Global Technology / Internet Trends Stanford Graduate School of Business – Version 2.0 November 15, 2005 [email protected] 1 Outline • Global Internet Data Points • General Technology / Internet Trends • What About Revenue? • Attributes of Winning Technology Companies 2 Global Internet Data Points 3 Internet Data Points - Global Global N. America = 23% of Internet users in 2005; was 66% in 1995 S. Korea Broadband penetration of 70%+ - No. 1 in world China More Internet users < age of 30 than anywhere 4 Internet Data Points - Communications Broadband 179MM global subscribers (+45% Y/Y, CQ2); 57MM in Asia; 45MM in N. America Mobile 1.1T SMSs sent with $50B in revenue in 2004 (Informa 5/05); Messaging more emails sent in Japan via mobile than PC (DoCoMo 2005) VoIP 61MM registered Skype users (10/05) - fastest product ramp? Denmark VoIP minutes > landline voice minutes Tencent 16MM peak simultaneous Instant Message users, China, CQ2 5 Internet Data Points - Content 7.6B global searches (+74% Y/Y, 5/05); 384MM global unique Google visitors (+36%, 5/05) per comScore Personalization 40MM+ estimated My Yahoo! users Blogging 27% of US Internet users read blogs, 11/04 Yahoo! ~1.6B streaming video (music…) sessions (+100% Y/Y, CQ3) 565MM cumulative iTunes as of 9/05; 7MM iPods sold in Digital Media CQ3:05 (+220% Y/Y); 1MM videos sold in 20 days (10/05) $3B annual ringtone sales (Informa 5/05) - vs. $559MM+ Ringtones cumulative iTunes sales (9/05) 6 Internet Data Points - Payments PayPal 87MM accounts (+53% Y/Y, CQ3); 25MM users (+41% Y/Y) Mobile Payments 4MM+ NTT DoCoMo wallet phone users (CQ1) in Japan 7 Global Technology / Internet Trends 8 What We Lived Through Pattern Company Creation Boom Bust Boom-let Wealth Creation Boom-let Bust Boom 9 Top 5 Global Internet Market Cap Leaders Google + Yahoo! + eBay + Yahoo! Japan + Amazon.com • $ 2B = market value - pre-2000 IPO • $178B = market value - Nasdaq peak – 3/10/00 • $ 32B = market value - Nasdaq trough – 10/9/02 • $262B = market value - 11/11/05 For Google we include $100MM in post-money valuation 10 Significant Infrastructure Builds… Capital Expenditures (US$ in Millions) C2003 C2004 C2005E Google $177 $319 $797 Y/Y 375% 80% 150% Yahoo! $117 $246 $405 Y/Y 128% 109% 65% eBay (1) $365 $293 $381 Y/Y 163% (20%) 30% Amazon.com $46 $89 $200 Y/Y 17% 94% 124% Source: Company filings, Morgan Stanley Research. Figures exclude capital expenditures from acquired companies. (1) C2003 includes $125.1MM purchase of additional office space. E = Morgan Stanley Research estimates. 11 …Significant Infrastructure Builds To organize all the world’s information and make it universally accessible and useful. - Google’s Mission 12 In / Entering Major Computing Cycles 4 major computing cycles over past 50 years Mainframe Æ Minicomputer Æ PC Æ PC Internet (Narrowband) In / entering 2 most profound cycles ever PC Internet (Broadband) Æ Mobile Internet Why now? 1) Broadband becoming pervasive 2) Internet-enabled mobile devices becoming pervasive small / functional computers 3) Global technology innovation may be at all time high 13 Shift to Consumer vs. Enterprise as Demand Driver • In CQ3, Microsoft indicated PC units grew a robust 15-17% while Client (PC-related) revenue rose only 7% • Disconnect between unit and revenue growth was attributed, in part, to relative strength in consumer market where products carry lower ASPs 14 US Share of Technology Usage / Innovation Falling Internet Users – 1B Mobile Subscribers – 2B C2005E (1) C2005E (2) N. America N. America 11% South 23% South America America 11% 5% Europe 19% Europe 24% ROW 12% Asia ROW Pacific 18% 36% Asia Pacific 41% (1) Source: Morgan Stanley Research. (2) Source: Morgan Stanley Communications Equipment Research - Scott Coleman, John Marchetti. 15 US Share of Global Market Value Falling 1970 2001 2030E Rest of Rest of Rest of World World World 34% 53% 73% US US US 66% 47% 27% Source: AXA. Projected data for C2030E calculated using the rate of growth of market capitalization for Rest of World and USA since 1970. 16 US Share of Technology Financings Falling Geographic Distribution of Technology Equity and Equity-Linked Transaction Volume ($B) $39 $133 $220 $69 $38 $69 $69 $44 100% 90% 80% 2005 70% Non-US, 65%, with 60% Asia, ex-Japan 35%, 50% Europe, 19%, Volume 40% Japan, 8% 30% 20% 10% 0% Equity and Equity-Linked Transaction Geographic Distribution of Technology of Technology Distribution Geographic 1998 1999 2000 2001 2002 2003 2004 2005 US Non-US Source: SDC, DealLogic, Morgan Stanley. 2005 data Year-to-Date as of 11/11/05. 17 US Share of Engineers Falling Annual Engineering Opex ($K) per Graduates (K) Employee (5) US 76 (1) $88 India 184 (2) 16 China 352 (3) 13 Rest of World 1,007 (4) -- (1) Source: Engineering Workforce Commission, Bachelor degrees awarded, 2003-2004 academic year. (2) Source: National Association of Software and Service Companies, 2003-2004 engineering graduates. http://www.nasscom.org/artdisplay.asp?cat_id=303. (3) Source: China Statistical Yearbook, 2004, http://www.stats.gov.cn/english/statisticaldata/yearlydata/yb2004-e/indexeh.htm, 21-11, “Regular College Course.” (4) Source: National Science Foundation, First University Science & Engineering Degrees, http://www.nsf.gov/statistics/seind04/append/c2/at02-33.pdf. (5) Source: Morgan Stanley Research based on FactSet 2004 operating expense, employee data. US data from S&P500 index (500 companies, 410 available). China data from Hang Seng China Enterprise Index (HSCEI) (40 companies, 31 available). India data from Bombay SENSEX Index (30 companies, 22 available). 18 US Litigation vs. R&D Spending In 2001 (the most recent year for which data are available), US industry spent more on tort litigation [$205B] than on R&D [$184B]. -National Academy of Sciences (1) (1) Rising Above The Gathering Storm: Energizing and Employing America for a Brighter Economic Future (http://www.nap.edu/catalog/11463.html). As quoted in the report “US research and development spending in 2001 was $274B, of which industry performed $194B, and funded about $184B. (National Science Board Science and Engineering Indicators 2004). One estimateof tort litigation costs in the United States was $205B in 2001. (Leonard, Jeremy A. 2003. How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness. Prepared for the Manufacturing Institute of the National Association of Manufacturers. http://www.nam.org/s_nam/bin.asp?CID=216&DID=227525&DOC=FILE.PDF.” 19 US Interest in Non-US Created Technologies Rising • eBay / Skype combination is best example (along with VeriSign / Jamba) of leading US-based technology company purchasing a leading non-US technology that had leadership in foreign markets with intent, in part, to bring technology into US market • More - potentially a lot more - to come… 20 Communications Changing / Being Changed 1975 2005 Mobile VoIP IM Pace of innovation across communication devices, services and networks continues to rise Landline Phone Email Blogs 21 Communications = 44% of US Online Usage & Rising 100% 90 80 70 60 50 Communications 40 30 20 % of Time Spent on Activity % of Time Spent 10 0 Email IM Voice Browsing / Discussion / Search Other Chat Source: comScore Media Metrix, based on average minutes per visitor by category (8/05). Browsing / Other includes general web-surfing activity not listed in other categories, including anything from news sites (cnn.com) to retail (Amazon.com) to job sites. 22 Hierarchy of Needs? 1943 - Maslow 2005 - ? ;) Self- actualization Internet / Mobile Phone Esteem Belonging Shelter Safety Food / Water Physiological Created for discussion purposes and perhaps a bit of humor. Not intended to discredit Maslow’s hierarchy of needs which we believe to be accurate. 23 Next Generation Communications Hubs? Internet Sites Search Engines Email Providers IM Services VoIP Services Payments MSN Google Search (1) Yahoo! Mail (1) MSN Messenger Active Skype / eBay PayPal / eBay Unique Visitors (2) (218MM) (219MM) Accounts (2) Registered Users (2) Accounts (2) (440MM) (185MM) (61MM) (87MM) Yahoo! Search (1) MSN Hotmail Google (1) (207MM) Active Accounts (2) Yahoo! Messenger (1) (384MM) (215MM) (79MM) Yahoo! Google GMail (1) AOL Instant Messenger Unique Visitors (2) (27MM) (AIM) (1, 3) (411MM) (64MM) eBay ICQ (3) Total Registered Users (2) (31MM) (168MM) Amazon.com Active Customers (2) • Convergence is happening (~10% of (52MM) Yahoo! IM sessions end in phone AOL call). Opportunities exist for non- Subscribers (2) mobile players to leverage existing (26MM) subscribers. MySpace.com (1) (21MM) • Who has the most valuable customer base as transition occurs? Who will have it when it is over? (1) Source: Unique Visitors, comScore Media Metrix (5/05). (2) Source: Company Reports, as of CQ3:05. AOL subscribers based on sum of US and Europe AOL-branded subscribers. Skype data as of 10/25/05. (3) Source: Company Web site, as of 4/04. 24 Wireless is Game Changer Global 2.5G / 3G Penetration 1,600 60% 1,400 50% 2.5G Ramp in 25- 1,200 30% Penetration 40% 1,000 Sweet Spot… 800 30% 600 20% Subscribers (MM) 400 10% % of Total Wireless Subscribers 200 0 0% 2005E 2006E 2007E 2008E 2009E 2.5G Subscribers 3G Subscribers % 2.5G Penetration % 3G Penetration Source: Morgan Stanley Telecom Research Scott Coleman, John Marchetti. 25 Mobile Leads Internet in Most Markets Mobile Users Internet Users Mobile Phone to Installed PCs Country (MM) (MM) Internet User Ratio(MM) China 363 100 3.6:1 53 US 177 211 0.8:1 207 Japan 88 78 1.1:1 55 Germany 69 51 1.4:1 39