The Mobile Internet Report Key Themes*

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Japan Carriers Losing Relative Share to Commerce / Content / Services Providers + Advertisers, Owing to Latter Group’s Rapid Monetization 100% Japan Mobile Ecosystem Revenue Share Data Access vs. eCommerce vs. Services vs. Advertising 2002 – 2013E Japan Mobile Ecosystem Revenue Share 80% 60% 40% 20% Mobile Advertising Mobile Paid Services Mobile Online Commerce Mobile Data Access 0% 2002 2004 2006 2008E 2010E 2012E Note: Mobile online commerce includes retail sales of physical goods and digital / virtual goods such as ringtones / wallpapers / avatars. Source: Nema Naoshi / Hironori Tanaka for Japan data, Morgan Stanley Research. 326
Japan as Proxy for Technology’s Role as Relative Wealth Creator of Mobile Internet Era Telecom lost relative market value to online commerce / paid services / advertising companies as mobile Internet became mainstream Japan’s mobile Internet companies, including Yahoo! Japan (advertising), Rakuten (online commerce), DeNA / Mixi / Gree (advertising + virtual goods) have grown to $33B in market value, up from $6B in 2000 and account for 22% of total market value of the mobile Internet ecosystem. Japan’s wireless telecom industry (including NTT docomo, KDDI and SoftBank) has experienced a market value decline from $510B in 2000 (97% of mobile Internet ecosystem) to $116B in 2009 YTD (78% of mobile Internet ecosystem). Japan Internet & Wireless Telecom Companies’ Market Value Share, 2000 + 2009 YTD 2000 - Telecom Dominates Early Mobile Internet Market Value Creation Tech = Mobile Internet = 3% of Total $6B Market Value 2009 YTD - Tech Taking Share in New Rounds of Wealth Creation Tech = $33B Market Value Mobile Internet = 22% of Total Telecom = $510B Market Value Telecom = $116B Market Value Technology Telecom Technology Telecom Note: 2009 YTD data as of 12/4/2009. Companies included in graphs: Tech = Yahoo! Japan, Rakuten, DeNA, Mixi, Gree; Telecom = NTT docomo, KDDI, SoftBank.Source: FactSet, Morgan Stanley Research. 327
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The Mobile Internet Report Key Them
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What You are Reading - The Mobile I
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Key Mobile Internet Themes 1) Wealt
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…Key Mobile Internet Themes… 3)
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…Key Mobile Internet Themes 6) Ma
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Key Theme #1 11
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Key Theme #1 - Wealth Creation / De
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Wealth Creation / Destruction Is Ma
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Winners of Each New Cycle Often Cre
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NCR Won Big in Mainframe Era, DEC W
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Compaq + Microsoft Won Big in PC Er
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Net, New Computing Cycles Create /
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New Computing Cycle Characteristics
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12,000,000 Mobile Internet Traffic
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Pace of company change related to m
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Rapid Pace of Corporate M&A Related
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Technology Companies Created > Weal
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Top Internet-Related Tech Wealth Cr
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We Know What Happened Over Past 15
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Mobile Internet Likely to Follow Ti
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2009 Global Top 30 TMT Companies by
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Key Theme #2 43
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Key Theme #2 - Mobile Ramping Faste
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Apple iPhone + iTouch = Fastest new
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Mobile Internet Outpaces Desktop In
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Tech Cycles Tend to Last Ten Years
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User-Interface Revolutions (Overlai
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Broad base of IP-based mobile usage
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Wireless Network Primer GPS - Glob
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Increasingly, Mobile Phone Usage is
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Mobile Devices + Infrastructure Ena
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Cloud-Based Content / App Services
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Machine to Machine (M2M) Takes on N
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Rapid growth in number / type of mo
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GPS proliferation (and related loca
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GPS = 421MM Chipsets Sold in 2008E
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WIRED Magazine - “Inside the GPS
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3G proliferation is a big deal. 75
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3G = Key to Enabling Internet Usage
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3G Penetration Inflection Points Va
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3G Growth Still Concentrated in Dev
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USA Likely to Remain Most Dynamic 3
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Wi-Fi proliferation is a big deal.
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Wi-Fi’s High Speed + Wide Availab
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100,000 Wi-Fi Households (USA) = 20
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Bluetooth proliferation is a big de
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Bluetooth = 1.3B Chipsets Sold in 2
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What Is a ‘Smartphone’ We defi
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Smartphone of 2009 = As Powerful as
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Mobile Internet - Leveraging the Ev
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Notebook PC + Smartphone Shipments
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Impressive / Rapid Growing Smartpho
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Consumer Internet-Enabled Devices -
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Significant Growth in 3G + Smartpho
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Unified Communication (UC) Voice (~
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If VoIP Leader Skype Were a Carrier
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VoIP = Material Impact on Tradition
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Google Voice Putting User in Contro
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Social Networking - Global Phenomen
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Facebook = Garnering Rising Share o
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Powerful Devices (like iPhone) + Ne
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Video = High Usage + High Bandwidth
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Mobile Ramping Faster than Desktop
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Key Theme #3 1) Wealth Creation / D
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Apple Leading in Mobile Innovation
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Apple’s Impressive Share Likely M
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iTunes App Store = Shot Heard ‘Ro
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iTunes App Store = The Killer Mobil
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Mobile App Definition A mobile appl
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Users / Developers / Apple = Likely
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Apple iPhone / iTouch = 2B+ App Dow
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Most Downloaded Free iPhone Apps -
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iPhone Apps for Nearly Everyone - L
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Mobile Developer Mind Share / Focus
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Powerful mobile device usage trends
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iPhone / Android Gaining Mobile Int
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Mobile Internet Operating System Co
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Handset Device Price / Volume Pyram
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High-End Quickly Becomes Low-End -
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iPhone 3G BOM = 33% Lower than iPho
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Apple iTunes App Revenue = Could Su
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Apple leads race for handset profit
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Apple + RIM = 13% Share of Handset
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Apple / RIM - Smartphone Leaders Co
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PC Platform Leaders (Microsoft + In
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Apple iPhone Base Case + Upside Cas
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Scenarios for Apple iPhone Market S
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The Apple Tablet Potential Should N
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Apple - Potential Long-Term Challen
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Google Android’s Open + Low Cost
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Apple may believe its platform mana
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In Technology, Products with Most /
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Multitudes of Android Phones - Tens
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Android’s Conundrum Open-Source S
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Next Generation Android Smartphones
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Apple’s Potential Long-Term Chall
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Native Apps Benefits Challenges For
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Native Apps Should Always Have Perf
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Apple = Likely Well Positioned to N
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Do Incumbents Have Apple-Like Poten
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Smartphones Not Relevant in Emergin
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Retail Sales (Not Carrier Sales) -
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Apple’s Success Has Been Proven i
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Buddhist Phone White-Box “Shanzha
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Don’t Expect Apple to Stand Still
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Carrier Exclusivity Limits Apple’
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iPhone Price Cut to $99 Would Elimi
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Ending Carrier Exclusivity = Could
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Battery Technology Constraining iPh
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Implications of New Horizontal Busi
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Apple’s Vertical Handset Model =
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Apple iPhone + iTouch = On Track to
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Apple iTouch - Key Companion to iPh
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RIM’s Vertical Handset Model = Pr
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Threats from RIM’s Vertical Integ
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Horizontal Handset Model Finally Em
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Opportunities / Benefits from Horiz
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Key Theme #4 235
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Key Theme #4 - Game-Changing Commun
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Facebook and Apple iPhone / iTouch
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Facebook + Apple iPhone / iTouch =
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Social Networks - Underpinning of I
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Social Networking Driving Consumer
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Social Networks - Gaining Material
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Facebook Platform - A Hub for Commu
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Facebook - Next Generation Portal f
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Facebook - Largest Share Gainer of
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Facebook / Twitter Replacing Tradit
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Communication on Twitter Not Only C
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Facebook Users = Heavy Content Crea
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Top 10 Facebook Applications - Game
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Facebook = A Platform for Advertise
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Facebook - Opportunity for Advertis
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Facebook - Advertiser / Vendor Succ
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Social Networks in General = Platfo
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LinkedIn - Social Network for Profe
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Like Twitter and Facebook, Foursqua
Page 275 and 276: Advertising Follows Eyeballs - Glob
Page 277 and 278: Facebook - Vibrant Developer / Appl
Page 279 and 280: Developer / Application Success on
Page 281 and 282: China Serves as Proxy & Leads World
Page 283 and 284: Tencent Business Model Overview - H
Page 285 and 286: Mobile = Future of Social Networks
Page 287 and 288: Mobile Social Networking in Japan ~
Page 289 and 290: Facebook Symbiotic with Mobile - Sh
Page 291 and 292: Carriers’ ‘Walled Gardens’ =
Page 293 and 294: Apple Unshackled Developers + Consu
Page 295 and 296: Mobile Commerce = Accelerator for O
Page 297 and 298: 15 Years for Online to Reach 4% of
Page 299 and 300: Mobile Revolutionizing Commerce - W
Page 301 and 302: Deep Discounts - Invitation-Only Ti
Page 303 and 304: Traditional Retailers Using Pings t
Page 305 and 306: Key Theme #5 305
Page 307 and 308: Key Theme #5 Growth / Monetization
Page 309 and 310: Japan has led world by 5-10 years i
Page 311 and 312: ROW’s Mobile Internet Revenue Mix
Page 313 and 314: Mobile Revenue (ex. Data Access) pe
Page 315 and 316: 3G Penetration - …Developed / Eme
Page 317 and 318: Why Has Japan Led the World in Mobi
Page 319 and 320: Rich Content / Apps / Services - Ja
Page 321 and 322: Powerful / Internet-Enabled Handset
Page 323 and 324: Japan Mobile Online Commerce / Paid
Page 325: Japan Mobile Online Commerce / Paid
Page 329 and 330: Japan mobile monetization models pr
Page 331 and 332: Japan’s Mobile Online Commerce /
Page 333 and 334: Mobile Online Commerce - Promising
Page 335 and 336: Japan - Physical Products Gaining S
Page 337 and 338: ROW Also Making Inroads into Mobile
Page 339 and 340: ROW - Branded Mobile Apps Could Dri
Page 341 and 342: Digital Content (Music / Video / Ap
Page 343 and 344: Digital Content - Mobile Games / Mu
Page 345 and 346: Tencent Business Model Overview - H
Page 347 and 348: Japan - Virtual / Digital Goods on
Page 349 and 350: China Serves as Proxy & Leads World
Page 351 and 352: Developer / Application Success on
Page 353 and 354: Japan Mobile Paid Services 5 Years
Page 355 and 356: Rakuten Travel - Mobile Gross Hotel
Page 357 and 358: Mobile Advertising - Personalizatio
Page 359 and 360: Japan - Mobile Advertising - 24% CA
Page 361 and 362: Upside to Mobile Search Advertising
Page 363 and 364: Heavy Search / Display Advertising
Page 365 and 366: Interactive Video Advertising Revol
Page 367 and 368: Desktop Internet Monetization Evolu
Page 369 and 370: …While Premium Content Revenue (U
Page 371 and 372: At Margin, Advertising + Online Com
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Media Time Spent vs. Ad Spend Out o
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History Proves That Ads Follow Eyeb
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Global Mobile Advertising Scenario
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Global Mobile Online Commerce / Pai
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Global Mobile Internet Ecosystem -
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Global Mobile Internet Ecosystem Re
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Mobile Internet Revenue Mix Shiftin
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Google - Internet Search Innovation
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Amazon.com - Online Shopping Experi
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Some companies can benefit from tec
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How Mobile Internet Revenue May Evo
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Key Theme #6 1) Wealth Creation / D
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Key Theme #6 - Massive Data Growth
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The Carriers’ Capex Conundrum…
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Massive Data Growth Driving Carrier
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Global Mobile Data Trends Imply Ong
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Global Mobile Data Users - 29% CAGR
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Global Mobile Data Users - 55% CAGR
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Company- and Product-level Mobile D
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AT&T = 50x Mobile Data Traffic Incr
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Data = Increasingly Dominating Netw
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European Market Supporting Data and
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Smartphone Data Usage Will Rise wit
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Near Term, Mobile Internet Usage Su
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European Mobile Network Utilization
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As Data Usage Becomes More Importan
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Aggregate Mobile Data Network Suppl
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Network Congestion in High Density
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Total Network Capacity on a Cell Si
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However, As Smartphone Penetration
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Overview of a Mobile Data Network T
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Wireless Capacity - Where Does It L
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Network Improvement Timeline Step A
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Short-Term Network Improvements - H
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Short-term Network Improvements - W
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Wireless Backhaul Capacity Expected
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Mobile Internet Implications for Wi
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Wi-Fi Moves from Carrier Foe to Fri
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Wi-Fi Significantly Cheaper for Car
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Wi-Fi Network Coverage in Home and
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~7,000 AT&T Wi-Fi Access Points at
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Wi-Fi Case Study #2 - Boosting Valu
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Bottom Line = Wi-Fi Offload Will Be
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HSPA + Backhaul Upgrades Should Red
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Long-term Network Improvements - Ne
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Good News = Proprietary Network Opt
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Long-term Network Improvements - Up
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HSPA / LTE Buildout Roadmap - Succe
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LTE = 24x Theoretical Bandwidth of
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39 Operators in 19 Countries Alread
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LTE Introduction Cost Should Be Low
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New Lower Spectrum Allocations, Suc
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Spectral Efficiency ((Bit/S)/Hz), p
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What effect will long-term network
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Raw Network Capacity Improvement Ca
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Underlying Technology Improvements
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Case Study - 2010E Capex Analysis f
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AT&T Plans to Increase Capacity in
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Network Sharing Is Becoming Increas
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In the USA and W. Europe, Carrier V
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Premium Voice + SMS Revenue Share L
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Rapid Consumer / Business Adoption
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VoIP International Long Distance (I
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Mobile Texting Revenue Growth Slowi
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Global Mobile Voice TTM Revenue of
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Mobile Data Pricing Models in Flux
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Flat-Rate Pricing = Necessary for U
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Flat-Rate Wireless Data Plans - Pro
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Flat-Rate Pricing May Also Encourag
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Wireline Broadband Tiered Pricing C
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KDDI Tiered Flat-Rate Pricing Cater
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Bell Canada Combo Plans Bring Tiere
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Base Case USA / W. Europe Carrier O
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Key Scenario Drivers for US Wireles
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USA Wireless Revenue Base Case Scen
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Total ARPU Expected to Decline Slig
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Non-Text Revenue = Key to Data Reve
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W. Europe* Wireless Service Revenue
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Implied W. Europe Wireless Carrier
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Scale, Access to Spectrum and Capit
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…10 Attributes of Winning Wireles
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Scale = Key Competitive Advantage f
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USA Spectrum Holdings - Larger Carr
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Exclusive Devices (such as iPhone)
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But Carrying the iPhone Is Mixed Bl
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Competitive Share Gain Opportunitie
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Scenario: AT&T Loses iPhone Exclusi
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Opportunities for Network Equipment
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Total Wireless Equipment Revenue Ex
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Network Services Is Now ~$80B Addre
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Mobile / 3G Subscriber Trends by Co
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…Mobile / 3G Subscriber Trends by
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…Mobile / 3G Subscriber Trends by
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Key Theme #7 563
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Key Theme #7 - Compelling Opportuni
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Emerging Markets = Significant Long
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Emerging Markets = Significant Long
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At Inflection Point, Long-Term EM O
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Opportunities Could Be Significant
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Over Time, Impact of Mobile Interne
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…Caused in Part by Sub-20% Fixed-
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3G / Wireless = ‘Only Choice’ f
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Vibrant Mobile Value-Added Services
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Emerging Asia VAS Revenue Share Alr
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Emerging Market Carriers Adapted to
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Bharti-Airtel = Cost Savings from O
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Compressing Wireless Data Could Red
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Emerging Markets - Some Near-Term 3
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Near-Term 3G Adoption Barriers = Lo
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Low Post-Paid Ratio + Low GDP per C
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High Monthly Data Plan Costs = Near
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Emerging Markets Regional Analysis
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Regional Analysis / Forecast - Chin
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Chinese Consumers Are Ready for 3G
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3G Creates New Battle Ground for Ch
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iPhone Costs Too High for Majority
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Key Scenario Drivers for China Wire
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China Wireless Revenue Base Case Sc
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Data ARPU Growth Expected to Partia
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India - Near-term Barriers to 3G Ad
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India - Upcoming Auction to Bring 3
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Base Case: Winning 3G Spectrum Does
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Capex Required for 3G Network Could
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Other Emerging Asia - Low Fixed-Lin
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Philippines - Mobile Overtook Fixed
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Indonesia - Mobile Could Accelerate
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WiMAX in Emerging Asia - Still in N
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EEMEA - Carriers Leverage Cost-Effe
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Africa - Mobile Broadband Prolifera
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Middle East + Africa Have the Lowes
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Key Scenario Drivers for Russia Wir
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Key Theme #8 639
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Key Theme #8 - Regulators Can Help
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Net Neutrality - Key to Decentraliz
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In the US, FCC Has Issued a “Noti
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Both Sides of Net Neutrality Debate
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What Could Regulators Do to Acceler
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Lower Mobile Data Roaming Fees = En
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“Not in My Back Yard” (NIMBY) P
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3G Licenses Reshape China’s Compe
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USA Recent Developments - USA F
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Recent Developments - China / India
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Disclosure Section (cont.) Morgan S
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Disclosure Section (cont.) Within t
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Disclosure Section (cont.) Analyst
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Disclosure Section (cont.) Stock Pr
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Disclosure Section (cont.) Importan
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Disclosure Section (cont.) MTN does
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