull in the best of Search Engine Providers of the Major Online Portals in Germany, 2003 structured and unstructured data into a Unique users Algorithmic Paid single [search] environment and make that (in millions) search search a one stop to get what’s the best on AOL and T-Online 15.3 AllTheWeb Overture on the Web. That’s a big focus of our Google 14.2 Google Google differentiation. There’s a lot of premium AOL 9.9 Google Overture MSN 9.4 Inktomi/Looksmart Overture content available to our AOL members. Web.de 8.6 Google eSpotting Anytime AOL content is relevant to the Yahoo 8.2 Google Overture query, were going to feature that to the user Lycos 8.0 AllTheWeb Overture and the experience.” Jim Riesenbach,VP & group Source: U.S. Bancorp Piper Jaffray, NetRatings, and company Web sites, general manager of AOL’s search and directional media March 2003 054246 ©2003 eMarketer, Inc. www.eMarketer.com group, October 2003 Search Engine Providers of the Major Online Portals The International Search Matrix in Japan, 2003 Unique users Algorithmic Paid Internationally,the ‘big three’ have the same algorithmic and paid- (in millions) search search search partnerships that they have for their US portals except for Yahoo 20.7 Google Overture/Google AOL, which uses Overture for paid search in the UK, France and Nifty 13.4 Google – Germany,and Google for paid search in the US. MSN 12.9 Inktomi Overture NTT Goo 9.0 Inktomi Overture Yahoo! until recently,was using Europe’s biggest paid search Source: U.S. Bancorp Piper Jaffray, NetRatings, and company Web sites, listing provider,eSpotting, for its paid listings in the UK and France, March 2003 but recently announced that all of its European operations will be 054247 ©2003 eMarketer, Inc. www.eMarketer.com now using Overture listings. eSpotting and Norwegian company Fast, until recently,were “There are five key companies that are vying providing some competition in the European search market, but for the position of pan-European portal with Overture’s acquisition of Fast and Yahoo!’s acquisition of player.These are T-Online, Wanadoo, Terra Overture (which owns AlltheWeb) and Inktomi, it means that there Lycos, British Telecom and Tiscali. All are the are now only two major players in both algorithmic and paid telecom companies of their origin country search in Europe and Japan – Yahoo! and Google. (Germany, France, Spain, United Kingdom With Internet penetration and usage considerably lower in most and Italy, respectively).” US Bancorp Piper Jaffray, European and Asian countries than the US, there are considerable March 2003 opportunities for growth in paid-search outside of the US.

Search Engine Providers of the Major Online Portals in France, 2003 Paid Search Revenues Unique users Algorithmic Paid Search revenues can currently be grouped into two main categories: (in millions) search search Wanadoo 8.9 Google Overture Paid listings – Supplied by firms such as Google and Overture, Free 6.7 Google Google they are paid-only links associated with a search term, usually Google 5.4 Google Google listed outside of the main search results and clearly labeled Yahoo! 5.3 Google eSpotting “sponsored links” or “advertisements.”Advertisers bid on a search MSN 5.1 Inktomi/LookSmart Overture term, with the highest bidder receiving the top placement. Lycos 4.9 AllTheWeb Overture Tiscali 4.7 AllTheWeb eSpotting Paid inclusion – Supplied by a firm such as Look Smart, this AOL 3.7 Google Overture includes a sponsored link within the main search results of a Source: U.S. Bancorp Piper Jaffray, NetRatings, and company Web sites, search query.Unlike paid listings, there is no preferential March 2003 placement of a paid inclusion and is only displayed depending on 054245 ©2003 eMarketer, Inc. www.eMarketer.com the relevance it has to the search term. Like paid listings, advertisers usually pay per click-through.

eMarketer Spotlight Report: Portal Plays 10 D. Online Advertising

According to estimates from US Bancorp Piper Jaffray,Overture Revenues Generated by Online Search in the US, by generated $688 million in paid listings revenue in 2002, compared Search Site, 2002 (in millions) to Google at $294 million.Yahoo!, MSN and AOL generated Overture $140million, $138million and $92 million respectively in 2002, but $688 2003 financial reports from these firms indicates that paid search Google* revenues have grown significantly in the last 12 months for the $294 ‘big three.’ Yahoo! LookSmart, the leading provider of paid inclusion. generated $75 $140 million in 2002, according to the US Bancorp Piper Jaffray. MSN* $138 eMarketer estimates paid search revenues in the US will reach $3 AOL* billion in 2005, up from $2 billion in 2003. US Bancorp Piper Jaffray $92 estimates that worldwide online search revenues will total $7 LookSmart billion in 2007, with the US market generating $5 billion of that total. $75

Online Search Revenues Worldwide and in the US, Ask Jeeves 2003 & 2007 (in billions) $74

2003 AltaVista $0.2 $55 $1.2 Inktomi 2007 $46 $1.9 InfoSpace $5.1 $43

Outside US US Lycos* Source: US Bancorp Piper Jaffray, March 2003 $43 054243 ©2003 eMarketer, Inc. www.eMarketer.com FindWhat $42

eSpotting* $40

About.com* $20

Fast $9

Note: cumulative total=$1,799 million; *estimates based on best available information since companies are either private or are divisions of larger public companies that do not disclose specific search revenues Source: US Bancorp Piper Jaffray, company reports, March 2003 049658 ©2003 eMarketer, Inc. www.eMarketer.com

eMarketer Spotlight Report: Portal Plays 11 D. Online Advertising E. Premium Content & Services

Examining Overture’s business metrics over the last 12 months While the online paid content market is still gives a clear indication of the growth of the paid search sector.In Q2 2003, Overture boasted 95,000 advertisers and half-year immature, there have been indications over the revenues of $490 million.Average price per click has also risen last two years that Internet users are more willing from $0.34 in Q32002 to $0.40 in Q2 2002, indicating that paid to pay for online content, apart from porn and search is becoming more and more expensive for advertisers. financial content, than they have been in the past. Key Business Metrics for Overture, 2002 & 2003 Q3 2002 Q4 2002 Q1 2003 Q2 2003 As the third component of their three prong revenue strategy Revenue (in millions) $173 $200 $225 $265 (which also includes Internet access and advertising & e- Year-over year growth 138% 97% 57% 74% commerce), each of the ‘big three’ are actively pursuing revenues Advertisers (in thousands) 73 80 88 95 in premium content and services.Yahoo! was the first of the major Year-over year growth 49% 51% 47% 42% portals to develop a clear strategy for generating additional Average price per click $0.34 $0.35 $0.37 $0.40 revenues from content and services and its list of premium Year-over year growth 62% 52% 54% 33% services now numbers over twenty. Source: Morgan Stanley, October 2003 053950 ©2003 eMarketer, Inc. www.eMarketer.com Are consumers more willing to pay for online content now than they were in the past, or are businesses simply less inclined to offer it for free? The answer is “yes” to both.A study from Forrester Research indicates that 18% of US online consumers are willing to pay for online content in 2003, up from only 5% in 2002. This gives a strong indication that the online paid content market is beginning to grow.

The characteristics of the more successful paid-content & service sites lead one to believe that consumers are willing to pay for online content if it:

is unique, e.g., RealOne.com,Audible.com, Salon.com

saves or makes you money, e.g., Consumer Reports, Financial Times,Wall Street Journal

enables you to build and maintain personal relationships within communities of like-interest, e.g., Classmates.com, MyFamily.com,Match.com

is better than the offline alternative, e.g., iTunes.com, eDiets,AWS WeatherBug

eMarketer estimates that general content spending, which includes music, sports, games, news/current affairs, etc, has risen from $503.1 million in 2001 to $950.4 million in 2003.While the online content market is growing, it is still a long way short of the $6.9 billion that is estimated will be spent on online advertising in 2003.

For more information on online content, see eMarketer’s Online Paid Content:Trends & Opportunities spotlight report at http://www.emarketer.com/products/report.php?content_on_dec03

eMarketer Spotlight Report: Portal Plays 12 E. Premium Content & Services

Select Paid Subscription Services on Yahoo!, US Consumer Online Content Spending, by Major November 2003 Content Category, 2001-2003 (in millions) Service details Payment plans 2001 2002 2003 Internet Partnership with SBC Dial-up: $15.95 per month, 6 Online gambling $2,350.0 $2,500.0 $3,100.0 access offering dial-up & month commitment; $21.95 broadband per month, month-to-month; General content $503.1 $864.4 $950.4 DSL: Pricing ranges from Adult content $375.0 $400.0 $445.0 $26.95 per month to $99.95 per month for a one year term; Personals/dating $72.1 $302.1 $448.1 $39.95 to $139.95 month to Total $3,300.2 $4,066.5 $4,943.5 month; prices scale with speed of connection offered. Note: eMarketer uses Online Publishers Association (OPA)/comScore Networks Inc. estimates as a guide when formulating its estimates Games Online games packages Subscriptions $14.95 per Source: eMarketer, October 2003 month, or $39.95 for three 053382 ©2003 eMarketer, Inc. months www.eMarketer.com Personals Personals/dating $14.96 per month, $42.95 for 3 months, 89.95 for 1$2 months One paid content category that has grown rapidly during 2003 is Music Customizable web radio $3.99 per month, $35.99 per Music/Radio, which has grown from practically nothing in 2002 to year something significant in 2003, thanks largely to the success of Photo storage Extra storage for photos $2.95 -$4.95 per month, $24.95 - $34.95 per year, depending Apple iTunes. on amount of storage space Real time News, financial and $9.95 per month Digital music sales will increase in 2004 with the relaunch of a paid financial info investment information Napster and half a dozen other similar music services that have E-Mail Extra storage for e-mail, $29.99 - $59.99 per year, launched or are about to be launch in the US. services anti-spam/virus features, depending on amount of multiple mailboxes storage space Fantasy Fantasy sports covering most games free, with option For information on the trends in online digital music, see Sports baseball, football, etc. of buying additional paid eMarketer’s upcoming spotlight report, Online Music features; some games for $24.95 per team per season, Redux, due in January 2004. $124.95 for a 20 team league Classifieds Real estate, pets, $7.95 - $34.95 per listing Online personals/dating spending (which eMarketer does not merchandise, etc. technically regard as online content) has grown dramatically over Bill payments Paying bills online $4.95 per month, first 3 months free the last two years and now rivals adult content spending, at nearly Domains/Web Hosting a Web site $11.95 - $39.95 per month, $450 million.The ‘big three’ are all active in the online personals hosting plus $25 setup fee space:Yahoo! runs its own popular online personals site; MSN Web site Tools to build a Web site $4.95 - $8.95 per month, plus partners with the largest online personals site, Match.com; AOL is packages $10-$15 setup fee currently developing Love.com utilizing its instant messenger Phone Various web services $4.95 per month through the phone subscriber-base; plus,Terra Lycos owns popular online personals E-Commerce Create Yahoo! store $39.95 to $299.95 per month site MatchMaker.com.Google made an unsuccessful bid for services online personal site Friendster.com in hopes of getting a piece of Video Sports, entertainment and $9.95 per month news online video media the ever-growing online personals pie. Source: eMarketer, November 2003; Yahoo!, 2003 Premium content and services currently make up the least 053285 ©2003 eMarketer, Inc. www.eMarketer.com significant part of revenue for the ‘big three.’ Yahoo! has successfully grown its premium content and services business, enabling it to diversify its revenue base and better monetize its Internet traffic. Its partnership with SBC and British Telecom allows Yahoo! to expose new broadband users to its premium content and services as well as using the premium services as an inducement to drive broadband subscriptions for its partners. When it launches its bring your own access (BYOA) service, it will be employing the strategy across many access providers, not just the current two.

Microsoft and its MSN portal have made it quite clear that it is an aggregator of content and will continue to partner with content providers rather than create its own premium content and

eMarketer Spotlight Report: Portal Plays 13 E. Premium Content & Services F.Yahoo! services.While it has launched a number of premium services, its Yahoo!’s acquisition of Inktomi and Overture and current strategy seems to be one of drawing eyeballs in and selling advertising, which it has become very good at. Microsoft its successful partnerships with SBC and BT in will also be focusing on is core competency,software, and 2003 have it nicely placed to take advantage of ensuring its BYOA software product becomes the front-end for as the SFO-era that is coming. many broadband subscribers as possible.

The downturn in the advertising sector in 2001 and 2002 did US Consumer Online Content Spending, by Content Category, 2001-2003 (in millions) wonders for Yahoo!’s future. It forced it to re-examine its business 2001 2002 2003 (1) model,and when Terry Semel (formerly co-chairman of Time Online gambling (1) $2,350.0 $2,500.0 $3,100.0 Warner’s movie and music division) took over the reins in mid- Personals/dating $72.1 $302.1 $448.1 2001, the advertising company quickly transformed itself into Adult content (1) $375.0 $400.0 $445.0 something more. Entertainment/lifestyle (1) $108.0 $210.5 $188.7 In December 2001,Yahoo! acquired HotJobs, one of the leading B2C business/financial (1) $107.2 $146.0 $167.3 online recruitment sites.This provides Yahoo! with a more diverse Personal growth/diets $32.4 $44.3 $98.0 revenue base, and during 2002 and 2003 it has looked for,and Community-made directories $46.1 $91.1 $93.1 Research $57.9 $106.6 $92.5 more importantly,found, ways to monetize its vast Internet traffic General news $51.8 $70.0 $78.4 with premium content and services. It has achieved this with both Games $46.5 $72.0 $75.2 tactical partnerships (such as with SBC) or building services in- Music/radio (1) $4.0 $17.0 $42.3 house (such as Yahoo! Personals). Credit Help $32.4 $40.4 $40.8 Yahoo!’s most recent financial statement shows that non- Greeting cards $6.8 $36.2 $37.6 advertising and marketing revenues made up over 30% of its total Sports $10.0 $30.3 $36.5 revenue in Q3 2003, which is largely unchanged over the last 12 Source: Online Publishers Association (OPA)/comScore Networks Inc., September 2003; (1) eMarketer estimates, October 2003 months, indicating a stability to this new revenue stream. 053379 ©2003 eMarketer, Inc. www.eMarketer.com Total revenues for the nine months ending 30 September 2003, compared to the same time in 2002 grew 44%, with each of its For AOL, driving premium content and services has become a business segments experiencing growth over 40% during the period. priority for its long-term future as both its subscriber base and advertising revenue have dramatically fallen.When AOL bought The Access & Fees segment of its business includes both Internet out Time Warner,many analysts (this one included) assumed that access as well as premium content and services.Yahoo! has it was the beginning of a coordinated broadband strategy to stated it is on target to reach 5 million fee-paying subscribers by transition its dial-up subscribers to broadband, which would start the end of 2003.While Yahoo! does not break out its fee-paying by utilizing the large cable network of Time Warner,as well as subscribers by category,the company indicates that the largest using the exclusive music, movie and other content assets of Time components of this group are in Internet access (partnership with Warner,as hooks to pull in dial-up subscribers to its broadband SBC), online personals and premium e-mail subscribers.Yahoo! offerings. No coordinated strategy emerged until 2003. also offers premium games, financial content and a variety of other fee-paying services which together generated $213 million With the launch of AOL for Broadband in 2003,Time Warner began in revenue as of the nine-months ending 30 September 2003, a charging for content on 14 of its magazine Web sites, such as 46% increase from the same time in 2002. Time, Sports Illustrated and Entertainment Weekly.This has allowed AOL to offer this content exclusively to its subscribers, Yahoo! has not been without its failures of course. Its premium making its services far more attractive, and differentiating it from audio/video service Yahoo! Platinum was launched as a direct its competitors.AOL is also developing content in-house with an competitor to RealOne’s broadband content service, but few original sports program, a food & gourmet site, live music concerts users signed up and it was quickly folded into other parts of and more. Nearly every press release from AOL over the last six Yahoo!’s business. months relates to broadband content in some way.It seems that a In search, however,Yahoo!’s acquisition of Inktomi and Overture coordinated strategy is now beginning to take shape, utilizing the has been a significant trump card over its competitors.The content assets of Time Warner with the Internet access of AOL. It is Acquisition of Inktomi means that it will not have to rely on Google still too early to tell if this strategy is having the desired effect. in the future for its search capabilities. Its acquisition of Overture, not only gives it another important advertising & marketing

eMarketer Spotlight Report: Portal Plays 14 F.Yahoo! G. AOL (Time Warner) revenue stream but since its competitors (MSN worldwide and AOL AOL may have been slow to develop its in Europe) are reliant on Overture’s paid listings for a significant percentage of their revenue, the greater the paid search revenue broadband strategy,but it seems to be on the for its competitors, the greater the revenue for Yahoo! right track now. Is it too late?

Yahoo!’s Revenue Distribution Worldwide, by As of Q3 2003,AOL had 32.4 million subscribers and generated Business Segment, 2002 & 2003 (% of total revenue) revenues of $6.44 billion.While it undoubtedly has had a tough time of it over the last 18 months, the company is still vastly bigger than its two closest rivals and its worst period may be over. Listings Listings 9.9% 9.8% Like the metaphorical Queen Mary doing a three-point turn in a Access Access & fees & fees tight space,AOL has been slow to reinvent itself in the new 21.9% 22.2% broadband era, and while it continues to turn, its rivals are

Advertising Advertising seemingly speeding away.But it would be foolish to write off AOL & marketing & marketing just yet. 68.2% 68.1% Despite its shrinking subscriber-base over the last 12 months, 2002 2003 Internet access revenues actually rose 6.8% over the period.This Note: as of the nine months ending September 30, 2002 & 2003 Source: eMarketer, company reports, November 2003 is primarily a result of an increase in dial-up access prices from 054108 ©2003 eMarketer, Inc. www.eMarketer.com $21.95 to $23.90 per month.This strategy,however,is unlikely to be successful in the longer term, particularly when the price of Yahoo!’s Revenues Worldwide, by Business Segment, ADSL has fallen significantly in the latter half of 2003 to under $30 2002 & 2003 (in millions and % growth) per month across many parts of the US and even cable Internet 2002 2003 Growth provider Comcast is offering broadband for cheaper Total revenues $667.30 $961.20 44.0% ($19.95/month) in certain regions. Advertising & marketing $455.10 $654.20 43.7% Access & fees $145.90 $213.00 46.0% AOL’s European operations did experience 3.3% growth over the Listings $66.20 $93.90 41.8% period, which may indicate that there are still international Note: as of the nine months ending September 30, 2002 & 2003 opportunities that AOL can capitalize on. Source: eMarketer, company reports, November 2003 054107 ©2003 eMarketer, Inc. www.eMarketer.com AOL has now begun the process of separating its Internet access service from its portal and content service.This is necessary E-Business Profile: Yahoo! Key Customer Metrics, Q3 2002 & Q3 2003 (in millions) because the Internet access market will become more and more diffused over the next five years as dial-up subscribers move to Q3 2002 Q3 2003 sign up with their local telecom or cable operator for broadband. Unique users 201 245 Active registered users 93 123 While dial-up in the US was dominated by three operators,AOL, Daily average page views 1,504 2,041 MSN, and Earthlink, broadband will have few dominant access Fee paying customers 1.6 4.2 players for some time as the market spreads, largely along Note: Figures are as of quarter-end; Unique and active users exclude regional lines. Yahoo! Japan. Source: Yahoo!, October 2003 If AOL is to maintain a relationship with its current dial-up 054251 ©2003 eMarketer, Inc. www.eMarketer.com subscribers in a broadband environment, it must build unique and exclusive interactive content and services which take advantage of a broadband connection and it must better partner with broadband access providers, starting with its own cable network, Time Warner Cable. Early indications suggest AOL is now putting the pieces in place for a broadband future.

eMarketer Spotlight Report: Portal Plays 15 G. AOL (Time Warner) H. MSN

AOL Subscribers Worldwide by Region, 2002 & 2003 MSN has already reinvented itself a number of (in millions and % growth) times during its existence. It must do so again. 2002 2003 Growth Total subscribers 35.3 32.4 -8.2% In October 2003, Microsoft announced its MSN division would be US 26.7 24.7 -7.5% Europe 6.1 6.3 3.3% separated into two groups. Blake Irving will head the new Other 2.5 1.4 -44.0% Communication Services and Subscription Platform Group.This Note: as of the nine months ending September 30, 2002 & 2003 will focus on Internet access, Hotmail e-mail, Passport and instant Source: eMarketer, company reports, November 2003 messaging, and will generate revenue from Internet access and 054106 ©2003 eMarketer, Inc. www.eMarketer.com premium e-mail services.The Information Services and Merchant Platform group, headed by Yusuk Mehdi, will focus on the MSN Percent of US Online Households Subscribed to AOL, 1998, 2002 & 2003 portal, MSN search and e-commerce channels, with the majority of its revenue being generated from advertising. 1998 46% This structural change signals that indeed MSN is looking to 2002 37% reinvent itself once again, in a not dissimilar fashion to its rivals. 2003 30% It is a recognition that Internet access and communications Source: Odyssey LP, March 2003 services will be a different business in the future once broadband 048526 ©2003 eMarketer, Inc. www.eMarketer.com subscribers outnumber dial-up, and that the value-add will be in the content and services segment of the business, rather AOL’s Revenues Worldwide, by Business Segment, 2002 & 2003 (in billions and % growth) than access. 2002 2003 Growth Microsoft’s is not an ISP,nor is it a content company,yet it Total revenues $6.77 $6.44 -4.8% continues to dabble, however reluctantly,in those business Access $5.33 $5.69 6.8% segments.What it is of course is a software company,and its MSN Advertising $1.00 $0.58 -42.0% 8.0 service was its first serious attempt to become the default Other $0.44 $0.17 -61.4% front-end of as many broadband services as possible. It has plans Note: as of the nine months ending September 30, 2002 & 2003 Source: eMarketer, company reports, November 2003 to launch its latest version of MSN service in December 2003 or 054104 ©2003 eMarketer, Inc. www.eMarketer.com early 2004.

AOL’s Revenue Distribution Worldwide, by Business With the success of Windows in the operating systems market and Segment, 2002 & 2003 (% of total revenue) Explorer dominating browsers, who would bet against it dominating the front-end of broadband access services?

Other Other MSN, the portal, recently turned a profit for the first time in Ad- 6.5% 2.6% vertising September 2003 and reported revenue for the nine months ending 14.8% Ad- of 30 September 2003 of $1.6 billion.While MSN does not vertising 9.0% breakdown its revenue by business segment, eMarketer estimates that MSN generated $624 million in advertising revenue for the first Access Access 78.7% 88.4% nine months of 2003, up 48.2% over the same period in 2002.

Access revenue has remained relatively flat over the last 12 2002 2003 months despite losing 1 million (11%) of its subscriber base over Note: as of the nine months ending September 30, 2002 & 2003 the period, but it is likely that in 2004, advertising and marketing Source: eMarketer, company reports, November 2003 revenue will be the business segment which generates the 054105 ©2003 eMarketer, Inc. www.eMarketer.com greatest share of total revenue. Like its ISP competitors, MSN has begun offering a discount dial-up offering for $9.95 per month with a 6-month commitment. It would seem that this is an attempt by MSN and the other ISPs to squeeze every last drop out of the dial-up market over the next two years, before it gets taken over by broadband.

eMarketer Spotlight Report: Portal Plays 16 H. MSN I. Terra Lycos

“MSN is exiting the ISP business as Microsoft Terra Lycos, which has its head office in Spain, looks to reposition the bulked-up software has pursued a similar strategy to Yahoo! by client as a front-end to cable and DSL diversifying its revenue base with fee-paying broadband access.” Joe Wilcox, Senior Analyst, Jupiter subscribers, not so much out of choice, but out Research, 2003 of necessity.

MSN’s Revenues Revenues Worldwide, by Business While Terra Lycos may be described as a second-tier portal in the Segment, 2002 & 2003 (in millions and % growth) US, it has a local presence in 40 countries and is available in 19 2002 2003 Growth languages. It also consistently ranks in the top 10 US online Advertising & marketing $421.0 $624.0 48.2% properties, according to Nielsen//NetRatings, and has done so for Access & other $888.0 $934.0 5.2% many years. Total $1,309.0 $1,558.0 19.0% Note: Microsoft does not publicly release MSN revenues by business When Terra Networks, one of the leading, Internet companies in segment so eMarketer has made estimates based on company data and news sources. the Spain and Latin America, bought Lycos in 2000 it combined a Source: eMarketer, November 2003 strong Internet brand with an extensive telecommunications 054241 ©2003 eMarketer, Inc. www.eMarketer.com network. It also realigned its focus to the Spanish and Latin American markets where it has considerable expertise.

“Our business model for MSN is largely Terra Lycos reported revenues of 391.2 million in the nine advertising-supported. So you want to months ending 2003, down 16% from the same time the previous have eyeballs, right? You want to have year.It is worth noting however that at a constant exchange rate quality subscribers or consumers who use between euro and the dollar and the euro and the Brazilian rias, your service because that draws your Terra Lycos revenues only declined 1%. Saying that, there is no advertising revenue.” Maggie Wilderotter, Senior VP going past the fact that advertising and e-commerce revenues for Business Strategy, Microsoft October 2003 plummeted over the last year and only made up 25.5% of total revenue in 2003, compared to nearly 50% in 2002.

This was offset to some extent by explosive growth in communication, portal and content services, which are now an important source of revenue. One of Lycos’s biggest cash cows in this business segment is its personals Web site, MatchMaker.com, which is one of the biggest personals sites in the world.

Revenue in Terra Lycos’ US operations fell 50% between September 2002 and September 2003, which meant more revenue was generated in Spain and Brazil than the US.This marks a significant change in Terra Lycos’s revenue base.A large part of the growth in Brazil and Spain was a result of increases in broadband adoption in these countries.This trend is likely to continue as these markets mature and Terra Lycos is well positioned to be the front-end of millions of Spanish and Latin American broadband subscriptions.

eMarketer Spotlight Report: Portal Plays 17 I.Terra Lycos J. Real Networks

Terra Lycos’ Revenues Worldwide, by Business RealOne is the leading broadband portal in the Segment, 2002 & 2003 (in millions of € and % growth) world and now derives nearly two-thirds of its 2002 2003 Growth Total €468.1 €391.2 -16.4% revenues from content subscriptions. Access €169.2 €158.6 -6.6% Advertising & e-commerce €228.0 €99.6 -56.3% While Real Networks is not attempting to compete against the ‘big Communication, portal & content €33.2 €88.1 165.4% three’ in all portal categories, it has built a successful business SME services & other €37.7 €45.0 19.4% aggregating broadband content across news, entertainment, Note: as of the nine months ending September 30, 2002 & 2003 games, sports, and music and is now a leader in this regard. Source: eMarketer, company reports, November 2003 Yahoo! recently had a crack at knocking Real off its perch with its 054109 ©2003 eMarketer, Inc. www.eMarketer.com Yahoo! Platinum service, but went quickly back to the drawing Terra Lycos’ Revenue Distribution Worldwide, by board when no one subscribed to its service. Real has built on its Business Segment, 2002 & 2003 (% of total revenue) first mover advantage and is now the benchmark broadband 2002 2003 service that others measure themselves against. Access 36.1% 40.5% Advertising & e-commerce 48.7% 25.5% Real Networks reported modest revenue growth in the first nine Communication, portal & content 7.1% 22.5% months ending 30 September 2003 of 8.6% compared to the same SME services & other 8.1% 11.5% time in 2002. Subscribers to its RealOne service, who pay $9.95 per Note: as of the nine months ending September 30, 2002 & 2003 month, grew 15% to 1.15 million subscribers, up from 1 million in Source: eMarketer, company reports, November 2003 Q3 2002. eMarketer estimates there will be 24.2 million broadband 054111 ©2003 eMarketer, Inc. www.eMarketer.com households in the US at the end of 2003, so RealOne has still only penetrated 6% of its potential target audience in the US. Terra Lycos’ Revenue Distribution, by Country, 2002 & 2003 (in millions of € and % of total revenue) Software licensing revenue, which made up 32.6% of its revenues 2002 2003 Growth in the first nine months of 2003, fell 15%, as did advertising € € Spain 107.4 139.9 30.3% revenue, which fell 6.3%. Brazil €91.7 €106.0 15.6% US €198.6 €93.8 -52.8% According to its latest financial statements, subscriber growth Other €70.4 €51.5 -26.8% picked up in the later part of 2003 largely as a result of its Note: as of the nine months ending September 30, 2002 & 2003 subscription music offering RealOneRhapsody.Real Networks also Source: eMarketer, company reports, November 2003 completed the acquisition of Listen.com in Q3 2003, and its music 054110 ©2003 eMarketer, Inc. www.eMarketer.com service is likely to be a primary driver for subscriber growth in 2004 Terra Lycos' Paid Subscribers Worldwide, Q3 2003 and is sure to provide strong competition to iTunes,Napster 2.0 Dial-up access 1,035,000 and other emerging digital music services. Unlike Apple’s iTunes, Broadband access 543,000 which is an a la carte model, Real’s music services is a subscription Communications and portal services 3,024,000 model which should appeal to heavy users of digital music who will Total paying subscribers* 4,602,000 eventually find $0.99 per music track too expensive. Note: *Based on number of services delivered. Some subscribers may be contracting access and OBP product/services at the same time While Real continues to approach profitability,one of its Source: Terra-Lycos, November 2003 continuing problems is the cost of content. It needs to partner 053315 ©2003 eMarketer, Inc. www.eMarketer.com with best-of-breed content providers across a broad range of categories in order for it to attract subscribers, but this is increasingly expensive. Real’s last financial statement gives some indication that it may be focusing more of its resources on digital music in the future as it sees some competitive advantage in that area. It recently announced a deal to provide Comcast’s 5 million broadband subscribers with its RealOne Rhapsody music service in conjunction with offering Comcast subscribers a week’s free trial of the service, which normally costs $9.95 per month.

eMarketer Spotlight Report: Portal Plays 18 J. Real Networks K. What Future for Google?

Real Networks' Revenues Worldwide, by Business Google has become synonymous with the Segment, 2002 & 2003 (in millions and % growth) Internet in only a few short years, but it is now in 2002 2003 Growth Total $136.5 $148.3 8.6% an interesting inflection point as the founders Software licensing $57.2 $48.4 -15.4% attempt to take the company to the next level. Content subscription $74.5 $95.4 28.1% Advertising $4.8 $4.5 -6.3% Note: as of the nine months ending September 30, 2002 & 2003 Source: eMarketer, company reports, November 2003 “Suddenly, in order to stay both happy and 054112 ©2003 eMarketer, Inc. www.eMarketer.com rich, the founders need to add one more Real Networks’ Revenue Distribution Worldwide, by thing to their list of objectives: predictable, Business Segment, 2002 & 2003 (% of total revenue) profitable growth.” Seth Godin, Editor,What Should Google Do?, 2003

Ad- Ad- vertising vertising Google has successfully turned a very good Internet search 3.5% 3.0% engine into a very good online advertising platform and reportedly

Software earns upwards of $300 million to $400 million per year in paid Content Software Content licensing search listings.Two of the three big portals are dependent on subscription licensing subscription 32.6% 54.6% 41.9% 64.3% Google, but there is no certainty that a new and better search engine developed by someone else is not just around the corner.

Microsoft’s rejected bid to takeover Google and Yahoo!’s 2002 2003 acquisition of Overture and Inktomi, combined with the possibility Note: as of the nine months ending September 30, 2002 & 2003 that Google may turn public in 2004, has made speculation rife Source: eMarketer, company reports, November 2003 054113 ©2003 eMarketer, Inc. www.eMarketer.com abut Google’s future.As a matter of fact, a whole book has been compiled on speculation of what Google should do.

Speculation aside, there are some conclusions one can draw from Google’s past actions, which may provide clues to its future.

Google has expanded its search capabilities to include Usenet groups and has adopted the Dmoz open directory,which categorizes things in a similar way to Yahoo!. It has developed software to automate the creation of news pages and it is Beta- testing a shopping search service, Froogle . Location-based searches are reportedly on the way,and it bought the pioneering Blogging service, Blogger.com,which enables Google to offer all Internet users a chance to create their own Web presence. It recently bought Kaltix, a company specializing in personalization and context-sensitive search, and it made an unsuccessful bid to acquire one of the most popular online personals networks, Friendster.com.All these elements would suggest that Google has been creeping into the portal business.

One thing Google hasn’t developed yet is an e-mail service, which would provide it with not only a useful advertising channel but also another piece of the portal pie.

eMarketer Spotlight Report: Portal Plays 19 K. What Future for Google? Implications for your business

“Overall, Microsoft needs Google more than For Marketers Google needs Microsoft — hence the fact The ‘big three’ will continue to be the online destinations where that Google hasn’t sold out to Microsoft. most Internet users go and this is unlikely to change in the near That doesn’t mean Microsoft is out of luck, future.They are therefore the destinations where advertisers and marketers will continue to find the largest potential audience. of course. Hardly. Microsoft will continue forward with its original plan of building its Paid search advertising is currently a cost effective means of own search solution, and you can expect it advertising, but costs are rising and it will be necessary to will be a serious competitor to Google, continue to monitor return on investment. Yahoo! and AOL — the other major search While this report focused on the current ‘big three,’ next year’s sites that operate. Danny Sullivan, Editor report may be about the ‘big four’ as Google IPOs and begins to SearchEnginWatch.com Nov 5 2003 resemble a portal. Google is already a powerful advertising platform, but there may be additional opportunities for advertisers and marketers within Google as it evolves. “Google is indeed an advertising company. That’s because the search engine business For Access Providers — and there is a search engine business — is The SBC Yahoo! partnership illustrates that content and services largely a new advertising medium. Some can drive broadband adoption and be a significant differentiator people search for information, but many are over the competition. Each of the ‘big three’ want to be the front- looking to purchase products and services.“ end of the broadband connection so strategic partnerships with Andrew Orlowski, Senior Writer,The Register 2003 one or more of the portals can be a win/win situation. eMarketer estimates that household Internet penetration in the US at the end of 2003 is 64%, so there is still a large section of the eMarketer is of the view that in the Search, Find & Obtain era, US population not online. Dial-up at $9.95 per month and Google does particularly well in the first two elements – search & broadband at less than $30 per month will drive Internet access find, and generates considerable revenue through advertising subscriptions, but are these prices economically sustainable for within those two elements, but has no part to play in ‘Obtain.’ access providers over the long term? When a user searches Google and finds what they want, they leave the Google network and go to another site. In contrast, The dial-up market does have some legs for the next few years as Internet users are able to completely fulfill their SFO needs at the Internet users reach saturation point in the US and broadband ‘big three’ portals and sites such as eBay (for new and used users maintain a back-up dial-up account, but it would be foolish goods),Amazon (for books and other items) and iTunes (for to base one’s future growth prospects completely on it. music). If Google is to take its business to the next level, it needs to work on ‘Obtain.’ For Content Creators & Aggregators With Internet access becoming ubiquitous and both broadband One possible way it can do this is to develop an online currency – and dial-up access prices falling, innovative interactive content Googles, if you like. (Seth Godin suggests this in What Should and services will be the element that differentiates one portal Google Do?, but in a slightly different context.) This would allow from another.Broadband users have now reached a critical mass users to search for what they want, find it, and use Googles to pay and the opportunity is now there to better utilize the always-on for it. On each transaction, Google would get a small percentage, ‘fat-pipe.’ The success of iTunes and many other content sites and it would allow Google to maintain a relationship with the user shows that consumers are willing to pay for unique, quality online throughout the transaction continuum. If Google developed an e- content and the trend from free to fee will continue. mail service, it could then e-mail the user to confirm the purchase and suggest similar items the user might like,Amazon-style.

Sure, many have tried the micropayments thing before, and most have failed, but Google’s reach is far greater than those who tried before, and its strong international brand endears confidence and trust like few other Internet companies.

eMarketer Spotlight Report: Portal Plays 20 Related Information & Links

Related Links Contact PaidContent.org – The Economics of Content eMarketer,Inc. Toll-Free: 877-378-2871 http://www.paidcontent.org 75 Broad Street Outside the US: 212-763-6010 Search Engine Watch http://www.searchenginewatch.com 32nd floor Fax: 212-763-6020

What Should Google Do? New York, NY 10004 [email protected] http://images.fastcompany.com/blog/googledo.pdf Spotlight Contributors Related Charts Yael Marmon Director of Research US Click-Through Rates for Free Search Vs Sponsored Search, by Industry, Krikor Daglian Researcher April-May 2003 Tracy Tang Researcher http://www.emarketer.com/images/chart_gifs/050001-051000/050987.gif David Berkowitz Senior Editor Kwanza Osajyefo Johnson Data Entry Associate US Marketers Using Paid Search Campaigns, June 2003 (as a % of respondents) Dana Hill Production Artist http://www.emarketer.com/images/chart_gifs/050001-051000/050408.gif

Select Paid Subscriptions Services on MSN, November 2003 http://www.emarketer.com/images/chart_gifs/050001-051000/053295.gif

Trust Index of Selected Internet Service Provider Brands Among US Consumers, 2003 (on a scale of 1-5) http://www.emarketer.com/images/chart_gifs/050001-051000/053478.gif

Suggested Key Words for eStat Database Internet Portals Internet Service Provider Online Content

Online Entertainment Music News & Information

Broadband Search AOL

Yahoo! MSN Microsoft

Google

eMarketer Spotlight Report: Portal Plays 21