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North America Equity Research

04 June 2010

Mobile Advertising
An In Depth Look at the Future of Mobile Advertising
For many of the internet companies in our coverage universe, the mobile space continues to be a front-runner for future growth opportunities. In this report, we review the current state of the market and future advertising and revenue possibilities. Web usage is experiencing hyper growth; We expect it to reach 107M users by 2011. The total number of US mobile phone users (ages 13+) has reached 233M (comScore), putting it roughly on par with the reach of TV (the number of US homes with at least one TV is 115M). More importantly, 18% of these mobile devices are smartphones (up from 13% in 2008), according to recent Nielsen data. Furthermore, 61M Americans use the mobile web (up 33% from 2008). If these growth rates are sustainable, this implies that almost 30% of mobile phones will be smartphones by 2011 and we estimate mobile web users could reach 107M in the same time period. However, we are still in the early days of the mobile ad cycle growth curve. We estimate that only $3.8B will be spent on advertising on the US mobile web in 2010 (up from $2.6B in 2009), well below our estimates for total US advertising spend of ~$25B in the US in 2010. Of the ad dollars allocated to mobile, we estimate that 85% is spent on SMS (text) advertising, 8% on mobile search, and 7% on mobile display. Some of the key challenges. Because we are so early into the mobile adoption cycle, new advertising forms are constantly being tested and developed. Additionally, mobile advertising carries with it its own unique set of challenges, including 1) the small screen, 2) lack of a standard mobile platform, 3) multiple players in the value chain, and 4) a different set of user expectations and needs from a mobile device. In this note, we take a look at the particular challenges facing mobile search, mobile display, apps, maps, and text as well as particular cases surrounding Apple, Microsoft, Android, and HP.

Internet Imran Khan


AC

(1-212) 622-6693 imran.t.khan@jpmchase.com

Bridget Weishaar
(1-212) 622-5032 bridget.a.weishaar@jpmchase.com

Lev Polinsky, CFA


(1-212) 622-8343 lev.x.polinsky@jpmchase.com

Shelby Taffer
(212) 622-6518 shelby.x.taffer@jpmchase.com

Vasily Karasyov
(1-212) 622-5401 vasily.d.karasyov@jpmorgan.com J.P. Morgan Securities Inc.

Mobile Market Leaders. On the device usage side, Apple, Google, RIM,
Microsoft, and Palm have established a firm market share with RIM as the leading mobile smartphone platform in the U.S. with 43% share of U.S. smartphone subscribers. Apple ranked second with 25% share, followed by Microsoft at 16%, Google at 7%, and Palm at 6%. ComScore notes that Googles Android platform continues to see rapid gains in market share. However, on the advertising side, we think leaders are less clear. In fact, we continue to believe that non-traditional ad platforms such as apps and local geographically targeted ads could be the winners. As such, we think it likely that newer entrepreneurial platforms could be the biggest winners as opposed to incumbents attempting to enter the market.

See page 21 for analyst certification and important disclosures.


J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Mobile Phone Scale on Par with Television


With approximately 233M mobile phone users in the US, we believe we can claim that the mobile phone market is on its way to maturity. If we assume that there are 2.5 people to a household, this would imply that almost 93M US households have a mobile home vs. 115M US households possessing at least 1 TV. While this reach offers interesting possibilities to the advertising market, the implications for carriers are a bit more dire, in our view. Carrier growth is now dependent on winning customers from competitors or driving growth through data services packages. Thus, we believe handsets and content experiences are becoming as key to carrier growth as they are to handset manufacturers and content providers.
Figure 1: Mobile Subscriber Growth is Slowing
Subscribers in millions

240 235 230 225 220 215 210 205 200


Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation and March 2010 press release

+ 3%

May -09 May -08 226 233

Jan-10 234

However, unlike mobile phone subscribers, smart-phone users are still growing at a healthy clip. Only about 18% of mobile subscribers use smart phones, according to Nielsen, but this number is up from 13% in 2008. As these users are 3x as likely to browse the mobile web, 3x as likely to use a mobile app, and 2x as likely to send photos or videos (comScore), we think smart phone penetration is key to mobile advertising growth.
Figure 2: Smart vs. Non-smart Phone Penetration
Smartphone Users, 18%

Non-smartphone Users, 82%

Source: Nielsen 2010 Media Industry Fact Sheet

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Use of the Mobile Web Is Becoming Mainstream


According to Nielsen data, the number of mobile web users has risen to 61M in 2009 (up 33% from 2008). We think improved hardware, better data speeds, and more versatile data plans are driving this uptake. The top 5 activities on cell phones still relate to SMS, camera, and messaging services, however, mobile games have now ranked in the top 10 activities and applications are showing the second highest annual growth rate at 111% (comScore).
Table 1: Usage of Available Mobile Services
Ranking 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Activity Sent text message to another phone Took photos Used network services for photos/videos Sent photo directly to another phone Received an SMS ad Changed to native ringtone Played games Set graphics with camera Changed to native graphics News or info via browser Transferred photo to PC Used email Captured video News or info via SMS IM Made own ringtone Listened to music on mobile phone News or info via app Uploaded video to computer Listened to music transferred from PC # Users (M) 138.6 105.1 73.9 67.9 58.9 57 55.4 55.2 52 47.7 46.3 42.3 40.9 32.9 31.6 30.3 28.3 24.5 22.1 21.2 % Users (of 233M cell phone subscribers) 59.5% 45.1% 31.7% 29.1% 25.3% 24.5% 23.8% 23.7% 22.3% 20.5% 19.9% 18.2% 17.6% 14.1% 13.6% 13.0% 12.1% 10.5% 9.5% 9.1% % Y/Y change 21.0% 15.8% 30.9% 29.8% 33.1% 7.8% 13.4% 14.1% 18.3% 42.3% 29.0% 41.5% 32.3% 84.5% 63.0% 27.5% 51.4% 111.3% 51.3% 48.4%

Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation

Mobile is Creating More Media Fragmentation, Posing New Challenges/Opportunities for Advertisers and Content Publishers
With better devices, improved data speeds, and more attractive data plans, content and service providers have been able to recognize distinct growth in usage. Mobile users spend ~24 minutes on Facebook and average 3.3 visits per day, which is now equal if not better than PC users who spend 27.5 minutes per day and average 2.3 visits. On the more traditional content side, browsers were used by ~29% of US mobile subscribers, according to comScore January 2010 data. Furthermore, branding remains key, with strong web brands dominating mobile devices.
Table 2: Top 5 Mobile Websites and Video Channels
1 2 3 4 5 Websites Google Search Yahoo! Mail Gmail The Weather Channel Facebook Video Channels YouTube Fox Interactive Media The Weather Channel Comedy Central CBS

Source: Nielsen 2010 Media Industry Fact Sheet

Mobile users access their smart-phones across all times and days with slight peaks during the day time and evening hours, consistent with sleeping patterns. We think

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

this offers advertisers an attractive pattern as ad rates and consumer reach should not be dependent on certain prime-time hours and days.
Figure 3: Segments by Day of the Week
subscribers

4600000 4400000 4200000 4000000 3800000 3600000 3400000 Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Source: comScore, March 2009

Figure 4: Segments by Day Part


subscribers

6000000 5000000 4000000 3000000 2000000 1000000 0 Early Morning (MF 6am-8am) Day time (M-F, 8am-5pm) Ev ening (M-F, 5pm-11pm) Late Night (M-F, 11pm-6am) Weekends (SatSun, all day )

Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation, March 2009

Surprisingly, early data indicates that mobile usage is actually providing a site visitation lift rather than cannibalizing the existing internet site visitor base. In a cross media panel conducted in February 2009, comScore found that the business directories category actually saw a 3% site visitation lift due to mobile visitation.
Table 3: Cross-Platform Website Reach
Directories % Mobile users accessing content via PC 64% 28% 43% 64% % PC users accessing content via mobile device 2% 1% 4% 5% Site visitation lift (Increase in internet site visitor base due to mobile visitation) 1% 4% 6% 3%

Google Yahoo! Yellowpages.com Business Directories Category

Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation, Feb 2009

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Bottom Line We think mobile web browsing is creating even more fragmentation in media consumption. In our opinion, aggressively reaching out to the mobile audience will assist content publishers (both new and traditional media) in bolstering their main platform. Historically, we learned that not having a web presence early in the internet life cycle hurt many traditional media companies. In the same way, we think failure to establish early mobile leadership could be detrimental for content aggregators and publishers. At the same time, failure to understand the mobile audience could lead to market share loss for producers and advertisers.
Figure 5: Time Spent Across Platforms Is Becoming More Fragmented--Mobile Usage Only Accelerates this Trend
35% 30% 25% 20% 15% 10% 5% 0% Print
Source: Yahoo! 2010 Investor Day Presentation

31%

28%

16% 12%

Radio

TV

Online

Still Very Early Stage of Mobile Ad Adoption Cycle


It is not a large leap of logic to conclude that advertisers will be attracted to mobile media as cell-phone adoption has reached critical mass; well over 50% of cell-phone users take advantage of non-voice features, and smart-phone launches and consumer purchases are increasing exponentially. However, we also think 2010 will still be an experimental year in mobile advertising as advertisers are forced to deal with the variety in devices and capabilities and the fragmented usage of SMS, browsing, and applications. We note that, while there is still a large gap between ad spend and time spent on a medium, ad spend is shifting to better reflect user behavior.

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

As the mobile time spent grows, we think the space will be able to attract ad dollars similar to the way the internet did. Figure 6: Ad Spend vs. Time Spent 2003
60% 50% 40% 30% 20% 10% 0% Print Radio Time Spent TV Online 23% 7% 27% 8% 24% 14% 3% 52%

Figure 7: Ad Spend vs. Time Spent 2009


50% 40% 30% 20% 10% 0% Print Radio Time Spent TV Online 26% 12% 16% 9% 39% 31% 28% 13%

Ad Spend

Ad Spend

Source: SRI Knowledge Networks, Universal McCann 6/03, and IAB 3/04

Source: Yahoo! 2010 Analyst Day Presentation

When looking at the relationship between internet ad spend as a percent of total ad spend in the US and broadband penetration growth, we notice that there is a correlation. Furthermore, we think that there is an inflection point in ad spend when broadband penetration per household traveled north of 30%. We think that this may be indicative of the pattern mobile ad spend will follow when smartphone adoption increases. Right now, comScore estimates that subscribers are pretty evenly divided between accessing content through browsing, applications, and SMS. As we expect users to continue to test these various platforms, we think both content publishers and advertisers will utilize all three platforms. Similar to the offline space, of the top search and portal sites, Google and Yahoo! maintain the largest reach on mobile devices.
Table 4: Lead Online Search and Content Provider Reach
reach % within category AOL Google Microsoft Yahoo! Other Browsing 24.4% 50.4% 22.5% 47.8% 87.6% Applications 27.6% 28.6% 21.5% 39.6% 54.2% SMS 24.5% 30.2% 13.1% 41.7% 35.5% Total 29.2% 47.2% 24.7% 48.4% 82.7%

Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation, Feb 2009

In terms of the type of advertisers, it is not surprising that mobile related industries are dominating mobile banner advertising. However, non-mobile sectors are also adopting mobile banner ads.

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Figure 8: Top Non-Mobile Advertising Industries, May 2009


% share of 191,380 ad instances

Braodcasting & Cable TV Automobile Manufacturers Communications Equipment Personal Products Wireless Telecommunication Serv ices Mov ies & Entertainment Application Softw are Hotels, Resorts & Cruise Lines Education Serv ices Computer & Electronics Retail Internet Softw are & Serv ices Computer Hardw are Automotiv e Retail Div ersified Banks Apparel, Accessories, & Lux ury Goods Internet Retail Adv ertising Specialized Consumer Serv ices Aerosplace & Defense Apparel Retail Household Products Food Retail Soft Drinks Publishing Leisure Products 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

Source: comScore Wired-Connecting to the Mobile Marketing Revolution presentation, Feb 2009

With approximately 60M Americans now actively using mobile internet service, we think that the market has reached enough scale to begin to be attractive to advertisers. We have subdivided mobile internet advertising into 3 categories: Message Advertising, Mobile Display, and Mobile Search.
Table 5: US Mobile Advertising Forecast, 2005-2010
millions 2005 Mobile message advertising Mobile display advertising Mobile search advertising Total Y/Y Growth Mobile message advertising Mobile display advertising Mobile search advertising Total 43 1 1 45 2006 296 9 9 315 2007 750 26 29 805 2008 1436 78 99 1613 2009 2298 140 178 2616 2010 3217 253 321 3790 2011 4182 404 513 5099 2012 5018 566 719 6303

585% 950% 950% 600%

153% 175% 207% 156%

91% 90% 90% 100%

60% 80% 80% 62%

40% 80% 80% 45%

30% 60% 60% 35%

20% 40% 40% 24%

Source: eMarketer, Yankee Group, Strategy Analytics, Nielsen Mobile, Coda, comScore, and J.P. Morgan estimates

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

SMS Advertising We think that mobile message advertising is currently the largest medium for mobile advertising as text messaging usage does not require high data speeds or advanced phone capabilities. Campaigns can include placement in text messages, direct spending on a message campaign, and spending on promotional coverage of end-user messaging costs. We expect this market to reach $3.2B by 2010. Mobile Display Advertising Mobile display advertising includes spending on display banners, links, or icons placed on WAP, mobile HTML sites or embedded in mobile applications such as maps or games and videos. We think mobile display advertising will be a high growth area over the next few years as improvements to data loading speeds and better phones fuel mobile internet usage. However, we see growth in mobile internet users and increased advertiser spend slightly offset by declines in CPMs due to available inventory increases. We expect the mobile display market to reach $253M by 2010. In addition to high growth, we think that the mobile display market will also undergo a competitive shift favoring traditional internet display companies. Early mobile display advertising was dominated by mobile specific ad networks such as Third Screen Media and AdMob which specialize in delivering ads for phone browsers. However, the latest browsers, like MobileSafari on the iPhone, are designed to bypass mobile websites and display full size, hi-fi websites and ads. Thus, the iPhone browser loads an ad the same way a computer does, eliminating the need for a special mobile ad network with different technology. We think that the trend toward these advanced phones will favor existing internet players that already have many advertiser partnerships. Mobile Search Advertising Mobile search advertising includes spending on sponsored display ads and text links that appear alongside mobile search results as well as spending on audio ads played to mobile phone callers making a directory inquiry (eg. GOOG-411 and 1-800FREE411). We think mobile search advertising will be a high growth area given its high volume and starting point status. We are expecting search advertising revenue to reach $321M by 2010. Unlike mobile CPMs, we actually think CPCs will grow as adoption increases.

Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Some Challenges
Table 6: Impact on the Content Ecosystem
Search News Sites Games Aggregators Opportunity more searches more targeted more product/place oriented reinstates the importance of a strong brand people download branded apps more time spent less barriers to entry slow loading speed should make aggregators more attractive to consumers reach larger audience with more available time high demand for video content while traveling larger audience than print can access for immediate demand Challenges less coverage less transactional (e-commerce) application demand less space to put ads companies with lower brand recognition will be less likely to sell apps multiple platform/device compatibility issues smaller screen/fewer buttons hard to differentiate in crowded app market less coverage apps allow consumers to create own personal aggregation smaller screen still run into internet issue of how to monetize may be harder to track source for in-store use

Video Coupons

Source: J.P. Morgan estimates.

Small Screen Over time internet publishers and search engines have learned to balance the number and placement of ads on a page to maximize revenue with the creation of a user experience which would encourage repeat visits. For search, this has meant about 13 ads at the top of a results page with the remainder down the right side of the page. For quality publishing sites, we now see about 1 large ad and 1-2 smaller ads discreetly placed around the content. However, on mobile phones, neither of these standards will work as one traditional search ad would occupy almost one third of the screen and one traditional display ad would take up the whole screen. This problem has resulted in significantly lower coverage on both content and search results pages. We note that, on the iPhone, Google and Yahoo! are putting only ~1-2 ads at the top of a mobile search results page with ~2-3 more at the bottom (much scrolling is required to see these). Many content publishers have resorted to putting on small display ad in a long narrow bar format (taking up about the same amount of space as a search text ad). On average, we saw only one ad on the screen at a time. We think some of this weakness will be offset by better pricing with AdMob estimating that mobile CPCs averaged about 11-12 cents and mobile CPMs around $12-$14 in 2009 (Business Insider, June 2009). However, we note that the greater load times on mobile devices make users less likely to click on ads and thus the greater pricing is more than offset by lower coverage and click-thru rates. A recent key development that has been able to offset these small screen size concerns is the introduction of the iPad and the expectation for more tablet devices. At about 9.7 inches (diagonally), this device is still small enough to be considered mobile but large enough to show ads more similar to a computer. We think these devices will help spur mobile advertising. Lack of a Standard Mobile Platform The Mobile Marketing Association has published mobile advertising guidelines, but it is difficult to keep such guidelines current in such a fast-developing area. There are hundreds of handsets in the market and they differ by screen size and supported technologies (e.g. MMS, WAP 2.0). For color images, typically PNG, JPG, GIF and BMP, with WBMP being the most basic (and the most common). As such, the MMA notes that the biggest difference between buying mobile web display ads and
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Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

internet display ads is that mobile web ads are not sold by unit size. To create the best experience for both consumers and advertisers, the size of mobile web banners are optimized to best fit the handset on which the ad is being viewed to maximize the user experience, ad readability, creative flexibility, and effectiveness. In cases where the ad-serving system cant identify the devices capabilities, the current default standard is applied. As a result we believe publishers and ad networks will likely request advertisers to provide multiple versions of the banner creative with mobile web campaigns.
Table 7: Handsets Display and Corresponding Ad Images
Handset X-Large Large Medium Small Approx Handset Screen Size (pixels) 320 x 320 240 x 320 176 x 208 128 x 160 Example Handsets Palm Treo 700p; Nokia E70 Samsung MM-A900; LG VX-8500 Chocolate Motorola RAZRs; LG VX-8000; Motorola ROKR E1 Motorola V195 Ad Size (pixels) 305 x 64 215 x 34 167 x 30 112 x 20

Source: Mobile Marketing Association Mobile Advertising Guidelines (North America) Dec. 2007

Multiple Player Value Chain For advertisers, another significant difference between advertising on the internet and advertising on mobile devices is the number of players in the value chain. This is particularly true in the case of mobile operators, which possess a large degree of control of content distribution, a role that is pretty much absent online where anyone can publish content without negotiating with an ISP. We find the Strategy Analytics model useful in studying the mobile advertising ecosystem. The model breaks the value chain into 5 components: content ownership, design/development, publishing/aggregation, provisioning/hosting, and marketing/delivery. Much of the user content in the mobile world (everything from ringtones to complex multiplayer games and location-based information) originates with a commercial entity. Design and development exists as a separate step in the value chain because existing content often has to be modified for mobile platforms. Games originally intended for console or PC play may have to be redesigned or recoded for devices with smaller screens and less graphics processing power. Often this step is made more complicated by the multitude of devices. Often the desirability of having content available on many devices has to be weighed against the costs of making different versions for different handsets. Publishers and aggregators are specialists who take content from multiple sources, test and validate that it operates on different devices and networks, price and promote the content to operators and other distributors, and create content bundles where appropriate. Provisioning and hosting includes providing hosting services that physically store and deliver content ordered from network operators. Finally, marketing and delivery includes operators, OEMs (handset makers), and independent retailers. Although the revenue split among players in the value chain varies with brand equity, value-add attributes, and proximity to the customer, in general, Strategy Analyticis estimates that for every $1 of revenue, content owners receive 33%, design/development 12%, publishing/aggregation 5%, provisioning/hosting 25%, and marketing/delivery 25%.

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Imran Khan (1-212) 622-6693 imran.t.khan@jpmchase.com

North America Equity Research 04 June 2010

Figure 9: Typical Revenue Splits in Mobile Data


Marketing/Deliv ery , 25% Content Ow nership, 33%

Design/Dev elopment Prov isioning/Hosting , 25% Publishing/ Aggregation, 5%


Source: Strategy Analytics, Wireless Media Strategies

, 12%

It is fair to say that the mobile advertising market is still in the very early stages of development and models for payment systems are still being worked out. As such, there are very few standard practices. When designers/developers create the ads themselves, this is typically done on a work-for-hire basis. Distribution of revenue for advertising within content is likely to be managed by the mobile operator or ad networks (Yahoo!, Doubleclick, Third Screen Media, AdMob) (Strategy Analytics, 2008). User Expectations According to a Nielsen//NetRatings survey of 2000 US internet users in 2007, 92% said that they would be irritated by advertising on their mobile phones. 74% stated that they preferred to search for local products and services rather than having ads sent directly to them. However, two-thirds favored more targeted ads. 56% of respondents said they only get ads relevant to them when using the internet and 53% said the same of television. We think that people will use their phones to actively search for products and services, especially on a local level. However, these results demonstrate the importance of careful targeted advertising. In addition to the annoyance of receiving ads, users must deal with the fact that load times are much slower on phones, and thus the time consequence of loading ads or clicking through to pages will be much higher on a mobile device than on the internet.

Early Leaders in the Field


Phone OEMs
According to comScore, Motorola ranked as the top OEM with ~23% of US mobile subscribers in the 3 month average ending January 2010. Rounding out the top 5 were LG with a 22% share, Samsung with a 21% share, Nokia with a 9% share and RIM with an 8% share.

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North America Equity Research 04 June 2010

Table 8: Top Mobile OEMs


3 mo ave ending Jan 2010 vs. 3 mo ave ending Oct. 09 Motorola LG Samsung Nokia RIM
Source: comScore MobiLens

Oct-09 24.1% 22.0% 21.0% 9.3% 6.4%

Jan-10 22.9% 21.7% 21.1% 9.1% 7.8%

Point Change -1.2 -0.3 0.1 -0.2 1.4

When looking only at the smartphone market, Blackberry and iPhone dominate. According to Nielsen data, the Blackberry 8300 Curve has the largest market share at 17%, followed by the Apple iPhone 3G at 15%, Apple iPhone 3G S at 12%, Blackberry 9530 Storm at 6%, and Blackberry 8100 Pearl at 5%.
Figure 10: Top Smartphone OEMs
Blackberry 8300 Other 45% 15% Apple iPhone 3G S Blackberry 8100 Pearl 5%
Source: Nielsen 2010 Media Industry Fact Sheet

Curv e 17% Apple iPhone 3G

12%

Blackberry 9530 Storm 6%

Phone OSs
Of the smartphone platforms (now totaling ~43M out of the total 234M mobile subscribers), RIM still leads the market with a 43% share, followed by Apple (25% share), Microsoft (16% share), Google (7% share), and Palm (6% share).
Table 9: Top Smartphone Platforms
3 mo ave ending Jan 2010 vs. 3 mo ave ending Oct. 09 RIM Apple Microsoft Google Palm
Source: comScore MobiLens

Oct-09 41.3% 24.8% 19.7% 2.8% 7.8%

Jan-10 43.0% 25.1% 15.7% 7.1% 5.7%

Point Change 1.7 0.3 -4 4.3 -2.1

Android OS According to the most recent AdMob Mobile Metrics Report March 2010), the Android ecosystem is gathering ever increasing penetration and diversity. In September 2009, two Android devices (the HTC Dream and HTC Magic) represented 96% of Android traffic. However, only seven months later, 11 devices represented 96% of Android traffic in the AdMob network. The top three devices in the US were the Motorola Droid, HTC Dream and Motorola CLIQ.

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North America Equity Research 04 June 2010

Table 10: Android Devices


% of March 2010 Android Traffic 32% 19% 11% 11% 10% 6% 2% 2% 6% Operating System 2.1 1.5 1.6 1.6 1.5 1.5 1.5 2.1 NA Manufacturer Motorola HTC HTC HTC Motorola Samsung Samsung HTC NA Resolution (px) 854 x 480 320 x 480 320 x 480 320 x 480 320 x 480 320 x 480 320 x 480 800 x 480 NA Keyboard Yes No Yes No Yes No No No NA CPU 550 MHz 528 MHz 528 MHz 528 MHz 528 MHz 800 MHz 800 MHz 1 GHz NA ROM (expandable) 512 MB (32 GB) 256 MB (16 GB) 256 MB (16 GB) 512 MB (16 GB) 512 MB (32 GB) 512 MB (16 GB) 512 MB (16 GB) 512 MB (32 GB) NA RAM 256 MB 288 MB 192 MB 192/288 MB 256 MB 256 MB 320 MB 512 MB NA

Motorola Droid HTC Hero HTC Dream HTC Magic Motorola CLIQ Samsung Moment Samsung Behold 2 Google Nexus One Other

Source: AdMob Mobile Metrics Report March 2010

iPhone OS According to AdMob data, as of March 2010 (prior to the launch of the iPad), there were six devices running the iPhone OS. iPhone OS traffic is composed of two device types: the iPhone (60%) and the iPod touch (40%). The most popular iPhone OS device in the AdMob network is the iPhone 3GS, followed by the second generation iPod touch. iPhone 3GS traffic share has increased from 30% in September 2009 to 39% in March 2010. The first generation iPhone only generated 2% of iPhone OS requests in March 2010. The second generation iPod touch generated over 2x more traffic than the third generation iPod touch, which was released in September 2009.
Figure 11: iPhone OS Handset Distribution, Worldwide March 2010
iPod touch 3rd Gen, 12% iPhone 3G, 20% iPod touch 2nd Gen, 25% iPhone 1st Gen, 2%

iPod touch 1st Gen, 2%


Source: AdMob Mobile Metrics Report March 2010

iPhone 3GS, 39%

Mobile Applications: A New Form of Content Consumption


Within the first 8 months of the Apple App Store, over 25,000 applications were introduced and over 800M applications were downloaded by users. Now more tech companies want to get in on the action and we have seen or soon expect to see Android Marketplace (Google), SkyMarket (Microsoft Windows Mobile), Blackberry App World (RIM), Ovi Store (Nokia), and others. When looking at the user profile of the iTunes App Store, we find that the average app store user comes
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North America Equity Research 04 June 2010

from a higher income level than traditional online users. According to comScore research, 35% had a household income of more than $100K per year, 32% more likely than the average online user. More than half of app users come from households making at least $75K per year. We think apps have proven to be an interesting way for advertisers to reach an attractive consumer base through self selection. Mobile app analytics company Distimo has compiled its findings on the six largest mobile app stores offered by Apple, Palm, RIM, Google, Nokia, and Microsoft. For quantity of apps, Apples App Store has a very significant advantage with over 150,000 apps, with Google coming in a distant second with just under 20,000. Windows Mobile, Palm, Nokia, and Blackberry trail with 690, 1,450, 6,120, and 4,760, respectively.
Figure 12: App Store Sizes
total number of applications

Window s Palm Nokia Android Blackberry Apple -

693 1,452 6,118 19,897 4,756 150,998 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000

Source: Distimo Presentation, Mobile World Congress 2010

However, Android's growth rate is faster. posting roughly 3,000 new apps per month (15% growth), vs. Apple's 14,000 new apps per month (9% growth).
Figure 13: App Store Growth
new applications per month (Dec 2009-Jan 2010)

Nokia Android Blackberry Apple -

734 3,005 501 13,865 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Source Distimo Presentation, Mobile World Congress 2010

In terms of pricing, RIM's apps were the most expensive at an average of $8.26, followed by Windows Mobile's at an average of $7.00. Apps sold by Nokia, Apple,

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North America Equity Research 04 June 2010

Google, and Palm all came out in roughly the same average price range of $2.50 to $3.60.
Figure 14: Paid App Price Comparison
average price for all paid apps

$10.00 $8.00 $6.00 $4.00 $2.00 $0.00 Apple $3.62

$8.26 $6.99

$3.27

$3.47

$2.53

Blackberry

Android

Nokia

Palm

Window s

Source: Distimo Presentation, Mobile World Congress 2010

Figure 15: Free vs. Paid Apps


Window s Palm Nokia Android Blackberry Apple 0% 24% 25% 20% 40% Free
Source: : Distimo Presentation, Mobile World Congress 2010

22% 32% 15% 57%

78% 68% 85% 43% 76% 75% 60% Paid 80% 100% 120%

Monetizing Apps We think that the majority of best known app stores have fallen roughly in line with the 30/70 revenue split introduced by Apple. Unsurprisingly, 80% of developers in North America think they should receive more than 70% of the revenue generated by their apps, according to the Spring North American Development Survey of over 400 developers in April 2010. App stores are the preferred distribution model for only 15% of North American developers, with over half preferring direct sales to end users or enterprises. Finally, over 70% thought that app stores should not impose any restrictions on price, and while a third thought content restrictions were acceptable, almost half thought there should be none at all (Cellular-News.com).

Mobile Ad Networks
Googles acquisition of AdMob, Apple's acquisition of Quattro Wireless, and the announcement of the iAd advertising platform, has ignited investor interest in the mobile ad space. Mobile ad networks play an important role in connecting mobile marketers with mobile publishers. Because the mobile ad network space is still in its infancy, the market is still very fragmented and there is no real way to estimate market share as there is no published revenue data. MobiThinking has divided
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networks into three categories based on business model. At one extreme there are blind networks which work mostly on a cost-per-click basis; at the other extreme are networks focused on premium publishers which work mostly on cost per thousand impressions. According to MobiThinking, blind networks are usually the largest in terms of publishers, advertisers, and impressions. They serve a high volume of advertising to an extensive base of mostly independent mobile publishers (mobile sites and applications), supplemented by premium publishers unfilled inventory. They offer plenty of options for targeting such as by country and content channels (news, sports etc), but do not usually allow advertisers to choose specific websites. Premium networks focus on a limited number of high quality publishers mobile operators and big-name destinations for which they act like an extension of their direct-sales team. In the case of Nokia and AOL, much of the mobile inventory they sell is on Nokia or AOL sites. Premium networks attract big brand advertisers who are prepared to pay premium prices to secure the prime locations on top-tier mobile destinations. This means CPMs will vary greatly from $5 to $75. Advertisers should expect more direct sales and support and a multitude of targeting options. Publishers should expect to receive a majority share of advertising revenue, roughly 50% to 70%. Deals are usually negotiated on a case-by-case basis. Following is a summary of a selective list of mobile ad networks based on MobiThinkings Mobile Ad Network Guide.

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Table 11: Summary of Mobile Ad Networks


Year Established Premium Networks Advertising.com/AOL 2005 HQ New York, USA # Publishers on Network Over 75 publishers, representing over 100 sites and applications # of Advertisers on Network Over 100/year Page Impressions Over 1B page impressions / month Geographic Coverage Primarily focused on USA, with growing presence in Canada, UK and other countries. All of Brazil Pricing Model CPM, CPC and CPA Cost Range for Advertiser CPM ranges from US$5-US$25; CPC ranges from US$0.05US$0.50; depending on campaign objectives and parameters. This varies according to how many impressions the advertiser buys. However, CPM is on average US$20. N/A

Hands

1999

So Paulo - Brazil

52 premium publishers

Microsoft Mobile Advertising

2007

Redmond, USA; European HQ: Paris, France

Nokia Interactive Advertising

2004

Boston, USA

Key partners include Verizon Wireless, Bouygues Telecom and independent publishers such as MSNBC, CNBC and Fox Sports. Microsoft mobile sites include: MSN, Windows Live Messenger, Windows Live Hotmail and the Bing search engine. NIA focuses on advertising on Nokia services, such as Nokia.mobi and Nokia Internet Radio, and works with strategic partners, top-tier publishers and operators, such as RTL in Germany, Airtel in India and Sprint in USA.

International advertisers include Unilever, GM, DHL and Mitsubishi; local advertisers include Loterias da Caixa and INPG. N/A

N/A

Nearly 2B page impressions / month and growing.

US, Canada, UK, France, Spain, Italy, Germany, Sweden, Denmark, Belgium, Netherlands and Norway.

100% CPM. Each ad deal is negotiated, there is no self-service marketplace common with blind and premium blind networks. Either CPM or CPC. Microsoft also selectively offers advertisers the option to purchase mobile media on a CPA basis.

In 2008 NIA ran almost 4,000 campaigns for over 350 brands.

Over 5,000 different ads / month

Americas, Europe, India, Southeast Asia, Middle East, Africa

CPM, predominantly, being a premium network.

From US$15 to US$75 CPM, depending upon region, class of publisher and targeting selected.

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Year Established Pudding Media 2006

HQ Singapore

YOC Group

2005

Berlin, Germany

# Publishers on Network Major mobile operators in APAC. During 2010 Pudding expects network to be connected to 10 major carriers in APAC. Over 196 publishers.

# of Advertisers on Network 50 premium brands

Page Impressions 100M page impressions / month and growing.

Geographic Coverage Singapore, Malaysia, Thailand, Indonesia, Philippines and Vietnam. 50% in UK, followed by Germany, Austria, Italy and France.

Pricing Model CPM and CPC

Cost Range for Advertiser from US$2 to US$15 CPM, depending on country

Advertisers include SAP, Vodafone, Mercedes, Opel, Walt Disney and CocaCola.

Over 500M page impressions / month

This varies per region. In Spain, Germany and France campaigns are run on a CPM basis. In the UK and Austria CPC and CPM are implemented.

N/A

Premium Blind Networks Jumptap

2005

Cambridge (MA) USA

Over 1000 premium sites, apps and carrier portals

Over 500 premium and performance advertisers

Monthly, Jumptap serves: 900M premium (CPM) display impressions and 8B performance (CPC) impressions.

USA 90%; 10% other

Madhouse

2006

Shanghai, China

1,000 publishers, with some exclusive partners.

Over 50 leading brands and 20 advertising agencies.

approaching 1B targeted ad impression / month

100% Mainland China.

Offers both self service, auction-based campaigns and premium managed campaigns. Advertisers can purchase CPM, CPC, CPA or a combination thereof. Fixed ad position / time, CPM, CPC and CPA.

This varies widely. Performance and run of network can be as low as US$0.05 CPC and premium can be as high as US$20 CPM. Costs range from US$10,000 to US$500,000 per campaign, depending on campaign requirements, scale, complexity and level of targeting. CPM cost varies from US$2 and US$15 depending on a number of factors. Varies depending on goals.

Milennial Media

2006

Baltimore, MD, USA

Quattro Wireless

2006

Waltham, MA, USA

The network includes thousands of sites, but 80% of impressions come from Nielsens top 100 sites. Thousands of sites and applications

Around 300 advertisers / month on the network (70% brand, 30% performance). Hundreds of campaigns running every week

7.3B impressions/month globally, of which 6.4B impressions come from US consumers. 4B mobile ads/month

USA (85%) and Europe.

Quattro serves ads in nearly every country in the world, but the majority are served in the United States.

CPM for brand advertising (about 70% of business); CPC for performance ads (30%). CPM for premium / brand ads; CPC for performance.

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Year Established Blind Networks AdMob 2006

HQ San Mateo, CA, USA

# Publishers on Network 9,000 Mobile Web sites and 3,000 applications

# of Advertisers on Network Advertisers include: Adidas, Diet Coke, P&G, Toshiba, MTV, Disney, Gap, Best Buy, American Express, RIM, Toyota and Jaguar

Page Impressions More than 10B impressions/month, which represent 32,000 different ads/month and 9,400 ads/day

Geographic Coverage USA (49%), India (5.9%), UK (4.1%), Indonesia (3.9%), Canada (2.4%), others (34.7%) defined by ad requests (Oct 2009)

Pricing Model CPM for brand ads. CPC for performance ads, calculated through an auctionbased pricing system

Cost Range for Advertiser The auction system calculates a CPC bid price that could start at US$0.01$; the maximum bid price is determined by the advertisers bid. CPM prices fluctuate according with geography and availability of inventory. This varies widely depending on the targeting options chosen.

Admoda/Adultmoda

2006

London

Over 2,000. Admoda/Adultmoda turn down 70% of sites that apply to join the network.

Advertisers on Admoda include: Gameloft, Buongiorno, Dada, Zed, Fox, MTV, Adidas. Advertisers on Adultmoda include: Private, Brazzers, Reality Kings, iPorn, mConnect.

2.1B mobile ads / month

BuzzCity

Network 2006; company 1999

Singapore

InMobi

2007

Bangalore, India

2,000 publishers; predominantly independent and mobile-focused, from mobile social networking to adsupported download sites. Branded media sites use BuzzCity to fill unsold inventory. Over 750

More than 200 regular advertisers; 70% are mobile companies.

delivers 3B ads / month

Top 10 countries for Admoda: South Africa, Italy, USA, UK, India, Germany, Australia, Indonesia, Kenya, France. Top 10 countries for Adultmoda: USA, South Africa, UK, Germany, Italy, France, Spain, Australia, Netherlands, Norway. 200 countries in total: South Africa (34%), Indonesia (32%), India (8 percent), UK (5%), USA (5%), Other (16%).

95% CPC

CPC predominantly; determined by bids in the auction-based self-service market place.

For untargeted campaigns: average CPC across network is US$0.03; average CPC in South Africa US$0.20; Australia US$0.11; United Kingdom - US$0.09. This varies between countries.

Over 150

4B ads served in Aug '09 ~10K unique visitors according to Compete in April 2010 (as cited by TechCrunch)

Asia 55% of business; Africa 18%; Europe 14%; Americas 9%; Australia 4%.

CPC and CPM are both available, but the vast majority is CPC.

Mobclix

2008

Palo Alto

20+ ad networks

Advertisers include Bank of America, Crest, Virgin, and Coca Cola

Source: MobiThinking's Mobile Ad Network Guide

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

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Explanation of Equity Research Ratings and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated research analysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE All Share Index, not to those analysts coverage universe. A list of these analysts is available on request. The analyst or analysts teams coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.

Coverage Universe: Imran Khan: AOL Inc. (AOL), Amazon.com (AMZN), Blue Nile (NILE), Dice Holdings, Inc. (DHX), Discovery Communications, Inc. (DISCA), Expedia, Inc. (EXPE), Google (GOOG), IAC/InterActive Corp. (IACI), MercadoLibre, Inc. (MELI), Netflix Inc (NFLX), News Corporation, Inc. (NWSA), Orbitz Worldwide, Inc. (OWW), Priceline.com (PCLN), QuinStreet, Inc. (QNST), Shutterfly, Inc. (SFLY), The Walt Disney Co. (DIS), Time Warner (TWX), Viacom Inc (VIAb), Yahoo Inc (YHOO), eBay, Inc (EBAY)
J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2010 Overweight (buy) 45% 48% 42% 70% Neutral (hold) 42% 46% 49% 58% Underweight (sell) 13% 32% 10% 48%

JPM Global Equity Research Coverage IB clients* JPMSI Equity Research Coverage IB clients*

*Percentage of investment banking clients in each rating category. For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.

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