The Mobile Internet Report Key Themes*

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China – Strong Subscriber Growth Offsets 3G Barriers in Short Term – 3G Adoption / VAS Could Provide Significant Upside Long Term China – Long-Term Positives for 3G China – Short-Term Barriers to 3G Adoption Mobile Internet usage surprisingly strong, despite minimal 3G – Mobile leader awarded less-advanced 3G technology China Mobile (~74% mobile subscriber market share in CQ4:08) was awarded the 3G license for TD-SCDMA, the homegrown Chinese 3G technology Due to this technology disadvantage, we foresee a potential massive share shift for 3G subscribers, with China Mobile capturing only ~40% of the market vs. 35% for China Telecom / 25% for China Unicom China has high WAP Internet usage (45% of total users in 2008, up from 34% in 2007) relative to most emerging markets, signifying higher demand for mobile Internet / data Mobile subscriber growth continues to provide revenue tailwind for carriers despite falling ARPU Despite declining ARPU in recent quarters (-7% Y/Y in CQ1:09), China Mobile has continued to increase revenue (+16% Y/Y in C2008), driven by strong subscriber growth (+24% in 2008). 3G handsets need substantial subsidies to reach attractive ASP for Chinese consumers 3G handset prices have been declining globally as components become less expensive, but we believe ASPs are still too high for Chinese consumers; carriers would need to subsidize handsets down to ~$100 to become attractive Value-Added Services (VAS) Could Provide Incremental Revenue for Carriers – China Mobile VAS revenue +37% in 2008, owing to strength in Mobile Music and Mobile Gaming Note: WAP stands for Wireless Application Protocol, an open standard used for mobile Internet access. WAP usage calculated as GPRS (General Packet Radio Service) users as a percent of total mobile subscribers. Source: Informa WCIS+, Morgan Stanley Research. 602
Chinese Consumers Are Ready for 3G – 155MM 2.xG Mobile Data Users, 46% of Internet Population in China in CH1:09 Internet and Mobile Data (2.xG) Users in China, CH1:07 – CH1:09 400 60% Internet / Mobile Data Users (MM) 300 200 100 Internet Users in China (MM) Mobile Data (2.xG) Users Mobile Data Users as % of Internet Users 253 210 29% 27% 162 24% 73 44 50 298 39% 118 338 46% 155 45% 30% 15% Mobile Data Users as % of Internet Users 0 CH1:07 CH2:07 CH1:08 CH2:08 CH1:09 0% Note: WAP stands for Wireless Application Protocol, an open standard used for mobile Internet access. Source: CNNIC, Richard Ji, Morgan Stanley Research. 603
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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
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Advertising Follows Eyeballs - Glob
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Facebook - Vibrant Developer / Appl
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Developer / Application Success on
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China Serves as Proxy & Leads World
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Tencent Business Model Overview - H
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Mobile = Future of Social Networks
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Mobile Social Networking in Japan ~
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Facebook Symbiotic with Mobile - Sh
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Carriers’ ‘Walled Gardens’ =
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Apple Unshackled Developers + Consu
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Mobile Commerce = Accelerator for O
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15 Years for Online to Reach 4% of
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Mobile Revolutionizing Commerce - W
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Deep Discounts - Invitation-Only Ti
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Traditional Retailers Using Pings t
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Key Theme #5 305
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Key Theme #5 Growth / Monetization
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Japan has led world by 5-10 years i
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ROW’s Mobile Internet Revenue Mix
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Mobile Revenue (ex. Data Access) pe
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3G Penetration - …Developed / Eme
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Why Has Japan Led the World in Mobi
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Rich Content / Apps / Services - Ja
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Powerful / Internet-Enabled Handset
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Japan Mobile Online Commerce / Paid
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Japan Mobile Online Commerce / Paid
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Japan as Proxy for Technology’s R
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Japan mobile monetization models pr
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Japan’s Mobile Online Commerce /
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Mobile Online Commerce - Promising
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Japan - Physical Products Gaining S
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ROW Also Making Inroads into Mobile
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ROW - Branded Mobile Apps Could Dri
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Digital Content (Music / Video / Ap
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Digital Content - Mobile Games / Mu
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Tencent Business Model Overview - H
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Japan - Virtual / Digital Goods on
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China Serves as Proxy & Leads World
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Developer / Application Success on
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Japan Mobile Paid Services 5 Years
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Rakuten Travel - Mobile Gross Hotel
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Mobile Advertising - Personalizatio
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Japan - Mobile Advertising - 24% CA
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Upside to Mobile Search Advertising
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Heavy Search / Display Advertising
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Interactive Video Advertising Revol
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Desktop Internet Monetization Evolu
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…While Premium Content Revenue (U
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At Margin, Advertising + Online Com
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Users Often Pay for Content as Long
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View of Paid vs. Ad-Supported Conte
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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
Page 551 and 552: Opportunities for Network Equipment
Page 553 and 554: Total Wireless Equipment Revenue Ex
Page 555 and 556: Network Services Is Now ~$80B Addre
Page 557 and 558: Mobile / 3G Subscriber Trends by Co
Page 559 and 560: …Mobile / 3G Subscriber Trends by
Page 561 and 562: …Mobile / 3G Subscriber Trends by
Page 563 and 564: Key Theme #7 563
Page 565 and 566: Key Theme #7 - Compelling Opportuni
Page 567 and 568: Emerging Markets = Significant Long
Page 569 and 570: Emerging Markets = Significant Long
Page 571 and 572: At Inflection Point, Long-Term EM O
Page 573 and 574: Opportunities Could Be Significant
Page 575 and 576: Over Time, Impact of Mobile Interne
Page 577 and 578: …Caused in Part by Sub-20% Fixed-
Page 579 and 580: 3G / Wireless = ‘Only Choice’ f
Page 581 and 582: Vibrant Mobile Value-Added Services
Page 583 and 584: Emerging Asia VAS Revenue Share Alr
Page 585 and 586: Emerging Market Carriers Adapted to
Page 587 and 588: Bharti-Airtel = Cost Savings from O
Page 589 and 590: Compressing Wireless Data Could Red
Page 591 and 592: Emerging Markets - Some Near-Term 3
Page 593 and 594: Near-Term 3G Adoption Barriers = Lo
Page 595 and 596: Low Post-Paid Ratio + Low GDP per C
Page 597 and 598: High Monthly Data Plan Costs = Near
Page 599 and 600: Emerging Markets Regional Analysis
Page 601: Regional Analysis / Forecast - Chin
Page 605 and 606: 3G Creates New Battle Ground for Ch
Page 607 and 608: iPhone Costs Too High for Majority
Page 609 and 610: Key Scenario Drivers for China Wire
Page 611 and 612: China Wireless Revenue Base Case Sc
Page 613 and 614: Data ARPU Growth Expected to Partia
Page 615 and 616: India - Near-term Barriers to 3G Ad
Page 617 and 618: India - Upcoming Auction to Bring 3
Page 619 and 620: Base Case: Winning 3G Spectrum Does
Page 621 and 622: Capex Required for 3G Network Could
Page 623 and 624: Other Emerging Asia - Low Fixed-Lin
Page 625 and 626: Philippines - Mobile Overtook Fixed
Page 627 and 628: Indonesia - Mobile Could Accelerate
Page 629 and 630: WiMAX in Emerging Asia - Still in N
Page 631 and 632: EEMEA - Carriers Leverage Cost-Effe
Page 633 and 634: Africa - Mobile Broadband Prolifera
Page 635 and 636: Middle East + Africa Have the Lowes
Page 637 and 638: Key Scenario Drivers for Russia Wir
Page 639 and 640: Key Theme #8 639
Page 641 and 642: Key Theme #8 - Regulators Can Help
Page 643 and 644: Net Neutrality - Key to Decentraliz
Page 645 and 646: In the US, FCC Has Issued a “Noti
Page 647 and 648: Both Sides of Net Neutrality Debate
Page 649 and 650: What Could Regulators Do to Acceler
Page 651 and 652: 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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The Mobile Internet Report Key Themes*

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