Digital Media: Monetizing Social and Mobile Media Industry Spotlight www.tmcapital.com Providing Tech M&A Advisory Services on a Global Scale has acquired has obtained a has acquired majority investment from has acquired has been acquired by has acquired has divested has been acquired by certain assets to has acquired has been acquired by has been acquired by has acquired 2 cedar has divested has divested certain assets to has merged with certain assets to has acquired CRESTONE INTERNATIONAL MEDIAAMERICA, INC. has been acquired by has sold certain assets to has acquired has merged with Digital Media Industry Spotlight Monetizing Social and Mobile Media TM Capital’s Digital Media Spotlight examines the health of the internet economy with a specifi c focus on “What I would like to have is a one-on-one relationship the monetization strategies for two rapidly converging with seven billion people in the world and be able to sectors that are capturing signifi cant attention: social customize offerings for those and mobile media. seven billion people. Digital allows that relationship” -Bob MacDonald The exuberance in the social media domain is perhaps CEO, Proctor and Gamble best showcased by Facebook’s most recent funding Potential Mobile Social round, an investment of $1.5 billion which valued the company at $50 billion. In 2010, the total market for social media advertising is expected to reach $1.7 around $500 million in 2008, it is no wonder that players billion. In other words, Facebook, which makes the bulk across the technology spectrum are taking notice. of its revenues via advertisements, was valued at nearly Google’s late 2009 acquisition of AdMob for $750 30 times the entire size of the social media ad market. million, representing an estimated ten times revenue Healthy valuations are being reported across the social multiple, and Apple’s 2010 acquisition of Quattro, media landscape, such as with the social location site instantly gave signifi cant legitimacy to mobile marketing Foursquare which raised $20 million in June which and advertising. However, the promise of the mobile valued the company at $95 million. Just a year earlier, market has been heralded before, only to disappoint Foursquare raised money at a $6 million enterprise investors over the past half decade. We believe the valuation. While the likes of Facebook and Foursquare mobile market has fi nally reached a positive infl ection are garnering massive attention from mainstream media, point. Like the social media space, advertising and apps advertisers, sophisticated investors and actual users represent the most robust revenue opportunities in the alike, less clear are the long term business models for mobile sector, with technology advancements in areas the broad social media ecosystem. Advertising, apps, such as location based services (LBS), augmented gaming, virtual good sales and premium services are the reality and payment systems providing emerging early front-runners in social media monetization efforts. opportunities. Like the social media sector, the evolution of the mobile Perhaps the greatest potential is in the convergence of space is now occurring at breakneck speed. With the social and mobile domains. Moving forward there Gartner projecting that the worldwide revenue for mobile will be an important symbiotic relationship between the advertising alone will be $13.5 billion in 2013, up from two sectors as mobile platforms displace computers as the dominant social media access Figure 1. The Converging Worlds of Social and Mobile Media point. While nascent, there are also signs of technology enablement in the Advertising social/ mobile sector that will have a meaningful impact for both users and Virtual Augmented advertisers. For example, the ability Goods Reality to mine an individual’s social data Social Games and (such as biographical information, Filter Apps network connections, social graph/ interests, tweets, etc.) and pair this MergingMMergin location basedsed datadatat Mobile Social with an individual’s social graph with location based data (provided by Media Media has game changing potential one’s cell phone) will provide a new level of targeted data and advertising Location Content Based opportunities. Leveraging the social Services and mobile domain may enable brands Premium Payments Services and advertisers to create a high-touch, intimately customized relationship on a eCommerce very large scale. Source: TM Capital - 1 - Digital Media - Monetizing Social and Mobile Media Industry Spotlight Health of Online Figure 2. Online Advertising Revenues, 2003-2011E Advertising and eCommerce $50.0 140% $43.3 Before delving into the 120% Y/Y Growth Y/Y Growt Advertising Advertising Online social and mobile space it is $40.0 $37.2 useful to take a temperature 100% $31.6 $29.5 check of established digital $30.0 80% media sectors, namely $24.5 online advertising and $22.0 $22.4 $19.4 $19.8 60% eCommerce. While these $20.0 $17.1 $14.8 $13.8 sectors are signifi cantly sized $11.0 40% $8.6 $9.1 and pervasive, they are still $10.0 h dvertising Revenue ($ in billions) in ($ Revenue dvertising $6.7 A $$5.2 20% quite small compared to their $2.7 traditional counterparts. For $ – 0% example, TV advertising billions) in ($ Revenue Advertising Online 2003 2004 2005 2006 2007 2008 2009 2010 2011 spending is more than 3 times the amount spent on internet Global Search Forecast Global Display Forecast advertising and eCommerce Y/Y Global Search Forecasted Growth Y/Y Global Display Forecasted Growth sales account for only 7% of Source: Company Reports, ComScore, Nielsen, IDC total retail sales in the U.S. As such, even the more mature digital media markets have Figure 3. Media Consumption vs. Ad Spend tremendous room for growth. 50% Online Advertising 39% In 2010, advertising rates have 40% rebounded due in part to an 31% improving economy and by 30% 28% 26% a reduction in a glut of lower ~$30B opportunity quality advertising inventory. At 20% Google, CPC rates increased 16% 13% 12% Advertising Spending Spending Advertising by 7% in the fi rst quarter and 9% by 4% in the second quarter of 10% 2010. Across all major sectors % % of Total Media vs. Consumption Time CPCs increased signifi cantly 0% in the second half of the year. Print Radio TV Internet As of December 2010, CPCs in Time Spent Ad Spend Source: Yahoo, Morgan Stanley Retail, Automotive and Finance were up by 10-15%, while CPCs in the Travel segment increased 20% year-over-year. dynamic results, which seek to capture the real-time data that is continuously being added through blogs and As shown in Figure 2, search advertising dominates social media sites, will both grow in relevance. display advertising and continues to grow at a faster rate. Brand advertisers prefer search advertising due Online Advertising Disconnect to its better targeting capabilities and more quantifi able value proposition. We also expect several innovations Time spent online is growing while traditional format that will help defend search pricing. Search companies media, such as newspaper and magazine readership, are increasingly targeting multimedia results including is shrinking. As shown in Figure 3, the Internet ranks video, image and audio into search results. Further, second in terms of time consumption, equaling both increased personalization, where search results are radio and print consumption combined. Despite the better targeted based on factors such as geography and signifi cant time spent online, the amount of ad spend on www.tmcapital.com - 2 - Digital Media - Monetizing Social and Mobile Media Industry Spotlight online platforms lags traditional Figure 4. US Online and Web-infl uenced Retail Sales, 2009 to 2014 media. For example, the aggregate amount of internet $1,800 advertising is less than half that of print ad spending. There is $1,600 $1,409 $1,312 at least an additional $30 billion $1,400 $1,213 opportunity in marrying the $1,200 $1,115 amount of internet advertising $1,021 spend with the amount of online $1,000 $917 consumption. $800 ($ in ($ billions) eCommerce $600 $400 The eCommerce market is $200 poised to continue to gain $192 $210 $230 $249 US Online and Web-influenced Retail Sales $155 $173 market share from traditional ʊ 2009 2010 2011 2012 2013 2014 retail markets in 2011 and for US online and Web- the foreseeable future. While influenced retail sales 42% 46% 48% 50% 51% 53% eCommerce sales outperformed as a % of total sales Online retail sales Web-influenced retail sales their traditional counterparts Source: Forrester Research in the market downturn, online purchases still represent a relatively small fraction of total Figure 5. eCommerce Penetration Lags Online Advertising retail sales. As shown in Figure 4, the internet is also projected 14.0% to infl uence more than half of 12.3% 12.0% all retail purchases by 2013. 10.4% Converting the perception of 10.0% the web from a research tool 8.4% 8.2% to a secure, price competitive 8.0% shopping destination is critical for online retailers. 6.0% 4.7% Penetration Rates 3.5% While eCommerce is continuing 4.0% 3.2% to gain market share compared 3.8%38% 3.9%39% 3.3% 2.9% to traditional outlets, online 2.0% 2.6% 2.2% retail has lagged market 1.7% share gains made by online 0.0% advertising, as shown in Figure 2002 2003 2004 2005 2006 2007 2008 5. Online commerce in the eCommerce as % of all US Retail Online as % of all US Advertising U.S. (including eBay sales) more than doubled between Source: US Census Bureau, EBay, Magna Global 2002 and 2009, but online advertising nearly quadrupled in the same period. We believe signifi cant runway exists for incremental growth, driven by continued user and sales frequency growth.