June 6, 2011

The Second Internet (formerly The Week in Social Media)

Social Media is changing the world to a far larger degree than Wall Street currently appreciates. We refer to the emerging Social Internet as The Second Internet. We believe that for the foreseeable future, the news flow on the Second Internet will be highly positive. To keep investors abreast of the latest developments in the sector, we publish this newsletter on all things Social.

IN THIS ISSUE:
THE WEEK IN DEAL COMMERCE Groupon Announces IPO Revealing Rapid Growth, Significant Losses, and Deteriorating Operational Metrics Mobile Rollouts, Partnerships, and Acquisitions Highlight Busy Week in Rapidly Evolving Deal Commerce Space THE WEEK IN FACEBOOK Wedbushs 3rd Social Media Survey Finds Membership and Engagement Still Growing for Social Networks in U.S., Privacy Remains a Major Concern Facebook Continues To Grow Lobbying Team THE WEEK IN TWITTER Twitter Distributes Follow Button Across the Net Twitter Taking Control Over Its Ecosystem THE WEEK IN SOCIAL GAMING Gaming Data for May Kabam & wooga Raise Over $100 MM THIS WEEK IN PRIVATE SHARES TRADING As Public Equities Trade Down, Facebook Reaches Highs, Valued at $77.8 B TWEET OF THE WEEK
PUBLISHED BY: Lou Kerner

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@loukerner (212) 668-9874 lou.kerner@wedbush.com

Wedbush Securities 1000 Wilshire Blvd., Los Angeles, CA 90017 (213) 688-8000 Member NYSE/FINRA/SIPC www.wedbush.com

The information herein is only for Accredited Investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors.
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm 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. Please see page 16 of this report for analyst certification and important disclosure information.

THIS WEEK IN DEAL COMMERCE

When Google introduced AdSense in 2003, the concept was simple: Combine the search experience with the unparalleled traffic monetization of Google.coms pay-per-click model to present contextually relevant paid links all around the net. Since that introduction, AdSense has become part of the monetization toolset on millions of websites, in addition to over 50 million parked domain names around the world. (A parked domain is a website that exists simply to monetize the direct navigation traffic through Google AdSense.) In 2010, Google earned roughly 30% of total revenue through Ad Sense. AdSense spread rapidly because it is such a powerful tool for monetizing from Internet traffic. There has never been a true competitor to AdSense for monetizing traffic on many Internet sites. Until now We think Deal Commerce can become the first true alternative/complement to Google AdSense for monetizing large swaths of Internet traffic. We believe that Deal Commerce is not a passing fad, but rather, the category is emerging as a major new commerce experience driven by the ease with which local merchants can leverage the Internet for the first time. Its the early days and there will be rapid market share gains and losses as the ecosystem evolves to best serve the needs of merchants and consumers. But given the ability to unearth significant revenue, we believe Deal Commerce may become as ubiquitous as AdSense.

Groupon Files S-1, Revealing Rapid Growth, Significant Losses, and Deteriorating Operational Metrics
On Thursday June 2nd, just six months after spurning Googles $6 billion buyout offer, Groupon, the global leader in the Deal Commerce space, filed its S-1 in anticipation of an IPO that will reportedly value the company at between $20-$30 billion (the last trade of Groupon shares in the private market occurred in March and valued the company at $7.4 billion). In our view, the most notable parts of the S-1 filing were: 1. Rapid growth: Groupons Q1 11 revenues of $645 MM were up an astounding 1457% over Q1 10. While there were some acquisitions, the significant majority of the growth was organic. Subscribers grew even faster at 2,419% year-over-year (although buying customers only grew 1,800%). Groupons sold grew 1596%.

For context, here are revenue growth metrics from first full year to first full second year: Google: 352% from $19.1 MM to $86.4 MM, Amazon: 838% from $15.7 MM to $147.8 MM Salesforce: 128% from $22.4 to $51 eBay: 724% from $5.7 MM to $47.4

Figure 1: Groupon Subscriber Growth Q2 2009 Q1 2011

Source: Groupon

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The medias reaction to the losses & growing marketing spend: Groupon has gotten roasted in the press for its significant increase in marketing spend, which ballooned to $208 MM in Q1 11 (which included a controversial Super Bowl ad), versus a marketing budget of just $4 MM in Q1 the prior year. The WSJ called the spending crazy and Forbes cited the massive 64% net loss. The company was also criticized for the significant amount of insider selling to date. The overall operational metrics are generally trending downward: Revenue per Groupon deal sold in Q1 11 dropped 8.7% year-over-year to $22.95. The number of Groupons sold per merchant declined 21% year-over-year to 612. Groupons gross profit fell from 45.2% in Q1 09 to 41.9% in the latest quarter (highlighting merchants are receiving a larger share of the revenue generated in an increasingly crowded marketplace). The metrics in its first city, Chicago, are also weakening: Groupons sold per customer per quarter started at 2.71 in Q3 09, in Chicago, and reached a new low of 1.65 in Q1 11. Revenue per customer per quarter started at $94.92 in Q3 09, and stood at $39.53 last quarter. The same buyer-fatigue appears in foreign cities, with Berlins revenue per customer per quarter falling from $150 in Q3 10 to $111 in Q1 11. One of the more thoughtful pieces analyzing Groupons metrics in Boston can be found at blog.yipit.com by Yipit, a leading deal data aggregator.

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Even with the deteriorating metrics, however, we believe Groupon is still likely a very solid business. Groupon, and the entire Deal Commerce industry, are just too young, and the industry is changing too rapidly, to have strong confidence in an appropriate valuation. Investors will have to make assumptions and here are a few things we think investors should consider when looking to invest in the Deal Commerce space: 1. The Deal Commerce space is going to be massive: As we mentioned above and discussed in detail in our Initial Deal Commerce Report, Groupon and the rest of the industry has grown so rapidly because, for the first time in history, merchants can leverage the Internet in scale. We also have an appreciation for the simple fact that many people love a deal. As a result, we believe Deals will become ubiquitous around the net. We believe Deals are the new AdSense. Groupon will be one of the leading players: Groupons current dominant scale, continued and grab mode, and apparent progress in most of the future key drivers of success, give us confidence that the company will remain a leader in the space for the foreseeable future. Detractors repeatedly cite limited barriers to entry in Deal Commerce as a significant risk, but the same could be said of e- commerce in general, and we note that Amazon leveraged scale and great execution to sustain its leadership position. The Deal Commerce space will be hyper competitive: LivingSocial is a formidable competitor. New entrants like Google, Amazon (early on in a partnership with LivingSocial) and Facebook will all likely take meaningful pieces. Microsoft will likely enter the space shortly. Other players like Travelzoo and white-label provider Tippr will also take their share. Foursquare and other mobile companies will be players. Clearly, thousands of niche players like Lot18 (for wine) will take a share of the Deal Commerce pie. Ultimately, we believe every major retailer and media company will need to have a Deal Commerce strategy and will be fighting for their share of the Deal Commerce revenue pie. Technology will play an increasingly important role: We believe self-serve provisioning of deals by retailers will be an important part of the future and this will require simple and scalable toolsets. Deals will become increasingly personalized and contextualized, which requires large data sets and the ability to intelligently parse them. Social will play an increasingly large role in the success of the leading providers, whereas today email is the key distribution platform. Mobile integrations to allow deals to be pushed to subscribers, or subscribers to search for deals based on location, will play an increasingly meaningful role in this landscape. Providing seamless, scalable, social, cross-platform solutions for merchants and consumers is a daunting task, but the companies that get this right will be creating significant shareholder value. Partnerships will play an increasingly important role: In a world in which Deals are ubiquitous, partnering will be a major part of achieving scale. Groupon is leading here with its recent partnership with Tencent to get into China (announced in February), and more recent deals with Expedia for travel and LiveNation for events. LivingSocial is partnering too (with Fairfax Media in Australia just last week). White label solutions will be one way for smaller web properties to garner scale in the space, but many will partner. Consolidation will continue: Groupon has made 13 acquisitions in the last year, although City Deals with almost two million subs across 80 markets was the only one of size (all the others had less then $1 MM in trailing 12 month revenue). Just last week, LivingSocial acquired one year-old Dealissime in France (Groupons largest European market), and Tippr acquired DealPop from WhitePages. In an industry where scale matters, and there are already over 500 players in the U.S., consolidation will be a major growth engine. Leading deal companies will add more sub-brands: LivingSocial has Escapes and Family Edition. Groupon has Groupon Now for mobile. Amazon launched MyHabit, a members-only deal site for designer clothing. Gilt launched Jetsetter for travel. Brand extensions are one way the leaders will compete with the niche players. 3

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8. 9.

Margins will compress further: Thats the nature of competitive marketplaces, and this market is going to be increasingly competitive. Significant innovation still to come: Its so very early and this market is evolving rapidly. Companies like VillageVines and innovations like Groupon Now are helping to solve the inventory problems that first generation Daily Deals didnt solve. Mobile will bring us new wonders in this space. We havent even discussed a single foreign company yet (Hong Kongs Bee Crazy sold over 100,000 yogurt deals last month). 55Tuan in China operates in over 200 cities and stated its intention to IPO. Deal Commerce is a global phenomenon and innovation will come from around the world and play a large role in determining the major winners.

Daily Deal Space Continues to Evolve Rapidly

Outside of Groupons IPO announcement, it was an exceptionally busy week in the Deal Commerce, with two major new entrants joining the fray, and major partnerships and service enhancements announced. After failing to buy Groupon for $6 billion last year, Google finally introduced its own competing service, Google Offers, in Portland, with an offer of $10 of coffee and pastries at Floyds Coffee Shop for just $3:

Figure 2: Google Offers First Deal

Source: The Pew Research Center Amazon also jumped in to the Daily Deal space with Amazon Local powered by LivingSocial, launching in Boise, Idaho

Figure 3: Amazons Latest Deal in Boise

Source: The Pew Research Center Amazon has been LivingSocials biggest supporter, investing $175 million in the company in December 2010, and participating in the $400 MM Series E fundraising round in April 2011. LivingSocial sold 1.2 million discount Amazon gift cards in a single deal, helping boost LivingSocials U.S. market share in January. The partnership continues to flourish. Another partnership was formed last week between Groupon and Expedia. While TripAdvisor (a unit of Expedia) launched its flash sale site, SniqueAway in November last year, the service has not really taken off outside of its home city of Boston. At the same time, LivingSocial unveiled its travel brand, Escapes, which we estimate sold more than $10 million in travel deals in its first month. Gilts travel deal site, Jetsetter, is also selling a lot of deals. So its not surprising that Expedia would want to partner with the industry leader, 4

Groupon, to form Groupon Getaways, and provide members of both sites travel deals from around the world. The deal with Expedia comes on the heels of Groupons partnership with LiveNation to form GrouponLive in April, giving customers deals on concerts, sporting events, and theater and arts events. Finally Groupon Now, Groupons push into mobile, announced its first expansion beyond Chicago with the launch of the service in New York City and San Francisco. Groupon Now gives merchants the ability to initiate deals in real time, with short windows, to users within a certain proximity. Groupon originally launched Now in Chicago, on May 20th, and in New York, this past Saturday, there were eight deal categories providing 47 different time-sensitive deals, all within less than one mile. LivingSocials introduced InstantDeals in Washington D.C. on April 15th and will bring InstantDeals to New York on June 8th.

Figure 4: Groupon Now Choices Available in New York on a Saturday Afternoon

Source: Groupon Given the rapid pace of change in the industry, we find the Daily Deal Stack below to be a helpful reference point to put the space into perspective:

Figure 5: The Deal Commerce Landscape

Source: Yipit Daily Deal Sites: The largest players are pure play Daily Deal sites, most notably Groupon & Living Social. These companies service both consumers and merchants and they control the majority of value created today. Vertical Deal Sites: Attempting to compete with the scale of the larger players, newer entrants often focus on a single vertical. The largest vertical focused site that displays its purchase count is OpenTable, which averages 563 vouchers sold per deal at $25 per voucher, or $13K per deal. Publishers: Major publishers like the DailyCandy, McClatchy, NYTimes, SF Chronicle, San Diego Union Tribune, and Thrillist have entered the space. Their specialty is mobilizing their audience, whom they've been telling how to spend their local dollars for years. White-Label Providers: White-Label providers focus on the publishers with access to consumers. Certain white-label providers such as Analog Analytics and Nimble Commerce are mostly technology plays, while others such as Powered By Tippr and Group Commerce have large sales forces. Exchanges: There are now at least four Daily Deal exchanges facilitating the transfer of merchant offer contracts between sales forces and publishers. Presumably the market is made on commissions offered to the publisher and details of the offer. Merchant Services: Services are forming to maximize the value to merchants in the burgeoning space. Companies like Closely have methods for merchants to convert promotion visitors into repeat customers. There are also agency models, like Stampede, that help merchants optimize best practices, demographics and commission rates for their clients. Consumer Services: The purchasing and redemption of offers has created new pain points for consumers that startups have formed to address. Secondary markets like Lifesta, DealsGoRound and CityPockets allow users to exchange unwanted vouchers with each other. Aggregators: As the number of daily deal sites has continued to proliferate, daily deal aggregators like Yipit have formed to recommend deals to users based on where they are and what they like. 6

THE WEEK IN FACEBOOK

Our 3rd Social Media Survey Shows Social Media Membership and Engagement Continuing To Ramp
In our third survey of 2,500 U.S. consumers 18 and older about their social media habits, we found user behavior evolving rapidly, but most metrics continue to go up and to the right for the major social media platforms.

Figure 6: U.S. Membership Trends at Major Social Media Platforms

I Am An Active Mem ber of The Follow ing Social Netw orks

80%

75.4% 74.1% 71.6%

Sept '10

Dec '10

April'11

60%

40%

20%

26.0% 23.4% 21.6% 24.0% 18.5% 18.2% 7.6% 5.6%

0% Facebook Tw itter LinkedIn Foursquare Badoo

So urce: Wedbush Securities & Wedbush Decisio n M etrics

Source: Wedbush Securities Inc, Wedbush Decision Metrics Its not surprising to see Facebooks penetration growth slowing as the site now counts over 75% of U.S. adults as active members. In fact, some markets where Facebook gained early significant penetration early on, like Canada and the U.S., membership is already modestly on the decline. But we were surprised by the accelerating membership growth at Twitter and LinkedIn, as more Americans are becoming members of multiple social networks. In this survey, we also began tracking Foursquare and Badoo, two rapidly growing social networks that we believe are poised to be major global players in the Second Internet. Badoo, which is still unknown to many in the U.S., is a London based social network that bills itself as the planets largest social network for meeting new people locally. Engagement at the leading social networks is also growing, as logging in daily is becoming more a part of every day life for two of the three networks. We attribute the drop in daily logins at LinkedIn to the fact it is the fastest growing of the three, and newer members tend to log in less (as they have fewer connections and thus derive less value early on):

Figure 7: Daily Log Ins for the Three Major Social Networks
% of Mem bership Logging In Daily 60% 45% 30% 15% 0% Facebook Sept '10 Tw itter Dec '10 April'11 Linked In 59.5% 58.2% 57.3%

35.4% 31.5% 31.2% 18.9% 19.0% 16.5%

I Source: Wedbush Securities Inc and WedbushDecision Metrics

The fastest growing demographic on Facebook is the age 55+ age group, which is also growing the engagement at the fastest rate:

Figure 8: Membership and Engagement of the Age Group 55+ Is Growing Rapidly on Facebook
Frequency of Facebook Login 55+ 50% 40% 30% 20% 10% 0% Daily Sept '10 Weekly Dec '10 April '10 Monthly 44.1% 41.5% 40.4%

39.3%40.0% 37.7% 19.7% 19.2% 18.2%

Source: Wedbush Securities Inc and Wedbush Decision Metrics Its a Waste of Time is the leading reason people cite for not joining Facebook, but Privacy Concerns became a close second:

Figure 9: Its a Waste of Time Grows as a Reason for Not Joining Facebook
Why Haven't You Joined Facebook
60% 57.9% 56.0% 51.7% 53.8% 47.9% 41.6% 24.6% 24.6% 21.7% 20% 15.1% 11.4% 9.8% 11.4% 10.2% 10.8%

40%

0% Waste of Time Privacy No Time Don't Know Much Don't Know How About It To Use It April'11

I Source: Wedbush Securities Inc and Wedbush Decision Metrics

Sept '10

Dec '10

Privacy concerns also leapt for Facebook members, as the issue continues to be a favorite of the press and politicians, raising the concern among members.

Figure 10: Privacy Concerns on the Rise Among Facebook Members

How Concerned Are Mem bers About Privacy on Facebook 60% 49.9% 45.9% 44.9% 40% 41.2% 43.0%

36.0%

20%

14.1% 13.9% 11.1%

0% Not at all Sept '10 Somew hat Dec '10 April'11 Very

Source: Wedbush Securities Inc and Wedbush Decision Metrics

The increase in concern over privacy is occurring even though 73% of Facebook members indicated they had changed their privacy setting at least once, a large increase over the 65% of members who had changed their setting in the last survey. Its also interesting to note that 78% of members said they are at least somewhat happy with the privacy controls on Facebook (up from 77% in December). Brand fan pages continue to be among the fastest growing part of Facebook, with more almost 60% of members indicating they have Liked a brand on Facebook:

Figure 11: Almost 60% of Facebook U.S. Members 18+ Have Liked a Brand
Have You "Liked" a Brand 75% 60% 45% 30% 15% 0% No Sept '10 Dec '10 April'11 Yes 53.2% 58.9% 48.9% 41.1% 46.8% 51.1%

Source: Wedbush Securities Inc, Decision Metrics Growing interest in Liking brands can also be seen in the accelerating growth rate of the leading fan pages on Facebook, with the top 5 pages growing by an astounding 300%+ CAGR the last two months, vs. the 100%+ growth rate the previous four months.

Figure 12: Rapid Growth at the Leading Brand Fan Pages on Facebook
Facebook Fans

1 2 3 4 5

YouTube Coca-Cola Disney MTV Starbucks Total

March 29,300,000 23,651,000 18,100,000 17,700,000 20,200,000 108,951,000

May '11 37,500,000 29,500,000 25,000,000 23,400,000 22,700,000 138,100,000

CAGR 339.5% 276.6% 594.3% 433.9% 101.4% 314.7%

Source: Wedbush Securities Inc, Decision Metrics

Facebook Continues To Beef Up Lobbying Team

Facebook is keenly aware of the privacy concerns of its members, the media, and the government, but other issues including cyber security, child safety, and even monopoly practices, are likely to become hot-button issues in the future. To best handle the situation in Washington, Facebook is continuing to build its lobbying team, most recently adding two former aides of former President George W. Bush. The more senior of the two, Joel Kaplan, was formerly Bushs Deputy Chief of Staff, and joins as Facebooks President of U.S. Policy. Kaplan will report to Marne Levine, V.P. of Global Policy at Facebook, and formerly the Chief of Staff to the White Houses National Economic Council. The addition of the two now brings the D.C. staff to 12, up from just one when Facebook first opened a D.C. outpost in 2007 under Larry Summers. In a statement announcing the new hires, Facebook spokesman Andrew Noyes stated that, At Facebook, were committed to explaining how our service works; the important actions we take to protect the more than 500 million people who use our service; and the value of innovation to our economy. This work occurs daily in Washington, at the state level and with policymakers around the world. While Facebook is increasing its spending on lobbying to $230,000 in the first quarter of 2011, up from $41,000 in Q1 10, its still a modest amount compared to others, like Google, which spent over almost $1.5 million lobbying in the first quarter. Facebooks efforts appear to be paying some dividends, as evidenced by the Town Hall meeting at Facebook held with President Obama in April. 9

Outside the U.S., the most senior person on the team is Facebooks Director of Policy for Europe, Richard Allan, who was formerly a Member of the U.K. Parliament as a Liberal democrat from 1997-205, after which he worked for Cisco before joining Facebook. Facebook is looking to aggressively build out its international policy team, with over 10 open country positions including Germany, France and the Middle East. Even at the most senior level, Facebooks ties to Washington run deep, with C.O.O. Sheryl Sandberg having formerly been Chief of Staff for the Treasury in the Clinton administration, and General Counsel Ted Ulyot, was Chief of Staff at the Justice Department.

Twitters Follow Button Distributed Across the Net

Facebooks Like button was introduced in April 2010 and today its available on over three million websites. Last week, Twitter followed suit by making its Follow button available to external websites. The Follow button launched on over 50 sites (e.g. AOL, IMDB, CBS.com, MTV.com), and Twitter has provided the API for sites to add the button on their own. Having previously distributed the Tweet button to facilitate easy publishing of content, Twitter introduced the Follow button to accelerate the establishment social connections on Twitter. Most sites are deploying the button next to Facebooks Like button:

Figure 13: Twitters Follow Button as Seen on AOL.com

Source: Aol.com We believe the Twitter Follow button will have a dramatic impact on the number of followers a person or brand attracts when the button is prominently displayed on a heavily trafficked website. Of late, Twitter has focused on initiativessuch as redesigning its homepage to stress following and improving searchthat stress content consumption over content creation. We believe that this push is designed to improve Twitters on-boarding experience to make Twitters value more obvious to new users, thereby converting a higher percentage of its 300 million+ registered users to active users.

Figure 14: Twitters Rapid Growth In New Members

Source: Twopchart, as of 6/3/2011

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Twitter Moves To Control Its Ecosystem

The most successful online platforms develop vibrant ecosystems of developers who build complimentary products that enhance the utility of the platform. These complimentary products are sometimes acquired and incorporated into the platform (like Facebooks acquisition of FriendFeed). Occasionally these products are denied access to the platform (like Myspace blocking Photobucket before acquiring it). However, sometimes the platform decides to build their own the service and try to compete with the third party provider. Whichever ways these scenarios play out, its crucial to recognize that the most dominant platforms hold the cards and are positioned to play each hand however they see fit. On May 23rd, Twitter announced the $40 MM acquisition of TweetDeck, a third party app for consuming and creating tweets. The acquisition came after UberMedia, a leading developer of third-party Twitter clients, had reportedly been close to acquiring TweetDeck earlier this year. Twitter pursued a different path with respect to the photo app ecosystem. Until now, Twitter users that included videos or photos in their tweets did so through third party providers, most often Twitpic or Yfrog.

Figure 15: How People Share Images Now

Source: Company data, Wedbush Securities, Inc. These third party products earn revenue by selling advertising around the images (Twitpic reportedly made $1.5 MM in ad sales in 2009 and ImageShack, which operates Yfrog, has raised $10 million in funding from backers, including Sequoia Capital). Last week, Twitter took greater control of its ecosystem by revealing that within weeks the company will be releasing a feature to allow users the ability to upload a photo and attach it to a Tweet from Twitter.com as well as official mobile apps. On the backend, Photobucket, a company with expertise in efficient file storage and serving, will host the photos. According to CEO, Dick Costolo, Twitter will also surface the most popular videos and tweets on its homepage. We will be intently watching how Twitter navigates the Third Party developer ecosystem as Twitter balances the desire to control essential apps with the need to enable a vibrant developer ecosystem to maximize the value of the platform.

Figure 16: How People Share Images Now

Source: Twitter 11

THIS WEEK IN SOCIAL GAMING Social Gaming Stats for May

Zynga had 231 million MAUs on its gaming platforms in May, or approximately 40% of the top developers MAU share. Looking at the remaining 60%, the competition is spread out quite a bit. Average MAUs for the next 39 developers is approximately 9 million, ranging from EA at 31 million down to iWin, Inc. at 2 million. Playdom and King.com were the big winners in the top 10 developers, with monthly gains in MAUs of 30% and 70% respectively. Playdoms gain of 6 million MAUs came largely as a result of the success of its Gardens of Time game. This game debuted in March, and is the first Hidden Object game on the Facebook platform. King.coms gains came largely as a result of the success of Bubble Saga.

Figure 17: Top Ten Game Developers Market Share By MAUs (gaming apps only)
Zynga ElectronicArts wooga Playdom CrowdStar DigitalChocolate SocialPoint PopcapGames GaiaOnline King.com

Developer Zynga ElectronicArts wooga Playdom CrowdStar DigitalChocolate SocialPoint PopcapGames GaiaOnline King.com

6/4/2011 5/4/2011 Change 254 242 4.72% 34 32 5.88% 26 30 15.38% 22 28 27.27% 31 25 19.35% 15 17 13.33% 17 16 5.88% 16 16 0.00% 12 13 8.33% 7 12 71.43%

Source: Wedbush Securities, appdata Gardens of Time (Playdom) and Diamond Dash (Wooga) were the big winners in the top ten over the past 3 weeks. Zynga maintained the edge with 5 out of the 10, and the top 4 games overall.

Figure 18: Top 10 Games by MAUs

Top10 Games CityVille FarmVille TexasHoldEmPoker FrontierVille GardensofTime MonsterGalaxy CafWorldbyZynga BejeweledBlitz DiamondDash PetSociety
Source: Wedbush Securities, appdata

Developer Zynga Zynga Zynga Zynga Playdom GaiaOnline Zynga PopcapGames wooga ElectronicArts

6/4/2011 89,790,085 44,312,371 34,970,012 13,947,182 12,848,041 12,529,980 12,033,292 10,520,215 9,056,829 8,977,337

MAUs 5/11/2011 89,823,910 44,134,413 35,830,653 14,518,691 9,706,905 11,890,167 12,699,778 10,611,021 8,099,189 9,416,649

Change 0.04% 0.40% 2.40% 3.94% 32.36% 5.38% 5.25% 0.86% 11.82% 4.67%

Zynga released Empires & Allies this past week. The game was developed in Zyngas Los Angeles studios in Marina Del Rey, and is a departure from previous games because of its strategic framework. According to the games executive producer its Cityville meets Risk.

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Figure 19: Empires & Allies

Source: Zynga Kabam and Wooga separately raised over $100 million in venture capital over the past two weeks. Kabam raised $85 million at a valuation of about $500 million in a round led by Google and co-led by Pinnacle Ventures. The capital is being raised to finance Kabams expansion into Asia, hire more developers, and make acquisitions. Kabams games cater to the hardcore gaming segment that Zynga didnt participate in until last weeks announcement. The Berlin-based game-maker Wooga raised $24 million from Highland Capital Partners, Tenaya Capital and existing investors Balderton Capital and HV Holtzbrinck Ventures. The investment was made to accelerate growth and build one of the largest gaming companies in the world by 2020 according to CEO Jens Begemann. Looking at non-gaming apps, BandPage by RootMusic has surpassed Badoo as the top non-gaming app. BandPage was also the top weekly gainer on Facebook gaining almost 2 million active users in the past week. The BandPage app allows musicians to share information and have social interactions with their fan base.

Figure 20: Top Non-Gaming Apps (excludes developer apps)

MAUs App BandPagebyRootMusic Badoo WindowsLiveMessenger Yahoo! AreYOUInterested? Phrases QuizTaco! Causes Yelp RewardVille 60Photos BandProfile:ProfilePagesforMusicians DailyHoroscope
Source: Wedbush Securities, appdata

6/4/2011 27,738,734 27,483,553 19,414,914 15,109,505 14,326,399 13,784,436 11,747,361 11,218,996 11,117,988 10,908,876 10,649,508 9,748,867 9,600,134

5/11/2011 24,290,607 28,160,859 19,132,983 14,384,575 14,921,740 15,724,473 13,586,956 12,782,230 11,019,026 11,974,664 5,426,895 9,349,816 7,942,063

Change 14.20% 2.41% 1.47% 5.04% 3.99% 12.34% 13.54% 12.23% 0.90% 8.90% 96.24% 4.27% 20.88%

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THIS WEEK IN FACEBOOK TRADING

The Facebook auction that took place on Wednesday 6/1/2011 priced the shares at $31.50. The $31.50 price, which has been the high for the shares, implies a value of $77.8 BN.

Figure 21: Facebook Shares Trading at $31.50, Implying a Value of over $77 BN

$35.00

Facebook Price at Weekly Auctions

$30.00

Share Price

$25.00

$20.00

$15.00
1/ 20 /2 01 1/ 27 1 /2 01 1 2/ 3/ 20 11 2/ 10 /2 01 2/ 17 1 /2 01 2/ 24 1 /2 01 1 3/ 3/ 20 11 3/ 10 /2 01 3/ 17 1 /2 01 3/ 24 1 /2 01 3/ 31 1 /2 01 1 4/ 7/ 20 1 4/ 14 1 /2 01 4/ 21 1 /2 01 4/ 28 1 /2 01 1 5/ 5/ 20 1 5/ 12 1 /2 01 5/ 19 1 /2 01 5/ 26 1 /2 01 1

Source: Company data, Wedbush Securities, Inc.

TWEET OF THE WEEK

Figure 22: Shaq Tweets His Retirement

Source: Twitter

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About Wedbush Securities Private Shares Group

The Private Shares Group of Wedbush Securities covers the growing base of privately traded securities, with an emphasis on those in the social media space. The mandate of the group is to build our trading network in all private shares, source deal flow in the space (including initial private offerings), and to build funds and create other alternative investment opportunities across private shares for our institutional and accredited retail clients.

About Lou Kerner

Lou Kerner is Managing Director of the Private Shares Group within Wedbush Securities Equities Division. Prior to this, Lou was Wedbush and Wall Streets first recognized Social Media equity research analyst. Before becoming an internet executive in 2000, Lou was an equity analyst following media and internet related companies for Goldman Sachs and Merrill Lynch. Lou started his internet career as CEO of The .tv Corporation, which licensed the top level domain .tv from the tiny island nation of Tuvalu. .tv was acquired by Verisign in 2001. Subsequently, Lou acquired one of the early leaders in social networking, Bolt Media, which grew to over 20 million monthly uniques under his three years of leadership. Lou has a BA in Economics from UCLA and an MBA from Stanford University.

Contact Wedbush Securities Private Shares Group:

Lou Kerner Managing Director, Private Shares Group (212) 668-9874 Lou.kerner@wedbush.com @loukerner Kevin Cohen Director of Trading, Private Shares Group (213) 688-8089 kevin.cohen@wedbush.com Michael Silverstein Researcher, Private Shares Group (213) 688-6663 michael.silverstein@wedbush.com

About Wedbush Securities

Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking, equities research, public finance, fixed income sales and trading, and asset management to individual, institutional and issuing clients. Wedbush currently ranks the #1 liquidity provider for NASDAQ, and was ranked #1 stock picker for 2010 by Barrons. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service, client financial safety, continuity, and advanced technology. (www.wedbush.com)

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IMPORTANT DISCLOSURES

The information contained herein is intended for accredited investors as defined in Rule 501 of Regulation D under the Securities Act of 1933 or institutional investors.

WEDBUSH SECURITIES Wedbush does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm 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. The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WS total revenues, a portion of which are generated by WS investment banking activities.

ANALYST CERTIFICATION I, Lou Kerner, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report.

Capital Markets Disclosures as of June 6, 2011 Company Facebook (private) Klout (private) Travelzoo Disclosure 12 12 1

Research Disclosure Legend 1. WS makes a market in the securities of the subject company. 2. WS managed a public offering of securities within the last 12 months. 3. WS co-managed a public offering of securities within the last 12 months. 4. WS has received compensation for investment banking services within the last 12 months. 5. WS provided investment banking services within the last 12 months. 6. WS is acting as financial advisor. 7. WS expects to receive compensation for investment banking services within the next 3 months. 8. WS provided non-investment banking securities-related services within the past 12 months. 9. WS has received compensation for products and services other than investment banking services within the past 12 months. 10. The research analyst, a member of the research analysts household, any associate of the research analyst, or any individual directly involved in the preparation of this report has a long position in the common stocks. 11. WS or one of its affiliates beneficially own 1% or more of the common equity securities. 12. Lou Kerner maintains a position in shares of Facebook (private) and Klout (private). Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding and assuming the risks involved. Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their value causing losses that may equal your original investment. Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investors own objectives, experience, risk tolerance, and resources. The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information. 16

This information is not intended to be or should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation of an offer to sell or buy any security mentioned herein. This firm, Wedbush Securities, its affiliates, officers, employees, members of their families, or any one or more of them, and its discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from time to time, purchases or sales thereof in the open market or otherwise. The information and expressions of opinion contained herein are subject to change without further notice. The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Any reference to past performance is not a guarantee of future results. Supporting documentation will be furnished upon request for any claims, comparisons, recommendation, statistics or other technical data. Additional information with respect to the information contained herein may be obtained upon request. Applicable disclosure information is also available upon request by contacting the Business Conduct Department at (213) 688-8090. You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017. RESEARCH DEPT. (213) 688-4505 www.wedbush.com EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000

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