Internet Trends 2008 Mary Meeker November 5 @ Web 2.0 Summit Technology / Internet Trends November 5, 2008 Web 2.0 Summit – San Francisco [email protected] / www.morganstanley.com/institutional/techresearch Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. Customers of Morgan Stanley in the US can receive independent, third-party research on companies covered in Morgan Stanley Research, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report. Outline • Economy 1. Recession – a long time coming, how long will it last? 2. Technology & Advertising Spending – closely tied to GDP growth • Technology / Internet 1. Digital Consumer – Undermonetized social networks / video / VoIP driving powerful usage growth 2. Mobile – Innovation in wireless products / services accelerating 3. Emerging Markets – Pacing next wave of technology adoption • Closing Thoughts 1. Companies with cogent business models that provide consumer value should survive / thrive – consumers need value more than they have needed it in a long time… 2 Economy 1) Recession – a long time coming, how long will it last? 1 year? 5 years? 3 Roots of Economic Challenge? 10+ Years of Rising Home Ownership + Declining Interest / Savings Rates U.S. Homeownership Rates vs. Interest Rates vs. Personal Savings Rates, 1965-2008 70% June 2004: US home ownership = 73MM 20% 68% 16% 66% January 1993: HUD began promoting broader home ownership. US home ownership = 62MM 12% 64% 8% U.S. Home Ownership Rate Ownership Home U.S. 62% 4% Rate Savings Personal & Rate Interest U.S. 60% 58% 0% 65 67 69 71 19 19 19 19 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 U.S. Home Ownership Rate U.S. Interest Rate U.S. Home Ownership Rate 30-year (1965-1995) Trendline U.S. Personal Savings Rate Note: HUD is Department of Housing & Urban Development. Interest rate is the overnight federal funds rate. 4 Source: Federal Reserve, DOC Bureau of Economic Analysis (BEA), Morgan Stanley Research. 10 Years of Rising Home Prices – Up ~2x U.S. Real Home Price & Building Cost Indexes, % Change 1965 - 2007 90% 80% 70% 60% 50% 40% 30% % Change From 1965 Level 1965 From Change % 20% 10% 0% -10% 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 U.S. Real Home Price Index U.S. Real Building Cost Index Note: Real home prices & building costs are adjusted for inflation; Source: Robert Shiller. 5 USA Total Debt = Up ~2x Over 30 Years to 3x GDP Foreign Ownership Ramped to ~60% US Treasuries – Helped Pace ‘Easy Money’ + Leverage 300% 70% 275% 60% 250% 50% 225% 40% 200% 30% Market Cap 175% U.S.Total Debt, % of GDP 20% 150% 125% 10% Foreign Ownership of U.S. Treasuries, % ofTotal 100% 0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 U.S. Total Debt, % of GDP Foreign Ownership of US Treasuries, % of Total Market Capitalization Source: Bridgewater, total debt include both public and private debt, US government debt = ~65% GDP, Morgan Stanley Research. 6 -0.3% Q/Q US GDP Growth in CQ3 / Consumer Spending Fell 3.1% Biggest Q/Q Decline Since 1980 – October < September < August < July U.S. Real GDP vs. Real Personal Consumption Expenditures (PCE) Q/Q % Change, 2005-2008 6% 5% 4% 3% 2% 1% Q/Q Growth Q/QRates Growth 0% CQ1:05 CQ3:05 CQ1:06 CQ3:06 CQ1:07 CQ3:07 CQ1:08 CQ3:08 -1% -2% -3% U.S. Real GDP Q/Q Growth U.S. Real PCE Q/Q Growth Note, Real GDP and real PCE are inflation-adjusted, Real PCE is seasonally adjusted. CQ3:08 data is “advanced,” may differ from final reported #s. 7 Source: BEA, Morgan Stanley Research. Global GDP Growth Forecasts Have Downward Bias – Decelerating / Negative Growth for 2008E + 2009E Difference from IMF Forecasts, 10/08 7/08 IMF Forecasts Country / Region 2006 2007 2008E 2009E2008E 2009E USA 2.8% 2.0% 1.6% 0.1%0.3% -0.7% Euro zone 2.8 2.6 1.3 0.2-0.4 -1.0 UK 2.8 3.0 1.0 -0.1-0.8 -1.8 China 11.6 11.9 9.7 9.3-- -0.6 India 9.8 9.3 7.9 6.9-0.1 -1.1 Russia 7.4 8.1 7.0 5.5-0.7 -1.8 Brazil 3.8 5.4 5.2 3.50.3 -0.5 Developed Markets (1) 3.0 2.6 1.5 0.5 -0.2 -0.9 Emerging Markets (2) 7.9 8.0 6.9 6.1 -- -0.7 World 5.1 5.0 3.9 3.0-0.2 -0.9 Note: (1) IMF equivalent of “advanced economies”; (2) IMF equivalent of “emerging and developing economies”; Source: International Monetary Fund (IMF) World Economic Outlook (WEO) database, 10/08. Morgan Stanley Research. 8 Stock Market = Leading Indicator of Economic Growth China off 71% vs. 12-Month Peak, Russia -67% / Japan -50% / Oil -53% / S&P500 -36% 600 2006 2007 2008 500 400 300 200 Indexed Value (base = 100) 100 0 10/05 1/06 4/06 7/06 10/06 1/07 4/07 7/07 10/07 1/08 4/08 7/08 10/08 S&P 500 NASDAQ Composite Index China Shanghai SE Composite India SENSEX Russia RTS Light Crude Oil - Continuous Contract Gold - Continuous Contract Japan Nikkei 225 Note: all indices start at a value of 100 on 10/31/05; data as of 10/31/08; Source: FactSet. 9 S&P500 – Your Customers Have Taken Big Hits Total Mkt % Change Cap ($B) 2008 Peak to S&P Sector 10/31/08 2006 2007 YTD Current (1) Market Cap Leaders Financials 1,314 16% -20% -41% -53% JPMorgan, Bank of America Consumer Discretionary 722 9 -18 -35 -46 McDonald's, Walt Disney Telecom Services 281 32 -12 -39 -44 AT&T, Verizon Industrials 930 8 7 -36 -41 GE, United Technologies Information Technology 1,393 11 12 -37 -40 Microsoft, IBM Materials 274 10 14 -37 -40 Monsanto, DuPont Utilities 325 17 6 -29 -33 Exelon, Southern Energy 1,118 14 36 -33 -30 Exxon, Chevron Health Care 1,192 1 1 -23 -27 Johnson & Johnson, Pfizer Consumer Staples 1,218 8 10 -14 -13 Wal-Mart, Procter & Gamble S&P 500 Total (2) 8,767 11% 1% -33% -38% Note: (1) % Change from S&P 500 peak of 10/9/07 to 10/31/08; (2) S&P 500 total market cap and % change, different from SP50 index price & % change. Source: Bloomberg, Morgan Stanley Research. 10 Economy 2) Technology + Advertising Spending – closely tied to GDP growth…also, remembering 2000-2003 11 Retail Sales Growth Rates Slowing Retail Sales vs. Adjusted E-Commerce Sales Y/Y Growth, CQ3:01 - CQ2:08 40% 30% 20% Y/YGrowth 10% 0% CQ3:01 CQ3:02 CQ3:03 CQ3:04 CQ3:05 CQ3:06 CQ3:07 US Adjusted Retail E-Commerce Sales US Total Retail Sales Note: E-Commerce adjusted for eBay by adding eBay US gross merchandise volume and subtracting eBay US transaction revenue; Source: US Dept. of Commerce (CQ2:08), Morgan Stanley Research. 12 Advertising Growth Rates Slowing U.S. Advertising Spending by Medium, Y/Y % Change 25% 20% 15% 10% 5% Y/Y Growth Rate 0% -5% -10% -15% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 Overall Cable+Broadcast TV Magazines Newspapers Internet* Outdoor Radio *Note: Internet is adjusted to include search ad spending - TNS excludes search revenue from Internet ad spending, thus unadjusted data may under-report online ad spending / growth. Source: TNS, IAB, Morgan Stanley Research. 13 Advertising Spending & GDP Growth = High Correlation of 81% U.S. Advertising Spending Y/Y Growth vs. Real GDP Y/Y Growth, 1986 – 2007 20% 15% 10% Median Y/Y Ad Spend Growth Rate = 5% 5% 0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 U.S. Ad Spend vs. GDP, Y/Y Growth Y/Y GDP, vs. Spend Ad U.S. -5% 1991 Ad Growth = -2% 2001 Ad Growth = -12% -10% U.S. Real GDP Y/Y Growth U.S. Ad Spend Y/Y Growth Source: Zenith Optimedia, IMF, Morgan Stanley Research. 14 Simple Regression Analysis: 1) Ad spend growth 3x sensitivity of real GDP growth 2) If GDP flat (current MS forecast), ad spend could decline ~4% Y/Y U.S. Advertising Spending vs. Real GDP y = 3.0263x – 0.0394 20% 1986 – 2007 R2 = 0.6553 y – ad spend growth x – real GDP growth 15% If real GDP Ad spend Y/Y growth Y/Y growth 10% is… could be… 5% 11% 4 8 5% 3 5 2 2 Ad Spend Y/Y Growth Ad Spend 1 -1 0% 0 -4 -1% 0% 1% 2% 3% 4% 5% -1 -7 -2 -10 -5% -3 -13 Real GDP Y/Y Growth -4 -16 -5 -19 -10% U.S. Ad Spend vs. Real GDP Y/Y Growth Linear Regression Line (y = 3.0263x - 0.0394 R^2 = 0.6553) Note: R 2 of 0.655 indicates that correlation is not perfect (n=22), and correlation does not equal causation.