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EQUITY RESEARCH

August 03, 2007 North America


Internet & Media
Internet Internet
Douglas Anmuth
Market Commentary/Strategy 1.212.526.0879
danmuth@lehman.com
InternetInside:What If WSJ.com Were Free LBI, New York

Sector View:
New: 2-Neutral
Old: 2-Neutral

Investment Conclusion
! With News Corp's acquisition of Dow Jones now official and the deal expected to close in the fourth quarter, we consider the impact a
free, ad-supported WSJ.com could potentially have on competing financial news properties and on a lucrative segment of display
advertising. We believe this scenario warrants consideration from investors as the emergence of WSJ.com as a free website for users,
backed by a highly motivated ad sales force with access to wider global distribution, would likely create increased competition for users
and online advertising ad dollars.

Summary
! We estimate that the finance verticals of the major portals could represent 10%-15% of each company's overall display advertising
revenue and given high CPMs, represent a high value area of premium inventory.
! An avg. page view on WSJ.com currently commands almost 4x the advertising revenue of a page view on NYTimes.com, by our
estimation, likely a key factor as News Corp evaluates whether to pursue a fully ad-supported model.
! A free WSJ.com, with global distribution through News Corp would likely see an increase in visitors and ad revenue, potentially siphoning
ad dollars from incumbent leading financial sites, Yahoo! Finance, MSN Money, and AOL Money & Finance.
! Large cap Internet stocks currently trade at an average 2008E EV/EBITDA multiple of 15x, P/E of 29x, and have a FCF yield of 3.8%.
! Large cap Internet stocks declined by an average of 1% for the week ended August 3: eBay (+3%), Google (-1%), Yahoo! (-2%), and
Amazon (-7%). Other notable performance includes a 5% gain in Expedia and a 17% gain in Overstock.com. These compare to a flat
S&P 500 and Nasdaq over the same period.

WHAT A FREE WSJ.COM COULD MEAN?


With News Corp’s acquisition of Dow Jones now official and the deal expected to close in the fourth quarter, in this week’s
Anmuth’s Internet Inside weekly we consider some of the potential changes which could occur at WSJ.com under new ownership,
and the impact such changes could have on the broader Internet space. In particular, News Corp has publicly discussed the possibility
of moving WSJ.com to a free, fully ad-supported model, and although the company has not suggested a move to free is imminent, we
believe the option will at least be seriously considered. Financial news is one of the key categories of premium content online which
continues to command among the highest CPMs for display advertising. According to the Internet Advertising Bureau (IAB), Financial
nd
Services was the 2 largest online advertising category in 2006, representing 16% of total U.S online advertising. While The Wall Street
Journal is one of the premier brands in global financial news, its reach is nonetheless limited by the fact that WSJ.com remains a paid
subscription website with limited free content.

While in the near-term a shift from paid subscription to free would significantly shrink overall revenue at WSJ.com, as we believe
almost 50% of the site’s revenue is derived from subscriptions, we believe the incremental advertising revenue derived from a
larger user base could ultimately make up for lost subscription revenue over time. The shift, however, could potentially have a
more meaningful impact on current financial news incumbents, including Yahoo! Finance, MSN Money, AOL Money & Finance,
and CNNMoney. A free WSJ.com, likely with access to a larger, re-energized ad sales force, would likely see an increase in visitors and
subsequently ad revenue, potentially siphoning ad dollars from the incumbent premium financial sites. Beyond any explicit marketing of
WSJ.com, we believe the site’s audience growth would result from an increase in organic cross-linking from other sites around the Internet

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PLEASE SEE ANALYST(S) CERTIFICATION(S) ON PAGE 8 AND IMPORTANT DISCLOSURES BEGINNING


ON PAGE 9
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EQUITY RESEARCH
as bloggers and other sites would increasingly link to WSJ.com articles (freed from subscription barriers), ultimately driving greater
relevancy in algorithmic search rankings for the site’s articles. We estimate that the finance verticals of the major portals could
represent 10%-15% of each company’s overall display advertising revenue, and while the personal finance focus of the portal’s
sites will continue to provide some appeal, we believe the emergence of the Wall Street Journal brand in the world of free online
financial content would significantly increase competition for both users and online advertising dollars.

OVERVIEW OF WSJ.COM
Launched in 1996, the Wall Street Journal online has become the largest subscription news site with nearly 1 million paid subscribers as of
the end of 2Q. The total online division of Dow Jones, which includes MarketWatch and several other properties, will generate an estimated
$115 million in advertising revenue in 2007, according to estimates from Lehman Brothers Publishing and Advertising Analyst Craig Huber.
Of the $115 million in total online ad revenue, we estimate approximately $75 million (+13% Y/Y) is generated by WSJ.com. In
addition, WSJ.com will generate roughly $65 million (+11%) in subscription revenue in 2007, putting advertising/subscription
revenues at a 54% / 46% split, or $140 million in total. Based on Dow Jones’ internal numbers, WSJ Digital (includes MarketWatch, and
other DJ sites) averaged 8.3 million monthly unique visitors and 106 million page views during 2Q07, globally. Using comScore tracking, in
June 2007, WSJ Online specifically, had 1.5 million unique visitors domestically (2.6 million globally) and 9 million page views
domestically (20 million globally). MarketWatch.com, acquired by Dow Jones in January 2005, is a free financial news site with shorter
articles and a greater focus on immediate news and market color rather than in-depth articles. While we estimate that MarketWatch will
generate roughly $40 million in advertising revenue in 2007, ultimately we believe WSJ.com will be the centerpiece of News Corp’s strategy
towards creating a powerful online business news hub, given the Wall Street Journal’s reputation for high-quality journalism and the brand’s
global appeal.

Notably, NYTimes.com, which is an almost entirely free site, will generate an estimate $175 million in advertising revenue in 2007
(excluding About, Boston.com and other smaller sites) yet will do this while generating 8 to 10 times the average monthly page views of
WSJ.com. Backing into advertising revenue per thousand page views, we estimate that an average page view on WSJ.com
currently commands almost 4x the advertising revenue of a page view on NYTimes.com. We believe this factor highlights the value
of the WSJ.com asset and will be a key consideration as News Corp evaluates whether to pursue a fully ad-supported model.

We believe Dow Jones’ ability to build a paid subscriber base at WSJ.com of almost 1 million online users is a notable achievement
particularly in an online environment where users are accustomed to accessing most information for free and speaks to the value which
readers assign to the site’s content. Not only is it the leading paid subscription news site, it is one of the more expensive online subscription
services aimed at consumers, although a recent promotion has made it significantly less expensive to new subscribers, with a 52-week
online subscription priced at $79 or a combined print and online subscription going for $99 (non-promotional rates are $298 for annual
combo-subscription or $249 for print alone). Figure 1 displays the concentration of online subscriptions by content category.

_______________________________________________________________________________________________________________
Figure 1: Online Subscription Revenue by Content Category

2005 2005
Content Category $ in millions % of Total Subscrption Rev.
Entertainment/Lifestyle 574 28%
Personals/Dating 503 25%
Business Content/Investment 320 16%
Research 152 7%
Personal Growth 117 6%
Games 108 5%
General News 79 4%
Community-Made Directories 65 3%
Sports 51 3%
Greeting Cards 46 2%
Credit Help 28 1%

Total 2,045 100%

Source: Online Publishers Association (OPA)


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THE LIKELY IMPACT OF A FREE WSJ.COM
With almost 50% of WSJ.com revenue from subscription fees, moving to a fully ad-supported model would have likely been a difficult
decision at an independent Dow Jones, particularly when the print-based advertising revenue was faltering. Holding all else equal, in order
to recoup $65 million in lost subscription revenue, we estimate WSJ.com would have to increase page views by 2x – 3x, which we view as
unlikely in the near-term, even as a free site. However, we believe that moving forward the property must be viewed within the greater
context of News Corp’s portfolio of assets both online and offline. Taking a more holistic view of WSJ.com, that $65 million in
potentially lost subscription revenue appears far less significant in light of both the $5 billion acquisition price paid and News
Corp’s projected 2007 revenue of $28.6 billion (estimate by Lehman Brothers Cable and Satellite Analyst Vijay Jayant).
Furthermore, Lehman Brothers Publishing and Advertising Analyst Craig Huber projects that WSJ.com subscription revenue will grow only
11% in 2007, decelerating to single digit growth moving forward. While the subscription model likely helps WSJ command higher CPMs
within its walls right now, as the company can point to a more engaged and demographically attractive reader, we believe that a free, fully-
ad supported model will prove to be more sustainable long term and the benefits of expanding reach and gaining share of overall online
advertising dollars will outweigh the opportunity, and absolute dollars, associated with the paid subscription model. Other potential
alternatives exist of course, such as making MarketWatch the more mainstream free website (it’s already free) and keeping WSJ.com as a
paid, premium site (i.e., doing very little with the current models, but possibly doing more cross-branding/content sharing), or a making
WSJ.com more free, but continuing to wall some premium content behind a subscription fee, similar to NYTimes’ TimeSelect program.
While less dramatic, these alternatives appear less likely in our view given the global appeal and opportunity associated with the Wall Street
Journal brand, future advertising potential based on current ad yield on WSJ.com, and a desire to grow the influence of the WSJ brand
globally, making it a more valuable centerpiece of News Corp’s future, multi-media, business-news services.

We believe a potentially free WSJ.com poses the greatest immediate threat to Yahoo! Finance, AOL Finance, and MSN Money, the
leading financial news sites on the Web (we note that page views to Yahoo! Finance are were down 27% in 2Q07 – which seems like a
steep decline even if we attribute some of the decrease to the impact of Ajax-based functionality on the site, which lessens page refreshes
and thus, page views). If News Corp moves more aggressively toward building out WSJ.com’s national and political news coverage (which
has been suggested), we believe the competitive threat would extend further to the general news sections of the portals, including MSNBC
and CNN. The potential rise of WSJ.com as a more formidable financial news hub is consistent with the theme of verticalization of the web
which we believe has been occurring online in recent years. We believe users are increasingly turning to distinctive, specialized brands for
higher-quality vertical content, rather than relying on a one-stop-shop for less in-depth content across disparate categories like sports,
finance, or technology.

While we believe a free WSJ.com could more aggressively siphon ad dollars from the major finance portals, like Yahoo! Finance
and MSN Money, we also expect that these portal-based finance sites will continue to attract an audience based on the broad
appeal of their content. We believe the audience size of WSJ.com is not simply limited by its subscription fee but also by its more
sophisticated content. Not unlike its print version (which only introduced color photography in the past few years) the WSJ.com is simply
not for everyone (in its current form). Additionally, we believe the portal sites’ heavier concentration on personal finance, real estate, and
functional stock/company look-up tools will help these sites maintain relevance and an audience. However, making WSJ.com free and
providing it with greater distribution domestically and internationally, which WSJ.com could achieve via News Corp’s existing properties,
including MySpace (potentially a stretch given the quite different content and user base), other Fox sites, as well as the company’s
broadcasting, cable, and satellite operations (assuming WSJ could exit its CNBC content-sharing partnership prior to 2012), could
significantly expand the site’s reach and popularity over time.

THE FINANCIAL NEWS CATEGORY


We believe the online financial news category is largely dominated by the big three portals, Yahoo!, MSN, and AOL, with Forbes and Dow
Jones rounding out the top 5 in terms of unique visitors domestically (see Figure 2). Given the broader demographic reach of portals in
general, the content across the big three tends to feature more personal finance articles (home buying, managing debt, retirement
planning), in addition to general business news and financial market data. Financial content has evolved and expanded across these sites
to meet the demand from financial services advertisers. According to data from the IAB, Financial services was the 2nd largest online
advertising category in 2006, representing 16% of total U.S. online advertising (see Figure 4). Financial services is also one of the
most penetrated online advertising categories, with 17% of the category’s total spending occurring online in 2006, behind only the
Computer/Software category, based on data from Advertising Age. Given both a relatively high CPM and a large enough audience to
attract meaningful total advertising dollars we believe the financial sector represents one of the highest value segments for the major
portals. We estimate that the finance verticals of the major portals could represent 10%-15% of each company’s overall display
advertising revenue. In reviewing the top sub-segments within Yahoo!, MSN, and AOL, the finance sites are among the highest page
view-generating verticals on each portal (see Figure 3). Further adding to this already competitive category, IAC announced on March 9
that it would partner with Dow Jones to build a community-driven personal finance website, incorporating content from the Wall Street
Journal and MarketWatch with content and tools from Lending Tree and Ask.com. This site is expected to launch in late 2007 or early 2008.

Within Fox Interactive Media’s current portfolio of sites, there is a clear gap in terms of premium financial content which WSJ.com
will likely fill. FIM’s portfolio is currently dominated by MySpace with only IGN and FoxNews.com generating page views near the
magnitude of the finance verticals at the major portals. Based on our estimate that 10%-15% of the display advertising at the major
portals is driven by the finance verticals, we estimate that at Yahoo!, Yahoo! Finance will drive $160 million - $250 million in 2007, or
applying a 45% EBITDA margin, roughly $75 million - $115 million in annual EBITDA. Using similar assumptions, AOL Money & Finance
will drive $98 million - $150 million in revenue and MSN Money will drive roughly $50 million - $70 million in revenue. Therefore, in
aggregate we estimate the 3 major portals could drive roughly $350 - $450 million in 2007 advertising revenue – representing a
key opportunity which a recharged WSJ.com could pursue.

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Figure 2: Leading Financial News Websites, Domestic Unique Visitors (000)

Web Property Jun-2006 Jun-2007


1 MSN Money 11,885 10,920
Y/Y Growth -8%
2 Yahoo! Finance 9,946 10,738
Y/Y Growth 8%
3 AOL Money & Finance 11,026 10,674
Y/Y Growth -3%
4 Forbes Property 7,511 6,452
Y/Y Growth -14%
5 Dow Jones & Company 6,096 5,226
Y/Y Growth -14%
MarketWatch 2,789 2,197
Y/Y Growth -21%
Wall Street Journal Online 2,096 1,905
Y/Y Growth -9%
6 CNN Money 4,741 4,766
Y/Y Growth 1%
7 Reuters Group 3,392 3,043
Y/Y Growth -10%
8 Bankrate.com Sites 3,369 2,980
Y/Y Growth -12%
9 MANTA.COM 805 2,940
Y/Y Growth 265%
10 Reed Business Information 2,284 2,430
Y/Y Growth 6%

Source: comScore Networks


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Figure 3: Yahoo!, MSN, AOL – Domestic Page Views by Channel (in millions), June 2007

Property Jun-2007 Property Jun-2007 Property Jun-2007


Time Warner Network 18,950 Microsoft Sites 20,418 Yahoo! Sites 34,927
AOL Email 6,476 Windows Live Hotmail 8,384 Yahoo! Mail 17,051
AIM.COM/AIM App 1,762 MSN Homepages 3,106 Yahoo! Homepages 4,297
AOL Homepages 1,463 LIVE.COM* 1,559 Yahoo! Search 2,872
MAPQUEST.COM* 1,184 MSN-Windows Live Search 1,383 Yahoo! Sports 1,187
AOL Screenname 1,073 MSNBC 583 Yahoo! News 746
AOL News 881 FOX Sports on MSN 506 My Yahoo! 607
AOL Search Network 665 MSN Movies 250 AT&T Yahoo! 533
AOL Games 391 Windows Live Spaces 244 Yahoo! Games 517
AOL Music 322 MSN-Windows Live Messenger 231 Yahoo! Local Network 491
ROADRUNNER.COM 312 PASSPORT.COM 213 Yahoo! Music 454
AOL Money & Finance 243 MSN Games 203 Yahoo! Personals 326
CARTOONNETWORK.COM 231 My MSN 160 Yahoo! Messenger 321
Moviefone 187 Microsoft Office 156 Yahoo! Groups 293
AOL People Connection 183 MSN Groups 150 Yahoo! Finance 290
Sports Illustrated Sites 157 Microsoft Windowsupdate 145 Yahoo! Avatars 262
AOL Living 152 MICROSOFT.COM 140 Yahoo! Chat 174
AOL Television 144 MSN Money 130 Yahoo! HotJobs 167
AOL Sports 133 MSN TV 109 Yahoo! 360° 158
AOL Member Directory 116 MSN News & Weather 107 Yahoo! Answers 158
AOL Pictures 81 MSN Lifestyle 106 Yahoo! Movies 148
AOL BlackVoices 72 MSN TV 109 Yahoo! Geocities 130
CNN Money 59 MSN News & Weather 107 Yahoo! Autos 119

Source: comScore Networks


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Figure 4: Online Advertising Spending by Category

Ad Category $ (millions) % of Total


Retail 4,136.0 25%
Financial Services 2,700.0 16%
Automotive 1,936.0 11%
Computing 1,700.0 10%
Telecom 1,400.0 8%
Leisure 1,144.0 7%
Media 998.0 6%
Entertainment 704.0 4%
Packaged Goods 704.0 4%
Other 1,457.0 9%
Total 16,879.0 100%

Source: Internet Advertising Bureau, 2006


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Figure 5: Large-Cap Internet Coverage Comps

(US$, millions except per share)


Company Yahoo! Google eBay Amazon.com Large Cap InterActiveCorp Expedia
Symbol YHOO GOOG EBAY AMZN Average IACI EXPE
LB Rating 1-Overweight 1-Overweight 2-Equal weight 2-Equal weight 2-Equal weight 2-Equal weight

Price as of 8/3/2007 $23.22 $509.25 $33.61 $78.60 $28.12 $27.93


Shares Outstanding 2006 1,419 313 1,403 422 315 358
Shares Outstanding 2007 1,414 316 1,377 425 303 317
Shares Outstanding 2008 1,426 321 1,391 426 299 300

Market Capitalization $32,953 $159,629 $47,146 $33,169 $272,897 $8,867 $10,009


Net Debt 2006 (2,787) (11,244) (3,483) (772) (1,138) (364)
Net Debt 2007 (2,885) (14,516) (4,321) (1,300) (894) 522
Net Debt 2008 (5,019) (19,391) (6,516) (2,505) (1,139) (63)
Less: Non-Consolidated Assets & Investments 5,953 1,000 60 983
Plus: Minority Interest 288

Total Enterprise Value 2006 24,213 147,385 43,604 32,397 6,746 9,933
Total Enterprise Value 2007 23,814 145,366 41,884 32,085 6,651 9,668
Total Enterprise Value 2008 21,771 143,037 40,175 30,974 6,297 8,612

EARNINGS PER SHARE (EPS) 1,2,3,4,5,6,7


EPS 2006 $0.73 $10.60 $1.05 $0.73 $1.61 $1.09
EPS 2007 $0.70 $15.74 $1.39 $1.29 $1.59 $1.21
EPS 2008 $0.80 $20.32 $1.64 $1.85 $1.78 $1.39
2006-2009 EPS CAGR 8% 33% 23% 49% 28% 5% 15%

P/E 2006 31.7x 48.0x 32.1x 107.6x 54.9x 17.4x 25.6x


P/E 2007 33.0x 32.4x 24.1x 61.1x 37.7x 17.7x 23.2x
P/E 2008 29.0x 25.1x 20.5x 42.5x 29.3x 15.8x 20.0x
P/E-to-Growth 3.7x 0.8x 0.9x 0.9x 1.0x 3.2x 1.4x

FREE CASH FLOW (FCF)


FCF 2006 1,267 1,678 1,732 485 550 525
FCF 2007 1,180 3,078 1,992 801 518 541
FCF 2008 1,385 4,484 2,300 1,116 585 607
2006-2009 FCF CAGR 5% 53% 15% 40% 28% 4% 8%

FCF/Share 2006 $0.89 $5.42 $1.23 $1.15 $1.74 $1.46


FCF/Share 2007 $0.83 $9.74 $1.45 $1.89 $1.71 $1.71
FCF/Share 2008 $0.97 $13.97 $1.65 $2.62 $1.95 $2.02

Price/FCF 2006 26.0x 94.0x 27.2x 68.4x 53.9x 16.1x 19.1x


Price/FCF 2007 27.8x 52.3x 23.2x 41.7x 36.3x 16.5x 16.4x
Price/FCF 2008 23.9x 36.5x 20.3x 30.0x 27.7x 14.4x 13.8x
P/FCF-to-Growth 4.5x 0.7x 1.4x 0.7x 1.0x NA 1.8x

FCF Yield 2006 3.8% 1.1% 3.7% 1.5% 2.5% 6.2% 5.2%
FCF Yield 2007 3.6% 1.9% 4.3% 2.4% 3.1% 6.1% 6.1%
FCF Yield 2008 4.2% 2.7% 4.9% 3.3% 3.8% 6.9% 7.2%

EBITDA
EBITDA 2006 1,906 4,621 2,290 706 956 648
EBITDA 2007 1,848 7,059 2,832 1,066 863 710
EBITDA 2008 2,162 9,596 3,338 1,395 938 790
2006-2009 EBITDA CAGR 9% 38% 19% 34% 25% 0% 11%

EV/EBITDA 2006 12.7x 31.9x 19.0x 45.9x 27.4x 7.1x 15.3x


EV/EBITDA 2007 12.9x 20.6x 14.8x 30.1x 19.6x 7.7x 13.6x
EV/EBITDA 2008 10.1x 14.9x 12.0x 22.2x 14.8x 6.7x 10.9x
EV/EBITDA-to-Growth 1.2x 0.4x 0.6x 0.6x 0.6x 26.1x 1.0x

REVENUE
Revenue 2006 4,560 7,296 5,970 10,711 5,919 2,238
Revenue 2007 5,020 11,531 7,453 14,248 6,321 2,584
Revenue 2008 5,593 16,133 8,889 18,015 6,725 2,852
2006-2009 Revenue CAGR 10% 42% 20% 27% 25% 5% 12%

Market Cap/Revenue 2006 7.2x 21.9x 7.9x 3.1x 10.0x 1.5x 4.5x
Market Cap/Revenue 2007 6.5x 14.0x 6.2x 2.3x 7.3x 1.3x 3.4x
Market Cap/Revenue 2008 5.9x 10.1x 5.3x 1.9x 5.8x 1.3x 2.9x

Notes:
1) EPS for YHOO, GOOG, IACI, EXPE, EBAY, AMZN, NFLX, TTGT are all pro forma
2) P/E and P/FCF for Yahoo! does not adjust for Yahoo! Japan

Source: Company reports, Lehman Brothers estimates

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EQUITY RESEARCH

Figure 6: Small-Cap Internet Coverage Comps

(US$, millions except per share) Greenfield Harris


Company Netflix Overstock.com Blue Nile TechTarget Online Interactive Alloy
Symbol NFLX OSTK NILE TTGT SRVY HPOL ALOY
LB Rating 2-Equal weight 2-Equal weight 2-Equal weight 2-Equal weight 2-Equal weight 1-Overweight 2-Equal weight

Price as of 8/3/2007 $17.06 $20.84 $82.14 $12.64 $16.10 $4.40 $8.96


Shares Outstanding 2006 71 21 17 36 26 61 14
Shares Outstanding 2007 66 24 17 44 27 59 14
Shares Outstanding 2008 67 24 17 44 27 59 14

Market Capitalization $1,206 $441 $1,370 $454 $423 $266 $128


Net Debt 2006 (400) (52) (98) (23) (37) (48) (17)
Net Debt 2007 (356) (27) (100) (93) (65) (41) (44)
Net Debt 2008 (418) (22) (136) (111) (90) (60) (44)
Less: Non-Consolidated Assets & Investments
Plus: Minority Interest

Total Enterprise Value 2006 805 389 1,271 432 386 218 111
Total Enterprise Value 2007 777 468 1,271 457 365 217 85
Total Enterprise Value 2008 719 480 1,226 450 341 197 85

EARNINGS PER SHARE (EPS) 1,2,3,4,5,6,7


EPS 2006 $0.82 ($5.01) $0.76 $0.23 $0.33 $0.17 NA
EPS 2007 $0.71 ($1.63) $0.90 $0.30 $0.50 $0.13 NA
EPS 2008 $0.75 ($0.61) $1.07 $0.45 $0.58 $0.19 NA
2006-2009 EPS CAGR -1% NA 20% 34% 28% 8% NA

P/E 2006 20.7x NA 108.6x 53.9x 49.2x 25.5x NA


P/E 2007 24.0x NA 90.9x 42.2x 31.9x 33.4x NA
P/E 2008 22.8x NA 76.6x 28.4x 27.8x 23.3x NA
P/E-to-Growth -31.1x NA 3.8x 0.8x 1.0x 2.8x NA

FREE CASH FLOW (FCF)


FCF 2006 63 (50) 39 11 18 23 NA
FCF 2007 12 (34) 41 12 22 19 NA
FCF 2008 22 (7) 56 18 26 20 NA
2006-2009 FCF CAGR -23% NA 19% 30% 20% -4% NA

FCF/Share 2006 $0.89 NA $2.32 $0.31 $0.69 $0.38 NA


FCF/Share 2007 $0.18 NA $2.43 $0.27 $0.82 $0.32 NA
FCF/Share 2008 $0.33 NA $3.40 $0.41 $0.96 $0.33 NA

Price/FCF 2006 19.3x NA 35.5x 41.0x 23.2x 11.5x NA


Price/FCF 2007 92.5x NA 33.8x 46.6x 19.7x 13.9x NA
Price/FCF 2008 51.8x NA 24.1x 31.0x 16.8x 13.2x NA
P/FCF-to-Growth -2.2x NA 1.3x 1.0x NA -3.5x NA

FCF Yield 2006 5.2% NA 2.8% 2.4% 4.3% 8.7% NA


FCF Yield 2007 1.1% NA 3.0% 2.1% 5.1% 7.2% NA
FCF Yield 2008 1.9% NA 4.1% 3.2% 6.0% 7.6% NA

EBITDA
EBITDA 2006 93 (61) 23 20 28 22 19
EBITDA 2007 87 (5) 27 24 35 19 18
EBITDA 2008 89 7 30 32 40 24 NA
2006-2009 EBITDA CAGR 1% NA 16% 25% 19% 6% NA

EV/EBITDA 2006 8.7x NA 55.6x 21.5x 13.8x 10.0x 5.9x


EV/EBITDA 2007 9.0x NA 47.3x 19.1x 10.5x 11.3x 4.6x
EV/EBITDA 2008 8.1x 73.3x 40.3x 14.1x 8.5x 8.2x NA
EV/EBITDA-to-Growth 7.2x NA 2.6x 0.6x 0.5x 1.3x NA

REVENUE
Revenue 2006 997 788 252 79 100 217 196
Revenue 2007 1,171 755 304 92 125 213 216
Revenue 2008 1,165 780 357 110 146 219 NA
2006-2009 Revenue CAGR 6% 1% 18% 18% 18% 1% NA

Market Cap/Revenue 2006 1.2x 0.6x 5.4x 5.7x 4.2x 1.2x 0.7x
Market Cap/Revenue 2007 1.0x 0.7x 4.5x 6.0x 3.4x 1.2x 0.6x
Market Cap/Revenue 2008 1.0x 0.6x 3.8x 5.1x 2.9x 1.2x NA

Notes:
3) EPS for NFLX is fully-taxed
4) EPS for OSTK, NILE are GAAP
5) EPS for HPOL is operational, fully-taxed, and based on calendar year
6) EPS for SRVY is GAAP, fully-taxed, and excludes one-time benefits
7) No EPS projections for ALOY until company provides more historical financial data

Source: Company reports, Lehman Brothers estimates

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EQUITY RESEARCH

Figure 7: Internet Coverage Stock Performance

Annual Stock Return


Price as of Market Weekly QTD YTD
Company 8/3/2007 Cap ($ mil.) Return Return Return 2006 2005 2004 2003 2002 2001 2000
Yahoo! $23.12 $32,811 -2% -15% -9% -35% 4% 67% 175% -8% -41% -86%
Google $508.97 $159,541 -1% -3% 11% 11% 115% 92% N/A N/A N/A N/A
eBay $33.58 $47,104 3% 4% 12% -30% -26% 80% 91% 1% 103% -47%
Amazon.com $78.39 $33,081 -7% 15% 99% -16% 6% -16% 179% 75% -30% -80%
Large Cap Average -1% 0% 28% -18% 25% 44% 148% 23% 10% -71%

InterActiveCorp $28.11 $8,864 -7% -19% -24% 31% -49% -19% 48% -16% 81% -30%
Expedia $27.88 $9,991 5% -5% 33% -12% -0.2% N/A N/A N/A N/A N/A
Netflix $17.05 $1,205 -0.3% -12% -34% -4% 119% -55% 396% -29% N/A N/A
Blue Nile $81.75 $1,363 8% 35% 122% -8% 46% -3% N/A N/A N/A N/A
Overstock.com $20.81 $440 17% 14% 32% -44% -59% 247% 53% -1% N/A N/A
Harris Interactive $4.40 $266 -7% -18% -13% 17% -45% -5% 181% 2% -21% -72%
Greenfield Online $16.12 $424 0.2% 1% 13% 144% -73% 18% N/A N/A N/A N/A
Alloy $8.96 $128 -8% -10% -22% -0.4% -12% 55% -52% -49% 180% -51%
Tech Target $12.64 $454 1% -2% -16% N/A N/A N/A N/A N/A N/A N/A

Total Universe Average 0.3% -1% 15% 4% 2% 44% 134% -3% 45% -61%

NASDAQ 2,563.97 -- 0.1% -2% 6% 10% 1% 9% 50% -32% -21% -39%


S&P 500 1,464.96 -- 0.4% -3% 3% 14% 3% 9% 26% -23% -13% -10%

Source: FactSet

Analyst Certification:
I, Douglas Anmuth, hereby certify (1) that the views expressed in this research Industry Note accurately reflect my personal views about any
or all of the subject securities or issuers referred to in this Industry Note and (2) no part of my compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this Industry Note.

Other Team Members:


Fenske, CFA, Brian (LBI, New York) 1.212.526.7827 bfenske@lehman.com
Josey, Ronald (LBI, New York) 1.212.526.4008 rjosey@lehman.com
Sinisi, Vincent (LBI, New York) 1.212.526.9265 vsinisi@lehman.com

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EQUITY RESEARCH
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Important Disclosures Continued:


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revenues, a portion of which is generated by investment banking activities

Company Name Ticker Price (31-Jul-2007) Stock / Sector Rating


Alloy, Inc ALOY US$ 9.40 2-Equal weight / 2-Neutral
Amazon.com, Inc AMZN US$ 78.54 2-Equal weight / 2-Neutral
Blue Nile NILE US$ 75.61 2-Equal weight / 2-Neutral
eBay, Inc EBAY US$ 32.40 2-Equal weight / 2-Neutral
Expedia, Inc. EXPE US$ 26.61 2-Equal weight / 2-Neutral
Google Inc. GOOG US$ 510.00 1-Overweight / 2-Neutral
Greenfield Online SRVY US$ 16.24 2-Equal weight / 2-Neutral
Harris Interactive HPOL US$ 4.48 1-Overweight / 2-Neutral
IAC/InterActiveCorp IACI US$ 28.74 2-Equal weight / 2-Neutral
Netflix Inc. NFLX US$ 17.23 2-Equal weight / 2-Neutral
Overstock.com OSTK US$ 18.67 2-Equal weight / 2-Neutral
TechTarget Inc. TTGT US$ 13.48 2-Equal weight / 2-Neutral
Yahoo! Inc YHOO US$ 23.25 1-Overweight / 2-Neutral

Guide to Lehman Brothers Equity Research Rating System:


Our coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2-Equal weight or 3-Underweight (see
definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry
sector (the “sector coverage universe”). Below is the list of companies that constitute the sector coverage universe:

Alloy, Inc (ALOY) Amazon.com, Inc (AMZN)


Blue Nile (NILE) eBay, Inc (EBAY)
Expedia, Inc. (EXPE) Google Inc. (GOOG)
Greenfield Online (SRVY) Harris Interactive (HPOL)
IAC/InterActiveCorp (IACI) Netflix Inc. (NFLX)
Overstock.com (OSTK) TechTarget Inc. (TTGT)
Yahoo! Inc (YHOO)

In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-
Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system.
Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.

Stock Rating
1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month
investment horizon.
2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a
12- month investment horizon.
3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-
month investment horizon.
RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm
policies in certain circumstances including when Lehman Brothers is acting in an advisory capacity in a merger or strategic transaction
involving the company.

Sector View
1-Positive - sector coverage universe fundamentals/valuations are improving.
2-Neutral - sector coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
3-Negative - sector coverage universe fundamentals/valuations are deteriorating.

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EQUITY RESEARCH

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