20100604-Mobile Advertising Morgan)

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North America Equity Research04 June 2010

Mobile AdvertisingAn In Depth Look at the Future of Mobile Advertising

Internet

Imran KhanAC

(1-212) 622-6693

[email protected]

Bridget Weishaar

(1-212) 622-5032

[email protected]

Lev Polinsky, CFA

(1-212) 622-8343

[email protected]

Shelby Taffer

(212) 622-6518

[email protected]

Vasily Karasyov

(1-212) 622-5401

[email protected]

J.P. Morgan Securities Inc.

See page 21 for analyst certif ication 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 mhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making thinvestment decision.

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 usersby 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 userscould 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 adoptioncycle, 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) multipleplayers 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.

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 localgeographically 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.


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Imran Khan(1-212) [email protected]

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 are2.5 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

May-08

226

May-09

233

Jan-10

234

200

205

210

215

220

225

230

235

240

+ 3%

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

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

Non-smartphone

Users, 82%

Smartphone Users,

18%

Source: Nielsen 2010 Media Industry Fact Sheet


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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 moreversatile 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 Activity# Users

(M)% Users (of 233M cellphone subscribers) % Y/Y change

1 Sent text message to another phone 138.6 59.5% 21.0%2 Took photos 105.1 45.1% 15.8%3 Used network services for photos/videos 73.9 31.7% 30.9%4 Sent photo directly to another phone 67.9 29.1% 29.8%5 Received an SMS ad 58.9 25.3% 33.1%

6 Changed to native ringtone 57 24.5% 7.8%7 Played games 55.4 23.8% 13.4%8 Set graphics with camera 55.2 23.7% 14.1%9 Changed to native graphics 52 22.3% 18.3%10 News or info via browser 47.7 20.5% 42.3%11 Transferred photo to PC 46.3 19.9% 29.0%12 Used email 42.3 18.2% 41.5%13 Captured video 40.9 17.6% 32.3%14 News or info via SMS 32.9 14.1% 84.5%15 IM 31.6 13.6% 63.0%16 Made own ringtone 30.3 13.0% 27.5%17 Listened to music on mobile phone 28.3 12.1% 51.4%18 News or info via app 24.5 10.5% 111.3%19 Uploaded video to computer 22.1 9.5% 51.3%20 Listened to music transferred from PC 21.2 9.1% 48.4%

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

Mobile is Creating More Media Fragmentation, Posing NewChallenges/Opportunities for Advertisers and ContentPublishers

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

Websites Video Channels

1 Google Search YouTube2 Yahoo! Mail Fox Interactive Media3 Gmail The Weather Channel4 The Weather Channel Comedy Central5 Facebook CBS


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


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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

3400000

3600000

3800000

4000000

4200000

4400000

4600000

Sunday Monday Tuesday Wednesday Thursday Friday Saturday

Source: comScore, March 2009

Figure 4: Segments by Day Part

subscribers

0

1000000

2000000

3000000

4000000

5000000

6000000

Early M orning (M-

F 6am-8am)

Day time (M-F,

8am-5pm)

Evening (M-F,

5pm-11pm)

Late Night (M-F,

11pm-6am)

Weekends (Sat-

Sun, 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

Director ies % Mobile usersaccessing content via

PC

% PC users accessingcontent via mobile

device

Site visitation lift(Increase in internet site

visitor base due tomobile visitation)

Google 64% 2% 1%Yahoo! 28% 1% 4%Yellowpages.com 43% 4% 6%Business DirectoriesCategory

64% 5% 3%

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


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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 willassist 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 OnlyAccelerates this Trend

12%

16%

31%28%

0%

5%

10%

15%

20%

25%

30%

35%

Print Radio TV Online

Source: Yahoo! 2010 Investor Day Presentation

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-phoneusers 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.


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As the mobile time spent grows, we think the space will be able to attract ad dollars similar to theway the internet did.

Figure 6: Ad Spend vs. Time Spent 2003

7%

27%

52%

14%

23%

8%

24%

3%

0%

10%

20%

30%

40%

50%

60%


T ime Spent Ad Spend

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

Figure 7: Ad Spend vs. Time Spent 2009

12%16%

31%28%26%

9%

39%

13%

0%

10%

20%

30%

40%

50%


Time Spent Ad Spend

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

Browsing Applications SMS Total

AOL 24.4% 27.6% 24.5% Google 50.4% 28.6% 30.2% 47.2%Microsoft 22.5% 21.5% 13.1% 24.7%

Yahoo! 47.8% 39.6% 41.7% 48.4%Other 87.6% 54.2% 35.5% 82.7%


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.


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

% share of 191,380 ad instances

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0

Leisure Products

Publishing

Soft Drinks

Food Retail

Household Products

Apparel Retail

Aerosplace & Defense

Specialized Consumer Serv ices

Advertising

Internet Retail

Apparel, Accessories, & Lux ury Goods

Divers ified Banks

Automotive Retail

Computer Hardware

Internet Software & Serv ices

Computer & Electronics Retail

Education Serv ices

Hotels, Resorts & Cruise Lines

Application Software

Mov ies & Entertainment

Wireless Telecommunication Serv ices

Personal Products

Communications Equipment

Automobile ManufacturersBraodcasting & Cable TV


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 2006 2007 2008 2009 2010 2011 2012

Mobile messageadvertising 43 296 750 1436 2298 3217 4182 5018Mobile display advertising 1 9 26 78 140 253 404 566

Mobile search advertising 1 9 29 99 178 321 513 719Total 45 315 805 1613 2616 3790 5099 6303

Y/Y GrowthMobile messageadvertising 585% 153% 91% 60% 40% 30% 20%Mobile display advertising 950% 175% 90% 80% 80% 60% 40%Mobile search advertising 950% 207% 90% 80% 80% 60% 40%Total 600% 156% 100% 62% 45% 35% 24%

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


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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 advancedphone 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 AdvertisingMobile 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 1-800-

FREE411). 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.


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Some Challenges

Table 6: Impact on the Content Ecosystem

Opportunity ChallengesSearch more searches less coverage

more targeted less transactional (e-commerce)more product/place oriented application demand

News Sites reinstates the importance of a strong brand less space to put adspeople download branded apps companies with lower brand recognition will be

less likely to sell appsGames more time spent multiple platform/device compatibility issues

less barriers to entry smaller screen/fewer buttonshard to differentiate in crowded app market

Aggregators slow loading speed should make aggregatorsmore attractive to consumers

less coverage

reach larger audience with more available time apps allow consumers to create own personalaggregation

Video high demand for video content while traveling smaller screenstill run into internet issue of how to monetize

Coupons larger audience than print may be harder to track source for in-store usecan access for immediate demand

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 1-

3 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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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 theuser 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 Approx Handset Screen Size (pixels) Example Handsets Ad Size (pixels)

X-Large 320 x 320 Palm Treo 700p; Nokia E70 305 x 64Large 240 x 320 Samsung MM-A900; LG VX-8500

Chocolate215 x 34

Medium 176 x 208 Motorola RAZRs; LG VX-8000;Motorola ROKR E1

167 x 30

Small 128 x 160 Motorola V195 112 x 20Source: 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 fromringtones 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 deliveryincludes 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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Figure 9: Typical Revenue Splits in Mobile Data

Content Ownership,

33%

Marketing/Delivery,

25%

Publishing/

Aggregation, 5%

Provisioning/Hosting

, 25%

Design/Development

, 12%

Source: Strategy Analytics, Wireless Media Strategies

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 mobilesubscribers 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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Table 8: Top Mobile OEMs

3 mo ave ending Jan 2010 vs. 3 mo ave ending Oct. 09

Oct-09 Jan-10 Point ChangeMotorola 24.1% 22.9% -1.2LG 22.0% 21.7% -0.3Samsung 21.0% 21.1% 0.1Nokia 9.3% 9.1% -0.2RIM 6.4% 7.8% 1.4

Source: comScore MobiLens

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

Other

45%

Apple iPhone 3G

15%

Blackberry 9530

Storm

6%

Apple iPhone 3G S

12%

Blackberry 8300

Curve

17%

Blackberry 8100

Pearl

5%


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

Oct-09 Jan-10 Point Change

RIM 41.3% 43.0% 1.7 Apple 24.8% 25.1% 0Microsoft 19.7% 15.7% -4Google 2.8% 7.1% 4.3Palm 7.8% 5.7% -2.1

Source: comScore MobiLens

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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Table 10: Android Devices

% of March

2010 AndroidTraffic

Operating

System

Manufacturer Resolution

(px)

Keyboard CPU ROM

(expandable)

RAM

Motorola Droid 32% 2.1 Motorola 854 x 480 Yes 550 MHz 512 MB (32GB)

256 MB

HTC Hero 19% 1.5 HTC 320 x 480 No 528 MHz 256 MB (16GB)

288 MB

HTC Dream 11% 1.6 HTC 320 x 480 Yes 528 MHz 256 MB (16GB)

192 MB

HTC Magic 11% 1.6 HTC 320 x 480 No 528 MHz 512 MB (16GB)

192/288 MB

Motorola CLIQ 10% 1.5 Motorola 320 x 480 Yes 528 MHz 512 MB (32GB)

256 MB

SamsungMoment

6% 1.5 Samsung 320 x 480 No 800 MHz 512 MB (16GB)

256 MB

SamsungBehold 2

2% 1.5 Samsung 320 x 480 No 800 MHz 512 MB (16GB)

320 MB

Google Nexus

One

2% 2.1 HTC 800 x 480 No 1 GHz 512 MB (32

GB)

512 MB

Other 6% NA NA NA NA NA NA NA

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

iPhone 3GS, 39%

iPod touch 1st Gen,

2%

iPod touch 2nd Gen,

25%

iPod touch 3rd Gen,

12%

iPhone 1st Gen, 2%

iPhone 3G, 20%

Source: AdMob Mobile Metrics Report March 2010

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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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 fromhouseholds 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

150,998

4,756

19,897

6,118

1,452

693

- 20, 000 40, 000 60, 000 80, 000 100, 000 120, 000 140, 000 160, 000

Apple

Blackberry

Android

Nokia

Palm

Windows

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)

13,865

501

3,005

734

- 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000

Apple

Blackberry

Android

Nokia

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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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

$3.62

$8.26

$3.27 $3.47$2.53

$6.99

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

Apple Blackberry Android Nokia Palm Window s

Source: Distimo Presentation, Mobile World Congress 2010

Figure 15: Free vs. Paid Apps

25%

24%

57%

15%

32%

22%

75%

76%

43%

85%

68%

78%

0% 20% 40% 60% 80% 100% 120%

Apple

Blackberry

Android

Nokia

Palm

Windows

Free Paid

Source: : Distimo Presentation, Mobile World Congress 2010

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 imposeany 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 thousandimpressions.

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 whoare 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 HQ # Publishers on

Network

# of Advertisers on

Network

Page Impressions Geographic

CoveragePremium Networks Advertising.com/AOL 2005 New York, USA Over 75 publishers,

representing over 100sites and applications

Over 100/year Over 1B pageimpressions / month

Primarily focused onUSA, with growingpresence in CanadaUK and othercountries.

Hands 1999 So Paulo - Brazil 52 premiumpublishers

Internationaladvertisers includeUnilever, GM, DHLand Mitsubishi; localadvertisers includeLoterias da Caixa andINPG.

N/A All of Brazil

Microsoft Mobile

Advertising

2007 Redmond, USA;

European HQ: Paris,France

Key partners include

Verizon Wireless,Bouygues Telecomand independentpublishers such asMSNBC, CNBC andFox Sports. Microsoftmobile sites include:MSN, Windows LiveMessenger, WindowsLive Hotmail and theBing search engine.

N/A Nearly 2B page

impressions / monthand growing.

US, Canada, UK,

France, Spain, ItalyGermany, Sweden,Denmark, Belgium,Netherlands andNorway.

Nokia InteractiveAdvertising

2004 Boston, USA NIA focuses onadvertising on Nokiaservices, such asNokia.mobi and NokiaInternet Radio, and

works with strategicpartners, top-tierpublishers andoperators, such asRTL in Germany,

Airtel in India andSprint in USA.

In 2008 NIA ranalmost 4,000campaigns for over350 brands.

Over 5,000 differentads / month

Americas, Europe,India, Southeast AsMiddle East, Africa


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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 primarilyresponsible 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 reportaccurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the researchanalysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by theresearch analyst(s) in this report.

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J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform theaverage total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelvemonths, 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 ofthe stocks in the analysts (or the analysts teams) coverage universe.] J.P. Morgan Cazenoves UK Small/Mid-Cap dedicated researchanalysts use the same rating categories; however, each stocks expected total return is compared to the expected total return of the FTSE

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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)

Neutral

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Underweight

(sell)JPM Global Equity Research Coverage 45% 42% 13%

IB clients* 48% 46% 32%

JPMSI Equity Research Coverage 42% 49% 10%IB clients* 70% 58% 48%

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

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