State Of The Internet: 2012

Henry Blodget CEO & EIC, Business Insider

The commercial Internet is now ~20 years old.

So, how are we doing?

2+ billion people online

Global Internet Popula on
2,500

2,000

(millions)

1,500

1,000

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Interna onal Communica on Union, Google

2/3 of the world left to go

Global Internet Popula on
7,000 6,000

5,000

(millions)

4,000

3,000

Global Popula on

2,000

1,000

Internet Popula on
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Interna onal Communica on Union, Google

US New media stock value 3X old media

$1,200

$1,000

$800

Market Value (billions)

$600

$400

$200

$0 New Media Old Media

(When you include Apple)

$700

$600

$500

Billions

$400

Market Value

$300

$200

$100

$0
Apple Google Amazon Facebook Disney Comcast News Corp Time Warner Time Warner Cable Viacom CBS

As ever, power is very concentrated

New Media
Yahoo Facebook Twi er Hulu Ne lix

Old Media
CBS Viacom Time Warner Cable Disney

Amazon

Time Warner

Google Apple
News Corp Comcast

$366 Billion Market Value

$1,089 Billion Market Value

And now to the actual businesses

MEDIA

U.S. Digital Advertising is making huge gains

U.S. Digital Adver sing
$35 $30 $25

(billions)

$20 $15 $10 $5 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IAB

And now accounts for ~20% of total ad spend

$180 $160 $140 $120

U.S. Adver sing

(billions)

$100 $80 $60 $40 $20

Offline

Online
$0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: IAB, U.S. Census Bureau, Stategy Analy cs. BI Intelligence es mates

Among the largest media companies, more than one-third of ad spending is now online.
Online vs. Offline Adver sing (U.S.), 2006-2011
$80,000 $70,000 $60,000 $50,000 38% share

23% share

Online

U.S. $40,000 Adver sing Revenue (millions) $30,000

$20,000 $10,000 $0 2006 77% share

Offline

62% share

2007

2008

2009

2010

2011

Source: Company filings and BI Intelligence es mates. Companies include: Google, Yahoo, AOL, Microso , Facebook, Time Warner, Disney, Viacom, CBS, News Corp, New York Times, Ganne , McClatchy, Time Inc, Entercom, CBS Radio, Clear Channel, Citadel, Cum

TV still biggest. Online close behind. Print getting smashed.

U.S. Adver sing, 2006-2011
$80,000 4%

$70,000 6% 11% $50,000 20%

$60,000

Outdoor Radio Print All Other Online

7% 9% 14%

U.S. Adver sing $40,000 Revenue (millions) $30,000

$20,000

13% 10%

23%

Google

$10,000

41%

Television

42%

$0 2006

2007

2008

2009

2010

2011

Source: Represents annual U.S. adver sing revenue for 20 large media companies based on company filings and our own es mates

Newspaper ad revenue has collapsed

TV may be next.

Over-the-top video is real and growing fast.

Digital Video Revenue, 2006-2011
$5,000

Hulu
$4,000

YouTube
Total Digital Revenues (millions) $3,000

$2,000

$1,000

Ne lix
$0 2006 2007 2008 Source: Company filings and BI Intelligence es mates

2009

2010

2011

Pay TV subscriptions are trending down.

Pay TV Subscriber Net Addi ons
1000 800 600 400

TelCo
200

Subscriber Net Addi ons (thousands)

Satellite
-200 -400 -600

Total
Cable

-800 -1000 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Source: Bernstein Research, BI Intelligence estimates 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

In online ads, Google is completely dominant. Facebooks gaining steam

Google

Facebook has already blown past AOL, Microsoft, and Yahoo

U.S Digital Adver sing
$9,000 $8,000

15% 4% 7%

$7,000

$6,000

8%

Digital

$5,000

Other AOL Facebook Yahoo

6% 13% 30%

11%

Adver sing
Revenue

(millions) $4,000
$3,000

Microso
55%

$2,000
11%

$1,000
40%

Google

$0 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Source: company filings BII es mates

Google, Facebook and a handful of new companies are winning, portals losing.
U.S Digital Adver sing: Winners And Losers
$9,000
11%

$8,000

$7,000

Facebook Other

15%

$6,000

Digital $5,000 Adver sing Revenue (millions) $4,000

6%

80% share!
Google

55%

$3,000

40%

$2,000
13% 11%

AOL Microso Yahoo

4% 8%

$1,000
30%

7%

$0 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Source: company filings, BII es mates

Display ad growth is flattening.

U.S. Display Adver sing
$3,000

$2,500

Microso
$2,000

AOL
Display Adver sing $1,500 Revenue (millions)
$1,000

Yahoo

Other

$500

Google

$0 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Source: company filings, BII es mates

And new companies taking share from portals YouTube, Hulu, Glam, Twitter, Demand, et al.
US Digital Adver sing: New Growth Companies
$1,800

Glam Media Federated Media Twi er

$1,600

$1,400

$1,200

Demand Media
Digital $1,000 Adver sing Revenue (millions) $800

Hulu WebMD

$600

$400

$200

YouTube Facebook

$0 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Source: company filings BII es mates

SOCIAL

Americans now spend more time on social networks than portals

Average Time Spent: Portals vs. Social Networks (U.S.)
30

Social Networks
25

20

Portals
Average Minutes 15 Per Usage Day

10

0 Nov-2010 Dec-2010 Jan-2011 Feb-2011 Mar-2011 Apr-2011 May-2011 Jun-2011 Jul-2011 Aug-2011 Sep-2011 Oct-2011 Nov-2011 Dec-2011
Source: comScore

1/7th of the worlds population use Facebook

Facebook Ac ve Users
1,000 900 800 700 600

Ac ve Users 500 (millions)

400 300 200 100 0 1Q09

Monthly Ac ve Users

Daily Ac ve Users

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Within social, Facebook dominates.

Social Networks: Unique Visitors (U.S.)
200,000 180,000

Yahoo Sites Facebook

Google Sites

160,000 140,000 120,000

Monthly Unique Visitors (thousands) 100,000

80,000 60,000 40,000 20,000 Nov-2010 Dec-2010 Jan-2011 Feb-2011 Mar-2011 Apr-2011 May-2011 Jun-2011 Jul-2011 Aug-2011 Sep-2011 Oct-2011 Nov-2011 Dec-2011
Source: comScore

LinkedIn

Twi er

Google+

Tumblr

Pinterest

So, will Facebook be bigger than Google?

Unlikely.

Google is the best ad product in the history of the world because its like advertising at a store.

Facebook, meanwhile, is like

advertising at a party.

Social referrals to commerce sites are still tiny

Drivers of E-Commerce Traffic
90.0%

80.0%

70.0%

60.0%

50.0% Percentage Of Traffic 40.0% 80.6%

Facebook referrals up 92% year-overyear

30.0%

20.0%

10.0% 9.7% 0.0% Google

Source: RIchRelevance

7.5% Bing

1.7% AOL

0.5% Facebook

0.02% Twi er

Yahoo

eCOMMERCE

E-Commerce continues to take share

$5,000,000 $4,500,000 $4,000,000 $3,500,000

U.S. Retail Sales

E-Commerce

(millions)

$3,000,000 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 $0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Federal Reserve Economic Data--St. Louis Fed, BI Intelligence es mates

Offline Retail Sales

New pure-plays launched in last few years

U.S. E-Commerce Sales
$200,000

Pure-Play "Social Commerce"

$175,000

$150,000

$125,000

Total Sales $100,000 (millions)

$75,000

$50,000

E-Commerce

$25,000

$0 2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: Federal Reserve Economic Data - St. Louis Fed, Company Filings, BII Es mates

 And theyre growing fast.

Social Commerce Revenues
$3,500

Fab
$3,000

ShoeDazzle One King's Lane

$2,500

Ideeli
$2,000

Zulily Beyond The Rack

Total Revenue (millions)

$1,500

HauteLook Rue La La LivingSocial

$1,000

$500

Gilt Groupe Groupon

$0 2008
Source: Company Filings, BII Es mates

2009

2010

2011

MOBILE

Something profound happened last year

Smartphone sales overtook PC sales

Global Internet Device Sales
1,000,000,000 900,000,000 800,000,000

Tablets
700,000,000 600,000,000

Units 500,000,000 Smartphones

400,000,000 300,000,000 200,000,000 100,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Gartner, IDC, Strategy Analy cs, company filings, BI Intelligence es mates

Personal Computers

And will soon dwarf them

Global Internet Device Sales
3,000,000,000

2,500,000,000

2,000,000,000

Tablets

Units 1,500,000,000

We are here
Smartphones

1,000,000,000

500,000,000

Personal Computers
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
Source: Gartner, IDC, Strategy Analy cs, company filings, BI Intelligence es mates

PC sales, meanwhile, are in a stall

Global PC Shipments By Manufacturer
100,000 90,000 80,000 70,000 iPad released

Other
60,000 50,000 40,000 30,000 20,000 10,000

Apple Acer Dell Lenovo HP

0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Source: Gartner, IDC

Tablets will also blow past PC sales in a few years

Tablet Sales Forecast
500 450 400

E-Readers
350 300

Units Sold 250 (millions)

200

We are here
150 100 50 0 2010

2011

2012E

2013E

2014E

2015E

2016E

So the future is mobile

G-20 Internet Access
3,000

2,500

2,000 Consumer Broadband 1,500 Connec ons (milions) 1,000 Mobile

500 Fixed 0 2005

Mobile Fixed

Fixed 2010

2015

Source: Boston Consul ng Group, Mary Meeker, Kleiner Perkins, Morgan Stanley Research, Berg Insight

Where are we in the mobile revolution?

Globally, were early.

Global Smartphone Penetra on Forecast
2,500

We are here
2,000

1,500

Feature Phone Sales

Global Mobile Phone Sales (millions)

1,000

500

Smartphone Sales

2010 2011 2012 2013 2014 2015 2016

The U.S., however, is more than halfway there

Changes In Smartphone Ownership, 2011-2012 (U.S.)
60%

50%

46%

48%
41%

40% 35% 30%

20%

17%
12%

10%

0%

Smartphone

Feature Phone
May-11 Feb-12

No Cell Phone

Growth slows after hitting 50% penetration

In the US, weve hit that point.

U.S. Smartphone Market: Year-Over-Year Net Adds
40

35

30

25

Users Added 20 (millions)

15

10

0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012

Source: comScore, Nielsen

Most of the under-penetrated segments in US are older and poorer

Smartphone Penetra on By Age And Income (U.S.)
90%
80%

80% 70% 60% 50%

69% 70% 65%

77% 74%

75%

65% 65% 58%

63% 60%

56% 53%

50% 43% 44%

52%

51% 48% 41% 42% 38%

40%
31% 32% 30% 27% 23% 24% 21% 16% 15% 16%

30% 20% 10% 0% Ages 18 - 24 Ages 25 - 34

<15k
18%

16% 17%

Ages 35 - 44
15k - 35k 35k - 50k 50k - 75k

Ages 45 - 54
75k - 100k 100k+

Ages 55 - 64

Ages 65+

Source: Nielsen

So the focus is on China, which now accounts for a quarter of smartphone sales.
Global Smartphone Shipments
180,000 160,000 140,000 120,000
(thousands)

100,000 80,000

Rest Of The World

60,000 40,000 20,000 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12
Source: Gartner, IDC, Strategy Analy cs, Canalys, BII es mates

China

So, what do people do on mobile?

Well, first, they do pretty much everything they do online

They play games and social-network

Daily Smartphone App Consump on, Minutes Per Category

7 7 10 11 15 24 10 12

25

24

Q1 2011 Games
Source: Flurry Analy cs

Q1 2012 Social Networking News Entertainment Other

Games sessions up 20-fold in two years

iOS & Android Mobile Game Session Growth
20.5X

5.3X 1.0X
Q1 2010
Source: Flurry Analy cs

Q1 2011

Q1 2012

They listen to music...

75% 70%

% of Traffic from Mobile

Pandora
50%

55%

Twi er

33%

Facebook
25%

5% 0% 1%

2008

2009

2010

2011

Source: Mary Meeker, Kleiner Perkins, companies

They consume content

Top Mobile Categories By Growth In Audience, Dec. 2010 vs. Dec. 2011 (U.S.)
35,000

30,000

25,000

20,000 Total Mobile Audience (thousands) 15,000

74% 72% 94% 80% 77% 74% 69% 134% 82% 70%

10,000

5,000

Health Informa on

Online Retail

Men's Magazine Content

Electronic Payment

Gaming Informa on Dec-11

Job Lis ngs

General Reference

Classifieds

Auc on Sites

Family Entertainment

Dec-10

Source: comScore MobieLens, 3 mon. avg. ending Dec-2011 vs. Dec-2010

100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

20
0% 1%
Source: StatCounter

Global Internet Trafic: Mobile vs. Desktop

4%

Mobile
12%

Desktop

Mobile now accounts for 12% of global internet traffic

08 20 - 12 09 20 - 02 09 20 - 04 09 20 - 06 09 20 - 08 09 20 - 10 09 20 - 12 10 20 - 02 10 20 - 04 10 20 - 06 10 20 - 08 10 20 - 10 10 20 - 12 11 20 - 02 11 20 - 04 11 20 - 06 11 20 - 08 11 20 - 10 11 20 - 12 12 20 - 02 12 20 - 04 12 20 - 06 12 -0 8

And its scaling faster than the desktop

Mobile Internet Users
2,500

Total Internet Users

2,000

1,500

(millions)

Mobile Internet Users

1,000

500

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Interna onal Communica on Union, Google

They look at pictures and video.

U.S. Video Engagement, Monthly Minutes Per Ac ve User
472 425 378 324 276 231

152 93 63 110

Mar 2011

June 2011
Google Internet Sites

Sept 2011

Dec 2011

Mar 2012

iOS & Android Photo & Video Apps

Source: Flurry Analy cs, comScore Video Matrix

They even watch movies and TV.

Time Watched By Video Length And Device
100% 90% 80%

Percent Of All Hours Watched

70% 60% 50% 40% 30% 20% 10% 0% 62% 48% 67% 93%

Desktop
> 10 min Source: Ooyala, Q2 2012

Smartphone
6 to 10 min Video Length 3 to 6 min

Tablet
1 to 3 min < 1 min

Connected TV

Especially at night
When People Watch Mobile Video, By Device
10% 9% 8%
Share Of Total Time Watched

7% 6% 5% 4% 3% 2% 1% 0% 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 Time Of Day
Smartphone Weekday Smartphone Weekend

Tablet Weekday

Tablet Weekend

Source: Ooyala

They Shop
Mobile accounts for 20 % of Gilts weekday sales and 30% of its weekend sales
- The iPad accounts for 40% of mobile sales

38% of U.S. consumers have used smartphones to buy products or services

- comScore, Dec 2011

They use smartphones to make buying decisions in stores.

U.S. Smartphone Owners Ac vity In Retail Stores

24.0% 22.3% 19.7% 20.4% 18.8% 16.2% 14.6% 13.1% 12.3% 11.1% 10.0% 8.3% 7.2% 6.3% 5.2% 10.9% 14.1% 20.2%

Took Picture Of Texted/Called Scanned A Sent Picture Of Product Friends/Family Product Barcode Products To About Product Family/Friends

Found Store Loca on Males

Compared Product Prices

Found Coupons Research Product Checked Product For Deals Features Availability

Females

Mobile is starting to drive significant traffic to ecommerce sites

Ecommerce Website Traffic By Device
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 2011
Source: Monetate

Smartphone Tablet

PC

Q2 2011

Q3 2011

Q4 2011

Q1 2012

They pay for stuff Paypals mobile payments are growing rapidly
PayPal Mobile Payments Processed
$5,000

$4,000

$3,000 Total Payment Volume (millions) $2,000

$1,000

$0 2008

2009

2010

2011

Square launched about two years ago, and its already processing $16+ million a day
Square Es mated Daily Payment Volume and Revenues
$18,000 $16,000 $14,000 $12,000

(Thousands)

Payment Volume
$10,000 $8,000 $6,000 $4,000 $2,000 $0 3/11

Revenues

4/11

5/11

6/11

7/11

8/11

9/11 10/11 11/11 12/11 1/12

2/12

3/12

4/12

5/12

6/12

They even buy content! (0n tablets)

Media Content Paid For On A Tablet, Q4 2011
70% 60% 50% 40% 30% 20% 10% 0% Downloaded Music
Source: Nielsen

Books

Movies

Magazines
US Italy UK

TV Shows
Germany

Streaming Radio

Sports

News

But the really interesting stuff that people do on mobile is what they DONT do online

Angry birds has over 1 billion downloads

Angry Birds Downloads vs. Nintendo DS Sales
700,000

600,000

500,000

Total Downloads Or Sales (thousands)

400,000

300,000

200,000

100,000

0 Mar 10 Jun 10 Sept 10 Dec 10 Mar 11 Jun 11 Sept 11 Dec 11

Source: New reports, company releases, BI Intelligence estimates

Note: Includes Nintendo 3DS Sales

Instagram hit 100 million users in 2 years

BOTTOM LINE: The growth of mobile = more Internet usage, new applications

Mobile makes Internet usage 24/7

Share Of Device Page Traffic Over A Day:

Source: comScore, Telefonica, Macquarie Capital (USA), December 2011

Usage is up across the board

U.S. Mobile Content Usage
80%

Sent Text Message

70%

Share of mobile popula on that has...

60%

Used Downloaded Apps

50%

Used Browser Accessed Social Network Or Blog Played games Listened to music

40%

30%

20%

10%

0% Feb Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July 10 10 10 10 10 10 10 10 10 10 11 11 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 Source: comScore

And people are consuming a huge amount of content through mobile

Media Content Accessed Through Mobile Device
59% 57% 53% 53%

41%

27%

26%

29% 23% 25%

29%

27% 22% 20%

9%

10%

9% 5%

Books

Movies

TV Shows

Magazines Tablet

News

Social Downloaded Networking Music

Sports

Streaming Radio

Smartphone

Source: Nielsen Q4 2011 Mobile Connected Device Report

So mobile advertising will be huge, right?

Hmm

The bullish mobile-ad story is the huge gap between time-spent and ad spending.
2011 U.S. Ad Spending vs. Consumer Time Spent By Media
42% 43%

25% 22%

26%

15% 11% 7% 1% 10%

TV

Print

Web

Radio
Time Spent Per Media

Mobile

Ad Spend Per Media Source: Mary Meeker (KPCB), eMarketer, IAB

But maybe theres a good reason for that gap

The screen is really small.

Mobile monetization still behind the desktop

ARPU, Desktop vs. Mobile
$58.95

$25.00 $17.61 $6.62

$3.87

$5.00

Pandora
Source: Pandora, Zynga, Tencent

Zynga Mobile Desktop

Tencent

Mobile CPMs are much lower

Effec ve CPM, Desktop vs. Mobile
$3.50

$0.75

Desktop Internet
Source: comScore, Vivaki, Mobclix Exchange

Mobile Internet

Including for companies like Google and Facebook.

Google CPC Growth
15% 10% 5% 0% -5% -10% -15% 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12
Source: Company data, Evercore Group LLC Research

Overall, mobile is still a tiny fraction of digital ad spending.

U.S. Digital Adver sing Revenues
$35 $30 $25
(billions)

Mobile

$20 $15 $10 $5 $0 2007

2008

2009

2010

2011

Source: IAB, BIA-Kelsey, BII es mates

And its growing much slower than TV + Internet in the first 5 years
Compara ve U.S. Adver sing Media Annual $ Revenue Growth (First 5 Years)
$5,000
$4,621

$4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500

$1,012 $3,698

$2,162

$2,162 $1,920

$1,171

$1,000 $500 $0 Year 1 Year 2 Broadcast TV

Source: IAB, McCann-Erickson, BIA-Kelsey, BII es mates
$358 $80 $55 $160 $267 $392

$907

$806

Year 3 Mobile Internet

Year 4

Year 5
Note: Adjusted for infla on

But okay, yes, mobile ads are just getting started (about ~$1.25 B last year)
U.S. Mobile Ad Forecast
$7,000 $6,000

Local
$5,000
Mobile Ad $4,000 Revenue (millions)

$3,000 $2,000 $1,000 $0 2009A

We are here
Media

2010A

2011A

2012E

2013E

2014E

2015E

2016E

2017E

By the way, Google owns mobile, too

Mobile Ad Market Share
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1Q09

Other

Microso Yahoo

Apple Pandora

Millennial Media

Google

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

Source: news reports, company releases, BII es mates

Because mobile ads are mainly just web search + display ads viewed on mobile
2011 Global Mobile Ad Spend By Category
Messaging 10%

Display 28% Search 62%

Source: IAB

But native mobile ads are finally beginning to appear

Ads in timelines (Twitter / Facebook) Geo-located ads Shareable ads

APPS

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

5,000,000,000

0
08 08 8 09 09 09 09 09 9 10 10 10 10 10 0 11 11

7/ 1/ 1/ /0 9/ 11 /1 1/ 1/ 1/ 1/ 1/ /0 1/ 3/ 5/ 7/ 9/ 11 /1 1/ 1/ 1/ 1/ 1/ /1 1/ 3/ 5/ 7/ 9/ 11 /1 1/ 1/ 5/ 7/ 9/ 11 1/ 1/ 1/ /1 1/ 3/ 5/ 1/ 3/

Apple App Store Downloads

11 11 11 /1 1/ 1/ 1/ 1 12 12 12

App downloads are growing frantically

On pace to hit 45 billion by the end of the year

Apple App Store Downloads
55,000,000,000 50,000,000,000 45,000,000,000 40,000,000,000 35,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000,000 0
2/ 1 1/ 1 3/ 1 1/ 1 4/ 1 1/ 1 5/ 1 1/ 1 6/ 1 1/ 1 7/ 1 1/ 1 8/ 1 1/ 1 9/ 1 1/ 10 11 /1 / 11 11 /1 / 12 11 /1 /1 1/ 1 1/ 1 2/ 2 1/ 1 3/ 2 1/ 1 4/ 2 1/ 1 5/ 2 1/ 1 6/ 2 1/ 1 7/ 2 1/ 1 8/ 2 1/ 1 9/ 2 1/ 10 12 /1 / 11 12 /1 / 12 12 /1 /1 1/ 2 1/ 13 1/ 1/ 1

People now spend more time on apps than they do browsing the web
U.S. Mobile Apps vs. Web Consump on, Minutes Per Day
94 81 70 64 74 66 72

43

June 2010

Dec 2010 Web browsing

June 2011 Mobile apps

Dec 2011

Source: Flurry Analy cs, Alexa, comScore

And the disparity is growing.

Total Time Spent Using Mobile Web vs. Apps
140

120

100

80 Minutes Spent Per Month (Biillions ) 60

Apps

40

20

Mobile Web
0 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12

Source: Nielsen Smartphone Analy cs

Mobile app revenue is growing fast, but still relatively small.

Mobile App Revenue
$4,000 $3,500 $3,000 $2,500

(millions)

$2,000 $1,500 $1,000 $500 $0 2008

2009

2010

2011

Source: iSuppli, Forrester Research, company releases, BII es mates

Because most downloads are free

Mobile App Store Downloads, Free vs. Paid: 2011
Total Downloads

Free Downloads 89%

Source: Garner, September 2012

Freemium is the dominant business model

Games are the biggest money makers

Mobile has become a platform game.

Platform markets tend to standardize around one or two platforms.

Right now, mobile is a two-horse race.

Mobile Pla orm Market Share
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q1 2009

Other

Windows Blackberry Apple iOS Android

Q2 2009

Q3 2009

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Source: Gartner, IDC, Strategy Analy cs, BI Intelligence es mates, and company filings

Android has the largest platform globally.

Smartphone Market Share By OS (Global)
100% 90% 80% 70% 60%

Microso Other Blackberry

Symbian

Share of Global Unit 50% Sales

40% 30% 20% 10% 0% Q3 2009

Apple

Android

Q4 2009

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Source: Gartner

But Apple is dominating app revenue.

Mobile App Revenue By Pla orm
$4,000 $3,500 Other $3,000 Android $2,500
(millions)

$2,000 $1,500 $1,000 $500 $0 2008 Apple iOS

2009

2010

2011

Source: iSuppli, Forrester Research, company releases, BII es mates

Tablet market is early, but almost totally dominated by Apple

Tablet Market Share By OS
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Q2 2010

Nook Kindle

Blackberry

Android

iPad

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Source: Es mates based on informa on from IDC, Strategy Analy cs, and company filings

Mobile profits are going mainly to two players.

Opera ng Profit Share By Vendor
80% 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% 2007 2008 2009 2010 2011 Q1 2012 Q2 2012
Source: Company releases, Canaccord Genuity es mates

Apple Nokia

Samsung

Sony Ericsson RIM LG Motorola HTC

BONUS: So, are we in a new tech bubble?

No.

Bubbles feature sky-high prices relative to fundamentals.

HOUSING BUBBLE: Price ratios spiked off the charts

Price-To-Rent: 1983-2012

STOCK BUBBLES: Price ratios spiked off the charts

S&P PE: 1885-2012

THIS Is A Bubble
NASDAQ, 1991-2004

THIS Is A Bubble
House Prices: 1976-2012

Do you see that pattern yoday?

NASDAQ: 1971-2012

Are tech-company price ratios off the charts?

No. Apples PE ratio has been declining for years

Recent hot IPOs are downright reasonable.

1.4X 2012E Revenue
2X Revenue 4X Revenue

14X Revenue

What about Facebook?

Facebook went public at an extremely high price 75X EPS

Why?

Because everyone thought IPO meant free money.

Oops.

Investors learned a painful lesson.

But Facebook still has an excellent valuation 45X EPS.

So dont let anyone tell you its cheap.

Whats happening to Facebook stock, by the way, is likely a common transition

High-growth stocks usually go through a momentum phase, in which theyre blowing away estimates.

Then growth slows, and expectations come in line with reality.

Thats followed by years of multiple compression.

Microsoft has been in this transition since 2000.

Google since 2008

Multiple compression can be followed by steady growth or death.

Amazon stock is back on the march.

Facebooks future is uncertain, but its a great company, and stock could return to growth.

But, for now multiple compression.

One area in which investors have been too exuberant:

The private market.

Facebooks IPO will probably dampen that enthusiasm.

Thank you very much.

Henry Blodget
Founder, CEO & Editor-in-Chief, Business Insider

Alex Cocotas, Analyst

BI Intelligence is a new subscription research service from Business Insider that provides in-depth insight, data, and analysis of the mobile industry. More info at intelligence.businessinsider.com