Internet Services Industry Survey - Standard & Poor's, 27 Mar 2008

Industry Surveys
Computers: Consumer Services & the Internet
March 27, 2008
Scott H. Kessler Internet Software & Services and Internet Retail Equity Analyst
CURRENT ENVIRONMENT..................................................................1 Internet still growing, changing

Microsofts historic offer for Yahoo Google continues to drive actions in the Internet segment Advertising-related acquisition activity a prelude to Microsoft-Yahoo? Emerging opportunities offer potential, require patience Internet advertising and retail: review and outlook
INDUSTRY PROFILE...............................................................................6 The Internet: vital for communication and content

Web hosting services see growth Significant Internet software segments: browsers and security Access services: ISPs in transition Destinations provide information, entertainment, commerce
INDUSTRY TRENDS ................................................................................11

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THIS ISSUE REPLACES THE ONE DATED SEPTEMBER 20, 2007. THE NEXT UPDATE OF THIS SURVEY IS SCHEDULED FOR SEPTEMBER 2008.
Healthy growth drivers The evolving world of online music Online gaming Far-reaching benefits The dark side of the Internet
HOW
THE INDUSTRY
OPERATES ..............................................................18
The World Wide Web A powerful global medium Infrastructure Destinations Government plays a prominent role
KEY INDUSTRY RATIOS AND STATISTICS ....................................................24 HOW TO ANALYZE AN INTERNET COMPANY ............................................25
Making qualitative assessments Financial statements: line by line Equity valuations
GLOSSARY .............................................................................................31 INDUSTRY REFERENCES.....................................................................34 COMPARATIVE COMPANY ANALYSIS ..............................................38
Standard & Poors Industry Surveys

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VOLUME 176, NO. 13, SECTION 1 THIS ISSUE OF INDUSTRY SURVEYS INCLUDES 4 SECTIONS.
C URRENT E NVIRONMENT
Internet still growing, changing

The Internet permeates nearly every aspect of our lives, giving us fast, relatively inexpensive, and nearly unbounded access to enormous amounts of constantly updated information. It allows us to expand our understanding of finance, politics, culture, science, and many other areas. It also enables us to facilitate communications, relationships, and transactions for both personal and professional purposes. According to technology research firm IDC Corp., there were 1.1 billion Internet users around the world and 211 million in the United States as of the end of 2006. To offer some perspective, the size of the worldwide population of Internet users is comparable to the population of India (1.1 billion as of mid-2007, according to the US Census Bureau), and the size of the US population of Internet users is comparable to the population of Brazil (190 million). overtures, indicating that Microsoft substantially undervalues Yahoo, even though the offer valued the company at a greater than 60% premium to where it was priced just before the bid. Regardless, if completed at even close to the articulated consideration, this would easily be the largest deal in the history of the technology sector. Microsoft has become more focused on Internet opportunities in recent years, and is more aggressive in pursuing them. We think its $6 billion acquisition of aQuantive Inc., an advertising solutions company, in August 2007 marked an important change. The company showed it was serious about the segment, and was prepared to make large decisions in order to make big progress. After losing out in a bidding war for privately held DoubleClick Inc. a digital marketing technology and services company we think Microsoft recommitted itself to the category, and offered to acquire aQuantive at a massive premium and valuation to ensure that the deal would be consummated. In October 2007, Microsoft purchased a 2% stake in social networking firm Facebook Inc., valuing the private company at an astounding $15 billion. With new online assets, a rejuvenated Internet strategy, and some management changes, we believe that Microsoft has finally started to make waves on the Web. For Yahoo, it has been a different story. The company indicated that it did not entertain Microsofts offers because Yahoo was seemingly convinced it was moving in the right direction, following the launch of the Panama search platform, and a few smaller acquisitions of its own to broaden the companys advertising reach beyond Yahoo properties. Unfortunately for Yahoo, the company often failed to meet expectations, due to what we view as its inconsistent corporate execution. Founder Jerry Yang became Yahoos CEO in June 2007, replacing the widely criticized Terry Semel. Mr. Yang promised a sense of urgency and no sacred cows,
Microsofts historic offer for Yahoo

In February 2008, Microsoft Corp. offered some $45 billion in stock and cash to acquire Yahoo! Inc. Apparently, Microsoft had initially approached Yahoo starting some 18 months earlier, but was repeatedly rebuffed. Yahoo continues to resist Microsofts
PERFORMANCE OF INTERNET STOCKS

(Index; September 30, 1998=200)
1,400 1,200 1,000 800 600 400 200 0 1999
2000
2001
2002 2003
2004
2005 2006
2007
2008
Source: TheStreet.com Internet Index.
MARCH 27, 2008 / COMPUTERS: CONSUMER SERVICES & THE INTERNET INDUSTRY SURVEY
but took too long to start sending business bovines to pasture. In our opinion, Yahoo was vulnerable. Microsoft sees large synergies with Yahoo. Most significantly, the company anticipates huge new investment and innovation in online technologies, especially related to search and advertising. Microsoft also knows that the Internet business offers considerable benefits to those companies with size and scale. Perhaps most importantly, Microsoft thinks Yahoo will allow it to more successfully compete with their common competitor Google Inc.
Google continues to drive activity in the Internet segment

As the Internet has expanded dramatically over the past several years, Google Inc. has been a major force in defining and driving that growth. Google is still the clear leader in the search segment, in terms of its category name recognition, vast index of information, number of queries, varied offerings, and ongoing innovations. The company has parlayed its success in the search arena into a pole position in the world of online advertising. Google has also expanded well beyond searchs into areas such as e-mail (Gmail), mapping (Google Earth and Google Maps), Web-based productivity applications (Google Docs & Spreadsheets), and video (Google Video and YouTube Inc., which Google acquired in November 2006). Google clearly has even loftier ambitions. Its zealous pursuit of mobile Internet opportunities has made it one of the main application providers for Apple Inc.s iPhone. Perhaps more importantly, however, Google has successfully pushed for more open standards in the mobile space, which would allow users to more easily choose the carriers and handsets they want. As a result of Googles efforts, the Federal Communications Commission (FCC) adopted flexible access rules for users and wireless resellers in conjunction with the agencys early-2008 wireless spectrum auction. In November 2007, Google introduced a software platform that allows for and promotes the development of mobile Internet applications, and launched the related Open Handset Alliance. Essentially, we believe these actions will allow Google to provide more
applications to more users, and enhance its brand and businesses. Googles bold, unconventional, and innovative approach has resulted in substantial success and forced the companys competitors to respond by both raising operating expenditures and capital spending to develop and deploy new initiatives, and engaging in more material acquisition activity. When Google announced its pending purchase of DoubleClick in April 2007, at a surprisingly high price of $3.1 billion, other segment players stood up and took notice, and a multitude of deals soon followed (see below). Ironically, while Google awaited European Commission approval to complete the DoubleClick transaction, its two biggest competitors became less focused on comparable actions, and more focused on a possible combination. Google consummated the DoubleClick deal in March 2008.
Advertising-related acquisition actions a prelude to MicrosoftYahoo?

As the online advertising business has grown, its participants have engaged in significant acquisition activity to improve their competitive positioning. These actions were before Microsoft announced its bid to buy Yahoo, and probably led to the proposed deal. When Google announced its intention to acquire DoubleClick in April 2007, it believed that combining Googles strength in search and associated advertising with DoubleClicks expertise in display advertising and related technology would add to and enhance Googles already dominant position in the online advertising market. The transacton was completed in March 2008. Googles competitors have been racing to make their own deals. Yahoo purchased a 20% stake in online advertising exchange company Right Media Inc. in October 2006 (as part of a consortium that invested $45 million), and it bought the remaining 80% for $650 million in July 2007. In October 2007, Yahoo acquired BlueLithium, an advertising network company, for $300 million. These deals were intended to expand Yahoos advertising reach beyond its owned and operated properties. In August 2007, Microsoft purchased aQuantive for $6 billion, as mentioned, in order to bolster its online market-
ing offerings. In September 2007, AOL LLC bought closely-held Tacoda Systems Inc., a behavioral advertising firm, for $275 million, as the company continues to focus on Internet advertising opportunities. Leading ad agency WPP Group Plc acquired digital marketing company 24/7 Real Media Inc. for $707 million in July 2007. WPP hopes that this deal will bolster its position in search marketing and digital media. We believe that companies will continue to make acquisitions to increase their prowess in the online ad business. For instance, IAC/InterActiveCorp, the corporate parent of Ask.com, has $2 billion in cash and may be heading toward an opportunistic acquisition to improve its online advertising capabilities. In our view, online market solutions company ValueClick Inc. is a potential takeover target.
Emerging opportunities offer potential, require patience

Internet bellwethers have committed billions of dollars to pursue the hottest growth opportunities. Google spent $1.8 billion in stock to acquire online video leader YouTube. Microsofts investment in Facebook valued the social networking company at a breathtaking $15 billion. Google pledged a minimum $4.6 billion bid in the pursuit of new wireless spectrum. However, while these are clearly exciting areas, we think the substantial investments being made in them will take time to pay off perhaps a lot of time.
they are largely unsophisticated and not very expansive. A lack of popular, high-quality inventory has left advertisers with somewhat limited options. Most Internet video advertisements consist of staid 15- or 30-second spots appearing before the content, and often turn off viewers. We believe that more creativity is warranted and necessary. Migrating traditional television advertisements to the Internet does not necessarily engage or appeal to viewers. Internet giants are trying to change the game in Internet video advertising. In August 2007, Googles YouTube unit started testing partially transparent advertisements shown on the bottom 20% of videos. In February 2008, Google launched AdSense for Video, as a way to distribute video advertising across non-Google Web sites. That same month, Yahoo acquired Maven Networks, which has technology that distributes videos and related advertising on third-party Web sites, for $160 million.
Social networks still very relevant

ComScore reported that the major social networks continued to show substantial global growth as of mid-2007. In June 2007, MySpace had 114 million unique visitors and experienced 72% annual growth; Facebook had 52 million visitors and generated 270% yearly growth; Hi5 had 28 million uniques and delivered 56% growth; Friendster had 25 million visitors and 65% growth; Orkut had 24 million users and experienced 78% growth; and Bebo had 18 million unique visitors and showed 172% growth. These six leading properties had a total of more than 260 million users, nearly doubling over the prior-year period. As a point of reference, they actually had more aggregate unique views than Yahoo (133 million uniques) and Google (123 million) in June 2007. However, despite the previously-described size and growth of the category and its leading properties, less than one and a half years after guaranteeing MySpace a minimum of $900 million in advertising revenues over multiple years, Google said in January 2008 that its social networking inventory is not monetizing as well as expected. As some had feared, we think Google is realizing that advertisers remain somewhat uncomfortable and are reluctant to have their marketing messages alongside what some would consider question-
Online video continues to develop

ComScore Inc. reported that 77% of all U.S. Internet users watched at least one online video in December 2007. Reflecting this substantial audience and activity, IDC forecasts that online video will become the second largest Internet advertising category in 2010, showing growth in revenues from $1.2 billion in 2006 to $6.5 billion in 2011. We believe this expected growth will be fueled by growing PC and broadband penetration. We also think more and more people are accessing Internet videos from mobile devices, such as Apple Inc.s iPhone. However, despite the considerable interest and activity in online video, monetization efforts have been slow to materially develop. Mass search capabilities are improving, but
able content. In November 2007, Facebook launched Beacon, an advertising system that obtains data from dozens of third-party Web sites and allows users to share such information with their friends. This new type of more relevant and more intimate marketing has raised significant privacy concerns and caused a substantial backlash. Adding to these concerns, there are indications that category growth is slowing. MySpaces and Facebooks US-based unique visitors actually showed a monthly decline in January 2008, according to comScore. Silicon Valley gossip Web site Valleywag reported that many social networks experienced monthly declines in the important average minutes per user metric in late 2007, citing comScore data. The law of large numbers and a slowing global economy might be adversely affecting growth. Although major social networks have substantial user bases and engagement, we think they will face considerable challenges in 2008, especially as they continue to develop business models and more aggressively pursue revenue opportunities. In March 2008, AOL announced the proposed acquisition of Bebo for $850 million. We would not be surprised to see consolidation involving more of the major players, especially in the face of economic uncertainties.
hindered by the lack of both a single dominant wireless technology or platform, as well as by widely adopted next-generation 3G offerings. We also believe that the popularity of wireless laptops will detract somewhat from growth in the mobile device area. Nonetheless, some important acquisitions have occurred in this segment. AOL acquired Third Screen Media, a provider of mobile advertising network and management platforms, in May 2007. Weeks earlier, Microsoft announced a proposed agreement to acquire ScreenTonic SA, a French mobile advertising company. Nokia Corp., which has been increasingly focused on providing software and services, acquired privately held mobile advertising firm Enpocket Inc. in October 2007, and launched a related mobile advertising network in February 2008.
Internet advertising and retail: review and outlook

Online marketing and sales account for the majority of consumer-oriented revenues generated via the Internet. US online advertising revenues rose 35% in 2006, according to the IAB Internet Advertising Revenue Report. Its preliminary estimate was for 25% growth in 2007. We project increases of 19% in 2008 and 17% in 2009. We believe that the US accounts for more than half of worldwide online advertising. This growth reflects rising numbers of Internet users and increasing usage, greater spending on Internet advertising by corporations, and more compelling and effective marketing technologies and practices. KeyINTERNET ADVERTISING REVENUES
(In billions of dollars)
30 25 20 15 10 5 0 1998 99 00 01 02 03 04 05 06 P07 F2008
Mobile Internet becoming mainstream

Apples iPhone debuted in the US in June 2007 and in Europe in November 2007; additional markets, including one in Asia, are planned for 2008. The company expects to ship 10 million units this year, and we believe that with the iPhone with its crisp display, always-on Internet access, and simple navigation comes a new chapter in prodigious possibilities for mobile Internet advertising. IDC projects that US mobile marketing and advertising spending will nearly double on a compound annual basis, from $158 million in 2006 to $4.3 billion in 2011. The technology research firm sees viral sharing, the 2008 presidential election, data mining, content interoperability, content registries, mobile payments, and broadcast mobile TV as major-related milestones from 200811. However, while we agree that the growth potential of this market is massive, we are more cautious in our near-term outlook. We believe that US growth will continue to be
P-Preliminary. F-Forecast. Sources: PricewaterhouseCoopers LLP and the Interactive Advertising Bureau; Standard & Poor's estimates.
word search revenues contributed notably to these gains, with a 31% rise in 2006, largely reflecting the successes of Google. We forecast gains in search revenues of 22% for 2007 and 19% in 2008. Search advertising revenues are generated by click-throughs on sponsored links presented alongside algorithmic search results. We expect online video advertising to become increasingly important to category growth, especially following Googles acquisition of YouTube in late 2006. We believe that this $1.8 billion stock deal has placed Google in the early lead, in the race to pursue this vast market opportunity. According to Forrester Research Inc., a technology research firm, US online retail sales increased 20% in 2006. Forrester believes the largest contributors to sales in 2006 were travel, autos and auto parts, computer hardware, consumer electronics, and apparel. Travel sales were some $73 million in 2006. Standard & Poors estimates that Internet retail sales increased 17% in 2007 and will rise 15% in 2008. Improvements in multi-channel initiatives, better online merchandising, more personalized offerings, and increasingly sophisticated marketing efforts will drive the growth from 200410, according to Forrester.
I NDUSTRY P ROFILE
The Internet: vital for communication and content

The Internet is a complex, dynamic network that has become an essential medium for both communications and content. Comprised of smaller interconnected networks, the Internets reach and influence continue to expand. The industry that supports the Internet is a burgeoning conglomeration of technologies and interrelated business segments. Some of these areas, such as networking hardware, provide the physical equipment with which the Internet is built. Two prominent types of networking hardware are routers and access equipment. Another important type of hardware is the server. Detailed information regarding these areas can be found in the Communications Equipment and Computers: Hardware editions of Industry Surveys. This Survey focuses primarily on other largely intangible infrastructure that supports and enables the Internet. Web hosting services have grown with the number and complexity of Internet sites. Software providers have continued to innovate in areas such as browsers and security. Access services enable online connectivity in an era of increasing demand for speed and convenience. Portals and search engines facilitate the use of the Internet and have become key channels for monetizing user activity. Finally, content providers and e-commerce companies offer an expanding array of destinations to users. In this section, we give an overview of these areas and identify key players in each. (Additional information on Internet infrastructure is provided in the How the Industry Operates section of this Survey.) services was $8.2 billion in 2006 and was expected to reach $9.4 billion in 2007, according to research firm IDC. IDC forecasts that this market will continue to grow at a healthy compound annual growth rate of 15% between 2006 and 2011. As Internet traffic and the number of Web sites and pages grew rapidly through the midto late-1990s, demand for Web hosting services also increased substantially. This growing market has attracted a number of market participants, from technology bellwethers to start-ups. Many telecommunications and computer services giants bundle Web hosting services with other offerings to increase revenues and strengthen customer relationships. The market leaders by revenue in 2006 were International Business Machines Corp. (IBM), with an 18% share of this market, followed by Electronic Data Systems Corp. (6.3%), AT&T Inc. (6.0%), Savvis Communications Corp. (3.9%), and Verizon Communications Inc. (3.1%), according to IDC. Major acquisitions have affected market share. For example, in December 2005, Verizon purchased MCI Inc. for some $8 billion. Also in December 2005, AT&T Corp. was acquired by SBC Communications Inc. in a deal valued at $16 billion in cash and stock. The combined company, renamed AT&T Inc., subsequently acquired BellSouth Corp. for $85.8 billion in December 2006. It was considerably quieter on this front in 2007 than in 2005 and 2006.
Web hosting services see growth

Many companies maintain their Web sites on servers kept in-house. Companies with popular and/or complex Web sites typically purchase services from a Web hosting firm to maintain their Internet presence on a continuous basis. The US market for Web hosting
Significant Internet software segments: browsers and security

Two major types of Internet-related software are browsers and security offerings.
Browsers
A browser is software that allows users to retrieve and display information from the
World Wide Web. It is the key software component of the Internet. Although browsers generally are not sold and do not directly generate revenues, they are used to increase traffic to company Web sites, and thus bolster companies brands and drive purchases of products and services. Microsoft Corp.s Internet Explorer browser dominates the field, although it has been losing market share to up-and-coming rival Firefox, developed and distributed by Mozilla Corp. In January 2006, Internet Explorer had 85% global market share, while Firefox had under 10%, according to Web utility provider Net Applications. By January 2008, Internet Explorers worldwide share dropped to 75%, and Firefoxs rose to 17%. Apple Inc.s browser, Safari, had about 6% global market share as of January 2008, up from 3% in January 2006. We believe Safari has benefited from the introduction of Safari for Windows that can be run on nonApple computers, the introduction of the iPhone wireless device in the US and Europe, and new desktop and laptop computers.
Security
The software-based Internet security segment is comprised of several parts, all of which ensure the safety of networks and transactions. This segment includes secure content management, the offerings of which consist of antivirus, antispyware, Web filtering (to screen and prevent access to certain Web sites), and e-mail/messaging security software. (See the Glossary section of this Survey for definitions of virus and spyware.) Another security component is firewall/virtual private network (VPN) software, which controls user access to applications and data. Intrusion detection and vulnerability assessment software, which monitors devices and networks to prevent and remedy malicious activity, is yet another segment. Since early 2006, secure content management technologies have converged with threat management technologies to help companies better cope with a broader array of threats, according to IDC. The overall software-based Internet security segment generated $13.2 billion in revenues in 2006, and is projected to increase to $23.1 billion by 2011. Key players include Symantec Corp., with 18% market share as of 2006, followed by Cisco Systems Inc. (12%), McAfee Inc. (8.0%), and Trend Micro
Inc. (5.5%). All of these companies are based in the US, except for Trend Micro, which is domiciled in Japan. Some recent mergers and acquisitions have been a part of this trend toward convergence of secure content management and threat management. In June 2007, Cisco acquired IronPort Systems Inc., which provided a complementary product line of messaging security solutions for Ciscos network security offerings, for some $830 million. In October 2006, IBM acquired Internet Security Systems Inc. for $1.3 billion. Still operating under its former name, this IBM unit is the top supplier of intrusion detection and prevention products. Two additional areas of Internet security software are digital certificates (essentially, electronic signatures) and authentication and encryption. The digital certificates market is shared primarily by two companies: VeriSign Inc. (sales in 2007 of $1.5 billion) and Entrust Inc. (revenues in 2007 of $99.7 million). In September 2006, digital storage giant EMC Corp. acquired RSA Security Inc., a leader in authentication and encryption, for $2.1 billion.
Access services: ISPs in transition

People connect to the Internet through Internet service providers (ISPs). The consumer ISP market in the United States valued at $25.3 billion in 2006 and estimated to have hit $25.7 billion for 2007 should gradually grow to $29.8 billion in 2010, reports IDC. Average annual growth from 2005 to 2010 is projected at about 3%. The consumer ISP business is evolving. As broadband prices fall, ISPs are pursuing new business strategies, such as bundling Internet access with voice and video services. AOL LLC, a division of Time Warner Inc., shifted its business model from paid subscriptions to a free, advertiser-based portal that is similar to those offered by Yahoo Inc. and Google Inc. In early 2008, Time Warner indicated that it might look to sell its AOL access business. With a boost from its acquisition of BellSouth, AT&T Inc. is the largest player in the US market, with 17.9 million business and consumer digital subscriber lines (DSLs) in service and 18.2% ISP market share, as of the third quarter of 2007, according to ISP Planet, a market research firm focused on InMARCH 27, 2008 / COMPUTERS: CONSUMER SERVICES & THE INTERNET INDUSTRY SURVEY
ternet services. Next in line is Comcast Corp., with 12.9 million cable broadband subscribers and 13.1% share for the same period. AOL was No. 3, with 10.1 million broadband subscribers and 10.2% share. Other leading ISPs during the period include Verizon Communications Inc., Time Warners Road Runner, and EarthLink Inc. The top six ISPs controlled some 62% of the market, estimates ISP Planet. Other primarily regional and local ISPs battle over the remainder of the market. Their numbers have been dwindling quickly, however, reflecting the dot-com shakeout and what we consider questionable business models.
Destinations provide information, entertainment, commerce

Destinations are generally Web sites that people can access for information, entertainment, or commerce. The top Internet properties as of January 2008, in terms of aggregate US home, work, and university locations, were owned by Yahoo, Google, Microsoft, Time Warner, and News Corp., according to comScore Inc., an Internet media and market research firm. (For unique visitor statistics for these properties, see the table Top 25 Internet properties in this Survey.)
Other noted content providers are ESPN.com (part of The Walt Disney Co.s network of sites), MSNBC (a joint venture between Microsoft and NBC Universal Inc., 80%-owned by General Electric Co.), and the Weather Channel (owned by privately held Landmark Communications Inc., and speculated as being up for sale). Based on an agreement announced in December 2005, we expect NBC to buy Microsofts stake in MSNBC perhaps as early as sometime this year. Health information is a growing area of interest. Major suppliers of information on preventive care, medical conditions, and medications are WebMD and sites associated with medical teaching centers and facilities such as Johns Hopkins University, Harvard University, and the Mayo Clinic. A new player, RevolutionHealth.com, was launched in April 2007; its parent company, Revolution Health LLC, is led by AOL cofounder Steve Case. Microsoft and IAC/InterActiveCorp have been making acquisitions in the segment, and we expect Google Health to be launched in 2008. With new Web sites debuting every day and many of the major players either privately held or part of larger companies it is difficult to accurately estimate the size of this market.
Content providers produce news and information

These Web sites offer mostly original content (such as news articles) to subscribers. One major content provider is CNET Networks Inc., which provides technology news, product reviews, games, entertainment, and how-to tips through a portfolio of Web sites, such as technology news properties CNET and ZDNet, GameSpot, and TV.com. CNET Networks had revenues of $405.9 million in 2007. The company is facing keen competition from larger rivals and smaller blog sites and start-ups. Another popular content provider is About.com, which develops and supplies information to consumers on a variety of topics, including autos, home decorating, health, entertainment, and relationships. About.com was acquired by the New York Times Co. in March 2005 for $410 million. In 2006, About.com generated $80.2 million in revenues, up from $44.0 million in 2005, due to greater advertising sales.
Portals amass and distribute content

These Web sites usually aggregate content rather than produce it themselves. Their parent companies typically rely on the sale of advertising space to generate revenue. (For figures on US online advertising revenues, see the Current Environment section of this Survey.) The three major established players in the traditional portal market are AOL, Microsoft, and Yahoo. However, Google now offers iGoogle, which allows for substantial flexibility and customization. News Corp.s MySpace is part portal and part community, and has a front page that includes links to dozens of different categories from books to weather, as well as tens of thousands of user-provider videos uploaded every day.
Google remains unmatched in search services

Search services enable Internet users to find information online. When people think of the Internet search category, they often think of the company whose name and Web site have become synonymous with it:
SHARES OF US INTERNET SEARCHES

(Shares of leading 5 search engines, in percent, as of January 2008)
Ask.com network 4.5% Time Warner 4.9% Google 58.6% MSN 9.6%
Yahoo 22.2%
Source: comScore.
Google. The company established itself as the leader in keyword search advertising and has continued to take market share from competitors in recent years by offering a simple user interface and superior technology. Based on the number of US-based queries conducted in January 2008, Google led the online search segment, with 58.6% market share, according to comScore. Other important players were Yahoo (22.2% share), Microsoft (9.6%), Time Warner (4.9%), and the Ask.com network (4.5%).
Online communities have something in common with content providers and portals: all focus on providing information. While content providers and portals are centered primarily on articles, communities emphasize communications among, and contributions by, participants. The segment has experienced a renaissance over the last couple of years. Many community Web sites that focus on specific subjects or applications can take advantage of the breadth and power of the Internet to reach large audiences. The network effect, which refers to the tendency of companies that attract more users to attract ever more sellers, shoppers, and/or customers, also helps these community sites achieve success. Newer communities are often referred to as social networking Web sites. Based on total unique worldwide visitors in June 2007, MySpace.com was No. 1, followed by Facebook.com, Hi5.com, Friendster.com, Orkut.com, and Bebo.com, according to comScore. Their leading social networking
Communities flourish
sites are stronger in different parts of the world. For example, more than two thirds of Facebooks unique users and 42% of MySpaces unique visitors came from North America. Some 63% of Bebos users were from Europe, while a large majority of Friendsters users originated from the AsiaPacific region, and nearly half of Orkuts users were from Latin America. In March 2008, AOL anounced the proposed acquisition of Bebo for $850 million. Two relatively mature examples of Web communities are Classmates.com and Match.com, where users search for and communicate with former friends and future loves, respectively. Classmates.com, owned by United Online Inc., connects more than 50 million registered members with former school classmates, co-workers, and military colleagues. Match.com, an online dating business owned by IAC, had 1.3 million paid subscribers as of the end of 2007. In August 2007, United Online announced plans for an initial public offering of Classmates.com, but cancelled the IPO in December 2007, citing market conditions. Web logs, better known as blogs, are online journals that elicit and enable responses, often making them resemble Internet communities. As of April 2007, there were 70 million existing blogs with about 120,000 new ones being created daily, according to blog search and content company Technorati Inc. The so-called blogosphere was more than 100 times larger than it was three years earlier and was doubling in size every 230 days. Corporations are becoming increasingly aware of the power of bloggers who can help generate buzz around a new product, or spread negative opinions. Some companies monitor blogs through their advertising agencies or segment specialists. Wikis are similar to blogs, in that multiple people often contribute content. However, while blogs are largely written and managed by one person or a few people, wikis often allow anyone to add or revise content. The most popular wiki is appropriately called Wikipedia, which is hosted by nonprofit organization the Wikimedia Foundation Inc. As of March 2008, Wikipedia included 2.3 million English articles. Vlogs or videoblogs are blogs containing predominantly video content. Googles YouTube, which allows users to share video content, is the worlds most active vlogging site. The company, which was founded in Feb-
TOP 25 INTERNET PROPERTIES

(Data for January 2008; US only)
UNIQUE VISITORS (THOUS.) % REACH*
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25.
Yahoo sites Google sites Microsoft sites AOL Fox Interactive Media eBay Amazon sites Wikipedia sites Time Warner - excluding AOL Ask.com network New York Times Digital Apple Inc. Viacom Digital The Weather Channel CNET Networks Facebook.com Adobe sites Wal-Mart Superpages.com network AT&T Inc. Target Corp. Disney Online Verizon Communications Corp. Gorilla Nation Comcast Corp.
138,059 134,886 119,297 109,442 83,752 78,789 59,003 55,589 52,645 52,102 48,471 48,413 42,011 40,478 34,859 33,861 31,169 30,747 28,299 27,890 27,874 27,524 27,220 27,119 27,068
74.9 73.2 64.8 59.4 45.5 42.8 32.0 30.2 28.6 28.3 26.3 26.3 22.8 22.0 18.9 18.4 16.9 16.7 15.4 15.1 15.1 14.9 14.8 14.7 14.7
Home, work, and university usage. *The percentage of Web-active individuals who visited a site at least once during the month. Source: comScore. MARCH 27, 2008 / COMPUTERS: CONSUMER SERVICES & THE INTERNET INDUSTRY SURVEY
ruary 2005, was acquired by Google in November 2006. As the top US streaming video property in December 2007, Google sites streamed 3.3 billion videos during that month; 3.2 billion of those were from YouTube, according to comScore. Online communities are found within the confines of all kinds of Web sites, as companies have learned that a large, active, and loyal user base can be an extremely important element of a successful consumer Internet business. In fact, one of the largest and most successful dotcoms, eBay Inc., has referred to itself as a personal trading community, and has been introducing tools to enable its users to create their own blogs and wikis.
ports ComScore. The most popular categories for US online sales are computer hardware and software, autos and auto parts, apparel, home furnishings, and consumer electronics, according to research firm Forrester Research. Since the dot-com crash, the online retail segment primarily consists of a number of real-world companies that have established successful Internet operations. However, a number of exclusively online retailers have also been prosperous. Some of the major publicly traded online retailers include Amazon.com Inc. (sales of $14.8 billion in 2007), Overstock.com Inc. ($767 million in 2007), and GSI Commerce Inc. ($750 million in 2007). Relatively recent acquisition activity in the online retail segment includes Amazons $300 million proposed purchase of digital audiobooks company Audible Inc. that was announced in February 2008, and eBays acquisition of online tickets marketplace StubHub Inc. in February 2007 for $310 million. Several businesses offer travel products and services over the Internet. The leading player in this category is Expedia Inc., which owns brands including Hotwire and TripAdvisor. Other online travel companies include Orbitz Worldwide Inc., Sabre Holdings Corp., and priceline.com Inc. In March 2007, Sabre was acquired by private-equity firms Silver Lake Partners and Texas Pacific Group, in a transaction valued at $5 billion, including the assumption of debt. In August 2006, Cendant Corp. sold its Travelport travel distribution division (consisting of Orbitz, ebookers, and CheapTickets) to private equity investment firm The Blackstone Group for $4.3 billion. In July 2007, Blackstone took Orbitz public.
EBay dominates online auctions

The online market for auctions is dominated by eBay. In 2004, Overstock.com launched an auctions offering, but it has not gained significant traction; eBay is still the overwhelming market-share leader in this category. Although eBay has continued to grow, revenue increases have slowed markedly from robust rates of years ago. To reach the growing youth market, eBay entered partnerships in 2007 with social networks Facebook and Bebo. Facebook members can search for used textbooks on eBays Student Superstore page on Facebook. Bebo users can list items they want to sell or buy
Business-to-consumer e-commerce grows

According to IDC, worldwide business-toconsumer (B2C) Internet spending may reach $273 billion by 2010, compared with $171 billion in 2006. US consumer online retail spending (excluding travel) reached $102 billion in 2006, reflecting a 26% increase over 2005, re-
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INDUSTRY TRENDS
Consumers have found the Internet to be a useful tool in communicating, conducting research, and purchasing goods and services, as well as for many other purposes. Corporations have found that, although the Internet is challenging traditional business models, it can offer significant advantages to those that fully embrace it. The Internet is still in a growth phase, fueled by the increasing availability of personal computers (PCs) and Internet access, but the pace of expansion has moderated over the last few years.
Healthy growth drivers

By any measure, the Internet has been one of the fastest-growing commercial phenomena in history. The number of Web servers ex-
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on the Bebo site; clicking on an item takes a user to the eBay site. EBay has expanded aggressively into international markets, which accounted for more than half of its revenues in 2007. Some of its largest non-US operations are in Germany, the United Kingdom, and South Korea. However, the company has faced notable competition in Asia, particularly in China (Taobao, owned by Alibaba Group Inc.), South Korea (Gmarket Inc.), and Taiwan (Yahoo). In 2007, eBay replaced its Chinese auction site with a new joint-venture site run by its partner Tom Online Inc., an Internet company based in Beijing. We expect Latin America to become more of a focal point for the company since its partner in the region, Mercado Libre, came public in August 2007. EBay owned 18% of the company as of December 2007. A major player in the travel segment of the online auction category is priceline.com Inc., which patented a reverse auction process for airline tickets, hotel and rental car reservations, and other goods and services. According to Forrester Research, US online auction sales will grow to $65.3 billion by 2010 from $27.7 billion in 2005, for average annual growth of 19%. Forrester predicts that mainstream shoppers will drive this growth, with popularity increasing for newer categories such as home products (projected average annual growth of 40%), food and beverage (36%), and health and beauty (33%).
US INTERNET PENETRATION
(Millions of households)
140 No Internet 120 100 80 60 40 20 0
2001 02 03 04 05 06 F07 F08 F09 F10 F11 F2012
Non-broadband Internet
Broadband
F-Forecast. Source: Forrester Research.
ploded from slightly over 10,000 in December 1994 to more than 100 million in December 2006, according to Hobbes Internet Timeline, a history of Internet development compiled by the Zakon Group LLC. A key factor in the Internets growth has been the increasing availability of affordable PCs. As component prices have fallen, PC manufacturers have passed cost savings on to their customers, resulting in computers priced at seemingly ever lower levels. This makes PCs more attractive and affordable for first-time users, lower-income families, and bargain hunters. Low-cost PCs helped drive up PC penetration in US households from 65% in 2001 to 77% in 2006, according to estimates by Forrester Research Inc., a technology research firm. Approximately 72% of US households had access to the Internet in 2006 a figure expected to rise to 80% in 2012, according to Forrester. The number of households with high-speed broadband Internet access is expected to increase from 51 million in 2006 to 83 million by 2012, predicts Forrester. When consumers are asked why they purchased a PC, the most common answer is to connect to the Internet. As Internet usage continues to expand, Standard & Poors believes that significant growth will be spurred by broadband connectivity and Internet-enabled wireless devices. IDC has projected that narrowband revenues for Internet service providers (ISPs) may drop 75% between 2005 and 2010, while high-speed ISP revenues may rise more than 50% during this period. Broadband connections generally promote increased In-
ternet usage not only because of their higher access speeds, but because they are mostly always on and available. Wireless fidelity (or Wi-Fi) has enabled users of laptop computers and other mobile devices to access the Internet from a variety of public locations (known as hot spots), such as cafes, hotels, and airports. We expect that the number of devices able to use Wi-Fi hot spots will surge as the technology becomes more affordable and in demand. IDC projects that the number of worldwide Wi-Fi hot spots available to the public will nearly triple from under 85,000 in 2004 to over 250,000 in 2009, for average annual growth of roughly 25%. Over the same period, growth is expected to be between 22% and 26% for North America, Western Europe, and Asia-Pacific. WiMAX (worldwide interoperability for microwave access) is another broadband technology that will help increase Internet traffic. Leading US wireless carrier Sprint Nextel Corp. is working on a multi-billion dollar WiMAX mobile broadband network, with commercial service slated to be launched in the second quarter of 2008, beginning in the Chicago and Washington, DC areas.
retailer overall in the US based on units sold, reported market research firm NPD Group. (NPDs figures include online and retail sales, but do not include mobile music sales.) Market leaders were Wal-Mart Stores Inc. (16% share), Best Buy Co. (14%), and iTunes (10%). According to NPD, iTunes dominates the digital music market, accounting for more than three quarters of all songs downloaded in the US as of early 2007. Apples online shop, now known as the iTunes Store, has a catalog featuring more than six million songs, 600 TV shows, and 1,000 movies. In January 2008, Apple introduced a movie rental service with offerings from all of the major film studios.
Rest of segment consolidates and changes

Other companies competing with Apple in the online music segment include Napster Inc. (formerly Roxio Inc.) and RealNetworks Inc. Their offerings are more flexible and varied than iTunes, as they are compatible with a variety of music players and have multiple purchase options, including subscriptions. However, they face notable challenges because they are not designed to work with an iPod, which is the dominant digital online music device. Napster began in 1999 as a groundbreaking, file-sharing service allowing users to listen to copyrighted music free, which led to a spate of lawsuits. Digital media company Roxio acquired Napsters brand name and other assets out of bankruptcy in 2002, and launched a new, legal, paid Napster service the following year. Napster now offers multiple paid online music services, including subscription offerings for streaming songs to computers and allowing for downloads to MP3 players, as well as la carte purchases like iTunes. RealNetworks has been a major player in fee-based online music services for years, and the companys Rhapsody service offers very similar options. RealNetworks and Napster have been driving consolidation in the online music services segment. In January 2007, Napster purchased AOLs online music business called AOL Music Now. In August 2007, RealNetworks essentially acquired Viacom International Inc.s Urge service. In February 2008, RealNetworks became the exclusive provider of on-demand music services through Yahoo, replacing Yahoo Music Unlimited. Both companies have also been pur-
The evolving world of online music

Paid online music service revenues in the US were expected to grow from $814 million in 2005 to nearly $3.4 billion in 2010, according to IDC forecasts. On a global basis, this segments revenues are predicted to rise from $979 million in 2005 to almost $5.5 billion in 2010, and it remains a growth category. However, the online music arena continues to change. Apple Inc.s iTunes has evolved, but has been experiencing decelerating growth. Other players have been combining to better compete and capitalize on opportunities, and new and familiar new entrants are launching offerings.
Apples iTunes tops the charts

Apple Inc. has been a leader in the online music segment since it introduced the iTunes Music Store in April 2003. Since then, iTunes has sold more than four billion songs, according to a company announcement in January 2008. In the first quarter of 2007, iTunes surpassed Amazon.com Inc. and Target Corp. to become the third largest music
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Digital rights management spurs debate

Digital rights management (DRM), which refers to technologies used to protect against illegal usage and copying of digital media, is a topic that is being hotly debated by participants in the digital music business. In February 2007, Apple chief executive officer Steve Jobs released an essay stating that music companies should let his company and others sell songs free of DRM protection software. He believes that such technology has not succeeded in preventing piracy, and eliminating it could prompt consumers to buy more online music. Without DRM, music lovers could make online purchases from many stores and play them on multiple devices. However, some music companies disagree
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suing partnerships and acquisitions to better penetrate the mobile music category. Not surprisingly, Amazon.com, the worlds largest seller of music CDs, has been increasingly focused on the online music segment. In September 2007, the worlds biggest seller of music CDs launched an online music store that is free of copy protections. Another important participant in the online music segment is MySpace, the worlds largest social network. With millions of Web pages dedicated to performers, ranging from the Beatles to unknown garage bands, MySpace is an important online place for music. In fact, much of its early success is due to its emphasis on the music category. Consumers can learn about musical artists on MySpace, and then buy their songs and/or albums. There has been speculation that MySpace is negotiating with the worlds four largest music companies to create an online joint venture. Other players to watch in the category include eMusic.com Inc., which describes itself as the worlds largest seller of independent music and second-biggest Internet music service after iTunes, and musicsharing and recommendations company Last.fm, which was acquired by CBS Corp. in May 2007 for $280 million. Notwithstanding the potential of the online music category, intense competition has forced some to exit the segment, including major online players such AOL, Viacom, and Yahoo. Other blue-chip companies such as The Coca-Cola Co. and Virgin Group Ltd. discontinued their online music operations in 2006 and 2007, respectively.
with Jobs, as they are concerned about losing copyrighted music sales. Unprotected music using the MP3 format, which can be played on nearly all digital music players (including the iPod), has been available for several years. While most music from leading recording companies is sold with DRM protection, independent music labels have largely embraced the MP3 format. In April 2007, leading music company EMI Group PLC broke from the pack and declared that the company would offer most of its catalog for online sales without DRM. iTunes began selling EMIs DRM-free music in May, using the AAC file format, which is less widely used than MP3. In August 2007, Universal Music Group announced it was testing sales in the MP3 format. Amazon.coms online music download store now includes DRM-free music from four major record companies and independent labels. The success of the services from Amazon and eMusic, which also offers MP3 songs, will depend on whether the big music companies make a long-term commitment to the format. We expect this to happen, but stay tuned.
Illegal file sharing remains an issue

Lurking in the shadows of the legitimate online music business and the issues surrounding DRM is illegal file sharing. A massive number of people swap songs for free using peer-to-peer (P2P) file-sharing services such as LimeWire and Morpheus. Both of these are legal services that are often used for illegal purposes. The Recording Industry Association of America (RIAA), a trade group representing the US recording industry, has sued the owners of these entities. Notwithstanding a US Supreme Court ruling that purveyors of P2P systems can be sued for copyright infringement, the RIAAs efforts to sue those facilitating and engaging in illegal file sharing, and the growing popularity of legitimate alternatives, Standard & Poors believes that free P2P downloads continue to be a major issue for the music industry. Legal downloads were the fastest growing digital music segment in 2006, and the number of legal users was expected to exceed P2P users in 2007, according to research firm NPD Group. Nonetheless, this trend is offset by the tendency of P2P users to download many more files per user than people who pay for online music. Moreover, as of February 2008,
LimeWires P2P software was the third most popular download on Download.com, ahead of well-known applications WinZip, Acrobat Reader, and even RealPlayer.
Online gaming
As some of the entertainment sectors biggest participants have been hoping, the online video game segment is enjoying substantial growth. US revenues from online games are expected to increase dramatically from $1.8 billion in 2006 to $4.9 billion in 2010, according to IDC. The online games segment is one of the few Internet segments in which a subscription model is not only working but also flourishing. In 2005, subscription fees accounted for just less than half of online gaming revenues, and the remainder came from downloaded games and advertising. Standard & Poors believes that the category of downloadable games is one to watch. IDC forecasts that US sales of downloadable Internet games will climb substantially, from $443 million in 2006 to $2.6 billion in 2008. Electronic Arts Inc., Microsoft, RealNetworks and Yahoo are major participants in this category. The burgeoning online games market in China is spurring US-based game developers to partner with Chinese companies. In May 2007, global segment leader Electronic Arts announced a $167 million equity investment in The9 Ltd., one of Chinas largest online game developers, for 15% of the company. With the upcoming 2008 Beijing Olympics, interest in online sports games is rising, and introductions in the category are planned by mid-2008 by The9 (soccer) and Shanda Interactive Entertainment Ltd. (ping-pong). China generated $815 million in revenues from sales of online games in 2007, according to IDC.
try subscriptions as of February 2008, and the next highest market share was some 7%. A recent WoW expansion, entitled The Burning Crusade, sold 2.4 million copies on its initial release date in January 2007. The9 Ltd., which licenses and operates WoW in China, generated nearly all of its $175 million in net revenues in 2007 from the game. In August 2007, Blizzard Entertainment disclosed plans for another expansion pack that will give players new gaming abilities and a new continent to explore. Perhaps most importantly, in December 2007, Blizzards parent company, Vivendi Games, and Activision Inc. agreed to a proposed merger to create Activision Blizzard. Standard & Poors believes this planned $19 billion transaction is largely about the success and prospects for WoW. Not surprisingly, uncertainty looms over The9s WoW license, which is due to expire in mid-2009. Another popular online game is Second Life, which is a virtual three-dimensional world built and owned by its 13 million inhabitants from more than 100 countries. Initial basic accounts are free, but additional and premium accounts cost $9.95 per month. Privately held Linden Lab, the creator of Second Life, has indicated that the games interface and display are similar to many MMORPGs. However, Second Life is differentiated by the substantial creativity and ownership rights afforded to its residents.
Game consoles attracting more users

All three of the next-generation game consoles Microsofts Xbox 360, Nintendo Co. Ltd.s Wii, and Sonys PlayStation 3 (PS3) offer Internet access and capabilities. (Note: all shipment figures under this section heading in this section are global and cumulative, dating from the initial launch of the products.) Wii. The console can communicate wirelessly with the Internet. The Wii-Connect24 service delivers game updates. Nintendo reported that more than 20 million Wii units were shipped as of December 2007. The Wii had been the video-game console hit of the 2006 holiday shopping season, and its popularity continued throughout 2007. Although the Wiis Internet features and services are somewhat limited compared with those offered by the PS3 or Xbox 360, its in-
World of Warcraft Wow in more ways than one

The most profitable online games have been the massive multiplayer online roleplaying games (MMORPGs), which enable players to interact simultaneously with tens of thousands of other users. Blizzard Entertainments World of Warcraft (WoW) is the most popular MMORPG in history, with more than 10 million users as of January 2008. According to MMOGChart.com, a Web site dedicated to tracking segment growth, WoW accounted for 62% of indus-
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INSTALLED BASE OF ONLINE-CAPABLE VIDEO GAME CONSOLES

(In millions)
300 250 200 150 100 50 0 2005 2006 2007 2008 2009 2010 2011
Source: IDC's August 2007 forecast report.
played, what devices are being used, and the amount of time spent on game play. Initial Nielsen information revealed that the average number of minutes per session in June 2007 was 83 minutes for PS3, 61 minutes for Xbox 360, and 57 minutes for Wii. We think more transparency about related data will drive increasing advertising spending. In May 2006, Microsoft acquired in-game advertising firm Massive Inc., for an undisclosed sum. In July 2007, Google Inc. revealed that it was testing an ad-brokering service for online video games. To support this endeavor, it acquired video game ad firm Adscape Media Inc. in March 2007.
novative, motion-sensitive controller and affordable pricing are attracting fans. Xbox 360. The console offers access to various Xbox Live services, including multiplayer gaming, access to casual games, and in-game voice chat. As of December 2007, Microsoft had shipped 18 million Xbox 360 units. PlayStation 3. Sonys product offers always-on Internet connectivity, multiplayer gaming, text and video messaging, voice chatting, content downloads, and general Internet access. As of December 2007, Sony had shipped more than 10 million PS3 consoles. Shipments of the predecessor product, Playstation 2, reached some 127 million.
Far-reaching benefits
Although the Internet is still evolving as a medium for communications and commerce, it already has had a substantial impact on both consumers and businesses. For consumers, the advent of online shopping has brought greater convenience and time savings, while businesses have realized significant productivity gains through the use of the Internet.
Online shopping is easy and convenient

In a relatively short amount of time, the Internet has provided consumers with a number of benefits, including greater convenience, more choices, and easier access to information. The convenience of online shopping has proven to be a major attraction for many consumers, particularly in the markets for computer hardware and software, apparel, and consumer electronics. The product information available online is another boon to shoppers. It is relatively easy to conduct research regarding various products over the Internet. Consumers can access information needed to make an informed decision about major purchases, such as PCs, consumer electronics, and cars. Features, performance, and price all may be compared. Although the lowest-priced item is not always purchased, the nature of the Internet makes comparison-shopping so easy that prices in many categories of goods undoubtedly will decline over time. Online shopping experienced a spurt of merger and acquisition (M&A) activity in 2005. eBay acquired Shopping.com for some $620 million, and The E.W. Scripps Co., which owns a variety of traditional media
Games offer new medium for advertising

As online games gain in popularity, marketing and technology firms are seeking ways to use them as a new medium for advertising. Like product placements in movies and television shows, advertisers can place ads or branded products within elements of the virtual world of games, such as on billboards or in vending machines. In the future, advertising within Web-based games may become more dynamic, with changes based on the time or information about players. Advertising revenue from online games was $55 million in the US in 2006, and it is forecast to rise to $800 million in 2011, according to research firm Park Associates. The Nielsen Co. BV, which tracks TV and Internet usage, introduced a new service, Nielsen GamePlay Metrics, in mid-2007. This service monitors which games are being
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properties, purchased Shopzilla (formerly BizRate.com), a comparison-shopping company, for $525 million. Also in 2005, PriceGrabber.com LLC was bought by Experian Information Solutions Inc., which owns Internet marketing businesses, for $485 million. In July 2007, online ad and media company ValueClick Inc. acquired MeziMedia Corp., an operator of comparison-shopping Web sites, for an initial payment of $100 million in cash. Additional payments of up to $352 million may be made to MeziMedia management based on meeting performance benchmarks by December 31, 2009. We would not be surprised by another wave of consolidation in the segment in 2008, as some prior combinations have not worked out as well as was expected. For retailers, online sales offer opportunities and challenges. They can use the Internet to interact with current and potential customers in numerous ways, including e-mail newsletters and online surveys. To attract and retain customers, companies are not competing on price as much as on selection, service, and shipping, which is sometimes provided at a discount. Of course, online retailing has its costs: companies need to invest in various kinds of technology, from Web site development to Internet-enabled customer service. Companies are increasingly using the Internet to communicate with customers not only by e-mail but also by instant messaging and other technologies. If an online channel for sales or service is developed and deployed correctly, it can benefit both Internet sellers and buyers. In 2006, for example, Dell Inc. launched DellConnect, a service that allows technicians to remotely diagnose and repair PCs under warranty. During this process, the technicians can talk through issues on the telephone with customers and connect to their PCs via a broadband link. Dell hoped that developing DellConnect and other services would help dampen criticism of its support offerings and increase customer satisfaction. Now, a variety of companies offer real-time online customer service. Andectodal evidence indicates that customers have benefited from such offerings from Fidelity Investments Inc., Microsoft, and Time Warner Cable Inc.
Internet-based competitors, many public and private companies have benefited from embracing the Web. Companies have made use of the Internet as a new sales channel and service delivery mechanism to improve internal communications, upgrade internal processes, change the supply chain, and for advertising purposes, according to management consulting firm A.T. Kearney Inc. Nonfarm business productivity continues to experience notable growth, according to the US Bureau of Labor Statistics. Retired Federal Reserve chairman Alan Greenspan attributed productivity gains in part to technology advancements and deployments. The use of Internet-based applications and platforms such as e-mail, instant messaging, Voice over Internet Protocol (VoIP) telephony, video conferencing, corporate intranets, and even blogs has helped to promote improved communications among employees, customers, and partners, while reducing associated costs. In the near future, Internet-based voice communications will likely be commonplace, which will further reduce communication costs. The Internet also enables companies to establish a national or even global presence without having to invest in physical infrastructure. Dell is a company that saw early on how real-world corporations that is, those with significant physical assets could improve operational performance by employing the Internet throughout their businesses. For many years, Dell was successful at selling its own and third-party products directly via the Internet. Customers could research products, customize orders, track shipments, and access useful technical and support information using the Internet. This direct-sales model helped Dell maintain a lean organization with little inventory on hand, enabling the company to adjust to market changes and deal with obsolete inventory. Moreover, Dell has been a pioneer in using the Internet to enhance customer service. However, in 2006, Dell was forced to revisit its business model due to declining sales and stronger competition. It has since redoubled its efforts to improve its Web-based sales and services to better meet customer needs; it has also ventured into retail sales.
The dark side of the Internet

Corporate productivity gains
Although some corporations, particularly real-world retailers, have lost market share to Although the Internet is seen largely as a positive force for consumers and business, it
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does suffer from some issues that cast a negative light on the segment. Junk e-mail (commonly known as spam), computer viruses, and identity theft are just some of the problems posing serious threats to online users. The US is a hotbed of Internet security threats, according to software security firm Symantec Corp. In early 2007, Symantec reported that the US accounts for nearly onethird of the worldwide total of malicious activities involving botnets, phishing, and many other illegal endeavors (described below and in the Glossary section of this Survey). As Internet technology and offers get increasingly sophisticated, so do its criminals. Two new areas attracting hackers are online ads and Web-based applications. Just clicking an online advertisement can infect a computer. According to Internet security company McAfee Inc., in mid-2007, nearly 7% of sponsored links were tied to dubious sites that could potentially infect a PC with malicious software. Security vulnerabilities also have been found in Web-based applications, including Yahoo mail, the worlds most popular online email service.
Security issues affect e-commerce

Consumer concerns about security breaches, such as computer viruses and theft of identity and financial information, are having a considerable impact on e-commerce. These concerns were expected to result in a loss of $2 billion in e-commerce sales in 2006, based on a survey by research firm Gartner Inc. An estimated $913 million in ecommerce sales were lost in 2006 due to security concerns among online shoppers. Computer crime, including viruses, spyware (software that secretly collects information from Internet-connected computers), and theft of PCs, costs US businesses $67.2 billion a year, according to the 2005 FBI Computer Crime Survey (latest available). Businesses need to find ways to increase consumer confidence, as well as to reduce online fraud and other computer crimes.
Phishing invasions grow more sophisticated

Phishing involves sending an e-mail to a user while falsely claiming to be a legitimate enterprise in order to trick the receiver into supplying private information. The phisher then uses that information for identity theft or illegal financial gain. Phishing is a growing problem, in terms of the volume of messages sent and the sophistication of phishers. Approximately 109 million US adults got phishing e-mails in 2006, nearly double the number in 2005, according to a 2006 survey by Gartner. The number of phishing e-mail recipients who handed over sensitive information climbed from 1.9 million in 2005 to 3.5 million in 2006. Phishing attacks resulted in more than $2.8 billion in financial losses in 2006, according to Gartner, which believes that phishers are increasingly targeting high-income adults. Phishers seem to favor impersonating popular Internet brands such as PayPal and eBay; they are pretending less frequently these days to represent banks.
Spam battles continue

For years, spam has been eating up bandwidth and infecting computers with viruses, and, it is becoming measurably worse. Global spam volumes doubled in 2006, according to Ironport Systems Inc., a spam-filtering firm (acquired by Cisco Systems Inc. in June
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2007), and 76% of sent e-mail messages were spam on a randomly-chosen day in February 2008, according to TrustedSource, a service of Secure Computing Corp. A large part of the current surge of unwanted e-mail is image spam, in which the words of an advertisement are incorporated into a picture, making it more difficult for conventional spam detectors to spot and filter out. Quadrupling in 2006, image spam makes up 25% to 45% of all spam, reports Ironport. Although anti-spam companies battled spam successfully for a while by scanning sender information, content, and Web site links in e-mail messages, clever spammers were able to fight back and resume sending more spam messages. The US Securities and Exchange Commission (SEC) has filed many cases against spammers over the years, and the federal Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003 forced domestic e-mail marketers to refrain from the activity or face imprisonment. As a result, spammers now operate out of the reach of US law in places such as Asia, Eastern Europe, and Russia. The CAN-SPAM Act also has a significant loophole in that it allows bulk e-mailing if messages are marked as advertising and contain a way for recipients to decline emails. This blurs the line between spam and corporate marketing through e-mail.
In the case of online brokerage accounts, in addition to using spyware and programs that log keystrokes to steal account information, phishers invade customer accounts to sell all the securities and take the proceeds, according to SEC reports. Phishers can artificially pump up the price of a specific stock by buying and selling the stock; they then use the proceeds to purchase more of the stock, in order to push up the share price. Social networks, such as MySpace and LiveJournal, have come under attack from phishers, especially during the second half of 2006, according to Internet security firm Netcraft. Although social network accounts have little monetary value, phishers can infect computers with malicious software codes to forward spam and viruses to other computers connected to the Internet. Banks, brokerage houses, ISPs, and other businesses are employing aggressive measures to detect phishing activity. To help consumers, Microsofts updated Internet Explorer 7 Web browser, released in October 2006, includes a phishing filter tool that assigns color codes based on security assessments: green is for a legitimate business, yellow means the site could be suspicious, and red signals a phishing scam.
government agency that maintained the Internet from 1985 to April 1995. The NSF began to transform what was a military intelligence network focused on safeguarding data to an expanding civilian network linking universities and commercial users. As the network grew, people began to communicate via a new medium: e-mail. The NSF expanded the backbone from six supercomputer sites in 1985 to 16 sites in 1995, including academic networks. In 1995, the NSF contracted with commercial entities to provide access to its backbone, and these licensees were charged with selling connections to groups, organizations, and companies. Since then, the NSF has moved beyond supporting the backbone, allowing independent for-profit companies such as AT&T Inc., Sprint Nextel Corp., and Verizon Communications Inc. (which owns UUNET Technologies following the companys acquisition of MCI Inc.) to build and maintain, throughout the country, networks that now constitute a large part of the Internet.
The World Wide Web

The World Wide Web was developed primarily by Tim Berners-Lee for scientists at the Conseil Europen pour la Recherche Nuclaire (CERN), based in Geneva, Switzerland. The system was designed to facilitate research by allowing authors to reference documents available on the Internet. Years after this and other contributions, BernersLee was awarded the Millennium Technology Prize, the worlds largest technology award (based on financial value), in June 2004. In July of that year, he was knighted by the Queen of England for his accomplishments. The Web uses hypertext markup language (HTML) to reference documents with a simple coding system and to format them for viewing by Web users. Until 1992, the Web remained text-based and was relatively unknown outside academic circles. The network was difficult to navigate, and most users were computer science college students or former university users at computer-related companies. In the spring of 1993, a software program called Mosaic was developed by a team of students at the University of Illinoiss National Center for Supercomputing Applications. Mosaics graphical interface was a browser software that enables an Internet user to view
HOW THE INDUSTRY OPERATES

The origins of the Internet date back to the late 1960s, when the US Department of Defenses Advanced Research Projects Agency (ARPA) began to explore designs for a packetswitched communications network that could withstand the loss of any single part of the system. Called ARPAnet, this network transmitted military data via various computer facilities across the United States. These facilities, called nodes, were interconnected by a series of telephone lines in such a way that the nodes were largely independent of one another. What made this network revolutionary was its reliability. If one node was rendered inoperable, data could still flow among the others. In addition, the nodes could detect whether certain connections were congested and then would route the data accordingly. Before 1985, ARPAnet was primarily a military resource. That year, ARPA ceded control of its network to the National Science Foundation (NSF), an independent US
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both text and graphics. The transition to a visual interface simplified Internet use and sparked rising interest in the Web. Although the Web is actually just a part of the Internet, it is so popular that it became synonymous with the Internet itself, due largely to the creation of the browser. The Web allows even novice users to surf the Internet, jumping from Web site to Web site to search for desired information. Using HTML, organizations and individuals can create home pages with text, graphics, and dynamic content such as audio and video clips. These pages are tied together by a series of links, which the Internet user clicks on to move to the referenced page. Increasingly, Web sites are employing extensible markup language (XML), which enables more flexible presentation and manipulation of data online. The most popular Web-surfing software today is Microsoft Corp.s Internet Explorer. Netscape Communications Corp.s browser, which was once the markets leader, has fallen far behind (less than 1% share as of June 2007). The company (which was acquired by America Online in March 1999) was cofounded by Marc Andreessen, one of the students who created Mosaic at the University of Illinois.
standard that offers faster connections and has better range than Wi-Fi. We look for WiMAX to become increasingly prevalent and important in the coming years. Sprint Nextel is investing $3 billion to build a nationwide WiMAX network. The company plans to launch commercial WiMAX service in the first half of 2008. More details about these connectivity options can be found in the Broadcasting & Cable; Telecommunications: Wireless; and Telecommunications: Wireline editions of Industry Surveys.
A powerful global medium

What makes the Internet a truly global medium is its decentralized nature. It is a virtual community owned by no one. The Internet empowers individuals and organizations by offering easy and equal access to billions of Web pages, and the opportunity to communicate with hundreds of millions of Internet users. Low barriers to entry, relatively small capital expenditures, and electronic-payment technologies enable merchants to sell their products to a worldwide population of consumers regardless of geography, language, or currency. Researchers can tap into an enormous source of information. The Internet serves as a continually growing global library, increasingly with multimedia content. With electronic mail, individuals have a low-cost, efficient way of keeping in touch with friends and family. Groups of people with similar interests can join online communities to exchange insights and debate topics regardless of location or time. Every client screen (i.e., every computer or other device accessing the Internet) becomes a gateway to a vast array of information and resources that is available on demand, 24 hours a day, from virtually anywhere.
How do users connect to the Internet?

From their homes, users generally access the Internet through dial-up, digital subscriber line (DSL), or cable access. Businesses often have high-speed access via direct T1, T3, or OC3 connections and broadband networks. Wi-Fi (wireless fidelity) had emerged as a standard for wireless Internet connectivity. It enables wireless devices such as laptop computers and personal digital assistants to establish and maintain broadband Internet connections. Wi-Fi can be employed via access points called hot spots, which are being established in locales such as cafes, hotels, airports, and other public places. EarthLink was rolling out municipal Wi-Fi networks in a number of cities across the country, including Philadelphia and New Orleans, but in February 2008, it announced that these operations no longer made strategic sense for the company, and indicated that it plans to divest them. WiMAX (worldwide interoperability for microwave access) is an emerging wireless
Infrastructure
A multitude of companies in different industries play integral roles in how the Internet functions. A logical way to study the industry is first to examine the infrastructure of the Internet, which encompasses hardware, software, and access services. (For information on leading companies that participate in these areas, see the Industry Profile section of this Survey.)
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Hardware
The computer and communications equipment industries provide the hardware that comprises the physical infrastructure of the Internet. More specifically, hardware companies make the equipment that connects, operates, and powers the networks that constitute a large portion of the Internet. Information about this hardware, which includes servers and networking equipment, can be found in the Computers: Hardware and Communications Equipment editions of Industry Surveys.
Web hosting services

Some companies maintain their Web sites on servers kept in-house. Other corporations employ Web hosting firms to ensure that their sites operate without interruption. Customers utilizing these services generally manage their own servers, while the data center operators offer safe, secure, and physical hosting space and direct service provider connections.
Software
Software companies provide a variety of Internet-related offerings to both businesses and consumers. This Survey concentrates on two of the more important types of Internet-related software: browsers and security software.
prevent access to certain Web sites), and email/messaging security software. Firewall/VPN software. This software controls user access to certain data and/or applications. A firewall is software that separates internal networks and the Internet, assessing which traffic can enter and exit. It allows specified employees to browse the Internet, while preventing unauthorized access by other Web users. Firewalls often are built into existing pieces of hardware like routers or servers. VPN software employs the public Internet to create a private communications network, used usually within a single company or organization. VPN software often is used to connect remote PCs and devices to corporate networks. Intrusion detection and vulnerability assessment software. This type of software monitors computers, devices, and networks to discover, assess, prevent, and remedy inappropriate or anomalous activity. Sometimes such activity is malicious in nature. Two other important areas of Internet security software are digital certificates (i.e., identification measures), and authentication and encryption software, which confirms parties involved in communications and/or transactions, and then safeguards such interactions.
Browsers. Browser software enables online navigation by allowing users to view Web site text and graphics that are housed in servers. Microsoft dominates the current browser market. Security software. There are many different types of security software designed to safeguard networks and electronic transactions, including secure content management software, firewall/VPN (virtual private network) software, and intrusion detection and vulnerability assessment software. The different kinds of security and threat management software have started to converge to help companies better cope with a broader array of threats (see the Industry Profile section of this Survey for details). Secure content management software. These products provide management and protection capabilities related to certain types of content, and often reside directly on personal computers (PCs) and other Internet-enabled devices. Types of secure content management software include antivirus, Web filtering (to
Access services
When consumers or businesses access the Internet, they connect to an Internet service provider (ISP). ISPs offer basic, flat-rate Internet access to customers, either through wholly owned networks or networks leased from other ISPs. Users generally access an ISPs network through ordinary phone lines or through faster DSL or cable connections, using a browser to gain entry to the Web. Access fees for major dial-up ISPs are generally $10 to $25 per month for unlimited Internet use. Interestingly, prices for highspeed DSL and cable access have fallen so much in recent years that they now cost consumers roughly the same as dial-up connections. In mid-2007, AT&T offered basic DSL service for $14.99 per month.
Destinations
Once a user has connected to the Internet, a dizzying array of destination sites is available to view and explore. For the purposes of this report, these destinations can
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be broken down into two main categories: content and commerce.
Content
This sector consists of Web sites that frequently and regularly are updated with new information and media. While many providers produce original content, others (known as portals) aggregate content from outside sources and repackage it into well organized and often customizable Web sites. Original content providers. These companies either create material especially for the Internet or reconstitute their content for online consumption. Many established media companies, including news organizations and magazine and newspaper publishers, fall within this category, along with a growing number of upstarts that have established sites with content that is available solely on the Internet. Given recent and projected significant growth in online advertising, many of these content providers generate revenues from Internet marketing. Types of advertising include keyword, display, classifieds, lead generation, and rich media. Not surprisingly, advertisers are attracted to heavily trafficked or leading niche sites to reach their intended audiences. Some providers charge fees to access at least a portion of their content or services. Subscriptions on the Internet are like traditional subscription models used for magazines: over a finite period, users pay to obtain content that they would not be able to get elsewhere. Because users have shown a general reluctance to pay for online content, the success of this model has been somewhat mixed. However, a variety of entities including ESPN, RealNetworks Inc., and the Wall Street Journal have shown that Internet users will pay for online content if it is unique, compelling, and reasonably priced. la carte purchasing options, whereby users pay for a specific article or song, are growing increasingly prevalent, largely as a result of the success of Apple Inc.s iTunes. Portals. These are Web sites designed to be an Internet users initial starting point for online usage. A portals front page usually offers search options, e-mail capabilities, and a variety of other content and services ranging from news headlines, stock
quotes, and sports scores, to shopping and entertainment offerings. Unlike fee-based content providers, portal companies often do not charge fees for most of the wide range of services that they offer. Instead, these companies predominantly generate revenues by providing online advertising solutions. The rates advertisers pay frequently are closely related to the number of people who potentially will see and click on particular ads and the degree of targeting that is employed. For example, a portals registered user, whose profile includes a New York address and who conducts a search at the site for the word football, could be shown ads for New York Giants paraphernalia or local sports bars. Portals have increasingly been focusing on advertising opportunities. Google Inc. is providing more content and services to be able to offer more advertising and more targeted messages. To spur growth in users and activity, AOL LLC, the Internet division of Time Warner Inc., has shifted its business model to offer mostly free services. Yahoo Inc. continues to pursue diversification with paid services such as enhanced e-mail and domain-name registrations, in addition to its free e-mail and information services. Communities. Unlike traditional portals, which offer information and services derived from typical mass media sources, communityoriented Web sites depend heavily on their registered user bases for content. Advertisers can target communities that they believe would respond favorably. For instance, a maker of entertainment software likely would target communities dedicated to electronic games. Increasingly, the differences between portals and communities have become blurred. Many portals have acquired or built communities and integrated them into their Web sites, and many communities have added portal-like content to their offerings. Examples of user-driven content include online postings, profiles, and polls, as well as newer technologies such as blogs, wikis, digital photographs, podcasts, and vlogs. Blogs (Web logs) comprise a kind of community that has been gaining popularity. Blogs typically involve authors posting (on the Web) their thoughts on particular subjects, with users responding. Initially, these kinds of forums generally focused on technology issues and politics, but they inMARCH 27, 2008 / COMPUTERS: CONSUMER SERVICES & THE INTERNET INDUSTRY SURVEY
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creasingly concern other topics as well. A wiki is a type of Web site that allows users to easily add, remove, or revise content. The most popular wiki is Wikipedia, which is a communitymaintained online encyclopedia. Other Internet communities involve multimedia elements. Flickr, which is owned by Yahoo, is a photo-sharing community. A podcast is an audio program that can be automatically distributed over the Internet to a persons computer, often for later playing on a digital audio device such as Apples iPod. A vlog is a blog that employs video content. The Internets most popular vlog Web site is Googles YouTube.com. Perhaps the most prevalent segment of the online communities category is social networking, which includes companies that facilitate personal connections among users with common interests and goals. Examples of popular social networks include MySpace and Facebook. Search services. Search engines are used to locate information online. Users input keywords, which search engines check against extensive volumes of indexed Web sites and Web pages. If matches are found, the search service provides them to the user in the order of most relevant to least relevant. As the vast amount of information on the Internet continues to grow explosively, the importance of search services has increased. As a result, companies focused only on providing search services have become more popular. Although established players such as LexisNexis (owned by Reed Elsevier Group PLC) offer a variety of fee-based search services, the advertising-focused free search model has become increasingly prevalent.
WORLDWIDE E-COMMERCE SPENDING

12,000 Business-to-consumer* 10,000 Business-to-business 8,000 6,000 4,000 2,000 0 2006 2007 2008 2009 2010
*The value of products or services purchased by individuals by clicking an order button on the Internet, and intended for consumption by themselves, family, friends, etc. The value of products or services purchased by businesses by clicking an order button on the Internet, and intended for consumption by the business or intended to be incorporated into the business's product or service offerings. Source: IDC's April 2007 forecast report.
consumer (C2C), also known as peer-to-peer or person-to-person (P2P) transactions. Business-to-consumer (B2C). This generally refers to transactions conducted between a consumer and an online retailer. Internet shoppers can browse through a companys inventory of goods, which will display a picture of each item along with a detailed description and an indication of availability. Most sites allow users to search for items based on specified criteria. On some sites, most notably Amazon.com, an items description is accompanied by reviews by both professional and amateur critics. Comparative shopping sites (such as eBay Inc.s Shopping.com or Google Product Search, formerly known as Froogle) offer applications known as shopping bots, which enable users to compare the prices of a specific product across multiple B2C e-commerce Web sites. The relatively low cost of establishing a Web site has reduced barriers to entry in the retail market. It is now possible to target an extremely large market without spending the exorbitant amount of capital necessary to open brick-and-mortar stores. Companies aim to build brands and establish loyal users that will consistently purchase goods from their Web sites. Traditional retailers often have advantages over new entrants: established brands and customer loyalty. Using these recognized and trusted names and existing (and sometimes longstanding) relationships as
Electronic commerce
Electronic commerce, or e-commerce, generally is defined as business conducted via the Internet. The e-commerce sector has two major segments business-to-consumer (B2C) and business-to-business (B2B). Although the B2B market is estimated to be much larger than the B2C market, both areas are growing rapidly. The online auction segment also has become a vibrant part of the e-commerce sector, although it reflects only a small percentage of the overall e-commerce industry. It includes B2C, B2B, and consumer-to-
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US ONLINE RETAIL SALES, BY CATEGORY

CATEGORY
2007
F2012
Apparel, accessories, and footwear Appliances and tools Auto/auto parts Baby products Books Computer hardware/software/peripherals Consumer electronics Cosmetics/fragrances Event tickets Flowers/cards Food/beverage Gifts cards/gift certificates Home furnishings Jewelry/luxury goods Movie tickets Music/video Office supplies OTC medicines/personal care Pet supplies Sporting goods/apparel Toys/video games Other* TOTAL US ONLINE RETAIL SALES
22.7 7.5 16.8 1.8 7.6 20.7 13.5 1.0 5.7 3.3 6.2 7.3 12.3 6.4 1.2 8.2 7.7 1.8 1.1 6.9 6.7 8.3 174.5
41.8 16.9 30.9 3.1 9.5 37.1 29.5 2.0 9.7 6.4 13.7 15.4 26.7 12.6 2.8 11.7 17.1 4.2 3.4 13.9 13.2 13.4 334.7
From a corporations perspective, e-commerce can deliver significant cost savings. When customers order regularly from a Web site, they do not have to interact with salespeople, who thus can pursue other sales. Furthermore, because orders are entered and recorded electronically, buyers can monitor and update their cost ledgers more easily, sellers can manage their inventories more closely and efficiently, and transaction errors are much less frequent. Auctions. Although auctions have been around for centuries, the Internet has given a new and enhanced life to this method of buying and selling goods. The best known and most dominant online auction company, eBay, is perceived as primarily facilitating transactions between individuals. However, eBay is increasingly enabling sales by small businesses, large corporations, and government entities. There are many other smaller B2B and B2C auction sites as well, which usually specialize in certain categories of items. A person or organization wishing to sell an item typically pays a small listing fee to the Web site operator, sets a minimum bid, and then waits a few days to see how the auction pans out. Sellers usually are held responsible for shipping goods to winning bidders. While there is always the potential for fraud in this process, many auction sites employ a rating system that helps to keep participants honest. Sellers who generate poor satisfaction ratings are unlikely to have much success in garnering significant bids for merchandise. In addition, eBay maintains a comprehensive fraud protection program, with a staff that monitors the companys sites for questionable activity. The company also offers escrow and insurance services for higher-priced items. A type of auction that was first deployed on the Internet is known as a reverse auction, which was developed and is employed by ecommerce company priceline.com Inc. Pricelines Web site allows customers to name their own price for a variety of products and services. Customer offers are guaranteed by credit cards. Priceline then communicates the bids to participating sellers. The company makes money either on the spread between the buyers and the sellers prices or by charging a fee. Today, the Web site accepts bids for a variety of primarily travel-related goods and services, including airline tickets, hotel rooms, rental cars,
F-Forecast. *Includes subscriptions, art and collectibles, and services. Source: Forrester Research US eCommerce Forecast, January 2008.
Business-to-business (B2B). In contrast to consumers sometimes impulsive purchasing, B2B transactions between companies tend to be very structured and are controlled by bureaucratic budgeting and buying processes. While a few vendors provide their goods solely via the Internet, many other firms take advantage of the Internet as an alternative distribution channel. Companies like Cisco Systems Inc. and Dell Inc. sell tens of millions of dollars of goods per day via the Internet.
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foundations, many traditional vendors have successfully expanded their sales capabilities to include the Internet. Conversely, many pure-play online retailers have gone out of business after incurring significant operating losses due to heavy sales and marketing expenditures, technology investments, and deep promotional discounting. The competitive and costly reality of running a large consumer e-commerce site has led many players to pursue outsourcing partners (which are responsible for some or all of their operations) such as Amazon.com Inc. or GSI Commerce Inc.
vacation packages, and cruises. An unusual aspect of this reverse auction process is that it is patented. A patent for this business model, filed by priceline.coms founder Jay Walker, was approved in August 1998. Its enforceability has been questioned, but the patent remains legally valid.
Government plays a prominent role

If you think the government is playing more of a role in the policies and practices shaping the Internet, you are absolutely right. Public entities have been more active in addressing issues of importance to online users as the Internet has become more important for consumers and companies. This heightened activity reflects government confidence in the Internets significance and staying power, as well as a belief that the rights of Internet users need to be protected. As the Internet has become increasingly essential in peoples lives, the governments inclination to evaluate and regulate online activity also has grown. Notwithstanding this trend and lobbying efforts from major Internet companies, Congress has not yet pursued legislation to mandate network neutrality, a proposal that would have required providers of Internet access to manage all Internet traffic on equal terms. In June 2007, the Federal Trade Commission (FTC) issued a report asserting that there was no need for new federal rules to require net neutrality, because existing laws provide sufficient protection for consumers. In February 2008, Congressman Edward Markey, chairman of the House Subcommittee on Telecommunications and the Internet, introduced a bill to promote and ensure net neutrality. In recent years, government entities have pursued the fight against identity theft and online gambling. The FCC made progress in promoting competition in broadband Internet access and VoIP (Voice over Internet Protocol) telephony. In addition, several government bodies moved forward on matters regarding online taxation and privacy two areas that continue to garner significant attention, for reasons explained in the text below.
the federal government. In September 2005, California enacted the first state law in the country that makes online phishing scams illegal. Phishing consists of sending an e-mail purportedly from a legitimate enterprise in an attempt to con the recipient into providing personal information that could be employed for identity theft. In mid-2007, the Internet Spyware (I-SPY) Prevention Act was introduced. In 2007, Congress introduced no fewer than 18 privacy-related bills, focusing on the protection of consumer information and the prevention of identity theft. In particular, multiple bills involve safeguarding the use of Social Security numbers, and these proposals are still being studied.
Taxation
In November 2001, after considerable debate, the Internet Tax Non-Discrimination Act was enacted. The proponents of this law believed that it promoted greater health and growth for the Internet economy. Many others, however, believe that the ban on Internet taxes unfairly disadvantaged government entities. The moratorium has been extended twice, and is now due to expire in 2014. The latest version of the law prevents states from taxing Internet access services, but allows levies on fee-based consumer voice or video offerings. It does not specifically address the issue of a sales tax on goods purchased online. In early 2008, New York Governor Eliot Spitzer revived a plan to require out-of-state companies to collect state sales taxes on items they send to New York addresses. Spitzers proposed budget estimates $47 million in related revenues. According to the New York Times, at least 17 states are trying to streamline taxes for collection by out-of-state companies. Another five states are planning to pass laws to comply with the Streamlined Sales Tax Governing Board, which intends to create and implement a simpler system of sales taxes.
KEY INDUSTRY RATIOS AND STATISTICS

Gross domestic product (GDP). GDP, the broadest measure of aggregate economic activity, is the market value of all goods and services produced by labor and capital in the United States. To arrive at GDP, four major expendi-
Privacy
Spyware, which is hidden software that tracks and reports user activity, has been an important issue considered and acted upon by
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ture categories are totaled: consumption, investment, government purchases of goods and services, and net exports of goods and services. Growth in the economy is measured by changes in inflation-adjusted (or real) GDP. The US Department of Commerce reports GDP data each quarter. The health of the overall economy affects the performance of Internet-related industries. As economic activity increases, the volume of communications traffic rises. This increased traffic requires that telephone, cable, and wireless companies raise the capacity of their networks, which spurs demand for network equipment. Healthy economic activity also spurs consumption of personal computers (PCs), servers, Internet access, and goods and services offered online. In 2007, US real GDP grew 2.2%. As of February 2008, Standard & Poors projected GDP growth of 1.2% for 2008 and 1.9% for 2009. Although Standard & Poors forecasts economic growth over the next two years, these estimates have been reduced materially in recent months, in light of the substantial challenges in the housing and credit markets. Moreover, Standard & Poors anticipates that the US economy will experience a recession defined as two consecutive quarters of declines in real GDP in the first half of 2008. PC unit sales. PC industry growth is a key element in determining the overall growth of the Internet. PCs are the primary gateway devices for users accessing the World Wide Web, and Internet access is becoming the primary driver for home PC sales. According to information from IDC, an information technology research and consulting firm that compiles historical data for PC sales and provides forecasts, worldwide PC shipments totaled about 208 million units in 2005 and 228 million in 2006. Sales are projected to increase steadily to 351 million in 2011. The compound annual growth rate in PC shipments from 2006 to 2011 is estimated at 9%. Historically low and declining PC prices, the popularity of the Internet, and advances in broadband technologies will continue to promote healthy growth in US and international markets, in our opinion. Nonetheless, we think that the material economic issues touched upon earlier could restrain this secular growth somewhat, especially domestically.
Internet and broadband penetration. This is the percentage of a population that has online and high-speed Internet access in a given geographic area. Lower penetration portends for greater subscriber growth potential; higher penetration generally contributes to more favorable usage metrics. Although the US had a broadband penetration rate of about 50% as of the fourth quarter of 2006, it lagged other regions with higher penetration rates, such as South Korea (89%), Hong Kong (83%), and the Netherlands (69%), according to research firm Point Topic. The number of US households with high-speed broadband Internet access is forecast to grow from 57 million in 2006 to nearly 89 million by 2010, according to IDC. Growth of Internet usage. Some growth figures describe the number of online subscribers, while data on page views offer greater detail about traffic patterns and behavior. Higher traffic rates could affect expenditures on hardware used to enhance the Internets capacity. In November 2006, Google Inc. surpassed Yahoo for the first time in terms of the number of worldwide visitors. In that month, Google had 475.7 million visitors, compared with Yahoos 475.3 million, according to ComScore Inc., an online media research firm. IDC estimates that, worldwide, Internet users will rise from 1.1 billion in 2006 to 1.7 billion in 2010, for a compound annual growth rate of 12%. This anticipated growth could be attributed largely to increased usage of the Internet on an international basis and the proliferation of various access devices, including mobile phones and other communications appliances.
HOW TO ANALYZE AN INTERNET COMPANY

When analyzing an Internet company, it is important to remember that the industry was created relatively recently in the last decade. Among all the new entrants, only a small number have managed to establish critical mass and sustain profitability. For these companies, analysts can use traditional measures when conducting comparative analyses, but they must pay close attention to quickly evolving market dynamics.
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Different techniques should be used to evaluate start-up companies and those with more limited revenue and earnings profiles. Analyzing any relatively young business, especially one with a focus on the rapidly changing Internet segment, poses special challenges. Traditional methods of determining financial standing and underlying value may not be readily applicable. As a result, companies are often valued largely on their prospects for future growth. In addition to the uncertainty surrounding specific companies, it is often difficult to estimate the potential size of the markets in which they compete, and forecasting category growth may be something of a guessing game. For these reasons, in our view, qualitative judgments are crucial in helping to determine an Internet companys competitive position, growth opportunities, and value.
tensive virtual inventory of products that can be easily searched, researched, and purchased. An example is eBay Inc., which serves as a platform used by more than 276 million registered users to buy and sell goods. Once an item of choice is located, a transaction can be completed in a matter of minutes. As more wouldbe purchasers flock to eBay, more sellers set up shop to win their business, which results in heightened consumer interest. This build-up of greater numbers of buyers, begetting more sellers and leading to even more shoppers, is an example of the network effect. The power of this phenomenon is one of the reasons eBay has been so successful.
Management expertise and ethics are key

When analyzing an Internet company, it is essential to focus on the quality of its management. More than any other industry, the Internet demands managerial excellence, with a particular focus on vision and execution. Being able to generate new ideas, market new products, and foster an entrepreneurial, innovative, and effective corporate culture are invaluable skills when managing a young business in a rapidly evolving new industry. Along with start-ups, many long-established companies are making forays into the Internet. To seize online opportunities more effectively, News Corp., a well-known media conglomerate, created Fox Interactive Media in mid-2005. This business unit has made a number of acquisitions, including the popular MySpace.com social networking business. In August 2006, Fox Interactive secured a search and advertising relationship with Google Inc. In December 2007, after months of negotiations, News Corp. acquired Dow Jones & Co. Inc. for $5.6 billion. We expect News Corp. to aggressively pursue new online opportunities involving traditional Dow Jones properties, which include the Wall Street Journal newspaper, Barrons magazine, and the Web site Marketwatch.com. Largely as a result of the Dow Jones purchase and the efforts of Fox Interactive, News Corp. is widely perceived as the traditional media company best positioned to capitalize on the promise of the Internet. Nevertheless, despite the proven prowess of Rupert Murdoch, the companys chairman and chief executive, we believe his and his familys significant control of the company
Making qualitative assessments

Rigorous financial statement analysis should be part of a review of any publicly traded company. For Internet-related firms, due emphasis should be placed on considerations regarding business models, competitive standing, and management expertise and ethics.
A model business model

Although Internet businesses of the past were conceived mostly to capitalize on significant growth opportunities, the dot-com crash and subsequent global macroeconomic woes from 2000 into 2003 changed the priorities of online companies and their investors. Internet firms must do more now than simply generate growth in users and revenues; they also must deliver on the promise of profitability. The most successful Internet business models generally have diversified revenue streams, scalable expense structures, and limited capital requirements. Many online companies that were once high profile, including At Home Corp., Pets.com Inc., and Webvan Group Inc., were able to garner noteworthy growth and brand recognition, but they ultimately failed because they could not generate sustainable earnings. In addition, the most profitable online companies often have business models that capitalize on the unique benefits provided by the Internet, such as the capability to offer an ex-
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detracts somewhat from our perception of its corporate governance practices. Standard & Poors believes that consideration of corporate governance is critical to investment analysis and decision-making, and consistently employs such considerations in making assessments related to stock recommendations. For example, corporate governance factors are often used in arriving at S&P Qualitative Risk Assessments (QRAs), which account for risk from an equity perspective. These QRAs are found in Standard & Poors Stock Reports.
able to absorb such reduced revenues and higher expenses. Yahoo has leveraged its leading market share positions in a number of global online content and communications categories to capture significant online advertising revenues. Googles No. 1 position in the search segment has enabled the company to generate substantial profits and invest in the enhancement of existing offerings, the development of new products and services, and the acquisition of complementary technologies and businesses.
Watch the competitive landscape

As with any high-tech industry, analysts need to monitor the competitive landscape closely. Because of constant innovation, relatively low barriers to entry, and an emphasis on human capital, Internet companies face substantial competition. Market positions shift rapidly, and new products and business models are developed frequently. The costs of switching providers of content and services are generally extremely low, which makes for relatively high customer turnover, or churn, as it is called in the industry. For example, in the late 1990s, Internet companies that were initially focused largely on search offerings, such as Yahoo Inc., turned their attention to becoming multifaceted mass-media portals. This created a huge opportunity for Google Inc., which was an Internet search company. Yahoo actually retained Google to power its search offerings in 2000. Overture Services, which was acquired by Yahoo in 2003 (and is now called Yahoo Search Marketing), created the concept of sponsored search but it was Google that perfected the process by marrying its powerful search technology and related advertising. Google remains the worldwide leader in search services; Yahoo is still trying to recover from its strategic oversights.
New products and services

Internet companies must convert new ideas into saleable offerings quickly in order to capture and retain market share. Given the entrepreneurial nature of most Internet companies, competition is cutthroat and the companies that can achieve expeditious time to market often win. There is a caveat, however. A company that wins share initially does not necessarily thrive over the long term. As the Internet evolves, there is significant risk that a companys vision will fall out of step with consumer tastes and/or market realities. Or, an upstart could develop and provide a new and more compelling offering. Google is a good example of what a great new service and fortuitous timing can lead to. Internet companies place huge bets on their vision of the mediums future. Therefore, in addition to monitoring which companies are the most nimble and effective over the short term, investors must be mindful of the long-term viability of these businesses.
Foreign operations
Many Internet players have significant operations in international markets. Success in these markets is likely to play an important role in the long-term competitive positions of dotcoms. EBay and Google derive about half of their revenues from international operations. We expect larger Internet companies to increasingly rely on international revenues for growth, particularly as they pursue acquisitions and alliances abroad. Amazon.com, eBay, Google, IAC/InterActiveCorp, and Yahoo have all announced or made significant investments in companies in China or India since 2004. Even smaller players like CNET Networks Inc. and Monster Worldwide Inc. have made acquisi-
Market position
The sheer size of a company has a significant bearing on its ability to succeed as an Internet player. For example, Amazon.com Inc. has bolstered its customer base by undercutting competitors on price and offering free shipping promotions. Most other Internet retailers are not large enough to be
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tions in China, which is poised to become the country with the largest Internet population, perhaps as early as this year. Multinational companies are subject to foreign currency risk. For firms based in the United States, overseas sales are translated from local currencies into dollars; a strong dollar hurts reported earnings, a weak dollar helps. (In 2006 and 2007, the weak dollar had a material positive impact.) Moreover, companies with global operations often benefit from lower corporate tax rates outside the US. Analysts and investors also should keep in mind other international risks, such as government regulation and political instability.
to sales growth. For example, Amazon.com expects its service revenues, generated from providing technology and support to other retailers, to grow at a faster rate than its core media segment. Gross margin. This measure the percentage of revenues remaining after subtracting the cost of goods sold is a key item to watch when examining income statement trends. Unlike other operating expenses, which are generally under the direct control of the company, costs of goods or services are more a function of demand for those products or services, as demand affects volume. Typically, a company with rising gross margins has either raised prices or achieved improvements in its supply chain. In general, Internet companies enjoy high gross margins because their fixed costs are low. Historically, software and portal companies, for example, have enjoyed gross margins of 80% or more. However, online retailers selling products over the Internet have considerably lower gross margins, closer to those of traditional vendors. Gross margins are also affected by changes in shipping costs in response to fluctuations in fuel prices. When considering gross margins, it is important to know the components of cost of goods sold, particularly for purposes of peer analysis. Some Internet companies, such as Amazon.com, exclude fulfillment expenses from costs of goods sold. Although this practice does not affect a companys bottom line, it does have a favorable impact on gross margins. Operating expenses. The major operating expense line items selling, general, and administrative (SG&A) expenses and research and development (R&D) outlays can yield important information regarding the efficiency and technological leadership of an Internet company. For many Internet companies, SG&A represents the majority of total expenses. Since the industry is still in a relatively early stage, companies are trying to position themselves for future growth by generating traffic and by building strong brands. The best way to accomplish these goals is through effective sales and marketing efforts. Increases in SG&A, either in absolute dollars or as a percentage of sales, should be examined closely to determine
Financial statements: line by line

Financial statement analysis offers important insights into a companys current position and prospects for future growth. The following discussion highlights some of the key line items found on the income statement and the balance sheet, as well as some useful financial ratios. It then addresses valuation methods based on financial measures and other data.
Income statement analysis

The income statement portrays the operating results of a company over a stated period. Trends in growth rates, and any aberrations from the norm, should be assessed. In particular, analysts look at sales, gross margins, and operating expenses. Revenues. Quarterly results should be compared with the year-earlier quarter and on a sequential basis (i.e., with the preceding quarter). Year-to-year changes reveal longer-term trends, while sequential fluctuations provide clues about sales momentum, seasonality, short-term events, and emerging trends. In reviewing these comparisons, an analyst must keep in mind that most Internet-related companies will enjoy more robust revenue growth in the short term because comparisons are being made against a relatively small sales base. It would be unrealistic to project continued growth at this pace over the long term. It is helpful to analyze sales data by segments which might include advertising revenues, license revenues, service revenues, and subscriber revenues, for instance in order to focus on the specific contributions
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the effects of additional spending on traffic or revenues. For example, heavy spending on R&D, followed by product delays or the introduction of inferior services, could be indicative of poor management.
ucts. Areas to watch include inventories and the cash position. Inventories. The inventory turnover ratio (cost of goods sold divided by average inventory) provides a measure of a companys inventory management. A higher ratio indicates that inventory turns over rapidly, as product moves from manufacture to sale. The number of days of inventory in stock (365 days divided by inventory turnover) is used to determine how long inventory is retained until it is sold. The lower the number of days sales outstanding (DSO), the faster products are getting to customers, which can signal a pick-up in demand or improved productivity. A higher DSO could reflect delayed purchases in anticipation of a new product upgrade release, or longer sales cycles, which might result from selling into larger and more bureaucratic organizations. If DSO gets too low, it might portend an inventory shortfall. Absolute inventory levels should be monitored, given the Internet industrys rapid product cycles and technological advancements that can render older inventory obsolete. If inventory levels are increasing faster than sales, this might indicate that existing products are not selling well. However, many high-technology companies build inventories in the early stages of a new product cycle. Net cash position. The level of cash, cash equivalents, and marketable securities should be followed closely to assess the short-term liquidity of a company. Larger, more established companies with strong cash flows prefer to have cash on hand to repurchase shares or to make acquisitions. A declining cash balance over time could signal competitive pricing pressures or operational problems specific to the company. Some Internet companies are not expected to generate profits for some time, and many are cash-flow negative. For companies expected to post near-term losses, cash burn can be a major issue. Cash burn an absolute decline in cash occurs when a company is spending more on operating costs and capital expenditures than it can replenish with cash flow. A sequential decline in cash burn may point to improving prospects for the companys ability to remain solvent and achieve profitability.
Stock options
In 2006, dozens of companies, including Internet firms CNET and VeriSign Inc., became caught up in issues related to past stock option grants. These companies were investigated for (and/or admitted to) backdating options. This essentially consists of changing the date of an option grant to benefit an issuee, such as a corporate manager, without making the proper disclosures. Backdating is illegal and can result in internal investigations, governmental inquiries, financial restatements, tax liabilities, civil and criminal lawsuits, executive and director departures, and stock market delistings, among other things. Companies must report their quarterly results according to generally accepted accounting principles (GAAP). Following a determination by government entities including the Securities and Exchange Commission (SEC), companies now have to treat stock-based compensation as an operating expense, a requirement that began in 2006. Previously, many companies and most Internet firms accounted for stock options as noncash items that did not affect the income statement. Nevertheless, many companies and equity analysts continue to emphasize non-GAAP financials. In fact, many analysts exclude stock option expenses from their published calculations of earnings something to watch for when reviewing so-called Street estimates. We believe that Street estimates for companies including Akamai Technologies Inc., eBay, Expedia Inc., Google, IAC/InterActiveCorp, and priceline.com Inc. exclude stock-based compensation expenses. For years, however, Standard & Poors has included stock option expenses in its calculations: since the announcement of our Core EarningsTM methodology in May 2002, we have viewed stock option expense as a valid cost of doing business.
Balance sheet analysis

The balance sheet provides valuable clues about demand for a companys prod-
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In considering a companys cash position, the assessment of payment obligations which are generally referred to on a balance sheet as long-term debt or convertible notes or securities is increasingly important. These obligations need to be identified, aggregated, and subtracted from the value of liquid assets to calculate a companys true cash position (referred to as net cash). Although a company might be carrying significant cash on its books, this apparent balance-sheet strength might be attributable to prior debt and/or convertible financing not yet paid off. Standard & Poors advises that investors assess the dates when company obligations become due. This information can be found in SEC filings, particularly 10-Ks. Amidst a seemingly stable economic and financial backdrop in 2006 through mid2007, companies increasingly pursued debt offerings to finance stock repurchases and acquisitions. In the summer of 2007, however, issues in the housing and lending markets led to a credit crunch, and capital became considerably harder to secure. For example, Expedia had to substantially scale back a stock repurchase program because of difficulties in securing sufficient debt capital on agreeable terms. We expect recent subsequent declines in interest rates to promote more debt issuances.
Equity valuations
The price-to-earnings (P/E) ratio, when calculable and material, can be compared with the estimated long-term earnings growth rate for an individual company (the PEG ratio). A companys shares may be undervalued if its P/E ratio is significantly below its long-term annual growth rate and if, after careful analysis, the investor or analyst concludes that the companys fundamental position is healthy. To forecast company growth rates, many analysts begin with the potential rate at which a certain markets revenues can increase. For companies that may be more than a year away from profitability, growth rates can be measured in terms of revenues or even subscribers. Then, considerations are made regarding potential market share gains or losses. After taking into account the high potential growth rates of many companies within
the Internet industry, price-to-earnings multiples are often well above those of other publicly traded companies, even following the sharp correction from 2000 into 2003. One of the reasons for this discrepancy is investors keen interest in Internet-related stocks, perhaps due to their significant appreciation in the late 1990s and promise of future growth. In addition, some of these stocks have only limited floats (the amount of stock that is actively traded), so the available supply is significantly less than the actual demand. Such a disparity contributes to higher valuation. However, quantitative techniques still play an important role in understanding and properly valuing an Internet company. A variety of methods can be used to value Internet stocks. Analysts often forecast future earnings, assign a multiple, and discount the projected price back to the present using a high discount rate. The same can be done with free cash flow, which is operating cash flow (net income plus amortization and depreciation) minus capital expenditures. Standard & Poors often employs discounted cash flow (DCF) analysis in deriving the intrinsic values of Internet companies. We believe that cash flow statements can be more revealing than income statements, in part because company definitions of revenues and operating expenses often vary significantly. Using DCF methodologies also helps in avoiding pitfalls associated with relative analyses, where an overvalued stock could appear attractive because it is less highly priced than another overvalued stock. However, we note that stock buybacks, which have been increasingly employed by Internet companies, detract from free cash flow. Nonetheless, we think peer analyses also have a place in company valuation assessments. Standard & Poors often considers metrics such as revenue per subscriber and revenue per employee. We believe that comparing PEG ratios is one of the better ways to value Internet stocks. However, because some dot-coms do not have material earnings, price-to-sales (P/S) ratios, based on projected sales for the current year, offer a useful alternative method for evaluating Internet stocks.
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G LOSSARY
Applet A small program designed to be executed within another application. Unlike applications, applets cannot be run directly from the operating system. Browsers can interpret applets from Web servers. ARPAnet The Advanced Research Projects Agency (ARPA) network, which was the precursor to the Internet. Developed in the late 1960s and early 1970s by the US Department of Defense, ARPAnet was designed as a distributed network of computers that could survive a nuclear war. Avatar A graphical icon that represents a real person in a fictional online environment, such as an Internet game. Users can choose among avatars with different characteristics. Sophisticated three-dimensional versions can change appearance depending on their actions (walking, sitting, etc.). B2B Business-to-business (B2B) e-commerce companies enable customers to engage in wholesale transactions electronically. B2B Web sites allow for the streamlining of intercorporate communications and commerce. B2C Business-to-consumer (B2C) e-commerce companies sell or promote the sale of goods and services directly to individuals. Bandwidth The range of frequencies a device can handle without distortion. The amount of bandwidth a channel is capable of carrying is a measure of capacity and determines what kinds of communications can be carried on it. Blog Contraction of Web log; a personal journal that an author makes publicly accessible on a Web page. Viewers can comment on entries, which may result in a kind of community forum. Also used as a verb, to refer to the authoring of a Web log. Botnet A number of Internet-connected computers that have been secretly set up by a remote master to forward harmful transmissions, such as spam or viruses, to other computers. Botnet refers to a robot network and is sometimes called a zombie army. A computer that is part of a botnet is referred to as a bot or a zombie. Broadband A high-speed, large-capacity transmission channel capable of transmission speeds of 200 kilobits per second (Kbps) or more. Broadband channels are carried on coaxial or fiber-optic cables or other communications connections that have a wider bandwidth than conventional telephone lines, giving them the ability to carry video, voice, and data simultaneously.
Browser A software program that retrieves and displays information from the World Wide Web, allowing users to interact with the Internet. Burn The act of copying digital content, generally music or video, to a compact disc (CD). Burn rate A measure of how quickly a company uses its available cash reserves; employed in assessing a companys financial health and viability. Cable modem A modem attached to a coaxial cable television system can transmit data at speeds up to 27 megabits per second (Mbps), much faster than a typical computer modem that sends signals over regular telephone lines. Client A personal computer (PC), workstation, personal digital assistant (PDA), wireless phone, or any other device that accesses data and programs from a server. Client computers are used to perform work, display images, and input data. Cookie Information about an Internet users computer, Web sites visited by the user, and/or information that is stored in a text file on the users hard drive. A server accesses this information when a person connects to a Web site that wants this information. A common example is when a user first visits a Web site and enters a username and password; the browser saves this information to expedite future access. Digital certificate An electronic method of verifying the identity of a person or corporation; essentially, a digital signature. The certificate is designed to prevent fraud or impersonation in Internet-related transactions. Digital subscriber line (DSL) A method of providing connectivity at speeds of up to eight Mbps using the existing phone network. Display ad An advertisement on a Web page that links to an advertisers Web site; the most common way to advertise on the World Wide Web. Banner ads are a kind of display advertising. Domain name A name that identifies one or more Web sites. The domain name standardandpoors.com, for example, represents multiple Web sites. Domain names are used in Uniform Resource Locators (URLs) to identify particular Web pages. For example, in the URL http://www.standardandpoors.com/equity, the domain name is standardandpoors.com. Dot-com Shorthand term for an Internet company. E-commerce Business conducted over the Internet.
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Encryption The process of scrambling data using keys of a specified length. Encryption makes a file unreadable by anyone not in possession of the key needed to decipher it. Extensible markup language (XML) A specification designed for Internet documents. XML allows designers to create their own customized tags, enabling the definition, transmission, validation, and interpretation of data among both applications and organizations. Firewall A barrier or gateway that separates the Internet from a private network or local area network and restricts certain data from passing to or from external networks. Home page The first or front page on a Web site that serves as the starting point for navigation; it is where the presentation of the sites information actually begins. Host The name often given to an Internet server. Hot spot A place where Wi-Fi Internet access is available. (See Wi-Fi.) Hypertext markup language (HTML) A simple system of codes (called tags) used to format documents for viewing by computers that are connected to the World Wide Web. Internet The global network of computer networks that grew out of ARPAnet. Internet2 Effort of leading research universities and government and industry partners to build the next generation of the Internet, with an emphasis on applications for collaboration. Internet service provider (ISP) An entity that provides access to the Internet. Intranet A private network within an organization that is only for internal or specified third-party use. iPod A family of portal digital audio and video devices designed and marketed by Apple Inc. iTunes Software developed by Apple for playing and managing digital audio and video files. Java An object-oriented programming language developed by Sun Microsystems that allows developers to create small, self-contained, platform-neutral applications called applets. Java-based programs can be linked to certain data on the Internet and delivered directly to a users computer when those data are accessed.
Java 2 Platform, Enterprise Edition (J2EE) A standard for developing multitier enterprise applications. J2EE simplifies these applications by basing them on standardized and modular components, providing services to those components, and addressing details of application behavior without the need for complex programming. Linux An operating system that has become a viable alternative to Microsoft Windows. Although Linus Torvalds is credited with Linuxs creation in 1991, the software was developed collaboratively over the Internet. Linux is considered a success in open source software development, which contributes to its reliability and flexibility. Modem A device that connects a computer to a data line and allows data transmission to occur; the name is a contraction of modulation/demodulation. MPEG Layer 3 (MP3) MP3 is a standard for audio compression and is the most common format used for transmitting music files over the Internet. Net (network) neutrality A phrase used to describe the notion that a network, such as the Internet, does not favor a certain online application or Web site over others. Certain Internet companies have argued that government entities should promulgate legislative and/or regulatory mandates for net neutrality. Network effect The concept that a network becomes more valuable as its number of constituents, such as users, increases. An example is eBay; its growing population of would-be buyers has attracted a larger number of sellers, which leads to even more prospective purchasers and additional vendors. This effect raises the value of the eBay network. Peer-to-peer (P2P) network System where each PC or client has equivalent capabilities and responsibilities, as opposed to client/server networks. These networks are often used for the sharing of files, most notably digital music. Phishing Sending an e-mail to a user and falsely claiming to be a legitimate enterprise in an attempt to con the user into providing private information. The e-mail directs the user to visit a Web site that requests an update to personal information (such as passwords and credit card, Social Security, or bank account numbers). However, the Web site is fraudulent, designed only to steal the users information. Plug-in A software module that adds a specific feature or functionality to a larger software program or platform. Podcast An automated transfer of a digital audio file directly to a users computer. A portable digital audio player, such as an iPod, is often used to listen to the file. Also a verb that refers to the act of creating a podcast.
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Pop-up ad An online advertisement that automatically appears on top of the browser window. In contrast to a pop-under ad (which appears behind the browser window), a pop-up is more obtrusive because it covers the content the user is trying to see. Protocol A common language among computers on a network. Search engine A software application embedded within a Web site that is designed to aid users in searching for and retrieving information on the World Wide Web. A search engine maintains a database of abstracts from hundreds of millions of Web pages. Server A computer that allows other computers to connect to it. Servers store information and allow client devices to retrieve information for users. (See Client.) Spam Junk e-mail; also, any unsolicited e-mail. Sponsored or keyword search A practice whereby Internet advertisers bid to receive priority placement in a search engines results; also known as pay-for-performance search. Advertisers bid on keywords or phrases relevant to what they are selling, and are charged for each instance in which a user clicks on a result listing. Sponsored searches enable vendors to find and market to users interested in their offerings. Spyware Software that secretly gathers information through an Internet connection without the users knowledge, usually for advertising purposes; it is often included as a hidden component of free programs that can be easily downloaded online. Once installed, spyware monitors user activity and transmits often-sensitive information to third parties. Trojan horse In computer technology, a Trojan horse is a program in which a malicious or harmful code is contained inside programming or data that appears harmless. The code can get control of infected computers and conduct specific tasks, such as destroying files on a hard disk. The term is based on the Trojan horse of Greek mythology in which enemy soldiers were hidden to destroy the city of Troy. URL An acronym for Uniform Resource Locator; it is the address of a resource on the Internet. World Wide Web URLs begin with http://. Virtual private network (VPN) A network that uses shared public telecommunication infrastructure, such as the Internet, to provide remote offices or individual users with secure access to their organizations network. A VPN uses security procedures and software to maintain privacy while using the shared network. For many organizations, a VPN is more cost effective than having an actual private network or leasing communications lines solely for the use of one organization.
Virus A piece of a code or a program that is loaded onto a computer without ones knowledge and often interrupts the functionality of a PC and/or network. Some viruses replicate themselves, causing memory overloads. Others transmit themselves across networks, bypassing security systems. VoIP (Voice over Internet Protocol) A technology that uses the Internet instead of traditional telecommunications systems for voice conversations. Various communications and cable companies are rolling out VoIP service as an alternative to more expensive voice options. Web 2.0 Refers to a second generation of online offerings that allow people to collaborate more easily and share information. According to Tim OReilly, who is largely credited with originating the concept, aspects of Web 2.0 include the Internet as a platform, harnessing collective intelligence, the importance and use of data, Web services, simple programming models, flexible software, and appealing user experiences. Web services A way of integrating Web-based applications using open standards over an Internetprotocol backbone. Web services share business logic, data, and processes across a network. A user interface (such as a Web page or an executable program) can be added to offer specific functionality to users. Importantly, Web services allow different applications from different sources to communicate with each other, providing for unique compatibility across the Internet. Web site The virtual location for an individuals or organizations presence on the World Wide Web. Wi-Fi Contraction of wireless fidelity. Generally refers to technology that enables a wireless connection between a computer or device and the Internet; also known as 802.11. Wiki A type of Web site that enables users to add, remove, or revise content. The most popular wiki is Wikipedia.org, which is a community-maintained online encyclopedia. WiMAX An acronym for worldwide interoperability for microwave access. The WiMAX protocol is a way of connecting computers. It is similar to Wi-Fi, but WiMAX offers faster connections speeds and has better range. Also referred to as IEEE 802.16. World Wide Web A segment of the Internet that combines graphics and text into interactive pages. Usually referred to simply as the Web, it contains documents (or pages), most of which are connected via hypertext links.
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I NDUSTRY R EFERENCES
PERIODICALS
Barrons Dow Jones & Co. 1 World Financial Ctr. 200 Liberty St., New York, NY 10281 (212) 416-2000 Web site: http://www.barrons.com Weekly; caters to a relatively sophisticated clientele interested in the financial markets and investing. Includes a Technology Week section. (In December 2007, Dow Jones was acquired by News Corp.) Business 2.0 Business 2.0 Media Inc. 1 California St., 29th Fl., San Francisco, CA 94111 (415) 293-4800 Web site: http://www.business2.com Monthly; provides guidance on succeeding in the Internet era. Owned by Time Warner Inc. Business Week The McGraw-Hill Cos. Inc. 1221 Ave. of the Americas, 43rd Fl., New York, NY 10020 (212) 512-2511 Web site: http://www.businessweek.com Weekly; general interest business news magazine. Includes a variety of technology-focused content, including Information Technology and Technology & You sections.
The Wall Street Journal Dow Jones & Co. 1 World Financial Ctr. 200 Liberty St., New York, NY 10281 (212) 416-2000 Web site: http://www.wsj.com Daily business and finance newspaper; contains a daily Technology section, and weekly technology content (Loose Wire, The Mossberg Solution, Personal Technology, Portals, and Real Time columns, and a Technology Journal section). Publishes periodic special reports on the Internet industry. Wired The Cond Nast Publications Inc. 520 3rd St., Ste. 305, San Francisco, CA 94107 (415) 276-4962 Web site: http://www.wired.com Monthly; covers the people, companies, and ideas that are changing the world technologically.
BOOKS
Amazonia: Five Years at the Epicenter of the Dot.Com Juggernaut James Marcus New York: The New Press, 2004 Describes the history of Amazon.com, from the perspective of an early employee. Dot.con: How America Lost its Mind and Money in the Internet Era John Cassidy New York: HarperCollins/Perennial, 2003 Chronicle of Internet-stock mania, which the author compares to previous speculative bubbles; identifies individuals important to the period. The Google Story David A. Vise and Mark Malseed Delacorte Press, 2005 Offers details about the origins, people, and operations of the well-known Internet search company. Newtons Telecom Dictionary Harry Newton New York: CMP Books, 2005 Best-selling reference on telecommunications, data communications, computing and the Internet. Includes terms related to e-commerce, wireless, broadband, intranet, and information technology. Written as a business book; de-emphasizes the complex nature of specific technologies. The PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth Eric M. Jackson Los Angeles: World Ahead Publishing Inc., 2004 Details the trials and tribulations of the online payment company, particularly as it competed with eBay.
Investors Business Daily Investors Business Daily Inc. 12655 Beatrice St., Los Angeles, CA 90066 (310) 448-6746 Web site: http://www.investors.com Daily newspaper targeted at individual investors; its Internet & Technology section offers stories, interviews, and information on a variety of new economy topics. The New York Times The New York Times Co. 229 W. 43rd St., New York, NY 10036 (212) 556-1234 Web site: http://www.nytimes.com Daily; general interest newspaper with a business section that includes articles on technology, as well as a section called Circuits every Thursday. Red Herring Red Herring Inc. 19 Davis Dr., Belmont, CA 94002 (650) 428-2900 Web site: http://www.redherring.com Weekly magazine that carries the tag line The business of technology; emphasizes content on start-ups, private companies, and venture capital, as well as international developments and companies.
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The Perfect Store: Inside eBay Adam Cohen Boston: Little Brown & Co./Back Bay Books, 2003 Chronicles the history of eBay, including its origin, early growth, challenges, and successes. The Search: How Google and Its Rivals Rewrote the Rules of Business and Transformed Our Culture John Battelle New York: Portfolio Hardcover, 2005 Provides insights regarding the history and technology underlying the Internet search, emphasizing the segments largest player. Stealing Time: Steve Case, Jerry Levin, and the Collapse of AOL Time Warner Alec Klein New York: Simon & Schuster, 2003 Details the background behind the worlds largest media merger, with a particular emphasis on its most important personalities.
GOVERNMENT AGENCIES
comScore Networks Inc. 11465 Sunset Hills Rd., Ste. 200, Reston, VA 20190 (703) 438-2000 Web sites: http://www.comscore.com http://www.mediametrix.com Provides a variety of data, information, and insights regarding a number of different aspects of the Internet economy, with a focus on e-commerce and audience measurement. eMarketer 75 Broad St., 32nd Fl., New York, NY 10004 (800) 405-0844; (212) 763-6010 Web site: http://www.emarketer.com Comprehensive, objective, and easy-to-use resource on the Internet; provides statistics, news, and other information on e-business, online marketing, and emerging technologies. Forrester Research Inc. 400 Technology Sq., Cambridge, MA 02139 (617) 613-6000 Web site: http://www.forrester.com Independent research firm that analyzes technologys impact on businesses. The Gartner Group Inc. 56 Top Gallant Rd., Stamford, CT 06904 (203) 964-0096 Web site: http://www.gartner.com Researches and analyzes trends and developments in the information technology industry. IDC 5 Speen St., Framingham, MA 01701 (508) 872-8200 Web site: http://www.idc.com Leading provider of information technology data, analysis, and consulting services. Interactive Advertising Bureau (IAB) 116 E. 27th St., 7th Fl., New York, NY 10016 (212) 380-4700 Web site: http://www.iab.net An association dedicated to helping online, Interactive broadcasting, email, wireless, and Interactive television media companies increase their revenues. Provides the quarterly IAB Internet Advertising Revenue Report, based on research by PricewaterhouseCoopers, which is an industry standard for online ad revenue data and information. Nielsen//NetRatings 770 Broadway, 13th Fl., New York, NY 10003 (646) 654-7990 Web site: http://www.nielsen-netratings.com A joint venture of NetRatings Inc., Nielsen Media Research Inc., ACNielsen Corp., and Harris Interactive Inc.; provides Internet and digital media measurement and analysis.
Federal Communications Commission (FCC) 445 12th St. SW, Washington, DC 20554 (888) 225-5322 Web site: http://www.fcc.gov Regulates interstate and international communications by radio, television, wire, satellite, and cable. Federal Trade Commission (FTC) 600 Pennsylvania Ave. NW, Washington, DC 20580 (202) 326-2222 Web site: http://www.ftc.gov Ensures that the nations markets function competitively, and are vigorous, efficient, and free of undue restrictions; educates the public about the importance of personal information privacy. US Department of Commerce 1401 Constitution Ave. NW, Washington, DC 20230 (202) 482-4883 Web sites: http://www.doc.gov http://www.commerce.gov http://www.ntia.doc.gov Promotes US competitiveness and manages resources to ensure sustainable economic opportunities; oversees national e-commerce policy; works to provide all Americans with access to the Internet and other crucial information technologies.
MARKET RESEARCH FIRMS
Analysys International Rm. 2021, 20th Fl., Jing An Center, No. 8 East Beisanhuan Rd., Chao Yang District, 100028 Beijing, China 86 10 6466 6565 Web site: http://english.analysys.com.cn/ home/index.php Leading provider of business information about technology, media, and telecommunications segments in China.
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Online Publishers Association 249 W. 17th St., New York, NY 10011 (212) 204-1491 Web site: http://www.online-publishers.org Industry trade organization dedicated to representing online content providers before the advertising community, the media, government entities, and the public; disseminates relevant research online. The Pew Research Center 1615 L St. NW, Ste. 700, Washington, DC 20036 (202) 419-4350; (202) 419-4500 Web sites: http://www.people-press.org http://www.pewinternet.org Opinion research group that studies attitudes toward press, politics, and public policy issues; launched the Internet & American Life Project, which issues reports based on its research, surveys, and analysis.
WEB SITES
Silicon Alley Insider http://www.alleyinsider.com Covers the intersection of the technology, media, and communications industries, with a focus on companies and people making news in New York. Provides news and commentary about digital publishing, entertainment, news, music, social networking, and gaming. Tech Trader Daily http://blogs.barrons.com/techtraderdaily News, analysis, and insights on technology investing from Barrons Silicon Valley bureau. Webopedia http://www.webopedia.com Online dictionary and search engine for computer and Internet technology.
CNET News.com http://www.news.com Comprehensive source for technology news, with an emphasis on the Internet. Hobbes Internet Timeline http://www.zakon.org/robert/internet/timeline Offers a timeline history of the Internet and useful statistics. MarketWatch http://www.marketwatch.com Source of economic, financial, and stock-market news and commentary, including Internet Daily and Net Sense columns; also features video interviews with Internet company managers and investors. paidContent.org http://www.paidcontent.org A news site covering the business of digital media and content. Searchblog http://www.searchblog.com Blog created by Wired magazine founder and search expert John Battelle. The blog offers thoughts on the intersection of search, media, technology, and more. Battelle is also the author of The Search. Seeking Alpha http://www.seekignalpha.com/internet Formerly know as the Internet Stock Blog, provides commentary on the Internet industry, companies, and stocks, often from third parties, including Wall Street analysts and research firms. Also includes free conference call transcripts.
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D EFINITIONS
FOR
C OMPARATIVE C OMPANY A NALYSIS TABLES
Operating revenues Net sales and other operating revenues. Excludes interest income if such income is nonoperating. Includes franchised/leased department income for retailers and royalties for publishers and oil and mining companies. Excludes excise taxes for tobacco, liquor, and oil companies. Net income Profits derived from all sources, after deductions of expenses, taxes, and fixed charges, but before any discontinued operations, extraordinary items, and dividend payments (preferred and common). Return on revenues Net income divided by operating revenues.
Price/earnings ratio The ratio of market price to earnings, obtained by dividing the stocks high and low market price for the year by earnings per share (before extraordinary items). It essentially indicates the value investors place on a companys earnings. Dividend payout ratio This is the percentage of earnings paid out in dividends. It is calculated by dividing the annual dividend by the earnings. Dividends are generally total cash payments per share over a 12-month period. Although payments are usually calculated from the ex-dividend dates, they may also be reported on a declared basis where this has been established to be a companys payout policy. Dividend yield
Return on assets Net income divided by average total assets. Used in industry analysis and as a measure of asset-use efficiency. Return on equity Net income, less preferred dividend requirements, divided by average common shareholders equity. Generally used to measure performance and to make industry comparisons. Current ratio Current assets divided by current liabilities. It is a measure of liquidity. Current assets are those assets expected to be realized in cash or used up in the production of revenue within one year. Current liabilities generally include all debts/obligations falling due within one year. Debt/capital ratio Long-term debt (excluding current portion) divided by total invested capital. It indicates how highly leveraged a company might be. Long-term debt includes those debts/obligations due after one year, including bonds, notes payable, mortgages, lease obligations, and industrial revenue bonds. Other long-term debt, when reported as a separate account, is excluded; this account generally includes pension and retirement benefits. Total invested capital is the sum of stockholders equity, longterm debt, capital lease obligations, deferred income taxes, investment credits, and minority interest. Debt as a percent of net working capital Long-term debt (excluding current portion) divided by the difference between current assets and current liabilities. It is an indicator of a companys liquidity.
The total cash dividend payments divided by the years high and low market prices for the stock. Earnings per share The amount a company reports as having been earned for the year (based on generally accepted accounting standards), divided by the number of shares outstanding. Amounts reported in Industry Surveys exclude extraordinary items. Tangible book value per share
This measure indicates the theoretical dollar amount per common share one might expect to receive should liquidation take place. Generally, book value is determined by adding the stated (or par) value of the common stock, paid-in capital, and retained earnings, then subtracting intangible assets, preferred stock at liquidating value, and unamortized debt discount. This amount is divided by the number of outstanding shares to get book value per common share. Share price This shows the calendar-year high and low of a stocks market price. In addition to the footnotes that appear at the bottom of each page, you will notice some or all of the following: NANot available. NMNot meaningful. NRNot reported. AFAnnual figure. Data are presented on an annual basis. CFCombined figure. In this case, data are not available because one or more components are combined with other items.
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C OMPARATIVE C OMPANY A NALYSIS C OMPUTERS : C ONSUMER S ERVICES &

Operating Revenues
Million $ Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAR DEC 162.2 84.6 137.6 61.9 108.4 38.1 94.0 21.2 55.0 16.3 32.0 19.4 NA NA 10,711.0 251.6 2,237.6 6,277.6 D 996.7 8,490.0 203.2 2,119.5 5,753.7 A,C 682.2 6,921.1 169.2 1,843.0 6,192.7 D 506.2 5,263.7 3,932.9 128.9 72.1 2,339.8 590.6 6,328.1 A,C 4,621.2 A,C 272.2 152.8 3,122.4 NA 222.2 A 3,468.9 C,D 75.9 15.7 NA NA 75.2 A NA NM NA NA NM NA NA NA 28.0 NA 58.7 12.6 67.4 38.3 34.2 522.7 A 545.6 A 1,575.2 178.8 6,425.7 525.1 304.0 A 1,609.5 A,C 148.6 5,257.7 448.6 A 169.2 A 1,166.5 A 111.9 3,564.5 277.3 92.5 A 1,054.8 81.7 1,625.1 A 167.5 A 62.6 A 1,221.7 61.0 953.1 A 57.2 A 44.9 A 983.6 35.9 717.4 NA NA 1.4 NA 19.1 NA NA NM NA NM 55.6 64.8 9.9 37.9 55.0 (0.5) 79.5 (2.1) 20.3 22.2 26.2 23.8 5.6 9.1 46.1 17.9 36.6 10,604.9 A 371.7 181.1 72.7 A 160.9 A 6,138.6 340.0 A 143.9 51.4 97.0 A 3,189.2 A 249.4 A,C 106.3 41.4 58.8 1,465.9 A 160.1 71.6 A 36.7 30.2 439.5 136.1 48.2 29.5 20.5 A NA 161.9 33.3 24.1 20.4 NA 0.2 NA NA NA NA NM NA NA NA NA 18.1 40.3 24.7 51.1 72.8 9.3 25.8 41.4 65.9 ** 186,803 ** ** ** ** ** 116,599 ** 33,690 68,024 ** ** 8,351 ** ** ** ** 170,838 ** ** ** ** ** 119,134 ** 27,566 53,918 ** ** 7,654 ** ** ** 428.7 79.7 173.3 A 307.6 A 5,969.7 A 283.1 49.0 A 120.2 A 220.4 A 4,552.4 A 210.0 39.2 70.0 A 154.1 A 3,271.3 161.3 36.6 38.7 A 101.2 A 2,165.1 145.0 26.6 NA 77.8 A 1,214.1 A 163.2 C 18.3 NA 57.8 A 748.8 A NA NA NA 0.1 0.4 NA NA NA NM NM 21.3 34.3 NA 39.7 51.5 51.4 62.4 44.1 39.6 31.1 ** ** ** ** ** ** 277,146 198,566 1,604,769 1,223,764 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 2004 Compound Growth Rate (%) Index Basis (1996 = 100) 2003
THE I NTERNET
Ticker
Company
2002
INTERNET SOFTWARE & SERVICES AKAM * AKAMAI TECHNOLOGIES INC RATE BANKRATE INC TRAK DEALERTRACK HOLDINGS INC DRIV DIGITAL RIVER INC EBAY * EBAY INC
** ** NA ** ** NA ** ** NA 138,856 91,172 70,075 879,384 582,015 326,371 ** 125,304 ** ** ** ** ** 86,340 ** 18,689 43,955 ** ** 8,238 ** ** ** ** NA 80,429 68,413 ** NA ** NA ** NA ** NA ** NA 78,074 90,427 ** NA 8,520 4,997 33,429 24,977 ** NA ** NA 8,418 6,148 ** NA ** ** NA NA
GOOG INSP JCOM KNOT PRFT
GOOGLE INC INFOSPACE INC J2 GLOBAL COMMUNICATIONS INC KNOT INC PERFICIENT INC
UNTD VCLK VRSN WBSN YHOO
* *
UNITED ONLINE INC VALUECLICK INC VERISIGN INC WEBSENSE INC YAHOO INC
INTERNET RETAIL AMZN * AMAZON.COM INC NILE BLUE NILE INC EXPE * EXPEDIA INC IACI * IAC/INTERACTIVECORP NFLX NETFLIX INC
PETS STMP
PETMED EXPRESS INC STAMPS.COM INC
Note: Data as originally reported. S&P 1500 index group. * Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. # Of the following calendar year. ** Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change. D - Data exclude discontinued operations. E - Includes excise taxes. F Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
Net Income
Million $ Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 41.2 62.6 378.0 32.1 751.4 47.1 40.6 138.6 38.8 1,896.2 3,077.4 (15.1) 53.1 23.4 9.6 1,465.4 159.4 51.3 4.0 7.2 399.1 51.0 31.6 1.3 3.9 117.5 87.9 186.2 26.2 839.6 57.4 10.0 19.3 60.8 1,125.6 328.0 9.7 4.5 54.3 1,082.0 34.4 13.4 11.3 35.3 778.2 (29.3) 12.1 (3.3) 17.1 447.2 105.6 (6.3) 35.8 1.1 1.0 27.8 9.8 (259.9) 16.7 237.9 2006 2005 2004 2003 2002 (204.4) 6.7 NA (0.5) 249.9 99.7 (138.6) 14.1 (5.1) (2.4) 2001 (2,435.5) (0.9) NA (19.2) 90.4 NA (498.9) (7.8) (15.1) (43.9) (47.8) (205.8) (2.9) (7.2) (4,961.3) (13,356.0) 16.7 3.1 106.9 (92.8) 1996 NA NA NA (0.7) 0.1 NA (0.4) NA NA NA NA NA (10.2) NA (2.3) Compound Growth Rate (%) 10-Yr. NA NA NA NM NM NA NM NA NA NA NA NA NM NA NM 5-Yr. NM NM NA NM 65.6 NA NM NM NM NM NM NM NM 59.4 NM 1-Yr. (82.5) 3.4 332.8 11.9 4.0 110.0 NM 3.7 492.8 33.3 (12.5) 54.0 172.7 (17.2) (60.4) 2006 ** ** ** NM NM ** NM ** ** ** ** ** NM ** NM Index Basis (1996 = 100) 2005 ** ** ** NM NM ** NM ** ** ** ** ** NM ** NM 2004 ** ** ** NM NM ** NM ** ** ** ** ** NM ** NM 2003 ** ** ** NM NM ** NM ** ** ** ** ** NM ** NM 2002 NA NA NA NM NM NA NM NA NA NA NA NA NM NA NM
Ticker
Company
* *
Net Income (continued)

Million $ Yr. End DEC DEC DEC DEC DEC # MAR DEC 14.4 16.5 12.1 10.4 8.0 (4.7) 5.8 (9.3) 3.3 (6.8) 0.8 (209.6) NA NA NA NA 77.3 NM 19.7 57.8 ** ** 190.0 13.1 244.9 174.8 49.1 333.0 13.2 228.7 598.4 42.0 588.5 10.0 163.5 185.8 21.6 35.3 27.0 111.4 126.7 6.5 (149.9) 1.6 70.0 7.4 (21.9) (556.8) NA (78.1) (186.8) (38.6) (5.8) NA NA (6.5) NA NM NA NA NM NA NM NA NM NM NM (42.9) (0.7) 7.1 (70.8) 16.8 NM ** ** NM ** NM ** ** NM ** ** ** 2006 2005 2004 2003 2002 2001 1996 10-Yr. 5-Yr. 1-Yr. 2006 2005 Compound Growth Rate (%) Index Basis (1996 = 100) 2004 NM ** ** NM ** ** ** 2003 NM ** ** NM ** ** ** 2002 NM NA NA NM NA NA NA
Ticker
Company
PETS STMP
Note: Data as originally reported. S&P 1500 index group. *Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the following calendar year. **Not calculated; data for base year or end year not available.
Return on Revenues (%)

Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAR DEC 8.9 19.5 8.8 16.8 7.4 NM 1.8 5.2 10.9 2.8 4.9 3.9 6.5 10.8 10.4 6.2 8.5 5.9 8.9 3.0 4.3 0.7 20.9 4.8 2.0 2.4 6.2 NM NM 2.3 11.9 0.2 NM 5.9 NM 7.9 11.5 24.0 17.9 11.7 9.0 13.4 8.6 26.1 36.1 26.2 51.9 16.0 23.4 23.6 10.0 10.6 NM 20.4 14.6 NM NM NM 27.5 11.2 8.1 8.3 10.6 7.8 6.7 4.7 10.0 3.1 1.3 10.1 27.8 13.7 29.0 NM 29.3 32.2 5.9 23.9 46.9 35.6 7.7 7.4 12.5 20.5 29.7 3.1 6.6 7.2 NM 50.0 2.9 3.5 22.7 NM 29.2 NM NM 21.4 NM 20.8 18.5 8.9 21.6 23.3 27.3 8.8 9.7 9.1 7.1 4.8 10.8 19.0 9.6 9.9 2.6 3.3 13.6 34.1 9.5 13.4 12.6 11.2 19.8 18.9 115.9 19.7 3.7 24.7 23.8 16.4 34.1 16.1 22.9 23.8 NM 33.1 NM 16.9 20.7 NM 25.1 NA NM 20.6 5.4 8.4 7.1 7.3 8.9 61.1 17.8 3.0 9.3 10.9 14.9 35.6 18.2 10.2 11.3 19.1 9.1 23.8 3.2 9.4 29.4 23.3 7.9 9.5 11.1 21.8 10.5 1.8 0.8 10.1 34.4 NM 2006 2005 2004 2003 2002 2006 2005 2004
Return on Assets (%)

2003 NM 54.8 NA 12.0 9.0 18.2 NM 40.5 3.2 4.5 10.8 3.3 NM 8.1 5.5 1.7 57.9 2.3 0.6 4.2 42.3 NM 2002 NM 48.1 NA NM 8.6 NA NM 24.9 NM NM NM NM NM 11.2 4.1 NM NA 11.2 NM NM 47.6 NM 2006 7.3 9.0 8.2 13.4 10.7 23.3 NM 23.2 22.8 11.0 12.3 9.9 17.1 16.6 8.5 56.1 20.3 4.2 1.9 15.3 31.6 14.9
Return on Equity (%)

2005 131.7 20.3 5.4 21.8 12.9 23.7 26.0 29.8 12.2 13.0 15.1 8.1 7.4 20.7 24.2 NA 15.9 3.3 5.0 22.0 39.0 10.2 2004 NA 39.7 NA 21.8 13.4 23.0 10.1 26.0 4.5 12.9 45.3 26.7 12.1 17.6 14.6 NA 35.4 2.1 1.2 16.1 41.9 NM 2003 NA 68.1 NA 18.1 10.6 31.3 NM 44.9 4.9 5.8 14.0 3.9 NM 14.2 7.2 NA NA 2.8 1.0 6.4 59.4 NM 2002 NA 91.1 NA NM 10.0 NA NM 28.8 NM NM NM NM NM 18.9 5.1 NA NA 19.5 NM NA 91.0 NM
Ticker
Company
* *
PETS STMP
39
40
Current Ratio
Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAR DEC 7.9 3.5 8.0 5.3 6.6 5.9 3.5 20.7 1.9 39.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.0 1.3 1.6 0.8 1.7 2.2 1.5 2.4 0.4 1.8 1.8 1.6 2.8 2.3 1.8 2.0 1.5 1.5 2.0 2.2 2.2 1.5 1.1 1.7 3.0 2.6 74.6 0.0 7.3 8.0 0.0 86.1 0.0 0.0 8.4 0.0 114.0 0.0 0.0 4.1 0.0 216.5 0.0 0.0 5.7 0.0 251.5 28.8 0.0 8.6 0.5 150.7 0.0 NM 55.0 0.0 0.0 0.0 1.5 4.6 1.0 2.3 2.5 1.9 4.9 1.3 2.9 2.9 2.1 6.9 1.4 2.9 3.5 3.4 7.7 1.6 2.9 2.4 2.9 15.8 0.9 3.1 2.4 0.0 0.0 0.0 0.0 7.5 10.6 0.0 0.0 0.0 7.8 20.4 0.0 0.0 0.0 9.5 0.0 0.1 0.0 0.0 14.4 0.0 0.4 0.2 0.0 0.0 0.0 0.0 NM 0.0 32.9 27.6 0.0 0.0 0.0 33.4 152.1 0.0 NM 54.5 0.0 0.0 0.0 10.0 6.2 6.0 5.6 2.1 12.1 7.0 7.0 2.8 2.2 7.9 6.6 6.6 2.8 1.6 2.4 7.6 7.6 2.6 2.1 2.6 10.0 5.5 1.5 1.5 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.1 0.3 7.5 0.0 0.0 0.6 0.5 6.1 0.3 0.0 0.2 0.7 2.7 3.3 0.0 0.4 1.4 6.9 0.0 0.0 0.0 0.1 0.6 0.0 0.0 0.1 0.5 31.3 0.0 0.0 1.3 0.8 31.4 51.2 0.1 0.0 0.0 25.8 201.0 0.0 0.0 35.6 0.0 0.0 0.0 4.2 20.4 6.7 3.4 2.0 5.7 2.0 4.9 2.4 2.1 2.3 10.8 2.3 2.7 2.7 3.2 7.4 3.1 2.5 3.3 1.7 3.1 NA 1.4 3.8 17.3 0.0 0.0 24.4 0.0 24.3 0.0 0.0 39.0 0.0 196.4 0.0 0.7 50.3 0.0 183.2 0.0 1.8 0.0 2.4 226.5 0.0 NA 0.0 0.4 70.1 0.0 0.0 39.2 0.0 68.2 0.0 0.0 79.8 0.0 414.5 0.0 1.5 98.1 0.0 276.2 0.0 4.5 0.0 8.3 0.6 0.0 0.3 1.2 10.9 0.0 0.1 NM 0.0 74.0 338.9 0.0 0.0 47.9 0.1 0.0 0.0 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 496.8 0.0 NA 0.0 1.3 4.6 0.0 0.8 4.2 58.3 0.0 0.4 NM 0.0 0.0 408.5 60.4 0.0 39.3 0.7 2.3 0.0
Debt / Capital Ratio (%)
Debt as a % of Net Working Capital
Ticker
Company
* *
PETS STMP
Price / Earnings Ratio (High-Low)

Yr. End DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC # MAR DEC 34-16 55-21 NM-56 53-31 38-18 68-41 42-23 62-38 59-32 40-27 31-13 38-11 31-12 53-26 40-23 52-27 NA-NA NM-77 95-22 37-11 NM-NM 24-16 40-21 17-10 50-26 81-42 20-11 44-20 62-35 43-27 32-22 11-4 13-6 49-20 47-23 64-33 64-19 86-20 NM-NM 39-15 NM-42 NM-NM NA-NA NM-80 NM-NM NM-40 31-6 NM-NM 50-32 NM-NM 30-18 33-12 51-23 84-32 10-4 23-14 85-27 31-16 97-46 36-14 27-14 94-43 33-9 NA-NA NM-NM 30-6 83-12 49-5 NA-NA NM-NM 23-3 NM-NM NM-NM NM-NM NM-NM NM-NM 44-13 NM-50 NM-NM NA-NA 68-30 NM-NM NM-NM 14-4 NM-NM NM-53 90-43 56-34 39-19 60-29 9-4 57-20 NM-NM 27-14 75-39 66-38 24-8 NA-NA 41-18 NM-53 NM-NM 24-4 NA-NA 59-15 93-48 NM-NM 8-1 NA-NA NM-NM 81-56 0 0 0 0 0 0 NM 0 0 0 125 0 0 0 0 0 0 0 0 0 0 0 2006 2005 2004 2003 2002 2006 2005 0 0 0 0 0 0 0 0 0 0 78 0 0 0 0 0 0 NA 0 0 0 0
Dividend Payout Ratio (%)

2004 0 0 NA 0 0 0 0 0 0 0 0 0 0 0 0 0 0 NA 0 0 0 NM 2003 NM 0 NA 0 0 0 NM 0 0 0 0 0 NM 0 0 0 NA NA 0 0 0 NM 2002 NM 0 NA NM 0 0 NM 0 NM NM NM NM NM 0 0 NM NA 0 NM NM 0 NM 2006
Dividend Yield (High-Low, %)

2005 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 8.0-5.2 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 7.1-4.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 2004 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 39.1-19.7 2003 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 2002 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 NA-NA 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0 0.0-0.0
Ticker
Company
* *
PETS STMP
Earnings per Share ($)

2006 0.37 0.58 0.54 1.58 0.80 5.31 4.94 1.07 0.17 0.33 0.77 0.46 0.54 0.81 1.35 0.81 0.75 0.68 1.79 0.79 0.51 0.46 0.35 (0.21) 0.30 (0.42) 0.19 (0.28) 2.20 4.89 1.55 4.61 1.02 4.01 0.62 7.64 0.28 8.12 20.20-9.36 39.24-14.56 1.45 0.80 0.51 0.50 0.42 0.09 6.98 0.35 0.38 0.14 (0.40) 0.49 0.62 (0.02) (0.78) 0.52 2.94 (2.97) 1.11 6.02 0.18 (0.91) 4.68 4.70 (3.75) NA 1.01 2.40 4.12 2.95 (2.74) (6.22) NA 1.75 2.16 (3.68) (16.09) 2.69 3.00 1.85 48.58-25.76 41.62-24.10 27.55-12.87 38.66-23.54 33.12-18.12 50.00-30.60 44.35-24.15 27.50-18.49 55.74-23.49 30.25-8.91 15.82-6.25 24.60-11.96 1.91 1.10 0.74 0.56 0.62 0.45 (0.90) 0.13 (0.04) (1.08) (20.97) 0.38 0.40 0.19 0.09 2.44 2.76 2.44 4.01 4.25 2.92 2.39 2.98 4.29 3.59 2.53 3.76 2.85 3.57 2.94 3.40 J 2.68 3.19 2.87 1.60 2.94 J 3.00 1.91 2.45 1.47 15.40-10.05 25.47-13.15 26.77-15.95 34.70-17.85 43.66-22.65 15.03-8.51 20.26-9.01 33.67-19.01 34.87-22.40 43.45-30.30 20.97-8.59 14.08-6.31 36.09-14.94 26.50-12.91 39.79-20.57 57.82-33.00 41.70-21.65 NA-NA 69.86-38.32 39.77-9.25 13.08-4.00 17.75-8.94 2.07 1.59 0.68 0.06 0.22 0.51 (0.20) 0.79 0.06 0.08 0.48 (4.52) 0.32 (0.28) (0.53) 50.15 17.67 4.10 3.29 1.00 31.20 14.31 3.29 1.14 0.60 10.25 10.87 2.30 0.92 0.35 2.73 10.17 1.84 0.85 0.31 0.89 10.96 0.89 0.39 0.20 513.00-331.55 28.39-17.28 32.00-19.93 29.46-10.75 19.41-8.64 446.21-172.57 48.70-21.36 24.34-15.02 14.39-4.55 10.32-5.12 201.60-95.96 57.92-23.05 18.17-9.41 5.65-2.55 7.31-2.00 NA-NA 27.75-8.48 23.95-4.53 5.00-0.71 3.94-0.43 29.09-8.47 11.12-2.61 17.55-6.55 14.93-5.76 22.74-8.25 61.15-18.55 NA-NA 82.75-27.93 85.76-41.46 30.50-5.34 9.45-1.78 13.20-7.80 2.41 0.61 0.13 1.57 0.79 0.28 0.87 0.33 1.09 0.59 (0.25) 0.84 (0.10) 0.58 0.35 (1.81) 0.48 NA (0.02) 0.22 4.10 6.90 4.93 8.38 2.69 3.19 0.71 3.19 2.56 2.21 (1.03) 2.67 NA 0.81 2.73 (1.48) (1.49) 1.65 J 0.75 NA NA 3.17 1.09 2.24 1.46 56.80-19.57 52.09-25.11 30.14-18.51 60.99-29.27 47.86-22.83 22.25-10.64 35.00-12.00 21.25-18.50 41.82-22.43 58.88-30.78 18.47-10.74 20.98-7.00 NA-NA 44.51-19.38 59.21-31.30 14.20-1.18 19.85-3.29 NA-NA 34.30-8.83 32.40-16.88 2005 2004 2003 2002 2006 2005 2004 2003 2002 2006 2005 2004 2003 2002 6.34-0.56 3.94-0.62 NA-NA 21.94-4.25 17.71-12.21 NA-NA 27.80-3.70 7.32-0.91 1.05-0.22 2.48-0.33 11.69-2.67 3.36-1.99 39.23-3.92 17.38-5.18 10.68-4.47 25.00-9.03 NA-NA 42.33-18.85 67.06-30.62 9.10-2.42 2.60-0.73 10.44-7.06
Tangible Book Value per Share ($)
Share Price (High-Low, $)
Ticker DEC DEC DEC DEC DEC DEC 10.21 DEC (0.48) DEC 1.08 DEC 0.90 DEC 0.38 DEC DEC DEC DEC DEC DEC DEC DEC DEC DEC 0.60 0.71 0.46 0.79 0.72 0.57 0.78 0.64 0.63 1.55 0.69 0.54
Company
Yr. End
* *
PETS STMP
# MAR DEC
Note: Data as originally reported. S&P 1500 index group. * Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. # Of the following calendar year. J-This amount includes intangible assets, that cannot be identified.
The analysis and opinion set forth in this publication are provided by Standard & Poors Equity Research Services and are prepared separately from any other analytic activity of Standard & Poors. In this regard, Standard & Poors Equity Research Services has no access to nonpublic information received by other units of Standard & Poors. The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
41
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Internet Services Industry Survey - Standard &amp; Poor&#39;s, 27 Mar 2008

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Industry Surveys

Computers: Consumer Services & the Internet

March 27, 2008

CURRENT ENVIRONMENT..................................................................1 Internet still growing, changing

INDUSTRY PROFILE...............................................................................6 The Internet: vital for communication and content

INDUSTRY TRENDS ................................................................................11

GLOSSARY .............................................................................................31 INDUSTRY REFERENCES.....................................................................34 COMPARATIVE COMPANY ANALYSIS ..............................................38

Standard & Poors Industry Surveys

Internet still growing, changing

Microsofts historic offer for Yahoo

PERFORMANCE OF INTERNET STOCKS

Source: TheStreet.com Internet Index.

Google continues to drive activity in the Internet segment

Advertising-related acquisition actions a prelude to MicrosoftYahoo?

Emerging opportunities offer potential, require patience

Social networks still very relevant

Online video continues to develop

Internet advertising and retail: review and outlook

Mobile Internet becoming mainstream

The Internet: vital for communication and content

Web hosting services see growth

Significant Internet software segments: browsers and security

Access services: ISPs in transition

Destinations provide information, entertainment, commerce

Content providers produce news and information

Portals amass and distribute content

Google remains unmatched in search services

SHARES OF US INTERNET SEARCHES

TOP 25 INTERNET PROPERTIES

EBay dominates online auctions

Business-to-consumer e-commerce grows

Healthy growth drivers

F-Forecast. Source: Forrester Research.

Rest of segment consolidates and changes

The evolving world of online music

Apples iTunes tops the charts

Digital rights management spurs debate

Illegal file sharing remains an issue

Game consoles attracting more users

World of Warcraft Wow in more ways than one

INSTALLED BASE OF ONLINE-CAPABLE VIDEO GAME CONSOLES

Source: IDC's August 2007 forecast report.

Online shopping is easy and convenient

Games offer new medium for advertising

The dark side of the Internet

Security issues affect e-commerce

Phishing invasions grow more sophisticated

Spam battles continue

The World Wide Web

HOW THE INDUSTRY OPERATES

A powerful global medium

How do users connect to the Internet?

Web hosting services

be broken down into two main categories: content and commerce.

WORLDWIDE E-COMMERCE SPENDING

US ONLINE RETAIL SALES, BY CATEGORY

Government plays a prominent role

KEY INDUSTRY RATIOS AND STATISTICS

HOW TO ANALYZE AN INTERNET COMPANY

Management expertise and ethics are key

Making qualitative assessments

A model business model

Watch the competitive landscape

Internet Services Industry Survey - Standard & Poor's, 27 Mar 2008

Internet Services Industry Survey - Standard & Poor's, 27 Mar 2008