2011 Internet Sector Outlook by J. P. Morgan

North America Equity ResearchJanuary 2011

Nothing But Net2011 Internet Sector Outlook

Internet, Media & EntertainmentImran KhanAC

Senior Analyst(212) 622 6693(212) [email protected]. Morgan Securities LLC

See the end pages of this presentation for analyst certification and important disclosures.J P M d d k t d b i ith i d i it h t A lt i t h ld b th t th fiJ.P. Morgan 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.

This document is being provided for the exclusive use of SARA SONG at CCB INTERNATIONAL(SHENZHEN) LIMITE

渐飞研究报告 - http://bg.panlv.net

New Forces Threaten to Disrupt the Order of Traditional IndustriesNew Forces Threaten to Disrupt the Order of Traditional Industries

Over the Top Social N t kp Networks

Retail Travel Publishing

TV Movies News Media

MobileGlobalization

The Bottom Line:

MobileGlobalization

1

Companies that don’t embrace these trends could find themselves in danger by the end of the decade.Source: J.P. Morgan.



A New World: What a Difference 10 Years Make!!A New World: What a Difference 10 Years Make!!2000 2010

1,320Dec 29 2000

1,258Dec 30 2010S&P 500 Index Dec 29, 2000 Dec 30 2010

97M 293M

$0 1B $46 8B

Wireless Subscribers

D t Pl (i R ) $0.1B $46.8B

124M 240M

$28B $166B

Internet Users

• Data Plans (in Revenue)

$28B $166B

~$2B ~$18B

$0 02B $21 90B

US eCommerce

• Amazon

$0.02B(2 yrs old)

$21.90B(F’10 net rev)

Didn’t Exist 500M+ Users

Google (Search)

Facebook (Social)

Founders working for PayPal Monetizing 100B views/yr

No Streaming Option ~12M users streaming

YouTube

N tFli

2

NetFlix

Source: J.P. Morgan.



What willWhat will 2015 or

2020 look like?

3Source: Viacom.



Dot Khan’s Top Ten Things to WatchDot.Khan s Top Ten Things to Watch

Continued adoption of social media and its impact on existing businesses such as advertising, entertainment and eCommerce.

Increased smartphone penetration will further proliferate mobile web usage and app development and could disrupt the way we shop, consume content and communicate.

Consumers embracing “over the top” video consumption. We think content owners, distributors and advertisers must embrace the new order and either partner with Netflix or other services or launch theiradvertisers must embrace the new order and either partner with Netflix or other services or launch their own.

Monetization of mobile search is a critical factor for Google’s growth.

US b i k & t t il ’ k t h l ld l t Additi ll t t i l k t US brick & mortar retailers’ market share losses could accelerate. Additionally, we expect material market share shifts in countries such as China, where B&M brands are relatively weaker.

The online hotel business retains significant runway for international growth, and we expect an above-industry-average growth rate in the segment.y g g g

We expect more consolidation/M&A rather than share buybacks.

Despite its underperformance of the search market growth rate for most of the last ten years, we think display should match search revenue growth in 2011display should match search revenue growth in 2011.

We believe rapid internet and smartphone penetration growth will create many more exciting businesses outside the US – but we expect US companies to face major challenges in markets outside Western Europe.

4

We expect a major effort by internet companies all over the world to woo local advertisers.






Consumers embracing “over the top” video consumption. We think content owners and advertisers must embrace the new order and either partner with Netflix or other services or launch their ownembrace the new order and either partner with Netflix or other services or launch their own.


US brick & mortar retailers’ market share losses could accelerate. Additionally, we expect material market h hift i t i h Chi h B&M b d l ti l kshare shifts in countries such as China, where B&M brands are relatively weaker.

The online hotel business retains significant runway for international growth, and we expect an above-industry-average growth rate in the segment.


Despite its underperformance of the search market growth rate for most of the last ten years, we think display should match search revenue growth in 2011.


We expect a major effort by internet companies all over the world to woo local advertisers

5




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

We See Social Sites as Network Platforms like Visa/MasterCard

Don’t Need to Monetize Directly from Customers Can Enable Applications, Then Collect a Small Fee as Network Provider

Casual Games Virtual Gifts eCommerceSocial Networks as a Platform

GoogleContent sites h NY Ti

Comparison shopping h h i

eCommerce sites such as Zappos.com Analytics

GoogleContent sites h NY Ti

Comparison shopping h h i

eCommerce sites such as Zappos.com Analytics

WindowsIntuit MS Office

such as NY Times such as shopping.com

WindowsIntuit MS Office

such as NY Times such as shopping.com

PaymentNetworks (e.g. Visa/MasterCard)

ChaseMasterCard

US BankVisa

Adobe Photoshop

Ch W ll F

PaymentNetworks (e.g. Visa/MasterCard)

ChaseMasterCard

US BankVisa

Adobe Photoshop

Ch W ll F

Social Net orking SitesBusiness/Nonprofit

apps such as Causes

ChaseVisa Debit Card

Wells FargoMasterCard

Social Games such as FarmvilleSocial Net orking Sites

Business/Nonprofitapps such as Causes

ChaseVisa Debit Card

Wells FargoMasterCard

Social Games such as Farmville

6

Social Networking SitesUtility apps such as Birthday Cards

& Horoscopes

pp

Communication tools such as WindowsLive Messenger

Social Networking SitesUtility apps such as Birthday Cards

& Horoscopes

pp

Communication tools such as WindowsLive MessengerSource: J.P. Morgan.



Social Networking: Facebook Leading the RaceSocial Networking: Facebook Leading the Race

Facebook Reach Now Comparable to Yahoo!, Google

Facebook’s user reach is now north of 70% of all US internet users Facebook s user reach is now north of 70% of all US internet users

In 2H’10, users are for the first time spending more minutes on Facebook than on Yahoo! sites

Facebook’s Expanding User Reach FB Minutes Surpass Yahoo!’s

Users as % of US Internet

79% 79%48%

84% 81% 70%40%

60%

80%

100% % of All US Internet Minutes

12%9% 10%

4%6%8%

10%12%14%

S S J P M i

48%

0%

20%

Yahoo Google Facebook

Aug-Oct '09 Aug-Oct '10

S S J P M i

4% 5%4%0%2%4%

Yahoo Google Facebook

Aug-Oct '09 Aug-Oct '10

35%40%

The Tollbooth at the Center of the Internet

Source: comScore, J.P. Morgan estimates. Source: comScore, J.P. Morgan estimates.

More than Half of Facebook Users Visit Site Daily

8%13% 13%

29%

38%

0%5%

10%15%20%25%30% Social Networking Sites (Primarily

Facebook) Are Becoming the Next-Generation Web Platform

Payments Games eCommerce all

7

At least once aday

Almost ev ery day 1-2x a w eek 1-2x a month Nev er Payments, Games, eCommerce all potentially game-changing opportunities

Source: J.P. Morgan consumer survey.



Social Networking: Becoming an Important Traffic SourceSocial Networking: Becoming an Important Traffic Source

A Potential Threat to Google’s Dominance?

Google currently generates ~36% of all online ad revenue by being at the center of the Google currently generates 36% of all online ad revenue by being at the center of the ecosystem

Thus far, Google largely retaining its share, but Facebook gaining rapidly

The ability to drive traffic is highly connected to the ability to drive revenue The ability to drive traffic is highly connected to the ability to drive revenue

We think Facebook Connect is helping drive this trend (see next slide)

Traffic to nytimes.com

25% 25%

Traffic to Amazon Sites

15%

Traffic to eBay Sites

20.8% 20.4%

4.8%2.9%

0%5%

10%15%20%

20.0% 19.6%

7.7%1.8%

0%5%

10%15%20%25%

11.8% 11.4%

4.7%2.6%5%

10%

15%

Source: comScore.

%

Google, -2% Y/Y Facebook, +66%

Oct-09 Oct-10

0%

Google, -2% Y/Y Facebook, +328%

Oct-09 Oct-10

0%

Google, -3% Facebook, +81%

Oct-09 Oct-10

8



Social Networking: Becoming an Important Traffic SourceSocial Networking: Becoming an Important Traffic Source

Facebook Connect: Used by over 250M users / month

Lets users use Facebook login on other sites and link activity back to their profile

The next step in the evolution of discovery:

Traditional Early Web 2000s Web Social Web

Portal site Search site Social site

y

Editor Editor UserUser’s

ConnectionsCurator:

Limited Limited Growing Multiplying

Mismatch of editors’ interests vs. User has to know

where to lookUser has to know what to search for

Lack of intent-based search

Fragmentation:

Limitation:readers’ where to look what to search for based search


9



Understanding Social GamesUnderstanding Social Games

Global digital gaming market was almost $16B in 2009 and is expected to reach $20B in 2010, according to Electronic Arts; we believe social games, which are a subset of digital, are growing significantly faster than the segment as a whole

Digital gaming grew at ~36% CAGR since 2004 and now represents 41% of the worldwide games market, up from 14% six year agoworldwide games market, up from 14% six year ago

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

More Frequent Facebook Visitors Also Play Games More Often

38%

54% play games

Almost ev ery day

Use FB: At least 1x /day

6%

20%

0% 10% 20% 30% 40% 50% 60%

1-2x a month

1-2x a w eek

Source: J.P. Morgan December 2010 consumer survey.

0% 10% 20% 30% 40% 50% 60%

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

10





Increased smartphone penetration will further proliferate mobile web usage and app development, and could disrupt the way we shop, consume content and communicate.









11




Future of Mobile AdvertisingFuture of Mobile Advertising

Mobile phone scale on par with television = Worldwide Mobile Phone vs. Broadband Penetration

Billions

huge ad opportunity

There is much room for broadband 0

2

4

6

subscription growth

Use of the mobile web is becoming Source: adenyo presentation

0

2005 2006 2007 2008 2009 2010

Mobile Subscriptions Internet Users

Fix ed Broadband Subscriptions Mobile Broadband Subscriptions

Use of the mobile web is becoming mainstream: eMarketer estimates ~7.5% of all media time spent by US adults is happening on mobile

Source: adenyo presentation.

Time spent across platforms is becoming more fragmented – Mobile usage only accelerates this trend

31%35%

Mobile is creating more media fragmentation; posing new challenges / opportunities for advertisers and content

12%16%

31%28%

15%20%25%30%35%

opportunities for advertisers and content publishers

Early leaders in the field: Phone OEMs &

0%5%

10%

Print Radio TV Online

12

Early leaders in the field: Phone OEMs & OSs

Source: Yahoo! 2010 Investor Day presentation.



Still Very Early Stage of Mobile Ad Adoption CycleStill Very Early Stage of Mobile Ad Adoption Cycle

US Mobile Ad Spend Forecast$ in millions$ in millions

$2,549.5(25%)

$2,036.8(36%) $1,501.3

(36%) $1,102.4(48%) $743.1

(79%) $416.0$1 000 0$1,500.0$2,000.0$2,500.0$3,000.0

(79%) (30%)

$-$500.0

$1,000.0

2009 2010 2011 2012 2013 2014

US Mobile Ad SpendSource: emarketer, Sep 2010.

US Mobile Ad Spend

US Mobile Ad Spend Share by Format

2011

2012

2013

2014

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2009

2010

Messaging Display Search Video

13

Source: emarketer, Sep 2010.

Messaging Display Search Video



Mobile Devices – More than Just a PhoneMobile Devices – More than Just a Phone

We estimate that there are approximately 233M mobile phone users in the US, and smartphones

are becoming an increasingly large proportion of the mix

Smart vs. Nonsmart Phone Penetration

Smartphone Users, 18%

Non-smartphone Users, 82%

Source: Nielsen 2010 Media Industry Fact Sheet.

Smartphone users are 3x more likely to browse the mobile web and to use a mobile app and 2x asSmartphone users are 3x more likely to browse the mobile web and to use a mobile app and 2x as

likely to send photos or videos (comScore)

14



Mobile Devices Present Some Challenges in Addition to OpportunitiesMobile Devices Present Some Challenges in Addition to Opportunities

Opportunity Challenge

Search more searches less coverage

more targeted less transactional (eCommerce)

more product/place oriented application demand

News Sites reinstates the importance of a strong brand less space to put adsp g p p

people download branded apps companies with lower brand recognition less likely to sell apps

Games more time spent multiple platform/device compatibility issues

less barriers to entry smaller screen/fewer buttonsless barriers to entry smaller screen/fewer buttons

hard to differentiate in crowded app market

Aggregators slow loading speed will make aggregators more attractive to consumers

less coverage

reach larger audience with more available apps allow consumers to create own personalreach larger audience with more available time

apps allow consumers to create own personal aggregation

Video high demand for video content while traveling

smaller screen

still run into internet issue of how to monetizestill run into internet issue of how to monetize

Coupons larger audience than print may be harder to track source for in-store use

can access for immediate demand

Source: J P Morgan

15




eReaders: A Different Kind of Mobile DeviceeReaders: A Different Kind of Mobile Device

Device proliferation is driving ubiquityAlthough a Majority Don’t Read Much,

16% R d 26 B k YPrices falling as devices get better

A niche market can still be a big market

~16% Read 26+ Books per Year

49%

%

40%

50%

60%

We think the money’s in content

Content means more than just books

eBook success could threaten traditional

20%

9% 7% 6%10%

0%

10%

20%

30%

0-10 books/y r 11-15 16-20 21-25 26-30 31+

retail

eBooks Penetration of Trade Print Is Growing Exponentially

9%10%

Source: J.P. Morgan Internet Team December 2010 Survey.

3%

9%

4%

6%

8%

10%

0.5% 0.6% 1%

0%

2%

2006 2007 2008 2009 2010

16Source: Association of American Publishers; J.P. Morgan estimates. Note: 2010 estimate based on Jan-Oct data.

eBooks as % of Trade Print



eReaders: Marketing and Price Drive PenetrationeReaders: Marketing and Price Drive Penetration

Amazon has marketed 100%Kindle aggressively, and its brand awareness is up to 76% 76%

45%84%

20%40%60%80%

100%

0%

Kindle Nook iPad

Brand Aw areness (Know the name & w hat it is)

Source: J.P. Morgan Internet Team December 2010 surveys.

28%15%20%25%30% Compared to our mid-2009

survey, significantly more users said they either

7%

28%

0%5%

10%

Jul 2009 Dec 2010

% say ing they either ow n a Kindle or plan to buy one in the nex t 12 months

owned a Kindle or planned to buy one in the next 12 months

% say ing they either ow n a Kindle or plan to buy one in the nex t 12 months

Source: J.P. Morgan Internet Team July 2009 and December 2010 surveys.

17



Is the iPad a Kindle Killer? NoIs the iPad a Kindle Killer? No.

When the iPad came out, many investors feared it would be the end of the Kindle

These fears appear to have been misplaced: Kindle has sold well in recent quarters

We think the price difference is one key factor: $139 for the lowest-priced Kindle vs. $499 for the lowest-priced iPad

Our survey suggests people are happy with both: ~40% of iPad owners also reported owning a Kindle

Another 23% of iPad owners plan to buy a Kindle in the next 12 months

Not mutually exclusive: Many of the iPad owners in our survey also reported owning Kindle

23%

23%

40%

No plan to buy Kindle

Plan to buy Kindle nex t 12 months

Also ow n Kindle

14%

23%

0% 20% 40%

Don't know / Not sure w hat Kindle is

No plan to buy Kindle

Percentage among iPad Ow ners in our Surv ey

18

Source: J.P. Morgan Internet Team December 2010 survey conducted by a third-party vendor; 1,002 total survey respondents.














19




Over the Top Video – A Consumer-Driven TsunamiOver the Top Video – A Consumer-Driven Tsunami

Approximately 12M Netflix subscribers are taking advantage of streaming services

With millions of devices out there (and another 46M tablets projected by JPM’s computer and hardwareWith millions of devices out there (and another 46M tablets projected by JPM s computer and hardware analyst to be sold in 2011), we think consumers’ appetite to view content in a broader range of ways is growing rapidly

We think members of the younger generation are more willing and more open to consuming content from alternative sources and on alternative devices

Our survey suggests as many as a quarter of pay TV subscribers would consider cutting the cord, and most of them would do so even at the loss of live sports. Those who are already using Netflix Watch Instantly (streaming) are even more open to cutting the pay TV cordInstantly (streaming) are even more open to cutting the pay TV cord

The success of Netflix is attracting additional entrants into the space

20



“Over the Top” Survey ResultsOver the Top Survey Results

More than 25% would consider Over the Top – Including 16% of those who are currently satisfied with pay TV lineup & pricing

Would you consider switching from Cable to Broadband Video?

75%

Among users who subscribe to a cable/satellite TV package

Source: J.P. Morgan consumer survey.28%

72%

25%

50%

28%

0%

Yes No

63% of these would consider it even if it meant losing access to live sporting events


21



“Over the Top” Survey ResultsOver the Top Survey Results

Netflix Watch Instantly subscribers are more likely to consider dropping their cable packages

Those who use Watch Instantly are more likely to consider switching away from Cable

50%

75%


33% 42% 47%67% 58% 53%

0%

25%

0%

Not a NFLX subscriber Nev er used streaming/tried once Stream at least 1-2x /month

Would consider dropping pay TV / don't hav e pay TV Would not consider


Netflix subscribers are more likely to also be premium pay TV subscribers

(And premium pay TV subscribers are more likely to be Netflix subscribers)

g y

22



Online Video Advertising Market to Grow in 2011, Mainly Due to Shift of Quality Video Content OnlineMainly Due to Shift of Quality Video Content Online

Viewing online videos has become the norm

Online Video Viewer Trends

40 000 000 185 000

thousands

10 000 000

20,000,000

30,000,000

40,000,000

165,000170,000175,000180,000185,000

S S d

0

10,000,000

Oct-2009

Nov -2009

Dec-2009

Jan-2010

Feb-2010

Mar-2010

Apr-2010

May -2010

Jun-2010

Jul-2010

Aug-2010

Sep-2010

Oct-2010

155,000160,000

T t l U i Vi (000) Vid (000)

Content quality is improving

Source: comScore data Total Unique View ers (000) Videos (000)

Source: comScore data.

Content quality is improving

Ad formats are diverse; performance measures are limited but improving

Brand advertisers are increasingly adopting the model

23














24




Google’s Challenge: Monetizing Mobile SearchGoogle s Challenge: Monetizing Mobile Search

Although Google has seen its desktop strength extend to the mobile device, the

15%Searches coming from Mobile

Dev ices

question is: Can Google narrow this gap?

3%Rev enue Coming from Mobile

Dev ices

Dev ices

0% 2% 4% 6% 8% 10% 12% 14% 16%

Source: J.P. Morgan estimates.g

Note: 3% gross revenue includes AdMob and mobile display revenue.

25














26




eCommerce: Economic Rebound + Secular Market Shift = Robust GrowthRobust Growth

Retail moving online less quickly than eCommerce penetration lags online advertisingadvertising

Amazon continues to gain market share; size is an entry barrier 4.8% 5.1% 5.4% 6.0% 6.4%

8.2%10.5%

3.6% 3.9%

13.7%

5%

10%

15%

Mobile eCommerce could further hurt brick-and-mortar retailers

Inventory management

Mobile commerce

1.4% 1.8% 2.1% 2.5% 3.4%2.9%

0%

5%

2002 2003 2004 2005 2006 2007 2008 2009

eCommerce as % of all US retail Online as % of all US Adv ertising

Mobile commerce

Brick-and-mortar bankruptcies

Catalysts for international growth

I f hi i i f

Source: US Census Bureau, Magna Global, J.P. Morgan estimates.

Improvement of shipping infrastructure

Improved payment systems

Better fraud protection

Internet sales tax; in our view, probably the headline risk

As eCommerce matures, private labels could help margins

27

help margins



eCommerce Forecast (excluding Travel); US and Global Revenue to grow by 13 2% and 18 9% respectively in 2011Revenue to grow by 13.2% and 18.9%, respectively, in 2011

J.P. Morgan's US eCommerce Revenue Forecast: $235B in 2013 Units as indicated

US eCommerce Forecast 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E '10 - '13 CAGRInternet population (M) 186 195 203 211 217 222 227 231 235 239 1.8%Online Shoppers 104 117 130 143 153 160 170 176 184 189 3.6%Shopping sessions / shopper / month 1.90 1.75 1.88 1.91 1.87 1.99 2.13 2.25 2.38 2.45 4.8%Total shopping sessions / year (M) 2,069 2,464 2,925 3,281 3,427 3,821 4,342 4,745 5,243 5,560 8.6%Average price / session 39.50$ 41.25$ 43.00$ 45.50$ 45.00$ 41.00$ 41.50$ 43.00$ 44.00$ 46.00$ 3.5%

Source: Department of Commerce, Internet World Stats, company reports, J.P. Morgan estimates.

Total eCommerce revenue (US $M)) 81,731 101,621 125,764 149,287 154,228 156,657 180,207 204,014 230,710 255,749 12.4%Product return rate 10.0% 9.0% 9.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 0.0%Net Revenue 73,558 92,475 114,445 137,344 141,890 144,124 165,791 187,693 212,253 235,289 12.4%

Y/Y Growth 25.7% 23.8% 20.0% 3.3% 1.6% 15.0% 13.2% 13.1% 10.9%

J.P. Morgan's Global eCommerce Revenue Forecast: $963B in 2013

We expect the US eCommerce market to grow at a 12.4% CAGR from 2010 to 2013

$ in MillionsGlobal eCommerce Forecast 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E 2013E '10 - '13 CAGRUS 73,558 92,475 114,445 137,344 141,890 144,124 165,791 187,693 212,253 235,289 12.4%Europe 52,430 72,690 98,193 134,387 175,305 188,446 195,174 210,876 246,651 283,014 13.2%Asia 24,274 32,450 41,911 54,569 76,783 107,078 155,718 208,953 266,560 323,065 27.5%ROW 9,440 13,216 18,502 25,903 34,970 41,963 55,811 73,113 95,047 121,660 29.7%Total 159,702 210,831 273,052 352,204 428,948 481,612 572,494 680,635 820,511 963,028 19.4%

We expect the Global eCommerce market to grow at a 19.4% CAGR from 2010 to 2013

Source: Department of Commerce, Internet WorldStats, UK eStats, Forrester Research, IDC, Iresearch, Korea National Statistics Office, Japanese Statistics Bureau, eMarketer, PhuCusWright, TIA.org, Jupiter, company reports, J.P. Morgan estimates.

Y/Y Growth 32.0% 29.5% 29.0% 21.8% 12.3% 18.9% 18.9% 20.6% 17.4%

28



“Online Shopping” Survey TakeawaysOnline Shopping Survey Takeaways

Online Shopping Gaining Penetration

30%

40%Question: How many times do you purchase items online per month?

20%

34%28%

13% 2% 1%3% 2%12%

36% 32%

15%

0%

10%

20%

Don't Shop Buy less than 1-2x /month 3-6x /month 7-9x /month 10x +/month

Source: J.P. Morgan Internet User surveys, 2007 and 2010.

Don t Shoponline

Buy less thanonce/month

1-2x /month 3-6x /month 7-9x /month 10x +/month2007 2010

Higher-income Users Shop Online More Frequently

Question: How many times do you purchase items online, per month?

19%

41%

27%

10%9%

35% 36%

16%

27%34%

23%

20%30%40%50%

10%3% 1%

9%2% 2%6% 6% 5%

0%10%20%

Don't Shoponline

Buy less thanonce/month

1-2x /month 3-6x /month 7-9x /month 10x +/month

29Source: J.P. Morgan Internet User survey, 2010.

$0-$49K $50K-$99K $100K+














30




US Online Travel Spend to Grow by 10 5% in 2011EUS Online Travel Spend to Grow by 10.5% in 2011E

US Market Share 1H08 and 1H10Corporate travel becomes a bit of a US Market Share, 1H08 and 1H10headwind

OTAs gain market share from suppliers

Hotels will likely be the most promising Ex pedia,43%

Trav elocity , 22%

Ex pedia,

Trav elocity , 19%

y p ggrowth opportunity

Priceline dominates domestic market share gains

43%Priceline,

9%

Orbitz, 26%

44%Priceline, 11%

Orbitz, 26%

Source: PhoCusWright US Online Travel Overview, Tenth Edition.

26% 26%

US Travel Market Forecast$ in Millions

2005 2006 2007 2008 2009 2010E 2011E 2012E Total Travel Spend 233,000.0 256,000.0 269,000.0 274,000.0 233,000.0 256,300.0 269,115.0 282,570.8 % online 28.3% 31.3% 32.7% 34.7% 38.6% 38.0% 40.0% 42.0%

Source: J.P. Morgan estimates, PhoCusWright, eMarketer, TIA.org, Jupiter and IPK International.

Online Leisure/Unmanaged Biz Travel Spend 66,000.0 80,000.0 88,000.0 95,000.0 90,000.0 97,394.0 107,646.0 118,679.7 Total Travel Spend Growth 9.9% 5.1% 1.9% -15.0% 10.0% 5.0% 5.0% Online Travel Spend Growth 21.2% 10.0% 8.0% -5.3% 8.2% 10.5% 10.3%

31



European Online Travel Spend to Grow by 10 4% in 2011EEuropean Online Travel Spend to Grow by 10.4% in 2011E

International markets benefit from online penetration

European Travel Market Share by Channel European Online Leisure/Unmanaged Business Gross Bookings 2009

Priceline passes Expedia in European market share

Gross Bookings 2009Euros in Billions

175.5 148.9 146.7150200250300

Euros in Billions

45.9 42.3 39.6

20.516 718.6

30

40

50

65.3 66.4 73.40

50100

2008 2009 2010

Online Leisure/Unmanaged Business Offline/Business

16.711.813.4 12.1

4.4 3.1 5.2

0

10

20

Germany UK France Spain Italy Scandinav ia

Total Market Online Leisure/Unmanaged Business

Source: PhoCusWright European Online Travel Overview, Sixth Edition. Source: PhoCusWright European Online Travel Overview, Sixth Edition

Europe Travel Market ForecastEuros in Millions

2006 2007 2008 2009 2010E 2011E 2012E Total Travel Spend 228,800.0 240,800.0 240,800.0 215,300.0 220,682.5 231,716.6 243,302.5 % online 21.2% 24.8% 27.1% 30.8% 33.3% 35.0% 36.0% Online Leisure/Unmanaged Biz Travel Spend 48,500.0 59,800.0 65,300.0 66,400.0 73,487.3 81,100.8 87,588.9 Total Travel Spend Growth 5.2% 0.0% -10.6% 2.5% 5.0% 5.0% O li T l S d G th 23 3% 9 2% 1 7% 10 7% 10 4% 8 0%

32


Online Travel Spend Growth 23.3% 9.2% 1.7% 10.7% 10.4% 8.0%



Asia-Pacific Online Travel Spend to Grow by 17 7% in 2011EAsia-Pacific Online Travel Spend to Grow by 17.7% in 2011E

APAC Travel Market Forward Growth EstimatesThe APAC travel market is not far APAC Travel Market Forward Growth Estimatesbehind the US in size

APAC significantly trails US and European markets in online travel penetration

US$ in Billions

2008 2009 2010E 2011E China 61.1 58.3 61.5 65.3 Y/Y Growth -4.6% 5.5% 6.2% India 12.9 15.4 17 19.4 Y/Y Growth 19 4% 10 4% 14 1% penetration

Inbound travel demand to China is an opportunity

F t d k t k thi i

Y/Y Growth 19.4% 10.4% 14.1% Japan 65.7 62.7 64.1 66.5 Y/Y Growth -4.6% 2.2% 3.7% Australia/New Zealand 23.7 22.7 24.4 26.6 Y/Y Growth -4.2% 7.5% 9.0% Singapore 5.6 5 5.2 5.5 Y/Y Growth -10.7% 4.0% 5.8%

Source: : PhoCusWright's Asia Pacific Online Travel Overview 3rd EdFragmented markets make this region attractive to OTAs

The hotel segment seems to be most attractive for OTAs

APAC Travel Market Forecast$ in Millions

2006 2007 2008 2009 2010E 2011E 2012E 2006 2007 2008 2009 2010E 2011E 2012E Total Travel Spend 226,666.7 232,727.3 215,100.0 202,200.0 196,134.0 202,018.0 210,098.7 % online 9.0% 11.0% 14.4% 18.0% 21.0% 24.0% 27.0% Online Leisure/Unmanaged Biz Travel Spend 20,400.0 25,600.0 31,000.0 36,000.0 41,188.1 48,484.3 56,726.7 Total Travel Spend Growth 2.7% -7.6% -6.0% -3.0% 3.0% 4.0% Online Travel Spend Growth 25.5% 21.1% 16.1% 14.4% 17.7% 17.0%

33




Hotel Volume Growing Faster than Air at OTAsHotel Volume Growing Faster than Air at OTAs

Priceline Air and Hotel Volume Growth Hotel growth more robust at all three major OTAs over the past year and a

14%

30%

16%3% 4%

44%56% 60% 57% 48% 54%

-3%

major OTAs over the past year and a half, with Priceline especially strong.

Expedia Air and Hotel Volume Growth 2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10

Air (Tickets) Hotel (Nights)Source: Company reports.

Orbitz Air and Hotel Revenue Growth

3% 9%

13%

27%32%

22%10%

26% 27% 23%18%

12% 14%6%

2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10

-24%

-10% -12%

3% 9%

-26%

13%10%

-33%

8%5%2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10

Air (Tickets) Hotel (Nights)Source: Company reports.

-31%

2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10

Air (Rev ) Hotel (Rev )Source: Company reports.

34














35




We Expect Healthy M&A ActivityWe Expect Healthy M&A Activity

As expected, 2010 saw a strong pickup in M&A activity, and we expect trends to remainAs expected, 2010 saw a strong pickup in M&A activity, and we expect trends to remain healthy in 2011 as market conditions continue to improve

Cash generation remains solid:

The companies in our coverage universe, along with Microsoft and Apple, have p g , g pp ,nearly $150B gross cash on the balance sheet

Additionally, we believe the internet companies we cover retain significant room for leverage

Acquisitions driven by:

Technology: buy rather than build

Traffic: buy rather than develop virally

Transactional: buying companies with proven sales/revenue track record Transactional: buying companies with proven sales/revenue track record

In our coverage universe, we believe the most attractive companies on these metrics are MercadoLibre and Netflix

36














37




State of Advertising OverviewState of Advertising Overview

Consumers are seeking ubiquity

Unbundling of content creates opportunity; threatens incumbent modelsUnbundling of content creates opportunity; threatens incumbent models

Ad Spend vs. Time Spent in 2003 and 20095 2 %

4 0 %5 0 %6 0 %

3 1 % 2 8 %2 6 %

3 9 %4 0 %

5 0 %

7 %

2 7 %

1 4 %2 3 %

8 %

2 4 %

3 %

0 %1 0 %2 0 %3 0 %4 0 %

P r in t R a d io T V O n lin e

1 2 %1 6 %

2 6 %

9 %1 3 %

0 %

1 0 %

2 0 %

3 0 %

P r in t R a d io T V O n lin e

Our thesis on newspaper market share declines plays outSource: SRI Knowledge Networks, Universal McCann 6/03, IAB 3/04 and Yahoo! 2010 Analyst Day presentation.

T im e S p e n t A d S p e n d T im e S p e n t A d S p e n d

Newspaper Ad Spend Continues to Decline

44.9 46.7 47.4 46.6 42.234.7

24.8 22.9

1.9% 3.9% 1.5%-1.7%

-9.4% -7.8%-10.0%

0.0%

10.0%

30.0

40.0

50.0

-17.7%

-28.6%

-40.0%

-30.0%

-20.0%

2003 2004 2005 2006 2007 2008 2009 20100.0

10.0

20.0

38Source: NAA.org, J.P. Morgan estimates.

New spaper ad spend % change



State of Advertising OverviewState of Advertising Overview

While content consumption is growing, it is increasingly difficult to reach TV viewers

TV Viewership Alternatives Grow

8:38Analog to digital

transitionNetflix launches online streaming"Can Netflix kill premium cable

TV?" - Journal Enterprise

7:12

7:40

8:09

YouTube launched

DVD format launched

VOD launched

Hulu

"Bye-bye TV? YouTube debuts live streaming" - Fortune

6:14

6:43

Hour

:Min

Launch of HBO Channel

Pay-per-view launched

Blu-Ray Disc launched

First TiVo DVR

HD television launched

VHS launched

launched

"Hulu Is An H-Bomb Ready To Destroy The TV Industry"

- Business Insider

4 48

5:16

5:45

s olaunched

Launch of DTH service

Netflix launched

"TiVo May Be `Disaster' for TV Industry" - Bloomberg

Business Insider

Source: Nielsen Media Research and J.P. Morgan.

4:19

4:48

1949 - 1950 1954 - 1955 1959 - 1960 1964 - 1965 1969 - 1970 1974 - 1975 1979 - 1980 1984 - 1985 1989 - 1990 1994 - 1995 1999 - 2000 2004 - 2005 2009 - 2010

TV Season

39

Thus, Cable and Internet advertising are gaining share



Display Advertising in 2011Display Advertising in 2011

2011 will likely be a year of innovation

Interactive brand sponsorships, which yield better content integration

Folding in purchase data for better targeting of branded ads

Better integration of real time consumer intent data Better integration of real-time consumer intent data

Time-based ads which leverage user engagement

Creative ad formats with real-time updating for better targeting

Challenges

Internet users have faced a large influx of inventory

Performance focus remains a headwind; need more measurement Performance focus remains a headwind; need more measurement

Monetizing non-premium inventory

Current resurgence of interest in premium display advertising to continue in 2011E as brand advertisers shift spend online

40



US Graphical Advertising to Grow at 13% Y/Y in 2011EUS Graphical Advertising to Grow at 13% Y/Y in 2011E

We are modeling RPMs to increase 4% in F’11, driven by flat growth in impressions per ff b 4% i i CPMpage offset by a 4% increase in CPMs

We expect the US graphical ad market to grow at a 10.7% CAGR from 2009 to 2014

J.P. Morgan's US Graphical Advertising Revenue ForecastUnits as indicated

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

Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS and IAB.

p ($ ) , , , , , , , , , %Y/Y Growth 23% 23% 7% 3% 15% 13% 10% 9% 7%

41



International Growth More of a Driver in 2011EInternational Growth More of a Driver in 2011E

J.P. Morgan’s International Graphical Advertising Revenue ForecastUnits as indicated

International 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 09-'14 CAGR Internet Population (M) 817 903 988 1,072 1,158 1,251 1,326 1,406 1,476 6.6% Pages Viewed / User / Day 37 38 39 40 41 43 45 46 48 3.8% Total Pages Viewed (B) 10,934 12,378 13,925 15,470 17,172 19,439 21,577 23,735 25,634 10.6% RPM (per 1,000 pages) $0.73 $0.80 $0.82 $0.79 $0.82 $0.83 $0.83 $0.84 $0.85 1.5%


Int'l Graphical Forecast ($M) 7,982 9,902 11,418 12,222 14,081 16,134 17,909 19,937 21,789 12.3% Y/Y Growth 28% 24% 15% 7% 15% 15% 11% 11% 9%

We expect the international graphical ad market to grow at a 12.3% CAGR from 2009 to 2014p g p g

42



We Estimate Global Graphical Advertising Market to Reach $26 4B in 2011 Up 14% Y/Yto Reach $26.4B in 2011, Up 14% Y/Y

J.P. Morgan’s Global Graphical Advertising Revenue ForecastUnits as indicated

Global 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 09-'14 CAGR Internet Population (M) 1,020 1,113 1,205 1,295 1,385 1,482 1,561 1,645 1,719 5.8% Pages Viewed / User / Day 38 39 41 42 43 45 48 49 51 4.0% Total Pages Viewed (B) 14,275 15,986 17,858 19,777 21,909 24,602 27,154 29,702 32,018 10.1% RPM (per 1,000 pages) $0.97 $1.07 $1.07 $1.02 $1.06 $1.07 $1.07 $1.08 $1.09 1.4%


Global Graphical Forecast ($M) 13,829 17,068 19,099 20,103 23,126 26,371 29,146 32,155 34,865 11.6% Y/Y Growth 26% 23% 12% 5% 15% 14% 11% 10% 8%

2009 Global Display Market Share 2010E Global Display Market Share

Google & Yahoo gain 1% each in

Microsoft5%

Y! 8% Microsoft5%

Y! 9%

gain 1% each in 2010E, while

AOL loses out

5%

AOL6%

5%

AOL4%

Other71%

Google10%

Other71%

Google11%

43

Source: Company reports and J.P. Morgan estimates. Source: Company reports and J.P. Morgan estimates.



Search Advertising Market OverviewSearch Advertising Market Overview

Advertisers likely to explore new search avenue

Domestic Explicit Core Search Market Share Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

Google Sites 66.0% 66.4% 66.2% 65.8% 65.4% 66.1% 66.3% Yahoo! Sites 16.9% 16.6% 16.7% 17.1% 17.4% 16.7% 16.5%

Source: ComScore data and J.P. Morgan estimates.

Microsoft Sites 10.8% 10.8% 11.0% 11.0% 11.1% 11.2% 11.5% Ask Network 3.8% 3.8% 3.8% 3.8% 3.8% 3.7% 3.6% AOL LLC 2.5% 2.4% 2.4% 2.3% 2.3% 2.3% 2.1%

International Explicit Core Search Market Share

Alibaba.com , 1.1Tencent, 0.7B 1 7

Conduit.com, 1.1eBay , 1.7

Baidu.com, 7.9

Facebook, 2.3

Ask Netw ork, 1.2

Google Sites 62 6

Yahoo! Sites, 7.6

Microsoft Sites, 3.5

44

Google Sites, 62.6

Source: comScore qSearch data. % of total worldwide searches



US Search Expected to Grow 13% in F’11US Search Expected to Grow 13% in F 11

We expect mobile search usage to be the main driver of query volume growth

We expect higher levels of RPS in 2011 to be driven by stabilization in advertisers’ budgets, which should lead to higher keyword bids

J.P. Morgan’s US Search Advertising Revenue ForecastUnits as indicated

United States 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 09-'14 CAGR

Internet Population (M) 203 211 217 222 227 231 235 239 243 1 8% Internet Population (M) 203 211 217 222 227 231 235 239 243 1.8% Queries / Month / User 47 57 68 78 87 95 104 112 120 8.9% Number of Queries (M) 114,896 144,080 177,938 208,188 236,293 264,648 293,759 323,135 348,986 10.9% RPS (per 1,000 searches) $74.86 $81.65 $81.59 $70.32 $70.14 $70.73 $71.64 $71.64 $72.22 0.5%

% Coverage 62.8% 63.5% 62.0% 61.6% 61.2% 61.2% 61.5% 61.5% 62.0% 0.1% % Clickthrough Rate 26.2% 27.3% 28.0% 25.3% 25.4% 25.4% 25.6% 25.6% 25.6% 0.2% $ Revenue / Click $0.46 $0.47 $0.47 $0.45 $0.45 $0.46 $0.46 $0.46 $0.46 0.2%

Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC and IWS.

US Search Forecast ($M) 8,602 11,764 14,518 14,639 16,573 18,718 21,044 23,148 25,203 11.5% Y/Y Growth 47% 37% 23% 1% 13% 13% 12% 10% 9%

45



International Search Growth AcceleratesInternational Search Growth Accelerates

J.P. Morgan’s International Search Advertising Revenue ForecastUnits as indicated

International 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E 09-'14 CAGR

Internet Population (M) 817 903 988 1,072 1,158 1,251 1,326 1,406 1,476 6.6% Queries / Month / User 33 41 49 57 63 69 77 85 93 10.5% Number of Queries (M) 326,900 441,315 582,536 728,170 873,804 1,039,827 1,226,996 1,435,585 1,650,923 17.8% RPS ( 1 000 h ) $19 07 $23 19 $25 74 $23 27 $23 55 $24 71 $25 98 $26 79 $27 44 3 4%

Source: J P Morgan estimates company reports comScore Nielsen//NetRatings IDC IWS

RPS (per 1,000 searches) $19.07 $23.19 $25.74 $23.27 $23.55 $24.71 $25.98 $26.79 $27.44 3.4% % Coverage 37.2% 38.3% 38.5% 38.5% 39.0% 39.0% 41.0% 41.0% 42.0% 1.8% % Clickthrough Rate 17.2% 18.4% 19.1% 19.5% 19.8% 19.8% 19.5% 19.8% 19.8% 0.3% $ Revenue / Click 0.30 0.33 0.35 0.31 0.31 0.32 0.33 0.33 0.33 1.3%

Int'l Search Forecast ($M) 6,233 10,235 14,993 16,947 20,580 25,695 31,882 38,458 45,306 21.7% Y/Y Growth 90% 64% 46% 13% 21% 25% 24% 21% 18%

Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS.

We are now modeling F’11 paid search revenue growth of 25% Y/Y, to $25.7B

W t th i t ti l h d k t t t 21 7% CAGR f

We expect the international search ad market to grow at a 21.7% CAGR from 2009 to 2014

We think the largest driver will be query growth. While we expect the US to experience query growth of 12% Y/Y in 2011, we believe international markets will see a 19% Y/Y lift in the number of queriessee a 19% Y/Y lift in the number of queries

46



We Estimate the Global Search Advertising Market to Reach $44 4B in 2011 up 20% Y/Yto Reach $44.4B in 2011, up 20% Y/Y

We continue to see personalized search and vertical search as hot topics

J.P. Morgan’s Global Search Advertising Revenue Forecast

Units as indicated

09 '14 Global 2006 2007 2008 2009E 2010E 2011E 2012E 2013E 2014E

09-'14 CAGR

Internet Population (M) 1,020 1,113 1,205 1,295 1,385 1,482 1,561 1,645 1,719 5.8% Queries / Month / User 36 44 53 60 67 73 81 89 97 10.0% Number of Queries (M) 441,796 585,395 760,474 936,358 1,110,097 1,304,475 1,520,755 1,758,721 1,999,909 16.4% RPS (per 1,000 searches) $33 58 $37 58 $38 81 $33 73 $33 47 $34 05 $34 80 $35 03 $35 26 0 9% searches) $33.58 $37.58 $38.81 $33.73 $33.47 $34.05 $34.80 $35.03 $35.26 0.9%

% Coverage 43.9% 44.5% 44.0% 43.6% 43.7% 43.5% 45.0% 44.8% 45.5% 0.8% % Clickthrough Rate 20.6% 21.5% 22.0% 21.3% 21.5% 21.4% 21.1% 21.3% 21.2% -0.1% $ Revenue / Click $0.37 $0.39 $0.40 $0.36 $0.36 $0.37 $0.37 $0.37 $0.37 0.2%

Global Search Forecast ($M) 14,835 21,999 29,511 31,586 37,153 44,413 52,925 61,606 70,509 17.4%

Y/Y Growth 63% 48% 34% 7% 18% 20% 19% 16% 14% Source: J.P. Morgan estimates, company reports, comScore, Nielsen//NetRatings, IDC, IWS.

47



W i l b l h dWe estimate global search and display spending will bedisplay spending will be

$105B$105Bin 2014

48














49




Robust Growth at Internet Companies Outside US/Western EuropeRobust Growth at Internet Companies Outside US/Western Europe

Companies outside the US and Western Europe are generating robust revenue growth and creating significant shareholder valuesignificant shareholder value

2008-2010E Revenue CAGR and Market Cap for Select Internet Companies

$1B $3B $7B $35B $41BMkt Cap: $23B75% $1B $3B $7B $35B $41BMkt Cap: $23B

50%

75%

16% 18%28%

39%

60%68%

25%

Source: J.P. Morgan estimates (MELI, Mail.ru), company reports, Bloomberg consensus for others; market cap based on 12/30/10 pricing.

0%

Yahoo! Japan Daum Group MercadoLibre Mail.ru Baidu Tencent

50














51




Local Advertising Market OverviewLocal Advertising Market Overview

US Local Advertising Spend by Medium in 2010ELocal online advertising is a small % of the

Magazines, 2%

Yellow Pages, 14%TV, 24%

Out-of-home, 6%overall market

In US, local advertising is an ~$82B industry, with only ~15% of the total estimated to be spent online in 2010

Radio, 14%

Pure-play Internet, New spapers 33%

estimated to be spent online in 2010, according to Veronis Suhler Stevenson

SMBs: Spenders of local advertising

Major players in the local ad market

Source: comScore data.

p y ,7%

New spapers, 33%Major players in the local ad market

Traditional media sources

Pure-play internet players

Rapid changes in the advertising landscape create customer acquisition challenges

52



Our Top Picks for 2011Our Top Picks for 2011

Amazon

Priceline

MercadoLibre

ReachLocal

Other Overweight -rated U.S. internet stocks are Netflix, Google, Yahoo!, Shutterfly, QuinStreet, MediaMind

Additionally, J.P. Morgan’s China internet analyst Dick Wei’s top picks are Tencent and NetEaseAdditionally, J.P. Morgan s China internet analyst Dick Wei s top picks are Tencent and NetEase

53



Top Pick: AmazonTop Pick: Amazon

The Bull Case: The Bear Case:

Positioned to take advantage of secular growth in eCommerce

Huge scale provides competitive advantage

Brick-and-mortar incumbents increasingly aggressive in eCommerce space

Barriers to entry may be low

Still underpenetrated in many categories, esp. in Int’l – ramp-up can take years, and thus operating margins should improve

G th i ti l h A l h ld

Because online shoppers are so price-sensitive, margin expansion opportunities will remain muted

I idl l i i k f f l Growth in verticals such as Apparel should help gross margins

Prime is a customer retention tool that others will find difficult to replicate profitably

In a rapidly evolving space, risk of one false step being quite costly

At scale, hard to maintain explosive growth rates indefinitely – will multiple contract if p p y

Fulfillment by Amazon enables continued share gains in third-party

Rapid growth in eBooks mean market share

y pgrowth slows?

Rapid growth in eBooks mean market share within books; could threaten traditional booksellers.

54



Top Pick: PricelineTop Pick: Priceline


International offers a secular growth opportunity: 80% of the company’s gross profit dollars come from the international business, which we think is more sustainable

Company generates significant amount of profit in the Euro and other FX denominations. Thus, volatility in the currency market could adversely impact the share price.

and will experience an above-average growth rate

Modest take rate increases as emerging markets develop

Domestic growth pressured by competition from other OTAs and suppliers

Increasing competition in the international markets develop

Continued ADR recovery

Domestic market share gains, aided by the development of booking com in the US

markets

development of booking.com in the US

Margins should expand as the company continues to benefit from improved advertising efficiency

55



Top Pick: MercadoLibreTop Pick: MercadoLibre


LatAm eCommerce growing rapidly as internet and broadband penetration rises; eCommerce still at sub-2% of retail in region

MercadoPago is poised to take lead in

Political, currency and macroeconomic risks remain; region is not historically known for stability

Valuation leaves minimal room for error and MercadoPago is poised to take lead in payments; we think this is a winner-take-most arena

MercadoPago 3.0 rollout driving TPV higher

Valuation leaves minimal room for error, and stock can be volatile if expectations not met

As Pago penetration grows, blended take rate likely to decline

We think ASPs on Marketplace should improve in F’11, esp. in the back half

Management is focused on long-term

Tax investigations of sellers (esp. in Brazil) create headline risk

g gopportunity and is managing business for growth

56



Top Pick: ReachLocalTop Pick: ReachLocal


We think local will be a key area of growth in the next two years

Expansion into additional markets (in 45 cities as of 3Q’10) is a growth driver

Rapid buildout and rapid growth leave minimal room for error in execution

In an evolving space, competition can come from nowhere: in two years social buyingas of 3Q 10) is a growth driver

IMC sales force (nearly 700 now) can keep growing, is a key barrier to entry

P d t i id ll

from nowhere: in two years, social buying sites have gone from almost zero to billion-dollar revenue run rates

Sales-driven model may limit room for margin Product expansion provides cross-sell opportunities, which will raise IMC productivity

As sales force matures, productivity benefit from a greater presence of experienced IMCs

expansion

g p p

Growing size of Upperclassman IMC force should help margins, as Underclassman training expenses should grow less quickly

We see 40% revenue growth in F’11E and 38% in F’12E, with improving profitability

57



AOL (Neutral)AOL (Neutral)


Graphical revenue to return to growth next year (F’11E revenue growth of 5.5%)

Potential monetization improvement in the acquired assets could drive top line growth

Continued declines in search revenue (14.2% decline in F’11E)

Subscriber base contraction hindering subscription revenue (we estimate AOL willacquired assets could drive top-line growth

Third-party revenue trends should improve

Easier comps as ad revenue growth in 2010 ti l i t d b l f

subscription revenue (we estimate AOL will lose 700k subscribers in 2011) and profit growth

Investment in Patch will pressure marginswas negatively impacted by sales force reorganization

Strong cost-cutting initiatives

58



Blue Nile (Neutral)Blue Nile (Neutral)


Increasing consumer confidence should drive sales growth (we are modeling 15% Y/Y revenue growth in F’11)

International markets should see some

Large fluctuations in diamond prices could pressure the top line

Mix shift toward the higher-margin non-engagement jewelry has been slow to International markets should see some

improvement

Slight EBITDA margin lift from SG&A leverage

B i k d t b k t i d f th

engagement jewelry has been slow to develop

Stock is still expensive (as of 12/30, trades at ~22x our F’11 EBITDA estimate vs. the peer Brick-and-mortar bankruptcies and further

consolidation in the industrygroup at 14x), and multiple expansion is unlikely

59



Dice Holdings (Neutral)Dice Holdings (Neutral)


Tech & Clearance should remain an attractive vertical (23%E Y/Y growth in F’11)

Finance segment to benefit from increased penetration

Overall recruitment market remains tough

Continental Europe and the Middle East still showing signs of weakness

penetration

Energy vertical has a lot of potential (we expect energy revenues to reach $13M by the end of 2011)

Fairly competitive business

EBITDA margins of 40+% in 2011E

60



eBay (Neutral)eBay (Neutral)


PayPal is a one-of-a-kind brand in online payments and has established itself as the one likely winner in the space

Micropayments social networks social

PayPal is a lower-margin business than Marketplaces, and the latter still generates most of the revenue

Marketplaces turnaround remains sluggish as Micropayments, social networks, social gaming all present incremental growth opportunities for PayPal TPV

Marketplaces should benefit from continued

Marketplaces turnaround remains sluggish as other sites innovate more quickly; burdened by need to maintain certain features to retain near-monopoly in auctions

growth in eCommerce

Auctions business is stable, but fixed-price business can grow faster as company improves product (shopping cart more daily

Search on eBay site remains an area of concern

Secular shift is to a multichannel environment in which eBay’s market share is lower; thisimproves product (shopping cart, more daily

deals, etc.)

Uniquely well-positioned to facilitate small-volume cross-border trade

in which eBay s market share is lower; this offsets secular gains from eCommerce growth

PayPal take rates may decline as larger merchants are a bigger piece of the pie

61



Expedia (Neutral)Expedia (Neutral)


International growth should remain healthy, aided by increased penetration in the APAC region (we are modeling F’11 Int’l gross bookings growth of 18% Y/Y)

Potential increased competition from booking.com in the US

Role of GDSs: Possible renegotiation of direct agreements with airlines

Continued expansion of TripAdvisor

G&A leverage and operational efficiencies should help margins

agreements with airlines

Increase selling and marketing spend could create margin pressure

Healthy FCF generation

62



Google (Overweight)Google (Overweight)


Strong search revenue growth: 1% net revenue growth in Google’s search revenue generates an estimated $0.35 EPS for the company

Increasing competition from social networking sites emerging as a big threat to Google’s traffic, and mobile applications which let users bypass search

Display offers a strong incremental opportunity: we think the overall display business will contribute an incremental $1.2B, or 4 points of the growth in 2011

Increased government scrutiny with regard to future acquisitions and business practices

Growth of non-text display products could or 4 points of the growth, in 2011

Mobile will drive search usage: over the past 2 years, search queries from mobile have grown 5x at an accelerating pace

create margin pressure as the display business margins are significantly lower than the company’s overall margins

Improved international online and ad spend penetration

63



IAC (Neutral)IAC (Neutral)


Match business (25% of revenue and 71% of OIBA) will be the largest driver of the stock

ServiceMagic should continue to see healthy revenue growth; additionally margins will

Market remains competitive for Ask.com, as large search players continue to make innovations to the space

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

Distributed and proprietary toolbars and

Lower RPS and increased product development expenses could create headwinds

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

64



MediaMind Technologies (Overweight)MediaMind Technologies (Overweight)


Publisher-neutral platform is appealing to customers

Highly scalable business model: uses low capex (~4% of revenue in F’10E) and thus

Largest competitors are parts of large advertising players such as Google and Microsoft

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

Platform customers to comprise over half of total revenue by the end of 2011E

Fluctuations in currency exchange rates could adversely affect the stock price, as roughly 70% of revenue comes from international markets

As the revenue grows, the company should see leverage from sales and marketing and R&D

Limited visibility into advertisers’ budgets creates challenges

65



Netflix (Overweight)Netflix (Overweight)


~60M installed base of NFLX-ready devices that reach the TV is a multiple of any other competitor

Decade of history in DVD business drives a

Extremely competitive space, with virtually all other players possessing deep pockets

If studios refuse to play ball, model could be threatened Decade of history in DVD business drives a

second-to-none recommendation engine, crucial for monetizing long tail of catalog

Spent over $1B on Marketing since ’06 to

threatened

If content costs go up too much, margins may not improve

DVD ill t ll b d li iestablish premium consumer brand; high customer satisfaction

Streaming carries lower fulfillment cost, fixed content cost room for margin improvement

DVD will eventually become a declining business, with deleverage on costs

International opportunity very uncertain –possible investments won’t pay offcontent cost – room for margin improvement

and for more investment in content

International opportunity could be a positive catalyst

p p y

Valuation leaves minimal room for error

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Orbitz Worldwide (Neutral)Orbitz Worldwide (Neutral)


International growth will be aided by a strong performance from ebookers (we are modeling 15% int’l gross bookings growth in F’11)

Continued focus on building the company’s

Continued challenges in reaching the brand identity and inventory scale of Expedia and Priceline

Margins may be pressured by a continued Continued focus on building the company s hotel business

Upcoming migration of HotelClub to the global technology platform

Margins may be pressured by a continued investment phase

American Airlines dispute and renegotiating the role of GDSs

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QuinStreet (Overweight)QuinStreet (Overweight)


Financial services vertical represents a large market opportunity (5x size of education market)

Education revenue growth should accelerate

Regulatory changes in the education sector could create headwinds

Acquisitions represent a large portion of the company’s growth; if QNST is unable to Education revenue growth should accelerate

as the company laps the reduction of spend from DeVry

Other verticals a longer-term catalyst

company s growth; if QNST is unable to identify and complete strategic acquisitions, or successfully integrate acquisitions it does make, it could adversely affect the business

(including home services, medical and B2B)

20% EBITDA margin is sustainable

Third-party publishers drive the majority of QNST’s traffic, yet QNST has only limited oversight and control over their operations

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Shutterfly (Overweight)Shutterfly (Overweight)


Increased penetration of photobooks and continued product development should drive strong growth in the company’s personalized products and services business

Highly seasonal business: over 50% of revenues are earned in the fourth quarter

Pricing pressure from competition

Retail partnerships (e.g., CVS/pharmacy and Walgreens) could help reduce friction and boost print revenue

Growth of commercial print business could create margin pressure

Commercial print business an attractive opportunity (could reach ~$40M annual revenue in a couple of years)

Growth of social media makes Shutterfly a Growth of social media makes Shutterfly a more utilized tool

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Yahoo! (Overweight)Yahoo! (Overweight)


Current share price does not reflect the full asset value: we see at least ~$7.4B ($5.51/share) in value from Yahoo! Japan and Alibaba (does not include the private assets of

Display business facing increasing competition, especially from Google and social networking sites

Search market share remains under pressureAlibaba Group, such as TaoBao)

Search comps will be easier once Yahoo! laps the discontinuation of paid inclusion

Search market share remains under pressure

Uplift in RPS from the Microsoft search alliance

Continued margin expansion, part of which can be attributed to the Microsoft search dealcan be attributed to the Microsoft search deal

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US Internet Coverage Universe

Trading statistics as of 12/30/10 ($ in millions, excluding per-share data and as indicated)


J P M I T h l U iTicker Rating

PriceDec'11

Price Target

Mkt Cap Ent .Val. EPS Y/Y EPS Growth Cal PE PEG

12/30 12/30 12/30 2009 2010E 2011E 2012E '10/09E 11/10E 12/11E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E

Search/AdvertisingAOL AOL N 24.02 $26 2,544 2,438 3.42 2.96 0.86 0.52 -13% -71% -40% 7.0 8.1 27.8 46.0 1.4 1.6 5.6 9.2Google GOOG OW 598.86 $625 193,059 159,679 20.41 25.40 28.32 32.82 24% 12% 16% 29.3 23.6 21.1 18.2 0.8 0.7 0.6 0.5

J.P. Morgan Internet Technology Universe

gQuinStreet QNST OW 19.08 $24 899 864 2.18 0.88 0.96 1.11 -60% 9% 16% 8.7 21.7 19.8 17.1 0.4 1.1 1.0 0.9ReachLocal RLOC OW 19.60 $23 546 468 (0.27) (0.48) (0.46) 0.18 78% -5% -139% -72.4 -40.7 -43.0 110.3 -3.6 -2.0 -2.1 5.5MediaMind MDMD OW 13.73 $18 298 204 0.76 0.54 0.68 0.83 -29% 26% 22% 18.0 25.4 20.2 16.5 0.9 1.3 1.0 0.8Yahoo* YHOO OW 16.76 $20 22,510 12,292 0.42 0.89 0.79 0.92 110% -11% 16% 39.7 18.9 21.1 18.2 1.6 0.8 0.8 0.7Group Average 5.1 9.5 11.2 37.7 0.3 0.6 1.1 2.9

Leading e-Commerce brandsAmazon AMZN OW 182.75 $199 83,151 78,656 2.03 2.55 3.67 5.14 25% 44% 40% 90.0 71.8 49.8 35.5 4.5 3.6 2.5 1.8Blue Nile NILE N 58.30 $49 869 822 0.84 0.93 1.12 1.33 12% 20% 18% 69.7 62.5 52.0 43.9 3.5 3.1 2.6 2.2Dice DHX N 14.70 $11 994 1,009 0.20 0.29 0.41 0.52 43% 40% 28% 71.9 50.5 36.1 28.2 3.6 2.5 1.8 1.4eBay EBAY N 28.13 $25 36,851 31,954 1.85 1.32 1.47 1.62 -28% 11% 10% 15.2 21.3 19.1 17.3 0.6 0.9 0.8 0.7Expedia EXPE N 25.28 $31.5 7,237 7,916 1.38 1.73 2.06 2.26 26% 19% 9% 18.4 14.6 12.2 11.2 1.8 1.5 1.2 1.1InterActive Corp IACI N 29.39 $35 3,184 1,706 0.54 0.87 1.25 1.32 59% 44% 6% 54.2 34.0 23.6 22.2 5.4 3.4 2.4 2.2Mercadolibre MELI OW 70.18 $82 3,097 3,046 0.75 1.26 1.63 2.20 67% 30% 34% 93.2 55.8 42.9 31.9 3.1 1.9 1.4 1.1 Netflix NFLX OW 179.80 $186 9,697 9,640 1.99 2.82 4.33 5.72 42% 54% 32% 90.4 63.8 41.6 31.4 4.5 3.2 2.1 1.6 Orbitz Worldwide OWW N 5.56 $8 586 931 (4.02) 0.09 0.15 0.16 -102% 59% 9% NM 60.4 38.1 35.0 NM 6.0 3.8 3.5$ ( )Priceline.com PCLN OW 404.27 $484 20,642 19,636 8.52 13.12 17.31 21.18 54% 32% 22% 47.4 30.8 23.4 19.1 3.2 2.1 1.6 1.3Shutterfly SFLY OW 34.88 $39 952 791 0.22 0.42 0.48 0.68 92% 14% 43% 159.8 83.4 73.0 51.0 8.0 4.2 3.6 2.6Group Average 71.0 49.9 37.4 29.7 3.8 2.9 2.2 1.8

Average 46.3 35.6 28.2 32.5 2.5 2.1 1.8 2.2

Source: Company reports and J.P. Morgan estimates.•YHOO's Enterprise Value assumes Yahoo!’s Asian assets are worth ~$8/share, Note: EBITDA= Operating income+D&A+/- Extraordinary charges,•J.P. Morgan Ratings: OW = Overweight, N = Neutral, UW = Underweight•* Price targets have a December 2011 end date

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Trading statistics as of 12/30/10 ($ in millions, excluding per-share data and as indicated)


Ticker RatingPrice EBITDA Y/Y EBITDA Growth Ent. Val/EBITDA Rev ($M) Y/Y Revenue Growth

12/30 2009 2010E 2011E 2012E '10/09E 11/10E 12/11E 2009 2010E 2011E 2012E 2009 2010E 2011E 2012E '10/09E 11/10E 12/11E

Search/AdvertisingAOL AOL N 24.02 877 661 445 375 -25% -33% -16% 2.8 3.7 5.5 6.5 3,248 2,388 2,150 1,996 -26% -10% -7%Google GOOG OW 598.86 11,001 13,116 15,485 17,787 19% 18% 15% 14.5 12.2 10.3 9.0 17,477 21,866 26,100 29,208 25% 19% 12%QuinStreet QNST OW 19 08 67 82 93 111 23% 13% 20% 12 9 10 5 9 3 7 8 293 381 463 537 30% 22% 16%QuinStreet QNST OW 19.08 67 82 93 111 23% 13% 20% 12.9 10.5 9.3 7.8 293 381 463 537 30% 22% 16%ReachLocal RLOC OW 19.60 1 0 13 44 -62% 2830% 249% 416.7 1088.2 37.1 10.7 213 291 408 561 37% 40% 38%MediaMind MDMD OW 13.73 17 20 26 31 19% 33% 18% 12.2 10.3 7.7 6.5 65 80 95 112 24% 18% 17%Yahoo* YHOO OW 16.76 1,722 1,599 1,692 1,893 -7% 6% 12% 7.1 7.7 7.3 6.5 4,682 4,557 4,470 4,670 -3% -2% 4%Group Average -5% 478% 50% 77.7 188.8 12.9 7.8 14% 15% 13%

Leading e-Commerce brandsAmazon AMZN OW 182.75 1,851 2,458 3,202 4,232 33% 30% 32% 42.5 32.0 24.6 18.6 24,508 34,293 44,904 56,397 40% 31% 26%Blue Nile NILE N 58.30 29 32 38 42 9% 19% 12% 28.2 25.9 21.8 19.5 302 329 372 414 9% 13% 11%Dice DHX N 14.70 50 52 69 82 4% 34% 19% 20.3 19.6 14.6 12.3 110 128 168 198 16% 31% 18%eBay EBAY N 28.13 2,663 3,223 3,624 3,813 21% 12% 5% 12.0 9.9 8.8 8.4 8,727 9,197 10,275 11,197 5% 12% 9%Expedia EXPE N 25.28 876 963 1,094 1,158 10% 14% 6% 9.0 8.2 7.2 6.8 2,955 3,336 3,710 3,967 13% 11% 7%InterActive Corp IACI N 29.39 169 257 281 288 53% 9% 3% 10.1 6.6 6.1 5.9 1,376 1,643 1,771 1,855 19% 8% 5%Mercadolibre MELI OW 70.18 48 85 119 158 76% 40% 33% 62.9 35.8 25.6 19.3 159 216 296 392 36% 37% 32%Netflix NFLX OW 179.80 449 587 712 854 31% 21% 20% 21.4 16.4 13.5 11.3 1,670 2,161 3,004 3,758 29% 39% 25%Orbitz Worldwide OWW N 5.56 143 151 165 179 6% 9% 8% 6.5 6.14 5.6 5.2 738 752 802 850 2% 7% 6%Priceline com PCLN OW 404 27 548 884 1 202 1 460 61% 36% 22% 35 9 22 2 16 3 13 4 2 338 3 082 3 732 4 300 32% 21% 15%

Source: Company reports and J.P. Morgan estimates.

Priceline.com PCLN OW 404.27 548 884 1,202 1,460 61% 36% 22% 35.9 22.2 16.3 13.4 2,338 3,082 3,732 4,300 32% 21% 15%Shutterfly SFLY OW 34.88 50 62 71 85 23% 15% 20% 15.8 12.8 11.1 9.3 246 297 347 412 20% 17% 19%Group Average 30% 22% 16% 24.1 17.8 14.1 11.8 20% 21% 16%

Average 43.0 78.1 13.7 10.4

p y p g•YHOO's Enterprise Value assumes Yahoo!’s Asian assets are worth ~$8/share, Note: EBITDA= Operating income+D&A+/- Extraordinary charges,•JPMorgan Ratings: OW = Overweight, N = Neutral, UW = Underweight•* Price targets have a December 2011 end date

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DisclosuresDisclosures

Other Companies Recommended in This Presentation (and priced as of market close on 30 December 2010)30 December 2010)

NetEase (NTES/$36.76/Overweight), Tencent (0700.HK/HK$168.90/Overweight)

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DisclosuresDisclosuresAnalyst Certification:

The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.

Important Disclosures

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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the a erage total ret rn of the stocks in the anal st’s (or the anal st’s team’s) co erage ni erse ] J P Morgan Ca eno e’s UK Small/Mid Cap dedicated researchthe average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Imran Khan: AOL Inc. (AOL), Amazon.com (AMZN), Blue Nile (NILE), Dice Holdings, Inc. (DHX), Discovery Communications, Inc. (DISCA), Expedia, Inc. (EXPE), Google (GOOG), IAC/InterActive Corp. (IACI), MediaMind (MDMD), MercadoLibre, Inc. (MELI), Netflix Inc (NFLX), News Corporation, Inc. (NWSA), Orbitz Worldwide, Inc. (OWW), Priceline.com (PCLN), QuinStreet, Inc. (QNST), ReachLocal (RLOC), Shutterfly, Inc. (SFLY), The Walt Disney Co. (DIS), Time Warner (TWX), Viacom Inc (VIAb), Yahoo Inc (YHOO), eBay, Inc (EBAY)

J.P. Morgan Equity Research Ratings Distribution, as of December 31, 2010

Overweight (buy)

Neutral (hold)

Underweight (sell)

J.P. Morgan Global Equity Research Coverage 46% 42% 12% IB clients* 53% 50% 38%JPMS Equity Research Coverage 43% 49% 8% IB clients* 71% 63% 59% *Percentage of investment banking clients in each rating category. For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

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