61 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Medio Systems Medio Systems is a provider of mobile search and advertising solutions. Created specifically for mobile, Medio Mobile Search combines a user interface with recommendation and personalization technologies. Using the targeting capabilities of the mobile search platform, the Medio MobileNow Search Advertising Network enables advertisers to identify and reach interested audiences. Through Medio's unique partnerships with mobile carriers and publishers, ads are integrated into the consumer mobile search experience where increased relevance drives response. Millennial Media Millennial Media is a mobile media network that specializes in the “millennial” audience. With Millennial Motion rich media for engaging user experiences, the MBrand network for targeted audiences across premium content and Decktrade for performance-driven campaigns, Millennial Media has a broad advertising offering. MoVoxx MoVoxx is an interactive advertising agency focused on mobile advertising via SMS/text. Solutions offer traditional and interactive agencies, media buyers and brand managers a quick, silent way to have a 1-to-1 dialogue with mobile consumers. INTXT allows advertisers to append ads to the outgoing SMS messages of MoVoxx Publisher Network traffic, creating a method of instant mobile distribution. Ads can be targeted by geography, daypart, and content channel. INADS enables advertisers to build their own mobile inventory through keyword/shortcode placements within their existing advertisements - print, TV, radio, Internet, or in-venue. This product helps leverage existing ads with an interactive call to action and a method for success reporting. mSnap mSnap is a mobile ad network, enabled by a platform for Broadcasters and Advertisers to easily create and manage mobile campaigns. The mSnap Network currently includes over 650 broadcast media partners, with the potential to reach over 200 million mobile users a week. Through exclusive relationships with broadcast partners like Citadel/ABC, the company offers the ability to target mobile ad campaigns locally or nationally, and by numerous demographic and interest-based criteria. Broadcasters can mobilize their programming, making it more interactive, engaging and measurable. SMS traffic can be monetized while increasing listener/viewer engagement and interactivity. Quattro Quattro is a mobile ad network that provides targeted, interactive multi-media mobile ad units (Video, SMS, WAP, click-to-call, email, share) all tracked in real time. For publishers, the company offers its proprietary Juicing technology (allows publishers to run wired assets on wireless devices without feeds), handset expertise, and interactive feature sets. 62 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com 2009 Online Payment Outlook 2008 proved to be another strong year for online payment platforms, especially PayPal, which saw revenue in the first nine months of the year grow 32% Y/Y, compared to 30% in F’07, with the unit’s off-eBay business posting particularly strong growth. Further, in October 2008, eBay acquired Bill Me Later for nearly $1B. In Latin America, Mercadolibre has seen strong growth in its payment business and has rolled out direct payment features in several countries, including Argentina. In China, Alipay has continued to grow rapidly, as well, adding stores and users to its portfolio. We expect growth to continue in 2009, helped by: • Continued global e-commerce growth, helped by increased global broadband penetration; • The growing acceptance of payment solutions on third-party platforms, including travel sites; • Increased use of mobile money transfer platforms helping drive revenues for those with a presence in the market, such as PayPal and Amazon Payment (through its relationship with Textpayme); and • Increased fee generation from deferred payment plan options, which are particularly attractive in developing markets. At the same time, we see several challenges to the Payment space, which may cloud the outlook somewhat. • Although we expect eCommerce to continue to win wallet share from offline shopping, the challenging environment could significantly hamper growth. • A tough credit environment may likewise dampen the growth in the segment derived from improved financing options. Key Highlights from 2008 This past year was a successful one for online payment companies. Both PayPal, which benefited from strength in its off-eBay business, and MercadoPago, Mercadolibre’s Latin America Payment platform, saw faster revenue growth through the first nine months of F’08 than F’07. Some key events in 2008: • PayPal continued to add buyer protection features, raising the dollar value of purchases insured for eBay buyers paying with PayPal. The company also bought FraudSciences in January to improve fraud prevention. • eBay started pushing for mandatory or near-mandatory acceptance of PayPal on its site, including a short-lived attempt to make it fully mandatory in Australia, which encountered regulatory difficulties. • MercadoPago continued the rollout of its MercadoPago 3.0 platform, with Argentina the most recent and largest geography to begin using the service. • eBay acquired Bill Me Later for $945M, with plans to integrate the offering more fully into PayPal. 63 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com • Alipay announced several sizable merchant deals, including Amazon and Giant Interactive, and reported, as of August, that it had 100M users and processed over 2M daily transactions; over 460K merchants now accept the service. Global eCommerce Growth Expected to Slow We expect online payment portals to benefit from eCommerce continuing to take wallet share away from offline channels in 2009 in both the U.S. and global markets; we continue to see rising broadband penetration as a key catalyst of eCommerce growth, and we expect eCommerce growth to flow through to higher usage of online payment services. While we expect the overall retail environment in the U.S. to remain weak, we expect online retailers to benefit from the continued shift of retail dollars online, driven by (1) increases in product selection, (2) continued Y/Y online sales improvements for brick-and-mortar retailers, (3) volatility in the offline retail space and (4) further improved efficiencies from site optimization. Our international forecast is driven by (1) continued rises in online shopping penetration, especially Western Europe, (2) continued investments by online retailers in broadening selection, (3) improvements in shipping infrastructure, (4) improved payment systems and (5) better fraud protection. Table 34: J.P. Morgan Global eCommerce Projections (Excluding Travel) $ in millions Global eCommerce Forecast 2004 2005 2006 2007 2008E 2009E 2010E 2011E ’08E – ’11E CAGR US 88,780 106,851 128,708 151,443 160,563 168,270 187,958 207,505 8.9% Europe 52,430 72,690 96,631 123,698 152,537 140,740 170,942 198,200 9.1% Asia 31,972 43,054 55,556 69,705 90,585 112,573 127,949 139,617 15.5% ROW 9,440 13,216 18,502 25,903 34,970 41,963 55,811 73,113 27.9% Total 182,622 235,811 299,397 370,749 438,655 463,546 542,660 618,435 12.1% Y/Y Growth 29.1% 27.0% 23.8% 18.3% 5.7% 17.1% 14.0% Source: Department of Commerce, Internet WorldStats, UK eStats, Forrester Research, Iresearch, Korea National Statistics Office, Japanese Statistics Bureau, eMarketer, PhuCusWright, TIA.org, Jupiter, company reports, J.P. Morgan estimates PayPal Remains the Largest Online Player; Still Trails Credit Cards According to our proprietary survey, 55% of online shoppers use PayPal, compared to 6% who use Google Checkout and 14% who use Amazon Payment. Although the number of people who reported using all three payment services was quite small, among them a 57% majority reported that PayPal was their preferred service. Credit cards remain the preferred method for online shoppers, with 84% stating that they use credit cards to make online purchases; the results were very consistent with the findings of our survey a year ago, when 83% noted using credit cards and 55% noted using PayPal. Unsurprisingly, PayPal’s penetration was even higher among those who said they had sold on eBay in the past: 78% of such respondents were PayPal users. 64 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 33: Payments Methods Used by Online Shoppers % among respondents who stated they shop online 83.6% 55.1% 5.5% 13.8% 9.5% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Credit Cards PayPal Google Checkout Amazon Pay ment Other Source: J.P. Morgan Internet Team 2008 Consumer Survey Online Payment Providers Offer a Viable Alternative to Other Payment Options Users Are Still Driven to Online Payment Options Despite Strong Satisfaction with Credit Cards PayPal, as well as Amazon Payment and Google Checkout, have been able to make inroads into the online retail business despite 89% of online shoppers who use credit cards rating their experience as either excellent or very good. It doesn’t appear that dissatisfaction with credit cards is the catalyst for growth for the third-party online payment platforms. Even users who are happy with credit cards are still choosing other options some of the time. Among respondents who used both credit cards and an online payment service, credit cards received one of the top two ratings (“Excellent” or “Very Good”) 90%+ of the time. Figure 34: Online Shoppers’ Satisfaction with Credit Cards for Users of Online Payment Services % of online shoppers who use the selected payment option 48% 39% 58% 48% 42% 32% 25% 26% 10% 7% 3% 7% 1% 1% 0% 0% 0% 25% 50% 75% All credit card users PayPal users Google Checkout users Amazon Pymts Users Excellent Very Good Satisfactory Needs Improv ement Source: J.P. Morgan Internet Team 2008 Consumer Survey % among all shoppers who use the payment method; may not add to 100% due to online payment users who don't use credit cards. Among online shoppers who do not use credit cards, PayPal is the prevalent method, with over 70% of those saying they used the service. 65 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 35: PayPal Dominant among Shoppers Who Eschew Credit Cards % of online shoppers who don’t use credit cards who use the selected payment option 69% 5% 14% 40% 0% 10% 20% 30% 40% 50% 60% 70% 80% PayPal Google Checkout Amazon Pay ment Other Source: J.P. Morgan Internet Team 2008 Consumer Survey Given the high level of satisfaction with credit cards, we find it remarkable that online payment services have been able to establish significant footholds online. We believe online payment services offer users security and ease-of-use advantages over credit cards, including eliminating the need to enter credit card numbers. Extending beyond eCommerce shoppers, online retailers can benefit from lower total transaction costs and P2P users benefit from lower costs and the added security benefit from not having to share personal financial information, such as bank account numbers. Figure 36: Online Payment Providers Simplify the Payment Process Traditional payment structure Merchant Consumer Payment gateway provider Card issuer processor Merchant bank Card-issuing bank PayPal payment structure Merchant Consumer Merchant bank Consumer bank Source: J.P. Morgan. Younger Users Are More Likely to Use Online Payment Providers Our proprietary survey revealed that younger users are more likely to be comfortable with more than one method of payment: nearly 60% of online shoppers in our survey between the ages 18-41 reported having used multiple payment choices (e.g., both credit cards and Google Checkout), compared to 46% among those older than 42. 66 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 37: Younger Users Choose More Payment Options % of online shoppers who selected a single payment provider, vs. those who chose more than one 40% 54% 60% 46% 0% 10% 20% 30% 40% 50% 60% 70% 18-41 42+ Use just one pay ment option Use multiple payment options Source: J.P. Morgan Internet Team 2008 Consumer Survey Additionally, younger users had a higher rate of use at each of the three online payment service providers we asked about, with Google Checkout in particular showing a higher penetration rate among the 18-41 set in our survey, vs. those older than 42. Figure 38: Online Payment Services Have Higher Penetration among Younger Users % among online shoppers in each age group 63% 9% 16% 67% 48% 3% 12% 52% 0% 20% 40% 60% 80% PayPal Google Checkout Amazon Payments At least one of PP, GC, AP 18-41 42+ Source: J.P. Morgan Internet Team 2008 Consumer Survey Key Features of Current U.S. Online Payment Providers PayPal PayPal expanded its merchant portfolio in 2008, adding several more airlines such as Delta and JetBlue, as well as new merchants including Blockbuster Video and American Eagle, which ranked 35 and 59, respectively, in Internet Retailer’s 2008 Top 500 list. PayPal is now offered by thousands of merchants around the world. PayPal offers a money market account for deposits, financing options and P2P money transfers. Additionally, PayPal made two notable acquisitions in the year, adding FraudSciences to help improve buyer protection – the company now offers unlimited buyer protection for certain on-eBay purchases – and paying $945M for Bill Me Later to add a financing option to its payment portfolio. In 3Q’08, PayPal for the first time saw more than half of its TPV come off the eBay site, and its Merchant business continues to grow at a faster rate. We expect 2009 to 67 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com be another strong year for PayPal as it grows its international and Merchant businesses and are forecasting transaction volume to increase 18% Y/Y to $72B. Users in our survey reported a high level of satisfaction with PayPal, with nearly two-thirds of users calling it “Excellent.” Figure 39: Majority of PayPal Shoppers Rate It Highly % among online shoppers who use the service Excellent 66% Very Good 26% Needs Improv ement 2% Satisfactory 6% Source: J.P. Morgan Internet Team 2008 Consumer Survey Table 35: PayPal Fee Structure Description Personal Account Premier/Business Account Fee for a buyer to make a purchase Free Fees for specific actions Open an Account Free Free Send Money Free Free Withdraw Funds Free for bank accounts in the US Free for bank accounts in the US Add Funds Free Free Receive payments funded by PayPal Balance, PayPal Instant Transfer or PayPal eCheck Free 1.9% to 2.9% + $0.30 USD Receive payments funded by Credit Card, Debit Card or Buyer Credit 4.9% + $0.30 USD (limit of 5 transactions per 12 month period) for domestic or U.S. transactions 1.9% to 2.9% + $0.30 USD 2% + applicable Fees for cross border payments 4.9% plus $0.30 USD for card payments received using PayPal on Skype Multiple Currency Transactions Exchange rate includes a 2.5% fee Exchange rate includes a 2.5% fee Source: www.paypal.com Amazon Payments Amazon rolled out its Amazon Payments Service in 2007. Amazon Payments offers P2P money transfer options. Amazon Payments is also integrated with Amazon Web Services to help developers accept payments more flexibly. As with PayPal, an overwhelming fraction of users reported a high level of satisfaction with the service: 68 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Figure 40: More than 90% of Amazon Payments Users Called It “Excellent” or “Very Good” % among online shoppers who use the service Excellent 49% Very Good 42% Needs Improv ement 1% Satisfactory 8% Source: J.P. Morgan Internet Team 2008 Consumer Survey Table 36: Amazon Payments Fees Fees to send payments Fees Sending Payments No fees Fees to receive payments (by payment method) less than $0.05 $0.05 to $9.99 $10.00 and more Bank Account 2% of T V + $0.05 2% of T V + $0.05 2% of T V + $0.05 Credit Card 5% of T V + $0.05 5% of T V + $0.05 2.9% of T V + $0.30 International Credit Card 6% of T V + $0.05 6% of T V + $0.05 3.9% of T V + $0.30 Amazon Payments stored funds 20% of T V, minimum fee of $0.0025 1.5% of T V + $0.01 1.5% of T V + $0.01 Source: payments.amazon.com Google Checkout Google Checkout is now available on hundreds of Internet retail sites. Google AdWords advertisers are offered discounted processing rates. Google Checkout does not currently offer P2P money transfer services. Figure 41: More than Half of Google Checkout Users Called It “Excellent” % among online shoppers who use the service Excellent 52% Very Good 42% Needs Improv ement 0% Satisfactory 6% Source: J.P. Morgan Internet Team 2008 Consumer Survey 69 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com Table 37: Google Checkout Fees Description Fee Fees to use Google Checkout to process sales 2% + $0.20 per transaction. AdWords advertisers are also eligible for free transaction processing for some or all of the Google Checkout sales each month. For every $1 spent on AdWords each month, an advertiser can process $10 in sales the following month for free through Google Checkout. Source: www.google.com 70 Global Equity Research 05 Januar y 2009 Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com 2009 Social Networks Primer Key Takeaways • Runaway usage growth continued in 2008. Of the major sites, Facebook and LinkedIn posted the most impressive usage growth, and across the group of social networking sites, user minutes worldwide grew 30%+, according to comScore data. And while its overall usage growth was not as rapid, Classmates posted a solid rise in paid accounts, up 37% Y/Y in the most recent quarter. • Not a fad – a technology that solves users’ problems. With another year of rapid growth behind us, there remains little doubt that there is very strong demand by users for the kind of interaction offered by social networks. We believe the sites’ gains in usage share, partly at the expense of email sites, demonstrate user needs are being better met. • Monetization remains tough nut to crack. Thus far, the problem of how to monetize all that traffic persists; CPMs did not see the hoped-for rise in 2008, and we are skeptical about monetization improvements in the near term. We think social networking sites will need to expand beyond the advertising model in order to successfully drive monetization. • Older users remain largely on sidelines. Our proprietary survey indicates 75% of users aged 18-41 used social network sites, and only 35% among those aged 42 or older. Further, whereas 40% of social network users 18-41 reported visiting the sites at least 20 times a month, older users tend to be occasional users: in the 42+ group, 63% visited the sites 1-4 times a month. Growth Remains Robust in 2008 The growth of social networks in 2008 remained very strong, with comScore estimating that minutes of usage across all worldwide social networking sites were up 32% Y/Y through the first nine months of the year. Although the rising tide lifted most boats, Facebook was a particular beneficiary, and is now the leader in terms of worldwide unique users and time spent, both of which were up more than double at the site. In the US, MySpace remains the usage leader; MySpace unique users were 8% higher Y/Y through the first nine months of 2008, while minutes were 24% higher. . 123,698 152,5 37 140 ,74 0 170 ,942 198,200 9.1% Asia 31, 972 43,054 55,556 69 ,70 5 90,585 112, 573 1 27, 949 139,6 17 15.5% ROW 9,440 13,216 18,502 25,903 34, 970 41,963. 2005 2006 20 07 2008E 2009E 2010E 2011E ’08E – ’11E CAGR US 88 ,78 0 106,851 128 ,70 8 151,443 160,563 168, 270 1 87, 958 2 07, 505 8.9% Europe 52,430 72 ,690 96,631