The document provides an overview and outlook for internet companies in 2008. Some of the key points made in the document include:
- The author expects internet companies to continue outperforming the broader stock market in 2008, driven by factors that led to outperformance in 2007.
- Earnings per share growth of 34% is projected for internet companies covered, compared to 8% for the S&P 500.
- Blended cost-per-million pricing is expected to re-accelerate after bottoming out in 2007, driven by tighter offline inventory and better monetization.
- Global search revenue is projected to hit $60 billion by 2011, up from an estimated $30.5 billion in 2008.
1. North America Equity Research
02 January 2008
Nothing But Net
2008 Internet Investment Guide
2007 saw Internet companies outperform the broader stock market, Internet
as the HHH rose ~14%, vs. a ~5% rise in the S&P 500. We believe Imran Khan
AC
some of the factors that drove F’07 outperformance will persist into (1-212) 622-6693
F’08, and thus expect the sector to outperform the broader market. imran.t.khan@jpmorgan.com
Bridget Weishaar
• Expect 34% EPS Growth, vs. 8% for the S&P 500. We expect (1-212) 622-5032
revenue growth to decelerate to 21.2% in F’08, from 25.6% in bridget.a.weishaar@jpmchase.com
F’07. We are projecting 34% earnings growth for our coverage Lev Polinsky, CFA
universe, compared to 8% for the S&P 500. (1-212) 622-8343
lev.x.polinsky@jpmchase.com
• Expect Blended CPM Pricing Growth Rate to Accelerate. We Joseph Boushelle, CFA
think blended CPM pricing bottomed out in F’07. We expect (1-212) 622-8523
tighter offline inventory and better monetization techniques will joseph.d.boushelle@jpmchase.com
lead to a re-acceleration of growth in F’08.
China Internet
• We Project Global Search Revenue to Hit $60B by 2011. We Dick WeiAC
are raising our F’08 global search revenue estimate to $30.5B, (852) 2800 8535
from $26.2B, driven by strong volume trends, better-than-expected dick.wei@jpmorgan.com
monetization, and continued robust growth in Continental Europe.
We expect the global search market to reach $60B by 2011,
growing at a 28% CAGR over the next four years.
• Global Consumer Growth Should Benefit Internet Companies. Please see our notes changing
World GDP growth has outpaced US growth in recent years, and a ratings for Priceline, and our note
projected 3-year CAGR of 6.5% for emerging economies means changing estimates for the
hundreds of millions of new consumers. We think large Internet remainder of our coverage
companies’ global reach means they’ll benefit from this rising tide. released simultaneously.
• M&A Market Likely to Remain Healthy. The five biggest
companies in our universe generated $8.8B in FCF in F’07, a
number we project will grow to $12.5B in F’08. While some of All data and valuation in this
that cash should continue to fund share repurchases, we think a report priced as of 26 Dec 2007.
significant portion of the incremental cash flow is likely to lead to
continued M&A in the sector.
• Top Picks. The above trends translate into our top Overweight
ideas going into the new year: GOOG, YHOO, EXPE, OMTR,
SFLY and MNST.
www.morganmarkets.com J.P. Morgan Securities Inc.
See page 309 for analyst certification and important disclosures, including investment banking relationships.
JPMorgan does and seeks to do business with companies covered in its research reports. As a result, 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. Customers of JPMorgan in the United States can receive independent, third-party research on the company
or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at
www.morganmarkets.com or can call 1-800-477-0406 toll free to request a copy of this research.
2. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Table of Contents
Key Investment Themes ..........................................................5
Dot.Khan’s Top Ten for 2008 .................................................13
U.S. Sector Outlooks..............................................................15
China Outlook .........................................................................99
Amazon.com, Neutral ($92.85) ............................................121
Blue Nile, Neutral ($74.16) ...................................................129
CNET Networks, Neutral ($8.90) ..........................................136
eBay, Overweight ($34.49) ...................................................144
Expedia, Overweight ($32.56)..............................................154
Google, Overweight ($710.84) .............................................161
HouseValues, Underweight ($2.94) .....................................169
InfoSpace, Neutral ($18.96)..................................................177
InnerWorkings, Neutral ($18.40)..........................................183
Liberty Interactive, Neutral ($19.79) ....................................190
Mercadolibre, Overweight ($72.85) .....................................199
Monster Worldwide, Overweight ($33.91)...........................208
Move, Inc., Neutral ($2.70) ...................................................215
Omniture, Overweight ($34.95)............................................222
Priceline, Overweight ($118.23)...........................................229
Shutterfly, Overweight ($27.38) ...........................................239
ValueClick, Overweight ($23.39)..........................................247
Yahoo!, Overweight ($23.96) ...............................................255
Baidu, Overweight ($399.67)................................................267
China Finance Online, Overweight ($23.75) .......................272
NetEase, Neutral ($19.33).....................................................276
Ninetowns, Underweight ($3.45) .........................................281
Shanda, Overweight ($34.39)...............................................285
Sina, Neutral ($45.50) ...........................................................290
Sohu, Overweight ($56.58)...................................................294
The9, Overweight ($23.50) ...................................................299
The authors acknowledge the contribution of Deval Delivala and Rachna Srivastava
of J.P. Morgan Services India Private Ltd., Mumbai, and John Ventimiglia of J.P.
Morgan Securities Inc. to this report.
2
3. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Figure 1: JPMorgan Internet Technology Universe
$ in millions, except per share data
JP Morgan Internet Technology Universe
Ticker Rating Price Mkt Cap Ent .Val. EPS Cal PE LT EPS PEG EBITDA ($M) Ent. Val/EBITDA Rev ($M)
12/26 12/26 12/26 2007E 2008E 2009E 2007E 2008E 2009E Grth (%) 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E 2007E 2008E 2009E
Search/Advertising
CNET CNET N 8.90 1,350 1,364 NM 0.14 0.22 NM NM 40.4 15 NM NM 2.7 82 100 118 16.7 13.7 11.6 411 451 494
Google GOOG OW 710.84 225,035 211,948 15.42 20.92 26.33 46.1 34.0 27.0 35 1.3 1.0 0.8 6,958 9,917 12,647 30.5 21.4 16.8 11,719 16,957 22,332
Infospace INSP N 18.96 629 54 (1.49) (0.88) 0.11 NM NM 167.0 5 NM NM 33.4 (9) 17 18 (5.8) 3.2 3.0 240 139 141
ValueClick VCLK OW 23.39 2,343 2,092 0.71 0.84 1.01 33.0 27.7 23.1 20 1.6 1.4 1.2 164 190 220 12.8 11.0 9.5 639 735 859
Yahoo* YHOO OW 23.96 33,426 25,615 0.43 0.49 0.58 55.9 49.4 41.0 25 2.2 2.0 1.6 1,906 2,248 2,533 13.4 11.4 10.1 5,095 5,895 6,433
Group Average 45.0 37.0 59.7 1.7 1.4 7.9 18.3 12.1 10.2
Leading e-Commerce brands
Amazon AMZN N 92.85 39,461 39,294 1.10 1.51 1.87 84.5 61.6 49.7 20 4.2 3.1 2.5 1,093 1,474 2,178 35.9 26.7 18.0 14,488 17,938 21,269
Blue Nile NILE N 74.16 1,254 1,180 1.03 1.23 1.50 71.9 60.4 49.5 20 3.6 3.0 2.5 30 36 44 38.8 32.6 26.9 322 388 454
Dice DHX R 8.14 505 587
eBay EBAY OW 34.49 46,727 42,283 1.48 1.70 1.98 23.3 20.3 17.4 25 0.9 0.8 0.7 2,863 3,337 3,754 14.8 12.7 11.3 7,685 9,007 10,506
Expedia EXPE OW 32.56 10,183 10,326 1.23 1.39 1.58 26.5 23.4 20.6 10 2.6 2.3 2.1 725 808 887 14.3 12.8 11.6 2,643 3,006 3,318
InnerWorkings INWK N 18.34 921 852 0.32 0.52 0.73 57.3 35.1 25.1 20 2.9 1.8 1.3 27 46 65 31.8 18.6 13.1 288 472 641
InterActive Corp IACI N 27.56 8,410 7,421 1.55 1.81 NA 17.8 15.2 NA 10 1.8 1.5 NA 867 958 NA 8.6 7.7 NA 6,352 6,897 NA
Liberty Interactive LINTA N 19.79 12,428 16,810 0.73 0.80 0.89 27.1 24.8 22.2 10 2.7 2.5 2.2 1,707 1,766 1,871 9.8 9.5 9.0 7,721 8,094 8,583
Mercadolibre MELI OW 72.85 3,227 3,164 0.21 0.58 0.86 354.1 126.2 84.6 30 11.8 4.2 2.8 24 43 68 132.2 73.7 46.3 84 134 195
Monster.com MNST OW 33.91 4,434 3,807 1.42 1.90 2.27 23.9 17.8 14.9 20 1.2 0.9 0.7 301 441 514 12.7 8.6 7.4 1,350 1,519 1,727
Orbitz Worldwide OWW R 9.43 784 1,320
Priceline.com PCLN OW 118.23 5,430 4,930 3.96 4.87 6.08 29.8 24.3 19.4 15 2.0 1.6 1.3 161 296 408 30.5 16.6 12.1 1,402 1,710 2,026
Shutterfly SFLY OW 27.38 671 576 0.38 0.53 0.75 71.6 51.3 36.3 20 3.6 2.6 1.8 32 45 61 18.1 12.9 9.4 183 251 328
Group Average 63.6 38.1 30.7 3.1 2.1 1.7 28.2 19.1 14.8
Online Services
Move.com MOVE N 2.70 419 233 (0.05) 0.03 0.05 NM 88.6 56.1 25 NM 3.5 2.2 29 42 49 8.1 5.6 4.8 294 320 349
HouseValues SOLD UW 2.94 72 7 (0.09) 0.02 0.07 NM 191.8 40.3 10 NM NM NM 3 7 8 2.2 1.0 0.9 60 49 54
Group Average NM 140.2 48.2 NM 3.5 2.2 5.1 3.3 2.8
Enabling Platforms
Akamai^ AKAM NR 36.80 6,590 5,859 1.29 1.66 2.01 28.6 22.2 18.3 25 1.1 0.9 0.7 275 368 469 21.3 15.9 12.5 628 805 994
Omniture OMTR OW 34.95 2,248 2,270 0.20 0.39 0.70 NA NM 49.8 35 NA NM 1.4 22 37 71 101.1 60.8 32.0 141 213 309
Salesforce.com^ CRM NR 63.87 7,682 7,176 0.13 0.32 0.65 NA 199.4 98.9 40 NM 5.0 2.5 38 77 NA 189.4 92.7 NA 741 1,030 1,372
Visual Sciences VSCN NR 19.31 369 394 0.59 0.75 0.74 32.9 25.6 26.1 20 1.6 1.3 1.3 15 21 NA 26.2 19.1 NA 82 90 NA
Websense^ WBSN NR 17.16 777 496 0.90 1.13 1.35 19.1 15.1 12.8 15 1.3 1.0 0.9 53 47 85 9.4 10.5 NA 226 309 338
Group Average 26.9 65.6 41.2 1.4 2.0 1.4 69.5 39.8 22.2
Average 59.0 55.7 42.8 2.7 2.1 3.2 33.6 21.7 14.0
Source: Company reports and JPMorgan estimates for JPMorgan rated companies. First Call consensus for non-covered companies. Note: Yahoo! EV assumes Yahoo! Japan is worth $26.9B. EBITDA – Operating Income + D&A +/- extraordinary charges
Data in this table and this report is priced as of December 26, 2007 close
JPMorgan is currently subject to a research blackout period for Dice Holdings, Inc and Orbitz Worldwide, Inc. Company write-ups are omitted here in compliance with NYSE and NASD provisions relating to lock-up agreements.
3
5. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Key Investment Themes
We Expect CPMs to Rise in 2008
While we think CPM growth was relatively muted in 2007, we expect 2008 will see
it accelerate, driven by several factors, including easier comps, better inventory sell-
through, behavioral and geographic targeting, and ad exchanges.
Tighter Offline Inventory
Broadcast network total day ratings were ~8% lower in 2007, and we expect
inventory is likely to continue shrinking further in 2008. Additionally, the reduced
supply will face higher demand, as we believe as much as 6% of spot TV ads in 2008
may be taken up by political ads. We expect the inventory tightness will have a
spillover effect online, as advertisers continue to shift a greater percentage of their
spend away from traditional media.
The Rise of Ad Networks
More than 80% of online inventory currently sells for less than a $1 CPM. As such,
we think ad networks present a significant opportunity for publishers to increase
yield, and, given the low base, the CPM enhancement from using ad networks will
not have to be very large, in absolute terms, to move the needle.
Inventory Aggregation
Many companies are aggregating traffic through partnerships and acquisitions. We
think aggregation is likely to lead to a certain degree of pricing power for the
aggregators. More importantly, we expect advertisers to be more willing to buy from
aggregators that offer them sufficient scale.
Easier Comps
2007 saw pressure on graphical ad CPMs, driven primarily by increases in non-
premium inventory, from sites such as MySpace and Facebook. We think the 2007
softness in the market is likely to set a lower base for 2008.
Free Cash Flow Likely to Drive M&A Activity
Large Internet companies are generating a significant amount of cash flow: looking
at the five largest Internet-only companies in our coverage universe, we estimate they
generated nearly $8.8B in FCF in F’07, and are poised to produce $12.5B FCF in
F’08.
Table 2: Free Cash Flow Generation at 5 Large Internet Companies
$ in millions
2007 2008
GOOG $ 3,490 $ 5,675
YHOO $ 1,307 $ 1,643
AMZN $ 1,351 $ 1,705
EBAY $ 2,067 $ 2,612
EXPE $ 566 $ 860
Top 5 Total $ 8,781 $ 12,494
Source: Company reports, JPMorgan estimates
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6. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
While we believe some of these companies will use part of their income stream on
share repurchases, we expect that a significant part will continue to spur increased
M&A activity in the sector.
Table 3: Uses of Free Cash Flow at 5 Large Internet Companies, TTM
$ in million, 4Q’06 – 3Q’07
TTM FCF ($M) Cash Acquisitions/FCF Buyback/FCF
GOOG 2,902 33.4% 0.0%
YHOO 1,300 33.6% 104.9%
AMZN 801 6.1% 31.0%
EBAY 2,052 15.5% 105.8%
EXPE 777 8.0% 179.8%
Top 5 Total 7,831 23.4% 66.1%
Source: Company reports, JPMorgan Estimates
Note: Table does not include acquisitions made with stock, such as Google’s YouTube acquisition
In particular, we believe large companies will continue to seek out investments in
social media, where sites often grow virally and the large-caps appear satisfied, for
the most part, to let the public pick the winners out of a crowded field before making
acquisitions.
In the ad network and ad exchange space, we expect the need for scale to lead to
continued consolidation and M&A activity, although perhaps not at the scale we
have witnessed in F’07, most sizably with the DoubleClick and aQuantive
transactions.
We expect continued M&A to be motivated by one or more of these key factors:
• Traffic. Developing high-traffic sites is difficult, and larger companies are often
willing to pay for sites that have proven an ability to generate traffic.
• Technology. Companies that develop a technology that is difficult or
uneconomical to replicate are often targets for acquisitions; such companies may
also generate traffic, but the technology is a motivator for the buyer.
• Transactional. Companies with a proven track record of revenue and sales
generation make attractive targets, as well; a recent example of a transactional-
focused acquisition is the 2007 purchase of Mezimedia by ValueClick.
Additionally, we continue to believe that there are synergies to be captured by a
strategic partnership among large-cap Internet companies, due to (1) increased scale,
(2) strengthened global footprint, (3) broadened user insights and (4) improved
operational efficiencies. We believe continuing share gains and product introductions
by Google may compel other large-cap Internet companies to explore strategic
alliances.
6
7. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Table 4: Selected M&A Activity in the Internet Space, 2007 (Please see Appendix of this section for full list)
Ticker Date Target Acquirer Seller Annc’d Tot Payment Status
AMZN 5/14/2007 www.Dpreview.Com Amazon.com Inc NA Undisclosed Complete
AMZN 5/23/2007 Brilliance Audio Inc Amazon.com Inc NA Cash Complete
CNET 10/25/2007 Webshots American Greetings Corp Cnet Networks Inc 45 Cash Complete
CNET 11/5/2007 Findarticles.Com CNET Neworks Looksmart 20.5 Cash Pending
EBAY 1/10/2007 Stubhub eBay 310 Cash Complete
EBAY 2/27/2007 Beijing Union Mobile Pay Ltd eBay 105 Cash Pending
EBAY 5/3/2007 Gittigidiyor.Com eBay NA Cash Complete
EBAY 5/30/2007 Stumbleupon Inc eBay 75 Cash Complete
EBAY 10/4/2007 Via-Online Gmbh eBay NA Cash Complete
EBAY 12/20/2007 Tom Online Inc eBay NA Undisclosed Pending
EXPE 2/28/2007 Smarter Travel Media Llc Expedia Inc NA Undisclosed Complete
EXPE 5/23/2007 Independent Traveler Inc Expedia Inc NA Undisclosed Complete
GOOG 10/31/2006 Jotspot Inc Google NA Undisclosed Complete
GOOG 1/4/2007 Shenzen Xunlei Netwk Tech Google NA Undisclosed Complete
GOOG 3/16/2007 Adscape Media Inc Google NA Undisclosed Complete
GOOG 4/13/2007 Doubleclick Google Multiple Sellers 3100 Cash Pending
GOOG 4/17/2007 Tonic Systems Google NA Undisclosed Complete
GOOG 4/20/2007 Video Conf. Software Google Marratech Ab NA Cash Complete
GOOG 5/29/2007 Greenborder Tech Ltd Google NA Undisclosed Complete
GOOG 5/31/2007 Panoramio.Com Google 7 Cash Pending
GOOG 6/1/2007 Feedburner Inc Google NA Undisclosed Complete
GOOG 6/6/2007 Peakstream Inc Google NA Undisclosed Complete
GOOG 6/20/2007 Zenter Google NA Undisclosed Complete
GOOG 7/2/2007 Grandcentral Communicat. Google NA Undisclosed Complete
GOOG 7/9/2007 Postini Google 625 Cash Pending
GOOG 7/19/2007 Beijing Feixiangren Informat Google NA Undisclosed Complete
GOOG 9/28/2007 Zingku Google NA Undisclosed Complete
GOOG 10/9/2007 Jaiku Ltd Google NA Undisclosed Complete
GOOG 12/18/2007 Endoxon Google NA Undisclosed Complete
IACI 12/20/2006 Ilike.Com IAC/ Interactive corp NA Complete
IACI 2/27/2007 Edodo.Com IAC/ Interactive corp NA Complete
IACI 2/27/2007 Netclub IAC/ Interactive corp NA Complete
IACI 3/1/2007 Insider Pages IAC/ Interactive corp NA Pending
IACI 3/19/2007 Echomusic IAC/ Interactive corp NA Complete
IACI 4/19/2007 Rqi Holdings Ltd IAC/ Interactive corp Gaylord Entertainment Co 109.12 Complete
IACI 5/17/2007 Front Line Mgmt IAC/ Interactive corp NA Complete
IACI 5/24/2007 Emma Enterntainment Hold IAC/ Interactive corp NA Complete
IACI 7/2/2007 Paciolon IAC/ Interactive corp NA Pending
INSP 9/17/2007 Switchboard.Com Idearc Inc Infospace Inc 225 Cash Pending
LINTA 5/11/2007 Backcountry.Com Liberty Media Interactive NA Cash Pending
MELI 10/1/2001 Ibazar Com Br Ltd MercadoLibre Inc Ebay Inc NA Stock Complete
MELI 11/13/2005 Deremate.Com MercadoLibre Inc NA Undisclosed Complete
MNST 1/17/2007 Arbeidskamerater As Monster Worldwide NA Undisclosed Complete
MSFT 5/18/2007 Aquantive Microsoft 5460.65 Cash Complete
MSFT 8/30/2007 Screentonic Microsoft NA Undisclosed Complete
MSFT 10/3/2007 Jellyfish.Com Microsoft NA Undisclosed Complete
MSFT 10/7/2007 Newsvine Inc MULTIPLE ACQUIRERS NA Undisclosed Complete
MSFT 10/24/2007 Facebook Inc Microsoft 240 Cash Pending
OMTR 1/18/2007 Instadia Omniture Inc 14.41 Cash Complete
OMTR 2/14/2007 Touch Clarity Omniture Inc 48.5 Cash Pending
OMTR 9/7/2007 Offermatica Omniture Inc 65 Cash & Stock Pending
OMTR 10/25/2007 Visual Sciences Inc Omniture Inc 390.27 Cash & Stock Pending
PCLN 11/8/2007 Agoda Co Priceline.com Inc NA Cash Complete
SFLY 6/27/2007 Make It About Me! Shutterfly NA Undisclosed Complete
TFSM 5/17/2007 24/7 Real Media Inc WPP Group PLC 580.67 Cash Complete
VCLK 12/4/2006 Shopping.Net ValueClick Inc 26.28 Cash Complete
VCLK 7/16/2007 Mezimedia Inc ValueClick Inc 100 Cash Pending
YHOO 1/9/2007 Mybloglog Yahoo! Inc Complete
YHOO 4/30/2007 Right Media Inc Yahoo! Inc 340 Cash & Stock Complete
YHOO 6/21/2007 Rivals.Com Yahoo! Inc NA Undisclosed Pending
YHOO 9/4/2007 Bluelithium Inc Yahoo! Inc 300 Cash Complete
YHOO 9/14/2007 Buzztracker.Com Yahoo! Inc Participate Media NA Cash Complete
YHOO 9/17/2007 Zimra Inc Yahoo! Inc 350 Undisclosed Pending
Source: Bloomberg, company reports, news reports
7
8. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Worldwide Growth and Economic Prosperity Creating an
Ever-Larger Consumer Base
JPMorgan estimates that GDP growth has been stronger outside the US than
domestically in all but one year since 2000. At the same time, worldwide Internet
penetration has been growing rapidly, as well. As such, we believe that, for larger
Internet companies, the importance of the US, while remaining high, will continue to
fade in relative terms in coming years.
Table 5: JPMorgan’s Global GDP growth projections
2001 2002 2003 2004 2005 2006 2007E 2008E 2009E
World 1.6% 1.9% 2.5% 3.8% 3.2% 3.6% 3.4% 3.0% 3.4%
Developed mkts 1.2% 1.3% 1.8% 2.9% 2.4% 2.8% 2.4% 2.1% 2.7%
G-7 1.0% 1.2% 1.8% 2.8% 2.3% 2.7% 2.2% 2.1% 2.7%
Emerging Econ. 3.0% 4.1% 5.0% 7.0% 6.3% 6.9% 6.9% 6.3% 6.2%
Latin America 0.5% 0.1% 1.8% 6.2% 4.3% 5.3% 5.1% 4.5% 4.4%
Emerging Asia 5.1% 6.6% 7.2% 7.9% 7.8% 8.4% 8.5% 7.7% 7.6%
ex China 2.7% 4.8% 5.1% 6.3% 6.0% 6.5% 6.3% 5.8% 5.9%
China 8.3% 9.1% 10.0% 10.1% 10.4% 11.1% 11.4% 10.5% 10.0%
Emerging Eur. 1.6% 4.5% 5.7% 6.8% 5.8% 6.4% 6.3% 5.8% 5.7%
ex Russia -0.6% 4.4% 4.7% 6.6% 5.5% 6.2% 5.5% 5.1% 5.2%
Russia 5.1% 4.7% 7.3% 7.2% 6.4% 6.7% 7.5% 6.8% 6.3%
Developed Eur. 1.9% 1.1% 1.1% 2.2% 1.8% 3.0% 2.8% 1.9% 2.4%
World ex-US 1.9% 2.0% 2.5% 3.8% 3.2% 4.0% 3.9% 3.2% 3.5%
United States 0.7% 1.6% 2.5% 3.6% 3.1% 2.9% 2.2% 2.5% 3.1%
Source: JPMorgan Economic and Policy Research
We believe the continued global GDP growth is creating an ever-expanding
consumer class. Twinned with the trend of rising Internet penetration, we believe an
ever-growing market opportunity exists outside the US for Internet companies,
especially those with the scale to invest meaningfully in their international
operations.
Internet companies are more Table 6: Revenue Mix Is Shifting Away from US at Large Ad-driven, eCommerce and Travel Sites
internationally diversified: we
% of revenue derived from US
estimate that ~64% of the
revenue of S&P 500 companies 2006 2007E 2008E 2009E
is derived from US/North Amazon (see note) 54.8% 55.0% 54.7% 54.0%
American sales, compared to eBay 52.1% 49.3% 47.5% 47.0%
Expedia (see note) 74.2% 70.0% 67.1% 64.6%
less than 60% for large Internet
Google 57.0% 52.4% 50.6% 49.4%
firms.
Priceline 59.4% 44.9% 35.8% 29.8%
Yahoo! 75.0% 74.9% 73.5% 68.9%
Total (revenue wtd) 59.0% 55.8% 54.0% 52.4%
Source: Company reports, JPMorgan estimates
Note: For Amazon and Expedia, the percentage given is North America revenue share, rather than US.
In this respect, we believe Internet companies are somewhat ahead of the broader
market: based on FactSet data we estimate that ~64% of the revenue of S&P 500
companies is derived from US/North American sales.
We see no reason for the shift away from the US to abate in the near future, and as
such we believe that the large-cap companies in our coverage universe are likely to
retain at least a somewhat firm footing even if the US economy and US consumer
experience a slowdown. At the same time, given the significant exposure of these
companies to the US, we believe it would be a mistake to think of them as
“recession-proof”.
8
9. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Rising Broadband Penetration Remains Growth Catalyst
We believe faster Internet connections are necessary for a variety of online functions
– obvious ones such as media and gaming, but even eCommerce – to achieve
mainstream use. As such, we think rising broadband penetration across the world
remains a key catalyst for the growth of the companies in our coverage universe.
We note that, in the US, eCommerce spend as tracked by the Department of
Commerce has increased at a similar pace as Broadband penetration. We believe this
is not coincidental: speed is a key component of user experience, and a positive user
experience is likely to drive greater use of eCommerce sites.
Figure 2: US eCommerce has grown hand-in-hand with Broadband penetration
$ in millions; eCommerce quarterly average spend
30%
30000 25%
20%
20000 15%
10%
10000
5%
0 0%
1H'02 2H'02 1H'03 2H'03 1H'04 2H'04 1H'05 2H'05 1H'06 2H'06 1H'07
eCommerce, $M Broadband Penetration, %
Source: Department of Commerce, OECD, JPMorgan estimates
OECD data suggests many countries in Continental Europe remain 1-2 years behind
the US and UK in terms of broadband penetration. As such, we think higher
broadband usage is likely to be a growth catalyst in those countries as well as in the
US in coming years.
While eCommerce has grown in parallel with Broadband penetration, online ad
spend, as measured by the IAB, has grown at a more rapid pace in recent years than
Broadband adoption:
Figure 3: US Online ad spend rising faster than Broadband penetration
$ in millions; IAB quarterly average ad spend
30%
5000
25%
20%
15%
2500
10%
5%
0 0%
1H'02 2H'02 1H'03 2H'03 1H'04 2H'04 1H'05 2H'05 1H'06 2H'06 1H'07
Ad spend, $M Broadband Penetration, %
Source: OECD, IAB, JPMorgan estimates
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10. Imran Khan North America Equity Research
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imran.t.khan@jpmorgan.com
We believe the faster rate of growth can be attributed in part to network effects: as
more users have access to a faster, more complete Internet experience, a greater
number of advertisers find it economical to direct part of their spend online. An
additional factor is the ability of richer media ads – which take advantage of higher
bandwidth – to command higher CPMs.
Newspaper Ad Spend Declining
Advertising spend at US newspapers is continuing to decline: 2007 saw an
acceleration of newspaper ad spend declines, and we think this trend is likely to
continue as time spent on newspapers declines in favor of time spent online. We
expect a continuation of the shift away from newspapers to be a tailwind for Internet
advertising in the coming year.
Figure 4: Newspaper Ad Spend Continues to Decline
$ in billions
3.9% 4.0%
1.9% 1.5% 2.0%
55.0
0.0%
-1.7% -2.0%
45.0 -8.6% -4.0%
47.4 -6.0%
44.9 46.7 46.6
42.6 -8.0%
35.0 -10.0%
2003 2004 2005 2006 2007
Source: NAA.org, JPMorgan estimates
Involvement of Regulatory Authorities Likely to Grow
As the industry grows and becomes entwined in more and more aspects of people’s
lives, we think regulators are going to take more and more notice of Internet
companies. Going forward, regulatory risk will likely grow, although we believe it
will remain relatively small, compared to other industries.
M&A in question
2007 saw several large mergers take place within the Internet space, most notably
Google’s purchase of DoubleClick and Microsoft’s acquisition of aQuantive. While
the latter was able to achieve regulatory clearance, European authorities are still (as
of mid-December) examining whether the Google – DoubleClick merger will create
a player in the online ad industry that is too dominant.
We think such regulatory flare-ups are likely to reoccur. Further, as online
advertising continues to take share away from traditional avenues, we expect the
incumbent players to pursue a variety of approaches, including lobbying for
regulatory/legislative intervention, to attempt to defend their position.
Privacy concerns abound
As search companies become larger and ad networks begin to capture more and more
data about users, privacy concerns have become more common.
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11. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
In response, several companies have made voluntary steps to lower the quantity of
personalized data collection they do. For example, Google has said it will anonymize
searcher data after 18 months, while Ask has given users the option of erasing their
search history immediately.
Social networking sites, which often collect more personal information than do
search engines, have also faced attention in regards to their data practices. As we
note in the Social Networks Primer, below, we think history indicates that users are
willing to sacrifice incremental erosions of their privacy in exchange for features
they find useful, especially if sites do not over-reach. Thus far, the desire of users to
express themselves has been stronger than the desire to hide, and we think that is
likely to continue.
Internet Taxation: Likely Not on the Horizon in US
Two key Internet tax issues exist in the US: an Internet access tax and a sales tax. A
bill renewing the ban on an Internet access tax for seven years passed the US
Congress in October 2007.
As regards sales taxes on online retail sales, JPMorgan’s Senior Vice President for
Government Relations, Tom Block, believes that a recently proposed bill, intended to
allow states to implement an Internet sales tax under certain conditions, does not
have a significant chance of passing in the foreseeable future. While offline retailers
and state governors have lobbied for rules such as this, voting for this bill could be
construed as a tax increase, and Tom Block thinks that makes passage of the bill a
non-starter, especially in an election year.
Internet IPO Market Remains Healthy
2007 saw solid IPO activity in the Internet and online space, with deals in the double
digits (please see chart below). We believe the trend is likely to continue in F’08, as
an ever-evolving marketplace gives rise to new opportunities.
Table 7: Selected Internet IPOs, F’07
$ in millions except per-share amounts
Pricing Date Issuer Name Symbol Amt ($mm) Mkt cap ($mm) % mcap Offering Price Price, 12/7 Performance
06/26/07 Comscore Inc SCOR 101 457 22% 16.50 36.13 119%
10/02/07 Constant Contact CTCT 123 433 28% 16.00 21.69 36%
07/17/07 Dice Holdings Inc DHX 221 805 27% 13.00 10.01 -23%
03/21/07 Glu Mobile Inc GLUU 86 327 26% 11.50 5.33 -54%
11/16/07 Internet Brands Inc INET 48 334 14% 8.00 7.99 0%
06/07/07 Limelight Networks Inc LLNW 276 1,192 23% 15.00 8.01 -47%
08/09/07 MercadoLibre Inc MELI 333 752 44% 18.00 43.77 143%
07/19/07 Orbitz Worldwide Inc OWW 510 1,244 41% 15.00 9.87 -34%
07/25/07 Perfect World Co Ltd PWRD 217 894 24% 16.00 31.53 97%
02/15/07 Salary.com Inc SLRY 69 158 44% 10.50 13.27 26%
05/16/07 TechTarget Inc TTGT 115 508 23% 13.00 13.66 5%
02/08/07 U.S. Auto Parts Network Inc PRTS 115 298 39% 10.00 8.59 -14%
03/08/07 Xinhua Finance Media Ltd XFML 300 883 34% 13.00 6.80 -48%
Source: Company reports, FactSet, JPMorgan estimates
We see the Internet landscape continuing to undergo changes in F’08. We expect
several types of companies to start achieving a level of scale and operational
visibility where a public offering makes sense. Particularly, we think the growing
maturity of sectors of the Internet previously thought to be not yet mature, such as
social networks, will spur deal activity.
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12. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
We Think 2008 Could Bring Greater Profitability
In 2006, 12 of the Internet companies in our coverage universe saw EBITDA
margins decline, and nine had increases. In F’07, the numbers were reversed, with 12
risers and nine decliners. We think, as some of the companies in our universe reach
greater maturity, profitability becomes a higher priority than growth, and more
achievable, and are forecasting rising EBITDA margins at 16 of these companies in
F’08.
At the same time, we do not believe that, given the scale of these firms, the leverage
that can be achieved in the short term is significant: of the 16 companies whose
margins we expect to improve, we are modeling greater than 100 bps EBITDA
margin improvement at only eight.
Finally, we would note that, should an economic downturn in F’08 be more severe
than currently expected, it is possible that our projected margin levels could see
pressure.
Table 8: Change in EBITDA margins for the JPMorgan Internet Coverage Universe
2006 2007E 2008E
EBITDA mgn Y/Y change EBITDA mgn Y/Y change EBITDA mgn Y/Y change
AMZN 6.6% -1.0% 7.5% 1.0% 8.2% 0.7%
CNET 20.8% 1.5% 19.9% -0.8% 22.1% 2.2%
DHX 35.0% -0.4% 41.4% 6.4% 41.5% 0.2%
EBAY 34.4% -6.3% 33.1% -1.3% 33.3% 0.1%
EXPE 27.3% -3.2% 27.4% 0.2% 26.9% -0.6%
GOOG 63.2% -2.0% 59.4% -3.8% 58.5% -0.9%
IACI 15.2% 0.7% 13.6% -1.6% 13.9% 0.2%
INSP -7.5% -28.3% -3.9% 3.6% -11.2% -7.3%
INWK 9.0% 2.4% 9.3% 0.3% 9.7% 0.4%
LINTA 36.3% 3.0% 35.2% -1.1% 34.8% -0.4%
MELI 14.2% 5.8% 28.3% 14.1% 32.1% 3.8%
MNST 25.1% 2.1% 22.3% -2.8% 29.0% 6.7%
MOVE 8.4% 6.3% 9.8% 1.4% 13.0% 3.2%
NILE 8.9% -0.8% 9.5% 0.5% 9.3% -0.1%
OMTR 10.1% 24.1% 16.0% 5.9% 17.5% 1.6%
OWW -8.3% -8.3% 11.6% 19.9% 16.8% 5.2%
PCLN 9.5% 2.3% 11.5% 2.0% 17.3% 5.8%
SFLY 16.8% -0.8% 17.4% 0.6% 17.8% 0.5%
SOLD 8.3% -19.5% 5.7% -2.6% 15.1% 9.4%
VCLK 26.6% -1.8% 25.6% -0.9% 25.8% 0.2%
YHOO 41.8% -0.3% 37.4% -4.4% 38.1% 0.7%
Source: Company reports, JPMorgan estimates
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13. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Dot.Khan’s Top Ten for 2008
1. CPM growth rate will accelerate
2. M&A market will remain robust
3. Audience Fragmentation: Will the Ad Network strategy work?
4. Domestic eCommerce growth will slow: Can Amazon continue to deliver above-
market growth?
5. Can Jerry Yang turn Yahoo! around?
6. Mobile ads will be like video ads: A whole lot of talk, not a whole lot of $
7. Booking fees are not going away: consider that USAirways just introduced fees
8. Economic slowdown may impact profitability somewhat, but we expect margins
to stabilize
9. Internet will continue to cannibalize Newspaper ad spend, which declined ~8%
in F’07
10. Battle of Facebook vs. MySpace: both will thrive, but we think Facebook will do
better
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14. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
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17. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
2008 Search Advertising Outlook
Given a very strong 2007 performance, we are increasing our outlook for the global
paid search market heading into 2008. We now believe global paid search revenues
will reach $30.5B in 2008, up from our prior estimate of $26.2B. We believe that
2008 paid search growth will be driven by:
• International growth due to continued adoption of paid search as a marketing
vehicle
• Keyword price inflation due to increased volume in advertisements
• Volume growth driven by increases in web usage
• CTR improvement driven by improvements in relevancy
Within search, we continue to believe that Google will take volume market share
from competitors as we have greater faith in the company’s ability to execute
relevancy enhancements and technological improvements and in its superior brand.
However, we believe that on a dollar market share basis, Yahoo! will grow its share
over Google due to the improved monetization from the global rollout of Project
Panama.
Yahoo! will grow its share over We estimate that Google has a 73% dollar market share currently (including revenues
Google due to the improved from AOL, Ask, and other affiliates). We believe that this may decline to 71% by
monetization from the global
rollout of Project Panama.
the end of 2008 as AOL and Ask have renegotiated their TAC rates and Yahoo! has
improved its monetization. While Internet and broadband usage appears to be
flattening out in developed countries, we believe that advertiser adoption of this well-
targeted marketing vehicle is in its infancy and that there is still much room for
monetization and click-through rate improvements.
Lessons Learned from 2007
In our “Nothing but Net" preview and outlook for 2007, we stated that we preferred
paid search to other Internet sub-sectors such as e-commerce, travel, and graphical
advertising. Looking back on the year, paid search actually exceeded our
expectations. Entering 2007, we expected the paid search market to grow 39% over
2006 (29% in the US and 52% internationally). However, due to better monetization
by Google, Yahoo!, and MSN, as well as volume gains, we now expect global paid
search revenues to grow 48% in 2007 (37% in the US and 64% internationally). We
were surprised by how robust search volume growth was during F'07. At the
beginning of the year we thought that much of F’07’s US search market growth
would come from increases in coverage and were modeling a 190 bp improvement in
coverage vs. 18% Y/Y growth in search volume. We now think that F’07 US
coverage will only improve 70 bps vs 25% growth in volume. We are encouraged by
this trend as it demonstrates that the market is less mature than we thought and that
search companies have not had to resort to increasing the number of ads on a page.
Global Search Overview: Global Search Expected to Grow
39% in F’08
We believe 2008 will be another strong year for global paid search. On the back of
48.3% growth in 2007, we forecast that global paid search revenues will grow 38.7%
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18. Imran Khan North America Equity Research
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imran.t.khan@jpmorgan.com
in 2008. From a metrics standpoint, we believe query volumes will grow 29.9% in
F’08, while RPS will grow 6.8%. We believe substantial monetization opportunities
exist and we anticipate a climb in search usage. In 2008, we expect local search,
personalized search and vertical search to be hot topics. Beyond 2008, we expect the
global paid search market to grow at a 28.4% CAGR through 2011.
Table 9: JPMorgan's Global Search Advertising Revenue Forecast
Units as indicated
Global 2002 2003 2004 2005 2006E 2007E 2008E 2009E 2010E 2011E 07-'11
CAGR
Internet Population (M) 593 710 820 924 1,020 1,113 1,205 1,295 1,380 1,471 7.2%
Queries / Month / User 12 17 22 29 36 44 53 61 68 74 14.2%
Number of Queries (M) 83,030 142,017 220,128 323,827 441,796 585,395 760,474 943,475 1,123,558 1,313,311 22.4%
RPS (per 1,000 searches) $14.57 $19.04 $23.42 $28.17 $33.58 $37.58 $40.12 $41.98 $44.75 $45.59 4.9%
% Coverage 31.7% 35.3% 38.7% 41.7% 43.9% 44.5% 44.5% 45.2% 45.6% 47.1% 1.4%
% Clickthrough Rate 15.1% 16.3% 17.3% 18.8% 20.6% 21.5% 22.2% 22.7% 23.5% 23.3% 2.0%
$ Revenue / Click $0.30 $0.33 $0.35 $0.36 $0.37 $0.39 $0.41 $0.41 $0.42 $0.42 1.4%
Global Search Forecast ($M) 1,210 2,704 5,156 9,121 14,835 21,999 30,511 39,606 50,275 59,868 28.4%
Y/Y Growth 197.0% 123.4% 90.7% 76.9% 62.6% 48.3% 38.7% 29.8% 26.9% 19.1%
Source: JPMorgan estimates, Company reports, comScore, Nielsen//NetRatings, IDC, IWS
Increasing F’08 US Search Growth Estimate: Now We
Expect to Grow 32%
Based on out-performance in 2007, we are increasing our 2008 growth estimate for
the domestic paid search market. We are now modeling 31.9% growth in 2008, up
from our prior estimate of 19.9%. Broken down by metrics, we are modeling US
query volume growth of 23.5% in 2008 (a very minor deceleration from the 25.4%
we observed in 2007), driven by an increase in the number of searches conducted per
user and a slight increase (3.0%) in the domestic Internet population.
We expect the domestic RPS to On the monetization front, we expect the domestic RPS to reach $87.21 in 2008, up
reach $87.21 in 2008, up from from $81.65 in 2007 (6.8% Y/Y growth). We expect increases in RPS to be driven
$81.65 in 2007 (6.8% Y/Y growth)
by advertiser demand for keywords as well as continued increases in sponsored-link
relevancy.
Table 10: JPMorgan's US Search Advertising Revenue Forecast
Units as indicated
United States 2006 2007E 2008E 2009E 2010E 2011E 07-'11
CAGR
Internet Population (M) 203 211 217 222 227 231 2.4%
Queries / Month / User 47 57 68 81 92 102 15.6%
Number of Queries (M) 114,896 144,080 177,938 215,305 249,754 282,222 18.3%
RPS (per 1,000 searches) $74.86 $81.65 $87.21 $88.73 $94.62 $94.91 3.8%
% Coverage 62.8% 63.5% 64.2% 64.3% 64.3% 64.5% 0.4%
% Clickthrough Rate 26.2% 27.3% 28.3% 28.6% 30.0% 30.0% 2.4%
$ Revenue / Click $0.46 $0.47 $0.48 $0.48 $0.49 $0.49 1.0%
US Search Forecast ($M) 8,602 11,764 15,518 19,104 23,631 26,786 22.8%
Y/Y Growth 47.2% 36.8% 31.9% 23.1% 23.7% 13.4%
Source: JPMorgan estimates, Company reports, comScore, Nielsen//NetRatings, IDC, IWS
Our Proprietary Research Shows...
Market Share Shifts Are Likely to Continue
In November, the JPMorgan Internet Team surveyed over 1,200 US residents to
determine Internet usage behavior. Our market research found that Google is the
dominant search engine with 54.6% of participants listing it as their most frequently
used search engine. Yahoo! ranked second among participants with 21.8% of
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19. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
participants using it most frequently. MSN and AOL trailed with 8.6% and 7.2% of
participants using them most frequently, respectively.
Figure 5: Most Frequently Used Search Engine
% of participants
Don't use/Don't
Other know AOL
3% 2% 7% Ask
Yahoo! 3%
22%
MSN
9%
Google
54%
Source: JPMorgan research
However, we note that while Google was the overwhelming favorite among
participants, 38.5% of respondents use search engines other than their favorite at
least 30% of the time. Thus, it appears that respondents are willing to try different
search engines for better results.
44% of participants older than 42 Surprisingly, older participants were more likely to try different brand search engines
used a search engine other than than younger participants. 44% of participants older than 42 used a search engine
their favorite more than 30% of
the time vs. only 32% of
other than their favorite more than 30% of the time vs. only 32% of participants in
participants in the 18-41 age the 18-41 age category. This difference was statistically significant (t=-4.37, p<.05).
category.
62% of Respondents Would Be Willing to Consider Switching Search Engines
When asked what improvements by other search engines would cause you to switch
from your preferred brand, only 38% of respondents stated that nothing would cause
them to switch as they were satisfied with their current search engine. The most
frequently selected improvement was results that better matched the search term,
with 43% of respondents stating that this would cause them to switch search engines.
Other factors that would cause respondents to consider switching search engines
were the user-friendliness of the site (28% of participants) and search engine speed
(28% of participants).
Table 11: Factors that Would Cause Search Engine Switching
% of Respondents
Results that better match search term 42.9%
Results that include video, music, and other forms of information 14.2%
A more uncluttered easy to navigate site 27.8%
Ability to preview web content 22.5%
Faster response speed to searches 27.5%
Other 1.7%
Nothing, happy with current search engine 37.6%
Source: JPMorgan research
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20. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
What would make participants try a different search engine? Friend and family
recommendations held the most weight, with 33.8% of respondents stating this as a
driver to try a new search engine. 21.7% of respondents stated that the
recommendation of a tech expert would influence them to try a new engine. Trailing
in the rankings of persuasiveness were TV ads (11.3% of respondents), billboards
(4.1% of respondents), newspapers and magazines (7.7% of respondents), and radio
(3.5% of respondents).
Over Half of Respondents Use Their Toolbar for Less than 40% of Searches
Approximately 75% of respondents to our survey use a search toolbar. Google was
the predominant choice of toolbars, with 40.7% of respondents having downloaded
it. Yahoo! came in second with 24.1% of respondents having downloaded it. MSN,
Ask, and AOL all had under 10% usage by respondents. Surprisingly, while almost
three-fourths of our respondents had toolbars, their usage of them was infrequent.
42.4% of respondents who had toolbars used them less than 20% of the time.
Figure 6: Toolbar Usage Frequency
% of respondents
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Less than 20% 21-40% 41-60% 61-80% 81-100%
Source: JPMorgan research
International Market to Top the US by F’09
We continue to believe the opportunities for paid search in the international
marketplace are even more significant than in the US. In our estimate, while the
U.K. is at par or ahead of the US market, the overall international paid search market
is still 2+ years behind the US in terms of development.
We expect the international However, we now believe that the international market will be larger than the
market to reach $20.5B in F’09 domestic market in F’09 with a market size of $20.5B vs. the US estimated market
vs. the US market size of $19.1B.
size of $19.1B. As such, we believe that the international markets will be a key
growth driver in the upcoming year. We believe a key driver in the international
markets will be query growth. While we expect the US to experience query growth
of 23.5% Y/Y, we believe international markets will see a 32% Y/Y lift in the
number of queries.
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21. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
Figure 7: US vs. International Query Volume
millions
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
3Q06 4Q06 1Q07 2Q07 3Q07
U.S. International
Source: comScore data and JPMorgan estimates
We are modeling paid search revenues to grow 46.5% in F’08, up from our prior
estimate of 34.9% driven primarily by higher growth in queries and, to a lesser
extent, monetization gains. Broken down by metrics, we are modeling international
query volume growth of 32.0% in 2008 (a very minor deceleration from the 35.0%
we observed in 2007), driven by an increase in the number of searches conducted per
user and an increase (9.5%) in the domestic Internet population. On the monetization
front, we expect the international RPS to reach $25.74 in 2008, up from $23.19 in
2007 (11.0% Y/Y growth). We expect increases in RPS to be sustainable as the
international market RPS is significantly below US levels ($81.65 in F’07). Gains
will likely be driven by advertiser demand for keywords as well as continued
increases in sponsored-link relevancy.
Table 12: JPMorgan's International Search Advertising Revenue Forecast
Units as indicated
International 2006E 2007E 2008E 2009E 2010E 2011E 07-'11
CAGR
Internet Population (M) 817 903 988 1,072 1,153 1,239 8.2%
Queries / Month / User 33 41 49 57 63 69 14.2%
Number of Queries (M) 326,900 441,315 582,536 728,170 873,804 1,031,0 23.6%
89
RPS (per 1,000 searches) $19.07 $23.19 $25.74 $28.16 $30.49 $32.08 8.5%
% Coverage 37.2% 38.3% 38.5% 39.5% 40.2% 42.3% 2.5%
% Clickthrough Rate 17.2% 18.4% 19.1% 19.8% 20.5% 20.5% 2.8%
$ Revenue / Click 0.30 0.33 0.35 0.36 0.37 0.37 2.9%
Int'l Search Forecast ($M) 6,233 10,235 14,993 20,502 26,644 33,082 34.1%
Y/Y Growth 90.1% 64.2% 46.5% 36.7% 30.0% 24.2%
Source: JPMorgan estimates, Company reports, comScore, Nielsen//NetRatings, IDC, IWS
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22. Imran Khan North America Equity Research
(1-212) 622-6693 02 January 2008
imran.t.khan@jpmorgan.com
2008 Graphical Advertising Outlook
After a difficult 2007 where CPMs were pressured from a non-premium inventory
glut, we believe that 2008 will see stronger graphical advertising growth.
Specifically, we think that 2008 growth will be driven by:
• Easier comps as growth will be computed off of this year’s depressed CPMs
• Improving CPMs as companies employ targeting techniques and use ad
exchanges
• Improving RPMs due to higher sell-through and increased ads per page
• Increased advertiser interest due to the increased TV ad demand due to political
campaigns
• Increased page views from rising broadband usage and social networking
As a result, we are slightly increasing our F’08 graphical advertising global growth
estimate to 22.1% from 20.6% to reflect better monetization (CPMs) through the use
of targeting and exchanges and expected growth from social networking sites and
blogs. We favor web publishers who are organically growing their page views at a
rapid pace and who have targeting capabilities.
Lessons Learned from 2007
In our “Nothing but Net” preview and outlook for 2007, we expressed our view that
the US graphical advertising market was poised to grow 20% in 2007. Now that the
year is almost complete, we have revised our F’07 US growth estimate to 23.4%.
We believe that we correctly recognized the audience fragmentation trend due to the
rise of social networking and blog usage. We also forecasted the resulting depressed
CPMs from the glut of non-premium inventory. However, we did overestimate the
impact of video advertising. We thought that the increase in video inventory,
coupled with lower CPMs, would cause many graphical advertisers to shift their
advertising budgets toward video and away from more traditional graphical
advertising. We now recognize that reaching revenue sharing agreements and
developing unobtrusive video ads accepted by viewers will be a longer process than
we first thought.
Global Graphical Advertising Overview: Expect to Grow
22.1% in F’08
We believe that 2008 will be a strong year for graphical advertising publishers,
particularly those with targeting capabilities. On the back of expected 23.4% growth
in 2007, we believe global graphical advertising revenues will grow 22.1% in F’08.
From a metrics standpoint, we believe page views and RPMs will grow 11.1% and
9.9% in 2008, respectively. We expect the global Internet population to expand
8.3% to 1.2B in 2008 and web usage to expand by 2.7% per Internet user. We
believe RPM growth will be driven by (1) improving CPMs as companies employ
targeting techniques and use ad exchanges, (2) increased sell-through rates, and (3)
increased ads per page. We expect the global graphical advertising market to grow at
a 17.6% CAGR from 2007 through 2011.
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