2011 Internet Sector Outlook JPMorgan

North America Equity Research January 2011
Nothing But Net

2011 Internet Sector Outlook
Internet, Media & Entertainment Imran KhanAC Senior Analyst

(212) 622 622-6693 6693 Imran.t.khan@jpmorgan.com J.P. Morgan Securities LLC
See the end pages of this presentation for analyst certification and important disclosures. JP M J.P. Morgan d does and d seeks k t to d do b business i with ith companies i covered d in i it its research h reports. t A As a result, lt i investors t should h ld b be aware that th t the th firm fi may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
New Forces Threaten to Disrupt the Order of Traditional Industries

Over the Top p Social N t Networks k
Retail
Travel
Publishing
TV
Movies
News Media
Globalization
Mobile
The Bottom Line: Companies that dont embrace these trends could find themselves in danger by the end of the decade.
Source: J.P. Morgan.
A New World: What a Difference 10 Years Make!!

2000 2010 1,258 Dec 30 2010
S&P 500 Index
1,320 Dec 29, 29 2000
Wireless Subscribers D t Plans Data Pl (i (in R Revenue) )
97M $0 1B $0.1B 124M $28B
293M $46 8B $46.8B 240M $166B ~$18B
Internet Users
US eCommerce Amazon
~$2B $0.02B $0 02B (2 yrs old)
Google (Search)
$21.90B $21 90B (F10 net rev) 500M+ Users Monetizing 100B views/yr
Facebook (Social)
Didnt Exist Founders working for PayPal
YouTube
No Streaming Option
~12M users streaming
N tFli NetFlix
What will 2015 or 2020 look like?

Source: Viacom.
Dot Khans Dot.Khan s Top Ten Things to Watch
Continued adoption of social media and its impact on existing businesses such as advertising,
entertainment and eCommerce.
Increased smartphone penetration will further proliferate mobile web usage and app development and
could disrupt the way we shop, consume content and communicate.
Consumers embracing over the top video consumption. We think content owners, distributors and
advertisers must embrace the new order and either partner with Netflix or other services or launch their own.
Monetization of mobile search is a critical factor for Googles growth. US brick b i k & mortar t retailers t il market k t share h losses l could ld accelerate. l t Additionally, Additi ll we expect t material t i l market k t
share shifts in countries such as China, where B&M brands are relatively weaker.
The online hotel business retains significant runway for international growth, and we expect an abovey g g growth rate in the segment. g industry-average
We expect more consolidation/M&A rather than share buybacks. Despite its underperformance of the search market growth rate for most of the last ten years, we think
display should match search revenue growth in 2011 2011.
We believe rapid internet and smartphone penetration growth will create many more exciting businesses
outside the US but we expect US companies to face major challenges in markets outside Western Europe.
We expect a major effort by internet companies all over the world to woo local advertisers.
4
Consumers embracing over the top video consumption. We think content owners and advertisers must
embrace the new order and either partner with Netflix or other services or launch their own own.
Monetization of mobile search is a critical factor for Googles growth. US brick & mortar retailers market share losses could accelerate. Additionally, we expect material market
share h shifts hift i in countries t i such h as Chi China, where h B&M b brands d are relatively l ti l weaker. k
The online hotel business retains significant runway for international growth, and we expect an aboveindustry-average growth rate in the segment.
display should match search revenue growth in 2011.
We expect a major effort by internet companies all over the world to woo local advertisers advertisers.
5
Social Networking: A Next-Gen Web Platform/Traffic Gateway

We See Social Sites as Network Platforms like Visa/MasterCard
Dont Need to Monetize Directly from Customers Can Enable Applications, Then Collect a Small Fee as Network Provider Casual Games Virtual Gifts eCommerce
Social Networks as a Platform
eCommerce sites such as Zappos.com Analytics Comparison shopping such h as shopping.com h i
Google
Content sites such h as NY Ti Times
Intuit
MS Office
Windows
Adobe Photoshop
Payment Networks (e.g. Visa/MasterCard)
Chase MasterCard Ch Chase Visa Debit Card
US Bank Visa W ll F Wells Fargo MasterCard
Social Net Networking orking Sites
Social Games such as Farmville Utility apps such as Birthday Cards & Horoscopes
Business/Nonprofit apps pp such as Causes Communication tools such as Windows Live Messenger
Social Networking: Facebook Leading the Race

Facebook Reach Now Comparable to Yahoo!, Google
Facebook Facebooks s user reach is now north of 70% of all US internet users In 2H10, users are for the first time spending more minutes on Facebook than on Yahoo! sites Facebooks Expanding User Reach
100% 80% 60% 40% 20% 0% Yahoo Google Facebook 79% 84% 79% 81% 48% 70%
FB Minutes Surpass Yahoo!s

14% 12% 10% 8% 6% 4% 2% 0%
Users as % of US I nternet
% of All US I nternet Minutes
12%
9% 4% 4% 5%
10%
Yahoo
Google
Facebook
Aug-Oct '09
Aug-Oct '10
Aug-Oct '09
Aug-Oct '10
S Source: comScore, S J J.P. P Morgan M estimates. i
S Source: comScore, S J J.P. P Morgan M estimates. i
The Tollbooth at the Center of the Internet Social Networking Sites (Primarily Facebook) Are Becoming the NextGeneration Web Platform Payments, Games Payments Games, eCommerce all potentially game-changing opportunities
7
More than Half of Facebook Users Visit Site Daily

40% 35% 30% 25% 20% 15% 10% 5% 0% 38% 13% 8% 13% 29%
At least once a day
Almost ev ery day
1-2x a w eek
1-2x a month
Nev er
Source: J.P. Morgan consumer survey.
Social Networking: Becoming an Important Traffic Source

A Potential Threat to Googles Dominance?
Google currently generates ~36% 36% of all online ad revenue by being at the center of the ecosystem Thus far, Google largely retaining its share, but Facebook gaining rapidly The ability to drive traffic is highly connected to the ability to drive revenue We think Facebook Connect is helping drive this trend (see next slide)
Traffic to nytimes.com
25%
20% 15% 10% 5% % 0% Google, -2% Y/Y Oct-09
Source: comScore.
Traffic to Amazon Sites

25% 20% 15%
Traffic to eBay Sites

15% 10%
20.8% 20.4% 2.9% 4.8%
10% 5% 0%
20.0% 19.6% 1.8% 7.7%
5% 0%
11.8% 11.4%
2.6% 4.7%
Facebook, +66% Oct-10
Google, -2% Y/Y Oct-09
Google, -3% Oct-09
Social Networking: Becoming an Important Traffic Source
Facebook Connect: Used by over 250M users / month Lets users use Facebook login on other sites and link activity back to their profile The next step in the evolution of discovery: Traditional Early y Web
Portal site
2000s Web
Search site
Social Web
Social site
Users
Curator:
Editor
Editor
User Connections
Fragmentation:
Limited
Limited
Growing
Multiplying
Limitation:
Mismatch of editors interests vs. readers

User has to know where to look
User has to know what to search for
Lack of intentbased search
Understanding Social Games

Global digital gaming market was almost $16B in 2009 and is expected to reach
$20B in 2010, according to Electronic Arts; we believe social games, which are a subset of digital, are growing significantly faster than the segment as a whole
Digital gaming grew at ~36% CAGR since 2004 and now represents 41% of the
worldwide games market, up from 14% six year ago
Key social gaming companies: Zynga, Playfish, CrowdStar, Playdom et al

More Frequent Facebook Visitors Also Play Games More Often
Use FB: At least 1x /day Almost ev ery day 1-2x a w eek 1-2x a month 0% 6% 10% 20% 30% 40% 50% 60% 20% 54% play games 38%
% of users playing social games, by frequency of FB visits

Source: J.P. Morgan December 2010 consumer survey.
10
Increased smartphone penetration will further proliferate mobile web usage and app development, and
11
Future of Mobile Advertising

Mobile phone scale on par with television =
huge ad opportunity Worldwide Mobile Phone vs. Broadband Penetration
Billions
6 4 2 0 2005 2006 Mobile Subscriptions 2007 2008 Internet Users Mobile Broadband Subscriptions 2009 2010
There is much room for broadband

subscription growth
Use of the mobile web is becoming

mainstream: eMarketer estimates ~7.5% of all media time spent by US adults is happening on mobile
Fix ed Broadband Subscriptions

Source: adenyo presentation. presentation
Time spent across platforms is becoming more fragmented Mobile usage only accelerates this trend
35% 31% 30% 25% 20% 15% 10% 5% 0% Print Radio TV Online 12% 16% 28%
Mobile is creating more media

fragmentation; posing new challenges / opportunities for advertisers and content publishers
Early leaders in the field: Phone OEMs &

OSs
12
Source: Yahoo! 2010 Investor Day presentation.
Still Very Early Stage of Mobile Ad Adoption Cycle

US Mobile Ad Spend Forecast
$ in millions
$3,000.0 $2,500.0 $2,000.0 $1,500.0 $1 000 0 $1,000.0 $500.0 $2009 2010 2011 2012 $416.0 (30%) $743.1 (79%) $1,102.4 (48%) $1,501.3 (36%)
$2,036.8 (36%)
$2,549.5 (25%)
2013
2014
US Mobile Ad Spend
Source: emarketer, Sep 2010.
US Mobile Ad Spend Share by Format

2014 2013 2012 2011 2010 2009 0% 10% 20% 30% 40% 50% Display 60% Search 70% Video 80% 90% 100%
Messaging
Source: emarketer, Sep 2010.
13
Mobile Devices More than Just a Phone
We estimate that there are approximately 233M mobile phone users in the US, and smartphones
are becoming an increasingly large proportion of the mix Smart vs. Nonsmart Phone Penetration
Smartphone Users, 18%
Non-smartphone Users, 82%
Source: Nielsen 2010 Media Industry Fact Sheet.
Smartphone users are 3x more likely to browse the mobile web and to use a mobile app and 2x as
likely to send photos or videos (comScore)
14
Mobile Devices Present Some Challenges in Addition to Opportunities

Opportunity Search more searches more targeted more product/place oriented News Sites less coverage less transactional (eCommerce) application demand Challenge
reinstates the importance p of a strong g brand less space p to p put ads people download branded apps companies with lower brand recognition less likely to sell apps multiple platform/device compatibility issues smaller screen/fewer buttons hard to differentiate in crowded app market
Games
more time spent less barriers to entry
Aggregators
slow loading speed will make aggregators more attractive to consumers reach larger audience with more available time
less coverage apps allow consumers to create own personal aggregation smaller screen still run into internet issue of how to monetize
Video
high demand for video content while traveling
Coupons
larger audience than print can access for immediate demand
may be harder to track source for in-store use
Source: J J.P. P Morgan Morgan.
15
eReaders: A Different Kind of Mobile Device

Device proliferation is driving ubiquity Prices falling as devices get better A niche market can still be a big market We think the moneys in content Content means more than just books eBook success could threaten traditional
retail Although a Majority Dont Read Much, ~16% 16% Read R d 26 26+ Books B k per Year Y
60% 50% 40% % 30% 20% 10% 0% 0-10 books/y r 11-15 16-20 21-25 26-30 31+ 20% 9% 7% 6% 10% 49%
Source: J.P. Morgan Internet Team December 2010 Survey.
eBooks Penetration of Trade Print Is Growing Exponentially

10% 8% 6% 4% 2% 0% 2006 2007 2008 eBooks as % of Trade Print
Source: Association of American Publishers; J.P. Morgan estimates. Note: 2010 estimate based on Jan-Oct data.
9%
3% 0.5% 0.6% 1%
2009
2010
16
eReaders: Marketing and Price Drive Penetration
Amazon has marketed Kindle aggressively, and its brand awareness is up to 76%
100% 80% 60% 40% 20% 0% Kindle Nook Brand Aw areness (Know the name & w hat it is)
Source: J.P. Morgan Internet Team December 2010 surveys.
76% 45%
84%
iPad
Compared to our mid-2009 survey, significantly more users said they either owned a Kindle or planned to buy one in the next 12 months
30% 25% 20% 15% 10% 5% 0%
28% 7% Jul 2009 Dec 2010
% say ing they either ow n a Kindle or plan to buy one in the nex t 12 months
Source: J.P. Morgan Internet Team July 2009 and December 2010 surveys.
17
Is the iPad a Kindle Killer? No No.

When the iPad came out, many investors feared it would be the end of the Kindle These fears appear to have been misplaced: Kindle has sold well in recent quarters We think the price difference is one key factor: $139 for the lowest-priced Kindle vs. $499 for the lowest-priced iPad Our survey suggests people are happy with both: ~40% of iPad owners also reported owning a Kindle Another 23% of iPad owners plan to buy a Kindle in the next 12 months
Not mutually exclusive: Many of the iPad owners in our survey also reported owning Kindle
Also ow n Kindle Plan to buy Kindle nex t 12 months No plan to buy Kindle Don't know / Not sure w hat Kindle is 0% 14% 20% 23% 23% Percentage among iPad Ow ners in our Surv ey 40% 40%
Source: J.P. Morgan Internet Team December 2010 survey conducted by a third-party vendor; 1,002 total survey respondents.
18
19
Over the Top Video A Consumer-Driven Tsunami
Approximately 12M Netflix subscribers are taking advantage of streaming services With millions of devices out there (and another 46M tablets projected by JPMs JPM s computer and hardware
analyst to be sold in 2011), we think consumers appetite to view content in a broader range of ways is growing rapidly
We think members of the younger generation are more willing and more open to consuming content from
alternative sources and on alternative devices
Our survey suggests as many as a quarter of pay TV subscribers would consider cutting the cord, and
most of them would do so even at the loss of live sports. Those who are already using Netflix Watch Instantly (streaming) are even more open to cutting the pay TV cord
The success of Netflix is attracting additional entrants into the space
20
Over Over the Top Top Survey Results

More than 25% would consider Over the Top Including 16% of those who are currently
satisfied with pay TV lineup & pricing
Would you consider switching from Cable to Broadband Video?

Among users who subscribe to a cable/satellite TV package
75%
50% 72% 25%

28%
0% Yes
No
63% of these would consider it even if it meant losing access to live sporting events
21
Over Over the Top Top Survey Results

Netflix Watch Instantly subscribers are more likely to consider dropping their cable
packages Those who use Watch Instantly are more likely to consider switching away from Cable
75% 50% 25% 0% 67% 33%
42%
58%
47%
53%
Not a NFLX subscriber
Nev er used streaming/tried once
Stream at least 1-2x /month Would not consider
Would consider dropping pay TV / don't hav e pay TV

Source: J.P. Morgan g consumer survey. y
Netflix subscribers are more likely to also be premium pay TV subscribers (And premium pay TV subscribers are more likely to be Netflix subscribers)
22
Online Video Advertising Market to Grow in 2011, Mainly Due to Shift of Quality Video Content Online
Viewing online videos has become the norm
Online Video Viewer Trends
thousands
40 000 000 40,000,000 30,000,000 20,000,000 10 000 000 10,000,000 0 Oct- Nov - Dec- Jan- Feb- Mar- Apr- May - Jun- Jul- Aug- Sep- Oct2009 2009 2009 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010
S Source: comScore S d data
185,000 185 000 180,000 175,000 170,000 165,000 160,000 155,000
T t lU Total Unique i Vi View ers (000)
Vid Videos (000)
Source: comScore data.
Content quality is improving Ad formats are diverse; performance measures are limited but improving Brand advertisers are increasingly adopting the model
23
24
Googles Google s Challenge: Monetizing Mobile Search
Although Google has seen its desktop strength extend to the mobile device, the question is: Can Google narrow this gap?
Searches coming from Mobile Dev ices
15%
Rev enue Coming from Mobile Dev ices
3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
Source: J.P. Morgan g estimates. Note: 3% gross revenue includes AdMob and mobile display revenue.
25
26
eCommerce: Economic Rebound + Secular Market Shift = Robust Growth

Retail moving online less quickly than
advertising eCommerce penetration lags online advertising
15% 10% 4.8% 5% 0% 1.4% 2002 1.8% 2003 2.1% 2004 2.5% 2005 2.9% 5.1% 5.4% 8.2% 6.0% 6.4% 3.6% 3.4% 3.9% 10.5% 13.7%
Amazon continues to gain market share;

size is an entry barrier
Mobile eCommerce could further hurt brickand-mortar retailers Inventory management Mobile commerce Brick-and-mortar bankruptcies
2006
2007
2008
2009
eCommerce as % of all US retail
Online as % of all US Adv ertising
Source: US Census Bureau, Magna Global, J.P. Morgan estimates.
Catalysts for international growth

Improvement I of f shipping hi i i infrastructure f Improved payment systems Better fraud protection
Internet sales tax; in our view, probably the

headline risk
As eCommerce matures, private labels could

help margins
27
eCommerce Forecast (excluding Travel); US and Global Revenue to grow by 13.2% 13 2% and 18.9%, 18 9% respectively, respectively in 2011
J.P. Morgan's US eCommerce Revenue Forecast: $235B in 2013
Units as indicated
US eCommerce Forecast Internet population (M) Online Shoppers Shopping sessions / shopper / month Total shopping sessions / year (M) Average price / session Total eCommerce revenue (US $M)) Product return rate Net Revenue Y/Y Growth
2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E 186 195 203 211 217 222 227 231 235 239 104 117 130 143 153 160 170 176 184 189 1.90 1.75 1.88 1.91 1.87 1.99 2.13 2.25 2.38 2.45 2,069 2,464 2,925 3,281 3,427 3,821 4,342 4,745 5,243 5,560 39.50 $ 41.25 $ 43.00 $ 45.50 $ 45.00 $ 41.00 $ 41.50 $ 43.00 $ 44.00 $ 46.00 81,731 101,621 125,764 149,287 154,228 156,657 180,207 204,014 230,710 255,749 10.0% 9.0% 9.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 73,558 92,475 114,445 137,344 141,890 144,124 165,791 187,693 212,253 235,289 25.7% 23.8% 20.0% 3.3% 1.6% 15.0% 13.2% 13.1% 10.9%
'10 - '13 CAGR 1.8% 3.6% 4.8% 8.6% 3.5% 12.4% 0.0% 12.4%
Source: Department of Commerce, Internet World Stats, company reports, J.P. Morgan estimates.
We expect the US eCommerce market to grow at a 12.4% CAGR from 2010 to 2013
J.P. Morgan's Global eCommerce Revenue Forecast: $963B in 2013

$ in Millions Global eCommerce Forecast US Europe Asia ROW Total
2004 73,558 52,430 24,274 9,440 159,702
2005 92,475 72,690 32,450 13,216 210,831 32.0%
2006 114,445 98,193 41,911 18,502 273,052 29.5%
2007 137,344 134,387 54,569 25,903 352,204 29.0%
2008 141,890 175,305 76,783 34,970 428,948 21.8%
2009 144,124 188,446 107,078 41,963 481,612 12.3%
2010E 165,791 195,174 155,718 55,811 572,494 18.9%
2011E 187,693 210,876 208,953 73,113 680,635 18.9%
2012E 212,253 246,651 266,560 95,047 820,511 20.6%
2013E 235,289 283,014 323,065 121,660 963,028 17.4%
'10 - '13 CAGR 12.4% 13.2% 27.5% 29.7% 19.4%
Y/Y Growth
Source: Department of Commerce, Internet WorldStats, UK eStats, Forrester Research, IDC, Iresearch, Korea National Statistics Office, Japanese Statistics Bureau, eMarketer, PhuCusWright, TIA.org, Jupiter, company reports, J.P. Morgan estimates.
We expect the Global eCommerce market to grow at a 19.4% CAGR from 2010 to 2013
28
Online Online Shopping Shopping Survey Takeaways

Online Shopping Gaining Penetration
Question: How many times do you purchase items online per month?
40% 30% 20% 10% 0% Don't Don t Shop online Buy less than once/month 1-2x /month 2007 3-6x /month 2010 7-9x /month 10x +/month 20% 12% 34% 36% 28% 32% 13% 15% 2% 3% 1% 2%
Source: J.P. Morgan Internet User surveys, 2007 and 2010.
Higher-income Users Shop Online More Frequently

Question: How many times do you purchase items online, per month?
50% 40% 30% 20% 10% 0% Don't Shop online Buy less than once/month $0-$49K
Source: J.P. Morgan Internet User survey, 2010.
41% 19% 9% 6%
35% 27% 27%
36% 34% 23% 10% 16% 3% 2% 6% 7-9x /month 5% 1% 2% 10x +/month
1-2x /month
3-6x /month
$50K-$99K
$100K+
29
30
US Online Travel Spend to Grow by 10 10.5% 5% in 2011E

Corporate travel becomes a bit of a
headwind
US Market Share, Share 1H08 and 1H10

Trav eloc
OTAs gain market share from suppliers Hotels will likely y be the most p promising g
growth opportunity
Trav eloc ity , 22% Ex pedia, Priceline, 9% Orbitz, 26%
ity , 19%
43% Priceline, 11%
Ex pedia, 44%
Priceline dominates domestic market

share gains
Orbitz, 26%
Source: PhoCusWright US Online Travel Overview, Tenth Edition.
US Travel Market Forecast

$ in Millions
Total Travel Spend % online Online Leisure/Unmanaged Biz Travel Spend Total Travel Spend Growth Online Travel Spend Growth
2005 233,000.0 28.3% 66,000.0
2006 256,000.0 31.3% 80,000.0 9.9% 21.2%
2007 269,000.0 32.7% 88,000.0 5.1% 10.0%
2008 274,000.0 34.7% 95,000.0 1.9% 8.0%
2009 233,000.0 38.6% 90,000.0 -15.0% -5.3%
2010E 256,300.0 38.0% 97,394.0 10.0% 8.2%
2011E 269,115.0 40.0% 107,646.0 5.0% 10.5%
2012E 282,570.8 42.0% 118,679.7 5.0% 10.3%
Source: J.P. Morgan estimates, PhoCusWright, eMarketer, TIA.org, Jupiter and IPK International.
31
European Online Travel Spend to Grow by 10 10.4% 4% in 2011E

International markets benefit from online penetration Priceline passes Expedia in European market share
European Travel Market Share by Channel
Euros in Billions
European Online Leisure/Unmanaged Business Gross Bookings 2009

Euros in Billions
50 40 45.9 42.3 39.6
300 250 200 150 100 50 0 65.3 2008 66.4 2009 Online Leisure/Unmanaged Business Offline/Business 73.4 2010 175.5 148.9 146.7
30 20 10 0 Germany 13.4
18.6 12.1
20.5 4.4
16 7 16.7 3.1
11.8 5.2
UK Total Market
France
Spain
Italy
Scandinav ia
Online Leisure/Unmanaged Business
Source: PhoCusWright European Online Travel Overview, Sixth Edition.
Source: PhoCusWright European Online Travel Overview, Sixth Edition
Europe Travel Market Forecast

Euros in Millions
Total Travel Spend % online Online Leisure/Unmanaged Biz Travel Spend Total Travel Spend Growth O li T Online Travel lS Spend dG Growth th
2006 228,800.0 21.2% 48,500.0
2007 240,800.0 24.8% 59,800.0 5.2% 23.3% 23 3%
2008 240,800.0 27.1% 65,300.0 0.0% 9 2% 9.2%
2009 215,300.0 30.8% 66,400.0 -10.6% 1 7% 1.7%
2010E 220,682.5 33.3% 73,487.3 2.5% 10.7% 10 7%
2011E 231,716.6 35.0% 81,100.8 5.0% 10.4% 10 4%
2012E 243,302.5 36.0% 87,588.9 5.0% 8 0% 8.0%
32
Asia-Pacific Online Travel Spend to Grow by 17 17.7% 7% in 2011E

The APAC travel market is not far
behind the US in size
APAC Travel Market Forward Growth Estimates

US$ in Billions
APAC significantly trails US and

European markets in online travel penetration
Inbound travel demand to China is an

opportunity
China Y/Y Growth India Y/Y Growth Japan Y/Y Growth Australia/New Zealand Y/Y Growth Singapore Y/Y Growth
2008 61.1 12.9 65.7 23.7 5.6
2009 58.3 -4.6% 15.4 19 4% 19.4% 62.7 -4.6% 22.7 -4.2% 5 -10.7%
2010E 61.5 5.5% 17 10 4% 10.4% 64.1 2.2% 24.4 7.5% 5.2 4.0%
2011E 65.3 6.2% 19.4 14 1% 14.1% 66.5 3.7% 26.6 9.0% 5.5 5.8%
Fragmented F t d markets k t make k thi this region i

attractive to OTAs
Source: : PhoCusWright's Asia Pacific Online Travel Overview 3rd Ed
The hotel segment seems to be most

attractive for OTAs APAC Travel Market Forecast
$ in Millions
Total Travel Spend % online Online Leisure/Unmanaged Biz Travel Spend Total Travel Spend Growth Online Travel Spend Growth
2006 226,666.7 9.0% 20,400.0
2007 232,727.3 11.0% 25,600.0 2.7% 25.5%
2008 215,100.0 14.4% 31,000.0 -7.6% 21.1%
2009 202,200.0 18.0% 36,000.0 -6.0% 16.1%
2010E 196,134.0 21.0% 41,188.1 -3.0% 14.4%
2011E 202,018.0 24.0% 48,484.3 3.0% 17.7%
2012E 210,098.7 27.0% 56,726.7 4.0% 17.0%
33
Hotel Volume Growing Faster than Air at OTAs
Hotel growth more robust at all three major OTAs over the past year and a half, with Priceline especially strong.
Priceline Air and Hotel Volume Growth

30% 14% 44% 56% 16% 60% 3% 57% 4% 48% -3% 3Q'10 54%
Expedia Air and Hotel Volume Growth
2Q'09
3Q'09
4Q'09 Air (Tickets)
1Q'10
2Q'10
Hotel (Nights)
Source: Company reports.
26% 13% 2Q'09 2Q 09
27% 27%
32% 23% 22% 18% 6% 12% 2Q'10 2Q 10 10% 14%
Orbitz Air and Hotel Revenue Growth

5% -26% 10% 3% 13% 9% 8%
3Q'09 3Q 09
4Q'09 4Q 09 Air (Tickets)
1Q'10 1Q 10
3Q'10 3Q 10
Hotel (Nights) -33% -24% -31% 2Q'09 3Q'09 4Q'09 Air (Rev )
-10%
-12%
1Q'10 Hotel (Rev )
2Q'10
3Q'10
34
35
We Expect Healthy M&A Activity

As expected, 2010 saw a strong pickup in M&A activity, and we expect trends to remain
healthy in 2011 as market conditions continue to improve
Cash generation remains solid: The companies p in our coverage g universe, , along g with Microsoft and Apple, pp , have
nearly $150B gross cash on the balance sheet
Additionally, we believe the internet companies we cover retain significant room for leverage Acquisitions driven by: Technology: buy rather than build Traffic: buy rather than develop virally Transactional: buying companies with proven sales/revenue track record In our coverage universe, we believe the most attractive companies on these metrics are
MercadoLibre and Netflix
36
37
State of Advertising Overview

Consumers are seeking ubiquity Unbundling of content creates opportunity; threatens incumbent models
Ad Spend vs. Time Spent in 2003 and 2009
60% 50% 40% 30% 20% 10% 0% P r in t R a d io T im e S p e n t TV O n lin e 23% 7% 27% 8% 24% 14% 3% 52%
50% 40% 30% 20% 10% 0% P r in t R a d io T im e S p e n t TV O n lin e 26% 12% 16% 9% 39% 31% 28% 13%
Ad S pend
Ad Spend
Source: SRI Knowledge Networks, Universal McCann 6/03, IAB 3/04 and Yahoo! 2010 Analyst Day presentation.
Our thesis on newspaper market share declines plays out

Newspaper Ad Spend Continues to Decline
10.0% 0.0% -10.0% -20.0% -30.0% -40.0% 2003 2004 2005 2006 2007 2008 % change 2009 2010 New spaper ad spend
Source: NAA.org, J.P. Morgan estimates.
44.9 1.9%
46.7 3.9%
47.4 1.5%
46.6 -1.7%
42.2 34.7 -9.4% 24.8 -17.7% -28.6% 22.9
50.0 40.0 -7.8%30.0 20.0 10.0 0.0
38
State of Advertising Overview

While content consumption is growing, it is increasingly difficult to reach TV viewers
TV Viewership Alternatives Grow
8:38
"Can Netflix kill premium cable TV?" - Journal Enterprise

8:09
Netflix launches online streaming
Analog to digital transition
YouTube launched
7:40
"Bye-bye TV? YouTube debuts live streaming" - Fortune
DVD format launched
7:12
VOD launched Blu-Ray Disc launched HD television launched
Hulu launched
6:43
Hour:Min
Launch of HBO Channel Pay-per-view launched
VHS launched
6:14
5:45
Launch of DTH service "TiVo May Be `Disaster' for TV Industry" - Bloomberg
First s TiVo o DVR launched Netflix launched
"Hulu Is An H-Bomb Ready To Destroy The TV Industry" - Business Insider
5:16
4 48 4:48
4:19 1949 - 1950
1954 - 1955
1959 - 1960
1964 - 1965
1969 - 1970
1974 - 1975
1979 - 1980
1984 - 1985
1989 - 1990
1994 - 1995
1999 - 2000
2004 - 2005
2009 - 2010
Source: Nielsen Media Research and J.P. Morgan.
TV Season
Thus, Cable and Internet advertising are gaining share

39
Display Advertising in 2011

2011 will likely be a year of innovation
Interactive brand sponsorships, which yield better content integration Folding in purchase data for better targeting of branded ads Better integration of real-time real time consumer intent data Time-based ads which leverage user engagement Creative ad formats with real-time updating for better targeting
Challenges
Internet users have faced a large influx of inventory Performance focus remains a headwind; need more measurement Monetizing non-premium inventory
Current resurgence of interest in premium display advertising to continue in 2011E as brand advertisers shift spend online
40
US Graphical Advertising to Grow at 13% Y/Y in 2011E

We are modeling RPMs to increase 4% in F11, driven by flat growth in impressions per page offset ff b by a 4% i increase i in CPM CPMs We expect the US graphical ad market to grow at a 10.7% CAGR from 2009 to 2014
J.P. Morgan's US Graphical Advertising Revenue Forecast

Units as indicated
United States Internet Population (M) Pages Viewed / User / Day Total Pages Viewed (B) Impressions / Page Total Impressions (B) CPM (per 1,000 impressions) RPM (per 1,000 pages) US Graphical p Forecast ($M) ($ ) Y/Y Growth
2006 203 45 3,341 0.50 1,671 $3.50 $1.75 5,847 , 23%
2007 211 47 3,608 0.60 2,165 $3.31 $1.99 7,166 , 23%
2008 217 50 3,933 0.62 2,438 $3.15 $1.95 7,681 , 7%
2009 222 53 4,307 0.60 2,584 $3.05 $1.83 7,881 , 3%
2010E 227 57 4,737 0.61 2,890 $3.13 $1.91 9,045 , 15%
2011E 231 61 5,164 0.61 3,150 $3.25 $1.98 10,237 , 13%
2012E 235 65 5,577 0.62 3,458 $3.25 $2.02 11,237 , 10%
2013E 239 68 5,967 0.63 3,759 $3.25 $2.05 12,218 , 9%
2014E 243 72 6,385 0.64 4,086 $3.20 $2.05 13,076 , 7%
09-'14 CAGR 1.8% 6 3% 6.3% 8.2% 1.3% 9.6% 1.0% 2.3% 10.7% %
Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS and IAB.
41
International Growth More of a Driver in 2011E

J.P. Morgans International Graphical Advertising Revenue Forecast
Units as indicated
International Internet Population (M) Pages Viewed / User / Day Total Pages Viewed (B) RPM (per 1,000 pages) Int'l Graphical Forecast ($M) Y/Y Growth
2006 817 37 10,934 $0.73 7,982 28%
2007 903 38 12,378 $0.80 9,902 24%
2008 988 39 13,925 $0.82 11,418 15%
2009 1,072 40 15,470 $0.79 12,222 7%
2010E 1,158 41 17,172 $0.82 14,081 15%
2011E 1,251 43 19,439 $0.83 16,134 15%
2012E 1,326 45 21,577 $0.83 17,909 11%
2013E 1,406 46 23,735 $0.84 19,937 11%
2014E 1,476 48 25,634 $0.85 21,789 9%
09-'14 CAGR 6.6% 3.8% 10.6% 1.5% 12.3%
We expect p the international graphical g p ad market to grow g at a 12.3% CAGR from 2009 to 2014
42
We Estimate Global Graphical Advertising Market to Reach $26 $26.4B 4B in 2011 2011, Up 14% Y/Y
J.P. Morgans Global Graphical Advertising Revenue Forecast
Units as indicated
Global Internet Population (M) Pages Viewed / User / Day Total Pages Viewed (B) RPM (per 1,000 pages) Global Graphical Forecast ($M) Y/Y Growth
2006 1,020 38 14,275 $0.97 13,829 26%
2007 1,113 39 15,986 $1.07 17,068 23%
2008 1,205 41 17,858 $1.07 19,099 12%
2009 1,295 42 19,777 $1.02 20,103 5%
2010E 1,385 43 21,909 $1.06 23,126 15%
2011E 1,482 45 24,602 $1.07 26,371 14%
2012E 1,561 48 27,154 $1.07 29,146 11%
2013E 1,645 49 29,702 $1.08 32,155 10%
2014E 1,719 51 32,018 $1.09 34,865 8%
09-'14 CAGR 5.8% 4.0% 10.1% 1.4% 11.6%
2009 Global Display Market Share

Y! 8% Microsoft 5% AOL 6%
2010E Global Display Market Share

Y! 9% Microsoft 5% AOL 4% Google & Yahoo gain 1% each in 2010E, while AOL loses out
Google Other 71% Google 10% Other 71%

Source: Company reports and J.P. Morgan estimates.
11%
Source: Company reports and J.P. Morgan estimates.
43
Search Advertising Market Overview

Advertisers likely to explore new search avenue
Domestic Explicit Core Search Market Share
Google Sites Yahoo! Sites Microsoft Sites Ask Network AOL LLC Apr-10 66.0% 16.9% 10.8% 3.8% 2.5% May-10 66.4% 16.6% 10.8% 3.8% 2.4% Jun-10 66.2% 16.7% 11.0% 3.8% 2.4% Jul-10 65.8% 17.1% 11.0% 3.8% 2.3% Aug-10 65.4% 17.4% 11.1% 3.8% 2.3% Sep-10 66.1% 16.7% 11.2% 3.7% 2.3% Oct-10 66.3% 16.5% 11.5% 3.6% 2.1%
Source: ComScore data and J.P. Morgan estimates.
International Explicit Core Search Market Share

Conduit.com, 1.1 eBay B , 1.7 17 Baidu.com, 7.9 Ask Netw ork, 1.2 Facebook, 2.3 Microsoft Sites, 3.5 Yahoo! Sites, 7.6 Tencent, 0.7 Alibaba.com , 1.1
Google Sites, Sites 62.6 62 6
Source: comScore qSearch data. % of total worldwide searches
44
US Search Expected to Grow 13% in F11 F 11

We expect mobile search usage to be the main driver of query volume growth We expect higher levels of RPS in 2011 to be driven by stabilization in advertisers budgets, which should lead to higher keyword bids
J.P. Morgans US Search Advertising Revenue Forecast

Units as indicated
United States Internet Population (M) Queries / Month / User Number of Queries (M) RPS (per 1,000 searches) % Coverage % Clickthrough Rate $ Revenue / Click US Search Forecast ($M) Y/Y Growth
2006 203 47 114,896 $74.86 62.8% 26.2% $0.46 8,602 47%
2007 211 57 144,080 $81.65 63.5% 27.3% $0.47 11,764 37%
2008 217 68 177,938 $81.59 62.0% 28.0% $0.47 14,518 23%
2009E 222 78 208,188 $70.32 61.6% 25.3% $0.45 14,639 1%
2010E 227 87 236,293 $70.14 61.2% 25.4% $0.45 16,573 13%
2011E 231 95 264,648 $70.73 61.2% 25.4% $0.46 18,718 13%
2012E 235 104 293,759 $71.64 61.5% 25.6% $0.46 21,044 12%
2013E 239 112 323,135 $71.64 61.5% 25.6% $0.46 23,148 10%
2014E 243 120 348,986 $72.22 62.0% 25.6% $0.46 25,203 9%
09-'14 CAGR 1 8% 1.8% 8.9% 10.9% 0.5% 0.1% 0.2% 0.2% 11.5%
Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC and IWS.
45
International Search Growth Accelerates

J.P. Morgans International Search Advertising Revenue Forecast
Units as indicated
International Internet Population (M) Queries / Month / User Number of Queries (M) RPS (per ( 1,000 1 000 searches) h ) % Coverage % Clickthrough Rate $ Revenue / Click Int'l Search Forecast ($M) Y/Y Growth
2006 817 33 326,900 $19 07 $19.07 37.2% 17.2% 0.30 6,233 90%
2007 903 41 441,315 $23 19 $23.19 38.3% 18.4% 0.33 10,235 64%
2008 988 49 582,536 $25 74 $25.74 38.5% 19.1% 0.35 14,993 46%
2009E 1,072 57 728,170 $23 27 $23.27 38.5% 19.5% 0.31 16,947 13%
2010E 1,158 63 873,804 $23 55 $23.55 39.0% 19.8% 0.31 20,580 21%
2011E 1,251 69 1,039,827 $24 71 $24.71 39.0% 19.8% 0.32 25,695 25%
2012E 1,326 77 1,226,996 $25 98 $25.98 41.0% 19.5% 0.33 31,882 24%
2013E 1,406 85 1,435,585 $26 79 $26.79 41.0% 19.8% 0.33 38,458 21%
2014E 1,476 93 1,650,923 $27 44 $27.44 42.0% 19.8% 0.33 45,306 18%
09-'14 CAGR 6.6% 10.5% 17.8% 3 4% 3.4% 1.8% 0.3% 1.3% 21.7%
Source: J J.P. P Morgan estimates, estimates company reports reports, comScore comScore, Nielsen//NetRatings Nielsen//NetRatings, IDC IDC, IWS IWS.
We are now modeling F11 paid search revenue growth of 25% Y/Y, to $25.7B We expect W t the th i international t ti l search h ad d market k tt to grow at t a 21.7% 21 7% CAGR from f 2009 to 2014 We think the largest driver will be query growth. While we expect the US to experience query growth of 12% Y/Y in 2011, we believe international markets will see a 19% Y/Y lift in the number of queries
46
We Estimate the Global Search Advertising Market to Reach $44 $44.4B 4B in 2011 2011, up 20% Y/Y
We continue to see personalized search and vertical search as hot topics
J.P. Morgans Global Search Advertising Revenue Forecast

Units as indicated
Global Internet Population (M) Queries / Month / User Number of Queries (M) RPS (per 1,000 searches) % Coverage % Clickthrough Rate $ Revenue / Click Global Search Forecast ($M) Y/Y Growth
2006 1,020 36 441,796 $33.58 $33 58 43.9% 20.6% $0.37 14,835 63%
2007 1,113 44 585,395 $37.58 $37 58 44.5% 21.5% $0.39 21,999 48%
2008 1,205 53 760,474 $38.81 $38 81 44.0% 22.0% $0.40 29,511 34%
2009E 1,295 60 936,358 $33.73 $33 73 43.6% 21.3% $0.36 31,586 7%
2010E 1,385 67 1,110,097 $33.47 $33 47 43.7% 21.5% $0.36 37,153 18%
2011E 1,482 73 1,304,475 $34.05 $34 05 43.5% 21.4% $0.37 44,413 20%
2012E 1,561 81 1,520,755 $34.80 $34 80 45.0% 21.1% $0.37 52,925 19%
2013E 1,645 89 1,758,721 $35.03 $35 03 44.8% 21.3% $0.37 61,606 16%
2014E 1,719 97 1,999,909 $35.26 $35 26 45.5% 21.2% $0.37 70,509 14%
09 '14 09-'14 CAGR 5.8% 10.0% 16.4% 0 9% 0.9% 0.8% -0.1% 0.2% 17.4%
Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS.
47
W estimate We i global l b l search h and d display spending will be
$105B
in 2014
48
49
Robust Growth at Internet Companies Outside US/Western Europe

Companies outside the US and Western Europe are generating robust revenue growth and creating significant shareholder value
2008-2010E Revenue CAGR and Market Cap for Select Internet Companies
75% Mkt Cap: $23B $1B $3B $7B $35B $41B
50% 68%
25% 28% 16% 0% Yahoo! Japan Daum Group MercadoLibre Mail.ru 18% 39%
60%
Baidu
Tencent
Source: J.P. Morgan estimates (MELI, Mail.ru), company reports, Bloomberg consensus for others; market cap based on 12/30/10 pricing.
50
51
Local Advertising Market Overview

Local online advertising is a small % of the
overall market In US, local advertising is an ~$82B industry, with only ~15% of the total estimated to be spent online in 2010 2010, according to Veronis Suhler Stevenson
TV, 24% Yellow Pages, 14%
US Local Advertising Spend by Medium in 2010E

Magazines, 2% Out-of-home, 6%
SMBs: Spenders of local advertising Major players in the local ad market

Traditional media sources Pure-play internet players
Radio, 14%
New spapers, spapers 33%
Pure-play p y Internet, , 7%
Source: comScore data.
Rapid changes in the advertising landscape

create customer acquisition challenges
52
Our Top Picks for 2011

Amazon Priceline MercadoLibre ReachLocal Other Overweight -rated U.S. internet stocks are Netflix, Google, Yahoo!, Shutterfly, QuinStreet,
MediaMind
Additionally, J.P. Morgan Morgans s China internet analyst Dick Weis Wei s top picks are Tencent and NetEase
53
Top Pick: Amazon

The Bull Case: The Bear Case:
Positioned to take advantage of secular

growth in eCommerce
Brick-and-mortar incumbents increasingly

aggressive in eCommerce space
Huge scale provides competitive advantage Still underpenetrated in many categories, esp.
in Intl ramp-up can take years, and thus operating margins should improve
Barriers to entry may be low Because online shoppers are so pricesensitive, margin expansion opportunities will remain muted
Growth G th in i verticals ti l such h as A Apparel l should h ld

help gross margins
In I a rapidly idl evolving l i space, risk i k of f one f false l

step being quite costly
Prime is a customer retention tool that others

p p profitably y will find difficult to replicate
At scale, hard to maintain explosive growth

y will multiple p contract if rates indefinitely growth slows?
Fulfillment by Amazon enables continued

share gains in third-party
Rapid growth in eBooks mean market share

within books; could threaten traditional booksellers.
54
Top Pick: Priceline

International offers a secular growth

opportunity: 80% of the companys gross profit dollars come from the international business, which we think is more sustainable and will experience an above-average growth rate
Company generates significant amount of

profit in the Euro and other FX denominations. Thus, volatility in the currency market could adversely impact the share price.
Domestic growth pressured by competition

from other OTAs and suppliers
Modest take rate increases as emerging

markets develop
Increasing competition in the international

markets
Continued ADR recovery Domestic market share gains, aided by the

development of booking booking.com com in the US
Margins should expand as the company

continues to benefit from improved advertising efficiency
55
Top Pick: MercadoLibre

LatAm eCommerce growing rapidly as

internet and broadband penetration rises; eCommerce still at sub-2% of retail in region
Political, currency and macroeconomic risks

remain; region is not historically known for stability
MercadoPago is poised to take lead in

payments; we think this is a winner-take-most arena
Valuation leaves minimal room for error error, and

stock can be volatile if expectations not met
MercadoPago 3.0 rollout driving TPV higher We think ASPs on Marketplace should
improve in F11, esp. in the back half
As Pago penetration grows, blended take rate

likely to decline
Tax investigations of sellers (esp. in Brazil)

create headline risk
Management g is focused on long-term g

opportunity and is managing business for growth
56
Top Pick: ReachLocal

We think local will be a key area of growth in

the next two years
Rapid buildout and rapid growth leave

minimal room for error in execution
Expansion into additional markets (in 45 cities

as of 3Q10) 3Q 10) is a growth driver
In an evolving space, competition can come

from nowhere: in two years, years social buying sites have gone from almost zero to billiondollar revenue run rates
IMC sales force (nearly 700 now) can keep

growing, is a key barrier to entry
Product P d t expansion i provides id cross-sell ll

opportunities, which will raise IMC productivity
Sales-driven model may limit room for margin

expansion
As sales force matures, productivity benefit

greater p presence of experienced p IMCs from a g
Growing size of Upperclassman IMC force

should help margins, as Underclassman training expenses should grow less quickly
We see 40% revenue growth in F11E and

38% in F12E, with improving profitability
57
AOL (Neutral)
Graphical revenue to return to growth next

year (F11E revenue growth of 5.5%)
Continued declines in search revenue (14.2%

decline in F11E)
Potential monetization improvement in the

acquired assets could drive top top-line line growth
Subscriber base contraction hindering

subscription revenue (we estimate AOL will lose 700k subscribers in 2011) and profit growth
Third-party revenue trends should improve Easier comps as ad revenue growth in 2010
was negatively ti l i impacted t db by sales l f force reorganization
Investment in Patch will pressure margins
Strong cost-cutting initiatives
58
Blue Nile (Neutral)

Increasing consumer confidence should drive

sales growth (we are modeling 15% Y/Y revenue growth in F11)
Large fluctuations in diamond prices could

pressure the top line
International markets should see some

improvement
Mix shift toward the higher-margin nonengagement jewelry has been slow to develop
Slight EBITDA margin lift from SG&A leverage Brick-and-mortar Bi k d t bankruptcies b k t i and df further th
consolidation in the industry
Stock is still expensive (as of 12/30, trades at

~22x our F11 EBITDA estimate vs. the peer group at 14x), and multiple expansion is unlikely
59
Dice Holdings (Neutral)

Tech & Clearance should remain an attractive

vertical (23%E Y/Y growth in F11)
Finance segment to benefit from increased

penetration
Overall recruitment market remains tough Continental Europe and the Middle East still
showing signs of weakness
Energy vertical has a lot of potential (we

expect energy revenues to reach $13M by the end of 2011)
Fairly competitive business
EBITDA margins of 40+% in 2011E
60
eBay (Neutral)
PayPal is a one-of-a-kind brand in online

payments and has established itself as the one likely winner in the space
PayPal is a lower-margin business than

Marketplaces, and the latter still generates most of the revenue
Micropayments, Micropayments social networks, networks social

gaming all present incremental growth opportunities for PayPal TPV
Marketplaces turnaround remains sluggish as

other sites innovate more quickly; burdened by need to maintain certain features to retain near-monopoly in auctions
Marketplaces should benefit from continued

growth in eCommerce
Search on eBay site remains an area of

concern
Auctions business is stable, but fixed-price

business can grow faster as company improves product (shopping cart cart, more daily deals, etc.)
Secular shift is to a multichannel environment

in which eBays eBay s market share is lower; this offsets secular gains from eCommerce growth
Uniquely well-positioned to facilitate smallvolume cross-border trade
PayPal take rates may decline as larger

merchants are a bigger piece of the pie
61
Expedia (Neutral)
International growth should remain healthy,

aided by increased penetration in the APAC region (we are modeling F11 Intl gross bookings growth of 18% Y/Y)
Potential increased competition from

booking.com in the US
Role of GDSs: Possible renegotiation of direct

agreements with airlines
Continued expansion of TripAdvisor G&A leverage and operational efficiencies

should help margins
Increase selling and marketing spend could

create margin pressure
Healthy FCF generation
62
Google (Overweight)
Strong search revenue growth: 1% net

revenue growth in Googles search revenue generates an estimated $0.35 EPS for the company
Increasing competition from social networking

sites emerging as a big threat to Googles traffic, and mobile applications which let users bypass search
Display offers a strong incremental

opportunity: we think the overall display business will contribute an incremental $1.2B, or 4 points of the growth growth, in 2011
Increased government scrutiny with regard to

future acquisitions and business practices
Growth of non-text display products could

create margin pressure as the display business margins are significantly lower than the companys overall margins
Mobile will drive search usage: over the past

2 years, search queries from mobile have grown 5x at an accelerating pace
Improved international online and ad spend

penetration
63
IAC (Neutral)
Match business (25% of revenue and 71% of

OIBA) will be the largest driver of the stock
Market remains competitive for Ask.com, as

large search players continue to make innovations to the space
ServiceMagic should continue to see healthy

revenue growth; additionally, additionally margins will likely stabilize as investment levels become steadier in 2011
Lower RPS and increased product

development expenses could create headwinds
Distributed and proprietary toolbars and

destination websites driving query growth
Remain cautious on the long-term outlook of

the toolbar business
64
MediaMind Technologies (Overweight)

Publisher-neutral platform is appealing to

customers
Largest competitors are parts of large

advertising players such as Google and Microsoft
Highly scalable business model: uses low

capex (~4% of revenue in F10E) F 10E) and thus offers a strong margin expansion opportunity
Fluctuations in currency exchange rates could

adversely affect the stock price, as roughly 70% of revenue comes from international markets
Platform customers to comprise over half of

total revenue by the end of 2011E
As the revenue grows, the company should

see leverage from sales and marketing and R&D
Limited visibility into advertisers budgets

creates challenges
65
Netflix (Overweight)
~60M installed base of NFLX-ready devices

that reach the TV is a multiple of any other competitor
Extremely competitive space, with virtually all

other players possessing deep pockets
Decade of history in DVD business drives a

second-to-none recommendation engine, crucial for monetizing long tail of catalog
If studios refuse to play ball, model could be

threatened
If content costs go up too much, margins may

not improve
Spent over $1B on Marketing since 06 to

establish premium consumer brand; high customer satisfaction
DVD will ill eventually t ll b become a d declining li i

business, with deleverage on costs
Streaming carries lower fulfillment cost, fixed

content cost room for margin improvement and for more investment in content
International opportunity very uncertain

possible investments wont p p pay y off
Valuation leaves minimal room for error
International opportunity could be a positive

catalyst
66
Orbitz Worldwide (Neutral)

International growth will be aided by a strong

performance from ebookers (we are modeling 15% intl gross bookings growth in F11)
Continued challenges in reaching the brand

identity and inventory scale of Expedia and Priceline
Continued focus on building the companys company s

hotel business
Margins may be pressured by a continued

investment phase
Upcoming migration of HotelClub to the global

technology platform
American Airlines dispute and renegotiating

the role of GDSs
67
QuinStreet (Overweight)
Financial services vertical represents a large

market opportunity (5x size of education market)
Regulatory changes in the education sector

could create headwinds
Education revenue growth should accelerate

as the company laps the reduction of spend from DeVry
Acquisitions represent a large portion of the

company s growth; if QNST is unable to companys identify and complete strategic acquisitions, or successfully integrate acquisitions it does make, it could adversely affect the business
Other verticals a longer-term catalyst

(including home services, medical and B2B)
Third-party publishers drive the majority of

QNSTs traffic, yet QNST has only limited oversight and control over their operations
20% EBITDA margin is sustainable
68
Shutterfly (Overweight)
Increased penetration of photobooks and

continued product development should drive strong growth in the companys personalized products and services business
Highly seasonal business: over 50% of

revenues are earned in the fourth quarter
Retail partnerships (e.g., CVS/pharmacy and

Walgreens) could help reduce friction and boost print revenue
Pricing pressure from competition Growth of commercial print business could

create margin pressure
Commercial print business an attractive

opportunity (could reach ~$40M annual revenue in a couple of years)
Growth of social media makes Shutterfly a

more utilized tool
69
Yahoo! (Overweight)
Current share price does not reflect the full

asset value: we see at least ~$7.4B ($5.51/share) in value from Yahoo! Japan and Alibaba (does not include the private assets of Alibaba Group, such as TaoBao)
Display business facing increasing

competition, especially from Google and social networking sites
Search market share remains under pressure
Search comps will be easier once Yahoo! laps

the discontinuation of paid inclusion
Uplift in RPS from the Microsoft search

alliance
Continued margin expansion, part of which

can be attributed to the Microsoft search deal
70
US Internet Coverage Universe

Trading statistics as of 12/30/10 ($ in millions, excluding per-share data and as indicated)
JP M J.P. Morgan I Internet T Technology h l Universe U i

Ticker Rating Price 12/30 Search/Advertising AOL Google g QuinStreet ReachLocal MediaMind Yahoo* Group Average Leading e-Commerce brands Amazon Blue Nile Dice eBay Expedia InterActive Corp Mercadolibre Netflix Orbitz Worldwide Priceline.com Shutterfly Group Average Average AMZN NILE DHX EBAY EXPE IACI MELI NFLX OWW PCLN SFLY OW N N N N N OW OW N OW OW 182.75 58.30 14.70 28.13 25.28 29.39 70.18 179.80 5.56 404.27 34.88 $199 $49 $11 $25 $31.5 $35 $82 $186 $8 $ $484 $39 83,151 869 994 36,851 7,237 3,184 3,097 9,697 586 20,642 952 78,656 822 1,009 31,954 7,916 1,706 3,046 9,640 931 19,636 791 2.03 0.84 0.20 1.85 1.38 0.54 0.75 1.99 (4.02) ( ) 8.52 0.22 2.55 0.93 0.29 1.32 1.73 0.87 1.26 2.82 0.09 13.12 0.42 3.67 1.12 0.41 1.47 2.06 1.25 1.63 4.33 0.15 17.31 0.48 5.14 1.33 0.52 1.62 2.26 1.32 2.20 5.72 0.16 21.18 0.68 25% 12% 43% -28% 26% 59% 67% 42% -102% 54% 92% 44% 20% 40% 11% 19% 44% 30% 54% 59% 32% 14% 40% 18% 28% 10% 9% 6% 34% 32% 9% 22% 43% 90.0 69.7 71.9 15.2 18.4 54.2 93.2 90.4 NM 47.4 159.8 71.0 46.3 71.8 62.5 50.5 21.3 14.6 34.0 55.8 63.8 60.4 30.8 83.4 49.9 35.6 49.8 52.0 36.1 19.1 12.2 23.6 42.9 41.6 38.1 23.4 73.0 37.4 28.2 35.5 43.9 28.2 17.3 11.2 22.2 31.9 31.4 35.0 19.1 51.0 29.7 32.5 4.5 3.5 3.6 0.6 1.8 5.4 3.1 4.5 NM 3.2 8.0 3.8 2.5 3.6 3.1 2.5 0.9 1.5 3.4 1.9 3.2 6.0 2.1 4.2 2.9 2.1 2.5 2.6 1.8 0.8 1.2 2.4 1.4 2.1 3.8 1.6 3.6 2.2 1.8 1.8 2.2 1.4 0.7 1.1 2.2 1.1 1.6 3.5 1.3 2.6 1.8 2.2 AOL GOOG QNST RLOC MDMD YHOO N OW OW OW OW OW 24.02 598.86 19.08 19.60 13.73 16.76 $26 $625 $24 $23 $18 $20 Dec'11 Price Target Mkt Cap 12/30 2,544 193,059 899 546 298 22,510 Ent .Val. 12/30 2,438 159,679 864 468 204 12,292 EPS 2009 2010E 3.42 20.41 2.18 (0.27) 0.76 0.42 2.96 25.40 0.88 (0.48) 0.54 0.89 2011E 0.86 28.32 0.96 (0.46) 0.68 0.79 Y/Y EPS Growth 2012E '10/09E 0.52 32.82 1.11 0.18 0.83 0.92 -13% 24% -60% 78% -29% 110% 11/10E -71% 12% 9% -5% 26% -11% 12/11E -40% 16% 16% -139% 22% 16% 2009 7.0 29.3 8.7 -72.4 18.0 39.7 5.1 Cal PE 2010E 8.1 23.6 21.7 -40.7 25.4 18.9 9.5 2011E 27.8 21.1 19.8 -43.0 20.2 21.1 11.2 2012E 46.0 18.2 17.1 110.3 16.5 18.2 37.7 2009 1.4 0.8 0.4 -3.6 0.9 1.6 0.3 PEG 2010E 1.6 0.7 1.1 -2.0 1.3 0.8 0.6 2011E 5.6 0.6 1.0 -2.1 1.0 0.8 1.1 2012E 9.2 0.5 0.9 5.5 0.8 0.7 2.9
Source: Company reports and J.P. Morgan estimates. YHOO's Enterprise Value assumes Yahoo!s Asian assets are worth ~$8/share, Note: EBITDA= Operating income+D&A+/- Extraordinary charges, J.P. Morgan Ratings: OW = Overweight, N = Neutral, UW = Underweight * Price targets have a December 2011 end date
71
US Internet Coverage Universe

Trading statistics as of 12/30/10 ($ in millions, excluding per-share data and as indicated)
Ticker
Rating Price 12/30 2009 877 11,001 67 1 17 1,722 EBITDA 2010E 661 13,116 82 0 20 1,599 2011E 445 15,485 93 13 26 1,692 Y/Y EBITDA Growth 2012E '10/09E 375 17,787 111 44 31 1,893 -25% 19% 23% -62% 19% -7% -5% 11/10E -33% 18% 13% 2830% 33% 6% 478% 12/11E -16% 15% 20% 249% 18% 12% 50% 2009 2.8 14.5 12 9 12.9 416.7 12.2 7.1 77.7 Ent. Val/EBITDA 2010E 3.7 12.2 10 5 10.5 1088.2 10.3 7.7 188.8 2011E 5.5 10.3 93 9.3 37.1 7.7 7.3 12.9 2012E 6.5 9.0 78 7.8 10.7 6.5 6.5 7.8 2009 3,248 17,477 293 213 65 4,682 Rev ($M) 2010E 2,388 21,866 381 291 80 4,557 2011E 2,150 26,100 463 408 95 4,470 Y/Y Revenue Growth 2012E '10/09E 11/10E 12/11E 1,996 29,208 537 561 112 4,670 -26% 25% 30% 37% 24% -3% 14% -10% 19% 22% 40% 18% -2% 15% -7% 12% 16% 38% 17% 4% 13%
Search/Advertising AOL Google QuinStreet ReachLocal MediaMind Yahoo* Group Average
AOL GOOG QNST RLOC MDMD YHOO
N OW OW OW OW OW
24.02 598.86 19 08 19.08 19.60 13.73 16.76
Leading e-Commerce brands Amazon Blue Nile Dice eBay Expedia InterActive Corp Mercadolibre Netflix Orbitz Worldwide Priceline.com Priceline com Shutterfly Group Average Average AMZN NILE DHX EBAY EXPE IACI MELI NFLX OWW PCLN SFLY OW N N N N N OW OW N OW OW 182.75 58.30 14.70 28.13 25.28 29.39 70.18 179.80 5.56 404.27 404 27 34.88 1,851 29 50 2,663 876 169 48 449 143 548 50 2,458 32 52 3,223 963 257 85 587 151 884 62 3,202 38 69 3,624 1,094 281 119 712 165 1,202 1 202 71 4,232 42 82 3,813 1,158 288 158 854 179 1,460 1 460 85 33% 9% 4% 21% 10% 53% 76% 31% 6% 61% 23% 30% 30% 19% 34% 12% 14% 9% 40% 21% 9% 36% 15% 22% 32% 12% 19% 5% 6% 3% 33% 20% 8% 22% 20% 16% 42.5 28.2 20.3 12.0 9.0 10.1 62.9 21.4 6.5 35.9 35 9 15.8 24.1 43.0 32.0 25.9 19.6 9.9 8.2 6.6 35.8 16.4 6.14 22.2 22 2 12.8 17.8 78.1 24.6 21.8 14.6 8.8 7.2 6.1 25.6 13.5 5.6 16.3 16 3 11.1 14.1 13.7 18.6 19.5 12.3 8.4 6.8 5.9 19.3 11.3 5.2 13.4 13 4 9.3 11.8 10.4 24,508 302 110 8,727 2,955 1,376 159 1,670 738 2,338 2 338 246 34,293 329 128 9,197 3,336 1,643 216 2,161 752 3,082 3 082 297 44,904 372 168 10,275 3,710 1,771 296 3,004 802 3,732 3 732 347 56,397 414 198 11,197 3,967 1,855 392 3,758 850 4,300 4 300 412 40% 9% 16% 5% 13% 19% 36% 29% 2% 32% 20% 20% 31% 13% 31% 12% 11% 8% 37% 39% 7% 21% 17% 21% 26% 11% 18% 9% 7% 5% 32% 25% 6% 15% 19% 16%
Source: Company p y reports p and J.P. Morgan g estimates. YHOO's Enterprise Value assumes Yahoo!s Asian assets are worth ~$8/share, Note: EBITDA= Operating income+D&A+/- Extraordinary charges, JPMorgan Ratings: OW = Overweight, N = Neutral, UW = Underweight * Price targets have a December 2011 end date
72
Disclosures
Other Companies Recommended in This Presentation (and priced as of market close on 30 December 2010) NetEase (NTES/$36.76/Overweight), Tencent (0700.HK/HK$168.90/Overweight)
73
Disclosures
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. Important Disclosures Important Disclosures for Equity Research Compendium Reports: Important disclosures, including price charts for all companies under coverage for at least one year, are available through the search function on J.P. Morgans website https://mm.jpmorgan.com/disclosures/company or by calling this U.S. toll-free number (1-800477-0406) Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the a average erage total ret return rn of the stocks in the anal analysts sts (or the analysts anal sts teams) co coverage erage universe.] ni erse ] J J.P. P Morgan Ca Cazenoves eno es UK Small/Mid-Cap Small/Mid Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe. Coverage Universe: Imran Khan: AOL Inc. (AOL), Amazon.com (AMZN), Blue Nile (NILE), Dice Holdings, Inc. (DHX), Discovery Communications, Inc. (DISCA), Expedia, Inc. (EXPE), Google (GOOG), IAC/InterActive Corp. (IACI), MediaMind (MDMD), MercadoLibre, Inc. (MELI), Netflix Inc (NFLX), News Corporation, Inc. (NWSA), Orbitz Worldwide, Inc. (OWW), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), Shutterfly, Inc. (SFLY), The Walt Disney Co. (DIS), Time Warner (TWX), Viacom Inc (VIAb), Yahoo Inc (YHOO), eBay, Inc (EBAY)
J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010 Overweight Neutral Underweight (buy) (hold) (sell) J.P. Morgan Global Equity Research Coverage 46% 42% 12% IB clients* 53% 50% 38% JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
74
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2011 Internet Sector Outlook JPMorgan

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North America Equity Research January 2011

Nothing But Net

Internet, Media & Entertainment Imran KhanAC Senior Analyst

New Forces Threaten to Disrupt the Order of Traditional Industries

A New World: What a Difference 10 Years Make!!

S&P 500 Index

1,320 Dec 29, 29 2000

Wireless Subscribers D t Plans Data Pl (i (in R Revenue) )

97M $0 1B $0.1B 124M $28B

293M $46 8B $46.8B 240M $166B ~$18B

Didnt Exist Founders working for PayPal

~12M users streaming

What will 2015 or 2020 look like?

Dot Khans Dot.Khan s Top Ten Things to Watch

Dot Khans Dot.Khan s Top Ten Things to Watch

Social Networking: A Next-Gen Web Platform/Traffic Gateway

Payment Networks (e.g. Visa/MasterCard)

Chase MasterCard Ch Chase Visa Debit Card

US Bank Visa W ll F Wells Fargo MasterCard

Social Net Networking orking Sites

Source: J.P. Morgan.

Social Networking: Facebook Leading the Race

FB Minutes Surpass Yahoo!s

% of All US I nternet Minutes

S Source: comScore, S J J.P. P Morgan M estimates. i

S Source: comScore, S J J.P. P Morgan M estimates. i

More than Half of Facebook Users Visit Site Daily

At least once a day

Almost ev ery day

Source: J.P. Morgan consumer survey.

Social Networking: Becoming an Important Traffic Source

Traffic to Amazon Sites

Traffic to eBay Sites

20.8% 20.4% 2.9% 4.8%

20.0% 19.6% 1.8% 7.7%

Facebook, +66% Oct-10

Google, -2% Y/Y Oct-09

Facebook, +328% Oct-10

Google, -3% Oct-09

Facebook, +81% Oct-10

Social Networking: Becoming an Important Traffic Source

Mismatch of editors interests vs. readers

User has to know where to look

User has to know what to search for

Lack of intentbased search

Understanding Social Games

Key social gaming companies: Zynga, Playfish, CrowdStar, Playdom et al

% of users playing social games, by frequency of FB visits

Dot Khans Dot.Khan s Top Ten Things to Watch

Future of Mobile Advertising

There is much room for broadband

Use of the mobile web is becoming

Fix ed Broadband Subscriptions

Mobile is creating more media

Early leaders in the field: Phone OEMs &

Source: Yahoo! 2010 Investor Day presentation.

Still Very Early Stage of Mobile Ad Adoption Cycle

US Mobile Ad Spend Share by Format

Mobile Devices More than Just a Phone

Non-smartphone Users, 82%

Source: Nielsen 2010 Media Industry Fact Sheet.

likely to send photos or videos (comScore)

Mobile Devices Present Some Challenges in Addition to Opportunities

more time spent less barriers to entry