Computers Commercial Services the Internet

Please see General Disclaimers on the last page of this report.

Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 11

Industry Trends ................................................................................................... 21

How the Industry Operates ............................................................................... 29

Key Industry Ratios and Statistics ................................................................... 37

How to Analyze an Internet Company ............................................................. 38

Glossary ................................................................................................................ 44

Industry References ........................................................................................... 47

Comparative Company Analysis ...................................................................... 50

This issue updates the one dated May 2014.

Industry Surveys Computers: Consumer Services & the Internet Scott Kessler, Information Technology Sector Equity Analyst

NOVEMBER 2014

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Global Industry Surveys

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S&P CAPITAL IQ INDUSTRY SURVEYS (ISSN 0196-4666) is published weekly. Redistribution or reproduction in whole or in part (including inputting into a computer) is prohibited without written permission. To learn more about Industry Surveys and the S&P Capital IQ product offering, please contact our Product Specialist team at 1-877-219-1247 or visit getmarketscope.com. Executive and Editorial Office: S&P Capital IQ, 55 Water Street, New York, NY 10041. Officers of McGraw Hill Financial: Douglas L. Peterson, President, and CEO; Jack F. Callahan, Jr., Executive Vice President, Chief Financial Officer; John Berisford, Executive Vice President, Human Resources; D. Edward Smyth, Executive Vice President, Corporate Affairs; and Lucy Fato, Executive Vice President and General Counsel. Information has been obtained by S&P Capital IQ INDUSTRY SURVEYS from sources believed to be reliable. However, because of the possibility of human or mechanical error by our sources, INDUSTRY SURVEYS, or others, INDUSTRY SURVEYS does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Copyright © 2014 Standard & Poor’s Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. STANDARD & POOR’S, S&P, S&P 500, S&P MIDCAP 400, S&P SMALLCAP 600, and S&P EUROPE 350 are registered trademarks of Standard & Poor’s Financial Services LLC. S&P CAPITAL IQ is a trademark of Standard & Poor’s Financial Services LLC.

INDUSTRY SURVEYS COMPUTERS: CONSUMER SERVICES & THE INTERNET / NOVEMBER 2014 1

CURRENT ENVIRONMENT

The Internet: prevalent and pervasive

Nearly every aspect of our lives is pervaded by the Internet, which provides us access to a number of continually improving applications and constantly updated information that is helpful in meeting almost all of our daily needs. The Internet enables us to increase our knowledge on a wide range of topics, from finance to food, health to horoscopes, science and sports, and many others. It also facilitates communication and both personal and professional transactions. In many respects, the Internet has become more popular than other media tools, such as the telephone and television, and even the computer. As the number of Internet users worldwide increases, several companies in this industry are becoming more active in various business activities to expand and strengthen the Internet’s influences, as well as to provide consumers with more advanced and reliable Internet applications. Improving mobile technologies, devices, and access is making the Internet even more prevalent and pervasive.

Technology market research firm IDC projected in October 2014, that there will be 3.0 billion unique Internet users worldwide by year-end 2014, including 270 million in the United States. To put things in perspective, the size of the global population of Internet users is comparable to the aggregated populations of China (estimated to be 1.4 billion as of July 2014, according to the US Central Intelligence Agency), India (1.2 billion), and Brazil (203 million), three of the five most populous countries on the planet. The size of the US population of Internet users is comparable to the combined populations of Japan (127 million), Mexico (120 million), and Australia (23 million).

INTERNET ECONOMY GROWTH

Countries around the world, including the US, continue to struggle amid the aftermath of the global economic crisis of 2008–2009, during which they faced what were arguably the most challenging and dire economic conditions experienced in generations. Bailouts and bankruptcies abounded. Unemployment hit a multi-decade high, while stock markets reached lows not seen since the mid-1990s. The value of everything, from housing and home heating oil, to automobiles and copper, plummeted. Nearly every nation’s economy was caught up in what has been called the Great Recession.

The Internet economy also contracted. While Internet-related businesses probably held up better than their non-digital counterparts, they still suffered from the massive macroeconomic meltdown. Countless Internet companies preannounced or reported disappointing quarterly results and lowered their forward financial outlooks. Even the mighty Google Inc. was not immune to the travails of the downturn; the Internet giant closed non-strategic operations, controlled costs, consolidated facilities, and cut some staff.

The Great Recession has officially ended and, in our view, many Internet businesses have recovered and prospered. We think Internet companies have gained market share against their conventional “brick-and-mortar” competition, and they have sharpened their strategies and streamlined operations, all the while accumulating considerable capital. We also think that the improved speed and accessibility of the Internet have increased its versatility and importance among users.

From March 2014 to September 2014, 41 companies classified in the S&P Internet Software & Services sub-industry or the S&P Internet Retail sub-industry announced or completed initial public offerings (IPOs), according to the S&P Capital IQ platform. Our fundamental outlook for the Internet Software & Services sub-industry for the next 12 months is positive, as we see an increasing percentage of advertising budgets being committed to the Internet and mobile (versus traditional) media, and pricing for associated offerings that have shown strong signs.

2 COMPUTERS: CONSUMER SERVICES & THE INTERNET / NOVEMBER 2014 INDUSTRY SURVEYS

FACEBOOK: SUCCESS VIA MOBILE AND BOLD MOVES

Leading up to Facebook’s completion of its IPO in February 2012, the company reached milestones and, at the same time, faced various challenges. Facebook aimed to continue expanding geographically and in mobile context by focusing on and serving its users, developers, and advertisers. The company’s mobile advertising revenue has become a key driver of its market capitalization growth, as more users are accessing Facebook solely through their mobile devices. Notably, over the past year or two, there have been significant increases in industry litigation and acquisition activity associated with patents related to Internet and mobile technologies.

Before Facebook’s IPO, people were interested, enthusiastic, and excited about the company and investing in it. In February 2012, Facebook filed a Registration Statement with the Securities and Exchange Commission (SEC) to pursue an IPO. After the announcement, the valuation of Facebook crossed the $100 billion milestone, according to data from private-company marketplace, SharesPost, which valued the company at $101 billion on February 22, 2012. The day Facebook stock started trading, it achieved a valuation of more than $120 billion, according to our calculations, making it the second-largest Internet company, after Google. In August 2012, Facebook acquired Instagram.

However, immediately after its shares began trading on May 18, 2012, problems started, as trading glitches initially plagued the stock. Less than four months later, Facebook’s value had fallen by more than half. Questions and criticism on subjects ranging from mobile and monetization to corporate governance and communications dogged the company. It appeared as if Facebook could not do anything right.

Hype notwithstanding, the reality is that Internet bellwethers have committed billions of dollars to pursue the potential of social networks. After all, by the time Facebook became a public concern both online users and advertisers had spent time and money on these platforms. Microsoft’s $240 million investment in Facebook in 2007 valued the social networking company at a then-breathtaking $15 billion. In late 2010, the company was valued at around $50 billion by virtue of an investment by Goldman Sachs, with which Facebook also formed a partnership.

Domestically, Facebook faces considerable competition from many companies, most notably Google (and Google+), Twitter, and LinkedIn. Internationally, Facebook faces competition from companies such as Cyworld in Korea, Mixi in Japan, Orkut (owned by Google) in Brazil and India, and Russia’s VK (also known as VKontakte and about 40% owned by Russia’s Mail.ru Group). Facebook is trying to expand its footprint in China, which is already being served by Renren, Sina, Tencent, and a number of other Chinese companies. Meanwhile, Google has spent hundreds of millions of dollars on Google+. A report in March 2014 from Forrester indicated that Google+ had nearly as many users as Twitter, and twice as much engagement. Nonetheless, in April 2014, Vic Gundotra, the executive who had led this business, announced his departure after nearly eight years with the company. David Besbris, Google’s former Vice President for Engineering replaced Gundotra in the position. In October 2014, Besbris clarified about Google+’s rumored challenges and dim future after Gundotra left in April.

Facebook has dramatically increased its lead and strongly solidified its place as the leading social network in terms of users, despite stiff competition. As of June 2014, Facebook had 1.3 billion monthly active users (14% growth from June 2013), approaching half of the global Internet user population. The company attributed recent user growth to the increased number of users in Brazil and India and increased usage via mobile. On average during the month ended June 2014, 488 million daily active users accessed Facebook through mobile means (a 56% increase). The company, however, noted a decline in computer users. Facebook has clearly capitalized on people’s strong desire to stay connected in the digital world, at all times and in a variety of ways. The company enables its users to communicate easily with friends and family through profiles with personal information, updates, comments, links, pictures, and videos. Facebook even provides proprietary e-mail and instant messaging offerings, and it allows people to play games with one another. It is also a great way to find and reconnect with old friends, and even make new ones.

Facebook also boasts some impressive financials. The company has seen its revenues increase more than 50-fold over the past six years, to $7.8 billion in 2013, from $5.1 billion in 2012, $3.7 billion in 2011, $2.0


billion in 2010, $777 million in 2009, and $272 million in 2008. In 2014, Facebook’s mobile advertising revenues and growth contributed to an expanded market capitalization, to $195 billion in July 2014 from $84 billion in July 2013. This put the company in position to overtake IBM’s market capitalization, which dropped from $214 billion in July 2013 to $194 billion in July 2014.

We project that Facebook’s revenues in 2014 will increase 66%, owing largely to the advertising business. However, like many, we see deceleration over time, reflecting the company’s significant size and competition. While few would dispute Facebook’s past growth, questions persist somewhat about its prospects for longer-term growth, especially in an increasingly mobile world and given changing technologies and tastes. For instance, will the company be able to sustain healthy growth, given substantial competition from well-capitalized peers and a constant wave of new offerings from other companies? Others ask will the company become more proactive, creative, and effective in monetizing its traffic, users, and data? Can Facebook be as successful in an increasingly mobile world, where it is not necessarily as well situated as a platform and where advertisements seem more intrusive? And what should Facebook do with the considerable capital it amassed following the IPO? Should it buy or develop a mobile operating system or browser?

Concerning leadership, is co-founder and CEO Mark Zuckerberg the right person to run the newly public company? We think that, at the TechCrunch Disrupt conference in September 2012, Zuckerberg did a good job addressing some of these questions, and the company’s quarterly results over the past year largely exceeded our forecasts.

We think Facebook has proven that it can and will monetize mobile users and engagement. The company introduced mobile advertising in March 2012, and by June in the same year it was generating around $500,000 a day from such advertising. We see this company continuing to build out advertising technologies and offerings, and have noted impressive progress regarding mobile monetization. Facebook's mobile revenues increased from limited levels in the second quarter of 2012 to $1.7 billion in the second quarter of 2014. We see potential related to other emerging properties and offerings, most notably Instagram.

With considerable capital, including $11 billion in cash and short-term investments as of December 2013, and a stock that nearly doubled last year, Facebook took action to add to its portfolio of assets, businesses, and offerings. In February 2014, Facebook announced the pending acquisition of mobile messaging firm WhatsApp in a transaction valued at $19 billion in cash, stock, and restricted stock. If consummated, this deal could become one of the largest in Internet history (and we expect it to close in 2014). The following month, Facebook announced the proposed purchase of Oculus VR, a leader in immersive virtual reality technology, for up to $2.3 billion in cash and stock. This transaction closed in July 2014.

After committing more than $22 billion in consideration for planned mergers and acquisitions (M&As), we expect Facebook to be somewhat less bold in related activity. Although we project substantial spending on products and infrastructure, we forecast improvements in annual operating and net margins in 2014 and 2015. S&P expects Facebook to continue to commit capital to mobile technologies and offerings, geographic expansion, and acquisitions of companies and patents. However, we think significant recent M&A actions will limit possible larger future deals.

TWITTER: GROWING REVENUES AND QUESTIONS

Twitter is a global platform that was created in March 2006. It allows individuals and entities to publicly express themselves and converse in real-time across the globe. Users send and read short, 140-character text messages called “tweets” to whomever chooses to “follow” them (unless users choose to protect their tweet updates). Twitter has also spawned countless services allowing users to more efficiently manage and publish communications, share everything from documents to videos, follow specific discussions, and focus on certain categories.

Twitter has become something of a phenomenon since its creation. Its brand is now synonymous with the “new” Internet (i.e., Internet companies that have been started up in more recent years), it is being featured in and adopted by a variety of mainstream media, and it is used by celebrities and corporations alike. On its


seventh birthday in March 2013, Twitter announced it had “well over” 200 million active users. Although the company experienced slower growth in active users in the first quarter of 2014, the estimated 267 million active users was topped in the second quarter of 2014, as it reached 271 million. Twitter attributes this increase to its newly implemented tools to enhance user experience. For instance, in October 2012, the company rolled out a real-time pooling tool, which it further explored and improved upon in 2014. These new tools include real-time scoring and voting ballots around the World Cup. Because of Twitter’s World Cup-specific products, there were 6.5 billion views of tweets during the game between Germany and Brazil. Twitter is turning out to be the Internet’s best potential source for real-time search. It has become a platform upon which hundreds of other offerings have been built.

Twitter has also been active on the acquisition front. After acquiring 10 companies in 2013, the company added around 10 more, including most notably data services partner Gnip, Inc. and e-commerce player TapCommerce Inc. In our view, these acquisitions enable Twitter to better control the experiences of its key constituents, assess the way the platform is used, collect and analyze important data, and generate higher returns on investment.

In preparation for these acquisitions, Twitter spent years bolstering its balance sheet. In September 2009, the company raised $100 million—a total that valued the company at roughly $1 billion, according to various reports. In November 2010, the company secured another $200 million in capital and was reportedly valued at $4 billion. In July 2011, Twitter raised $400 million from a variety of investment firms. In September 2011, Prince Alwaleed Bin Talal’s Kingdom Holdings purchased a $400 million stake from early-stage investor Union Square Ventures.

As of February 2012, the month Facebook filed its IPO papers, Twitter was valued at around $11 billion, according to SharesPost. Twitter’s valuation was some $10 billion around the time Facebook completed its IPO, and it had reportedly remained around this level for more than a year. However, just after filing to go public in September 2013, various reports indicated valuations for Twitter ranging from $15 billion to $20 billion.

On November 7, 2013, Twitter began trading on the New York Stock Exchange. The IPO was priced at $26 per share for 70 million shares. We estimate that, through this IPO, Twitter generated gross proceeds of $2.1 billion, including an overallotment of 10.5 million shares. In September 2014, the company issued $1.8 billion in convertible debt.

In our view, Twitter still seems to be figuring out its business model. Starting in October 2009, Twitter announced partnerships with significant US search companies to license its data, and the company has added new and comparable alliances to include smaller companies. In early 2010, the company indicated it was planning to create a Twitter advertising network. In April 2010, Twitter started to introduce what has become three offerings—Promoted Accounts, Promoted Tweets, and Promoted Trends—as a way to monetize specific promotional opportunities; in February 2012, it expanded Promoted Accounts and Promoted Tweets to Apple and Android devices. Twitter announced and introduced a new music service in April 2013.

We expect Twitter to increasingly tap data and business services as ways to generate revenue. The acquisition activity in recent years supports this notion, as well as opportunities in marketing.

Changes in leadership also portend potential strategic shifts and Twitter’s had its fair share. In August 2010, Twitter hired its first president in charge of global revenues, as well as a number of sales executives. In October 2010, the company announced that its COO, Dick Costolo, formerly of Google, was being promoted to CEO, and that Twitter’s co-founder and former CEO, Evan Williams, would focus on product strategy. In our view, at least part of the reason for Costolo’s ascension was so he could take Twitter to the next level as a commercial entity.

In the first half of 2014, Twitter found itself in the midst of a significant leadership shakeup. Ali Rowghani resigned from his position as the company’s COO in June. A day after his resignation, Twitter’s Vice President of Media, who reported directly to Rowghani, also left the company. Other leadership changes include the appointment of Anthony Noto as the company’s new CFO, succeeding Mike Gupta, who


assumed the role of Senior Vice President of Strategic Investments. Noto previously helped take Twitter public when he was an investment banker at Goldman Sachs, and before that covered Internet stocks as a sell-side analyst with the firm. Unconfirmed reports indicated the company changed its head of product for the second time in a year in October 2014.

Although an online property is popular, this does not point to success and sustainable revenues. After the Internet bubble burst in 2000, a multitude of big brands and businesses failed. Even online mainstays Facebook and YouTube stopped losing money only in 2009, we think, after years of investment and monetization efforts. Twitter has also had its fair share of notable problems, from somewhat regular failures of the service or various features, to spam and phishing schemes permeating the platform.

Despite the hurdles, and driven by growth in the advertising segment, Twitter’s revenues nearly tripled in 2012 and more than doubled in 2013. In our view, the advertising segment will fuel revenue growth, with data licensing contributing as well. We see significant opportunities in the international market, especially given that more than three-quarters of Twitter users are based overseas. However, only about a quarter of the revenue comes from abroad.

Annual margins are projected to improve through 2015, reflecting what we expect will be more successful monetization efforts. We also expect Twitter to benefit from greater scale and efficiencies. However, we see additional new public company expenses and expect the company to continue to invest in infrastructure, spend on content partnerships, and pursue international expansion.

Twitter has acknowledged related shortcomings, indicating it would work on improving user growth and engagement. Indeed, we have witnessed a number of changes regarding how users experience and engage with Twitter and its content.

We acknowledge the significant progress Twitter has made, the substantial challenges the company has overcome, and its considerable opportunities in the mobile space, the last of which is particularly notable for a company conceived of in the context of text messages. Ultimately, while we think Twitter has a lot going for it, much will have to go right for it to truly fulfill its potential, particularly in a world where technologies and tastes are constantly changing.

IPOS, M&A, AND FINANCINGS

Historically, companies have pursued IPOs to provide liquidity for investors and employees, and capital to finance expansion and acquisitions. In recent years, Internet companies seem to have eschewed public offerings, perhaps to enable their executives and employees to better focus on innovation and business execution, rather than SEC filings, roadshows, quarterly results, and conference calls.

Starting around mid-2010, venture capital firms and asset managers were providing the largest private financings we can recall. In our view, the valuations have been rich. Additionally, markets operated by the likes of SecondMarket Inc. and SharesPost Inc. enabled stakeholders to sell shares in many private Internet companies. Interestingly, we think these exchanges and their parent companies were being scrutinized by regulators, which are concerned about everything from disclosure rules to the transactions themselves. In fact, in March 2012 SharesPost announced it agreed to pay an SEC fine related to trading in Facebook. We think companies have been more proactive recently in pursuing public offerings.

We thought for a time that the Facebook IPO had changed the thinking of many as to whether a private company should seek funds to expand through an IPO. In our view, the Facebook IPO had perhaps also hurt Internet-related private-company trading on platforms like SecondMarket and SharesPost. We note that the enactment of the JOBS Act (Jumpstart Our Business Start-ups) in April 2012 has enabled companies to more easily raise capital and go public. We see both Internet-company IPO interest and activity at recent highs amid the recent outperformance of Internet stocks, and the stabilization and strengthening of the U.S. economy.


Public offerings We support the idea of many who have suggested that the amount and magnitude of IPO activity in 2011, 2012, 2013, and into 2014, are reminiscent of the dot-com bubble. Much like during the dot-com era, billions of dollars were raised, tens of billions in market capitalization were generated, and investors lost money as company business models and execution, in multiple cases, did not live up to expectations. US Internet companies that completed IPOs in 2011, 2012, and 2013 literally ranged from A to Z, and included the following:

Angie’s List Inc. (reviews of tradespeople and service professionals) Bankrate Inc. (financial data and information) Brightcove Inc. (media solutions) ChannelAdvisor Corp. (e-commerce solutions) Chegg Inc. (digital textbooks and learning offerings) Demand Media Inc. (content and advertising) Facebook Inc. (social networking) Groupon Inc. (daily deals) HomeAway Inc. (vacation rentals) Jive Software Inc. (enterprise social networking) Kayak Software Corp. (travel search) LinkedIn Corp. (professional social networking) Pandora Media Inc. (digital music streaming) RetailMeNot Inc. (digital coupons) Tremor Video Inc. (online video) Trulia Inc. (real estate) Twitter Inc. (microblogging) Yelp Inc. (user reviews of local businesses) Zillow Inc. (real estate) Zynga Inc. (social gaming)

We have noted with interest that most of these companies and some of their key shareholders have participated in follow-on and secondary offerings, whereby additional stock has been sold in the public market. We think this has happened as insiders and issuers have looked to raise more capital.

In March 2014, King Digital Entertainment plc completed a notable and somewhat controversial IPO. The purveyor of the popular Candy Crush Saga mobile game had 97 million users as of February 2014 and generated $1.9 billion in revenues in 2013. That same month, Coupons.com completed an IPO, and cloud storage company and Chinese microblogging company Weibo went public in April 2014. Around the same time, Chinese e-commerce conglomerate Alibaba Group Holding Ltd. announced its intention to complete an IPO on a US market. In April 2014, GrubHub Holdings Inc., a provider of digital systems and content for ordering food, completed its IPO.

M&A Over the past few years, two of the largest transactions involving Internet companies were completed. In October 2011, Microsoft bought Internet communications company Skype Technologies S.A. for $8.5 billion, and, in May 2012, Google purchased phone and telecommunications-equipment maker Motorola Mobility for $12.5 billion. Google sold Motorola Home in April 2013 and agreed to the pending sale of the remainder of Motorola in a deal with a combined value of some $5.3 billion, but the company plans to retain considerable intellectual property. As referenced earlier, Facebook announced the planned acquisition of mobile messaging firm WhatsApp in a transaction worth $19 billion. We also note that a number of the transactions discussed below involved companies outside the Internet segment.

Quite a few web-hosting companies were acquired in 2011. In April, Terremark Worldwide Inc. was acquired by Verizon Communications Inc. for $1.4 billion. In July, Savvis Inc. was purchased by telecom company CenturyLink Inc., in a transaction valued at $2.5 billion. In October, Level 3 Communications Inc. completed the acquisition of Global Crossing Ltd. in a deal valued at $2.9 billion. In December 2011,


Windstream Corp. bought PAETEC Holding Corp. in a deal valued at $2.3 billion, which included the assumption of $1.4 billion in debt.

In June 2011, eBay Inc. purchased GSI Commerce Inc., a provider of e-commerce and related marketing solutions, for $2.4 billion. In October 2011, Web.com Group Inc., which helps small businesses to expand their online operations, acquired domain-name pioneer Network Solutions LLC in a cash-and-stock transaction valued at $794 million.

In June 2012, 1-800 Contacts Inc., an Internet retailer of contact lenses, was acquired by health plan provider WellPoint Inc. for $900 million. In July 2012, Microsoft bought corporate social networking company Yammer Inc. for $1.2 billion. In September 2012, Facebook acquired Instagram Inc., a leader in social photo sharing, for about $1 billion in stock. In December 2012, online genealogy leader Ancestry.com Inc. was acquired by private equity firms led by Europe-based Permira for $1.6 billion.

In late 2012, some significant transactions were announced that centered on Internet travel search. In November 2012, priceline.com Inc. agreed to acquire travel search engine Kayak Software Corp. for $1.8 billion in cash and stock. The deal was completed in May 2013. In December 2012, Liberty Interactive Corp. paid $300 million to take a controlling stake in online travel reviews and recommendations company TripAdvisor Inc. Also in December, Expedia Inc. announced an agreement to buy a 62% stake in European hotel-search website trivago for $632 million; the deal closed in March 2013.

In our view, 2013 was largely about Internet bellwethers buying complementary technologies and offerings. In June, Yahoo acquired social content platform and publishing company Tumblr Inc. for $1.1 billion. In July, Google bought social mapping and navigation company Waze Ltd. in a transaction valued at $966 million. In December, eBay bought Braintree Payment Solutions LLC, a provider of mobile payment solutions, for $800 million.

Thus far in 2014, deals have reflected bigger sizes and broader views of the future, with companies looking to make bold purchases beyond core areas of focus. In February, Google acquired Nest Labs Inc., provider of smart thermostats and smoke detectors, for $3.2 billion. Later that month, Facebook announced the planned purchase of WhatsApp for $19 billion in cash and stock. The following month, Facebook announced the pending acquisition of virtual reality gaming concern Oculus for up to $2.3 billion in cash and stock; the deal closed in July 2014. In September 2014, online advertising technology solutions company Conversant, Inc. (formerly called ValueClick) announced its pending acquisition by marketing services company Alliance Data Systems Corp. for $2.3 billion in cash and stock.

Consolidation in the online real estate category became a notable theme. In July 2014, Zillow, Inc. announced the proposed acquisition of Trulia, Inc. in a transaction worth $3.5 billion in stock. In September 2014, Move, Inc., which operates the REALTOR.com website, announced its pending purchase by News Corp. for $950 million (net of acquired cash). Zillow, Trulia, and Move constitute some of the biggest participants in the online real estate area.

Financing deals Over the past couple of years, various domestic and international Internet companies have secured significant capital. Money has been raised at later-round and bellwether-type private companies and by public companies looking for additional funds for specific purposes. However, we think Facebook’s IPO has led to less aggressive private investing and funding.

Facebook raised capital in December 2010 and January 2011 through the private sale of stock totaling about $1.5 billion, according to S&P Capital IQ.

Twitter raised $200 million in November 2010 and another $400 million in July 2011. In 2013, Bloomberg reported that Twitter raised $1.82 billion from selling 70 million shares.

Zynga raised $350 million in June 2010 and $500 million in February 2011. Bloomberg reported in December 2011 that Zynga raised $1 billion in an IPO.


Groupon, which reportedly rejected a $6 billion bid from Google in late 2010 and stayed independent, raised nearly $1 billion in December 2010. The company’s investor, New Enterprise Associates, planned to raise $2.6 billion for its fund, according to Bloomberg in May 2012.

LivingSocial Inc., a Groupon competitor, raised more than $550 million in capital in April 2011, after raising more than $180 million from Amazon in December 2010. It raised another $400 million in November 2011 and $110 million in February 2013 (the latter from Amazon).

Dropbox Inc., a cloud storage company, raised $250 million from a variety of venture capitalists in October 2011. In January 2014, Dropbox had closed another $250 million funding round that valued the company at about $10 billion.

Box Inc., a Dropbox competitor, raised more than $275 million from February 2011 to July 2012. In December 2013, the company raised $100 million at a $2 billion valuation. In March 2014, the company filed to go public, but it has not executed an offering. In June 2014 it indicated it would raise $100 million before going public, and in July 2014, the company received $150 million in funding from Coatue Management and TPG Growth.

Airbnb Inc., purveyor of a marketplace to discover and book accommodations, raised $200 million in May 2011 and October 2012. In April 2014, the company raised $475 million in funding, which gave the company more resources to expand globally, add more travel services, and battle regulators.

Netflix raised $200 million from private venture firm Technology Crossover Ventures in November 2011 to help fund key content acquisition efforts. Bloomberg reported that in 2013, the company sold $500 million in bonds to fund exclusive shows and keep ahead of rivals. The following year, Netflix sold $400 million in bonds to fund potential acquisitions and capital spending.

Sina Corp. raised $200 million in December 2011 from international Internet investor DST Global to fund Sina’s Weibo, a Chinese microblogging site. In April 2014, Weibo Corp. completed its public offering, generating gross proceeds of some $429 million.

Spotify Ltd., an online music streaming company, raised some $285 million in June 2011 and May 2012. The company raised $250 million in November 2013 from Technology Crossover Ventures and others to finance expansion in Japan and other new territories. In March 2014, the company announced that it seeks to launch an IPO. Likewise, its subsidiary, Spotify AB, also intends to file an IPO in 2015. Spotify AB raised an undisclosed amount of funds from a new investor in May 2014.

Alibaba Group Holding Ltd., a Chinese Internet conglomerate focused on e-commerce, raised $4.1 billion in July 2012 to help finance the repurchase of some of its stock from Yahoo in September 2012. In May 2014, Alibaba filed to go public in a stock market based in New York. In September 2014, the company completed the largest IPO in history, raising over $25 billion.

Snapchat, a photo messaging application (formerly Picaboo), raised more than $125 million from various investors in 2013. In August 2014, the company reportedly raised $20 million from a new investor and used the funds to try to turn its messaging platform into an advertising platform. In October 2014, unconfirmed reports indicated that Yahoo was preparing an investment valuing the company at $10 billion.

Square Inc., an online payments company, raised more than $300 million in November 2011 and September 2012. Starbucks Corp. is one of Square’s investors, and the two companies announced a landmark partnership in August 2012. In November 2013, Square announced its plan to go public. However, in February 2014, the company considered raising another fund instead of launching an IPO. In September 2014, Square raised $100 million at a speculated $6 billion valuation in a new round of venture capital funding.

Pinterest, an image-based discovery and sharing company, raised $300 million from venture capitalists in May 2012 and March 2013, and another $225 million in October 2013. In May 2014, the company raised $200 million from various investors for investment in technology and discovery tools, advertising program development, business and website expansion, and monetization operations.

Uber Inc., a provider of mobile apps connecting riders with drivers, raised $258 million in August 2013 from Google and others to help finance expansion plans in Europe and Asia. In June 2014, the company announced it raised $1.2 billion at a $17 billion (pre-money) valuation.

International activity Several non-US Internet companies, most of which are China-based, have also been active on the IPO front. Over the past few years, a number of Chinese companies went public, including: 58.com (e-commerce), E-


Commerce China Dangdang Inc. (e-commerce), Qihoo 360 Technology Co. Ltd. (Internet and mobile security), Renren Inc. (social media), Tudou Holdings Ltd. (online video), Vipshop Holdings Ltd. (online discount retail), Youku.com Inc. (online video), and YY Inc. (social media). Yandex, a Russian search company domiciled in the Netherlands, also completed an IPO.

In August 2012, Youku purchased Tudou in a $1.1 billion deal producing China’s leading online video company. Based on research from Analysys International and iResearch, the combined entity commands 35%–50% of China’s online video market. The new company is called Youku Tudou Inc. Alibaba announced in April 2014 that it and a company controlled by its founder and chairman Jack Ma would invest $1.2 billion in Youku Tudou for an 18.5% stake in the company.

As indicated earlier, Weibo went public in April 2014 and Alibaba Group completed its IPO in September 2014. While Weibo was a notable offering, Alibaba raised more money via its IPO, over $25 billion, than any other company in history. Additionally, Alibaba was recently valued at around $225 million, making it one of the world’s largest technology enterprises. Weibo has been worth between $3 billion and $5 billion.

Nonetheless, we still see some concerns related to certain Chinese corporate structures and accounting. In December 2012, the SEC charged Chinese affiliates of major accounting firms with violating US securities laws due to their failure to produce certain documents.

We see somewhat restrained opportunities for Chinese Internet companies to go public and believe this factor has contributed to much more significant M&A activity. Baidu issued $1.5 billion in bonds in November 2012, $1.0 billion in bonds in July 2013, and another $1.0 billion in June 2014. In May 2013, Baidu bought PPStream Inc., a provider of online video services, for $370 million. In October, Baidu purchased 91 Wireless Websoft Ltd., a leading provider of third-party mobile app platforms, in a deal valued at $1.8 billion.

In April 2013, Alibaba Group purchased an 18% interest in Sina Corp.’s Weibo.com business (also known as Sina Weibo) for $586 million. In April 2014, Alibaba announced the proposed purchase of digital mapping company AutoNavi Holdings Ltd. for about $1.5 billion, and completed the acquisition in July. Alibaba also announced in April 2014 its intention to pursue a US IPO. In May 2014, the company filed an F-1 to initiate the IPO process, and the offering was completed in September 2014 amounting to $25 billion—the largest in history.

In September 2013, Tencent and Sohu.com Inc. announced a new strategic relationship, including joint development, cross-promotion, and integration of their offerings in areas such as search technology, user insights, and data sharing. For $448 million, Tencent acquired a 37% stake and a 21% voting interest in Sohu.com Inc.’s search business Sogou Inc., contributing its search-related Soso business. Tencent, in March 2014, took a roughly 15% stake in e-commerce company JD.com. In May 2014, JD went public and was recently valued at over $35 billion.

ONLINE ADVERTISING AND RETAIL: REVIEW AND OUTLOOK

The majority of consumer-oriented revenues generated via the Internet are from online marketing and sales. US online advertising revenues rose 21% in 2007 and 11% in 2008, but fell 3% in 2009, according to the IAB Internet Advertising Revenue Report, an independent survey conducted by PricewaterhouseCoopers International Ltd. Online advertising revenues rose 15% in 2010, 22% in 2011, 15% in 2012, and 17% in 2013. As of November 2014, S&P estimated that such revenues would increase 15% in 2014 and 14% in 2015. The US accounted for around half of worldwide online advertising, in our opinion.

This growth reflects the recent recession, as well as rising numbers of Internet users and increasing usage, greater overall spending on Internet advertising by corporations, more compelling and effective marketing technologies and practices, and firmer industry pricing. Search revenues should continue to contribute to these gains, following increases of 29% in 2007, 20% in 2008, and 1% in 2009, largely reflecting the success and dominance of Google. (Search advertising revenues are generated by click-throughs on sponsored links presented alongside algorithmic search results.) These revenues rose some 10% in 2010, 27% in 2011, 10% in


2012, and 8% in 2013. As of November 2014, S&P Capital IQ estimated that US search revenues would increase 2% in 2014 and 8% in 2015, but we foresee continuing outsized growth from abroad.

Online video advertising has become increasingly relevant to category growth, especially following Google’s acquisition of YouTube in late 2006. We think this $1.8 billion stock deal put Google in the lead in the race to pursue this vast market opportunity. Digital video advertising revenues rose some 127% in 2008, 36% in 2009,

30% in 2010, 46% in 2011, 15% in 2012, and 37% in 2013, and as of November 2014, we estimated such revenues would rise 25% in 2014. Notwithstanding our significant growth projections for this segment, video advertising revenues accounted for only 4% of the overall total in 2009, 5% in 2010, 6% in both 2011 and 2012, and 7% in 2013; we think the category will represent 8% in 2014 and 2015.

US online retail sales (excluding the auto, travel, and prescription drug categories) increased around 13% to $176 billion in 2010, 14% to $200 billion in 2011, and another 14% to $231 billion in 2012, according to Forrester Research, a technology research firm. In 2013, US online retail sales increased by 17%, and we estimate around 15% growth in 2014. Forrester attributed the considerable segment growth to the improving initiatives across multiple channels including physical and online stores, better merchandising, more customized offerings, and increasingly sophisticated marketing efforts. S&P Capital IQ forecasts Internet retail sales to rise comparably in 2014 and 2015, reflecting healthy economic conditions and consumer sentiment.

H08: US INTERNET ADVERTISING REVENUES

0

10

20

30

40

50

60

2003 04 05 06 07 08 09 10 11 12 13 E14 E2015

E-Estimated. Sources: PricewaterhouseCoopers LLP and the Interactive Advertising Bureau; Standard & Poor's estimates.

US INTERNET ADVERTISING REVENUES (In billions of dollars)


INDUSTRY PROFILE

The Internet: vital for communications and content

A complex and dynamic network, the Internet has become an essential medium for both communications and content. Comprised of smaller interconnected networks, the Internet’s reach and influence continue to expand, notwithstanding economic issues. The entities that support the Internet constitute a conglomeration of technologies and interrelated business segments.

Some of these areas, such as networking hardware, provide the physical equipment with which the Internet is built. Two prominent types of networking hardware are routers and access equipment; another important type of hardware is the server. (For more information on these topics, see the Communications Equipment and Computers: Hardware editions of Industry Surveys.)

The focus of this Survey is primarily on other largely intangible infrastructure that supports and enables the Internet. Web-hosting services have grown with the number and complexity of Internet sites. Software providers have continued to innovate in areas such as browsers and security. Access services enable online connectivity in an era of increasing demand for speed and convenience. Content providers and e-commerce companies offer an expanding array of destinations to users, while portals and search engines facilitate the use of the Internet and have become key channels for monetizing user activity. In this section, we give an overview of these areas and identify key players in each. (Additional information on Internet infrastructure is provided in the “How the Industry Operates” section of this Survey.)

GROWTH IN WEB-HOSTING SERVICES

Several companies maintain their websites on servers kept in-house. Companies with popular and/or complex websites typically purchase services from a web-hosting firm to maintain their Internet presence on a continuous basis. The US market for web-hosting services totaled $11.3 billion in 2011 and $12.1 billion in 2012, according to market research firm IDC. As of May 2013 (latest available), IDC forecast US web-hosting services to total $13 billion in 2013. It further expects this market to grow at a healthy compound annual growth rate of 7.0% between 2013 and 2017, to $17.0 billion.

In the mid- to late-1990s, as Internet traffic and the number of websites and pages expanded rapidly, demand for web-hosting services also increased substantially. This growing market has attracted a number of market participants, from technology bellwethers to start-ups. Many telecommunications and computer services giants bundle web-hosting services with other offerings to increase revenues and strengthen customer relationships. As of mid-2013 (latest available), according to IDC, the market leaders by revenue were International Business Machines Corp. (IBM), with a 9.6% share of this market, followed by AT&T Inc. (8.5%), Rackspace Hosting Inc. (8.3%), Savvis Inc. (6.7%), Equinix Inc. (6.4%), Hewlett-Packard Co. (6.0%), and Verizon Communications Inc. (5.7%). These seven companies accounted for more than half of the market, according to IDC.

Over the years, major acquisitions have affected market share. In August 2008, Hewlett-Packard Co. acquired Electronic Data Systems Co. for $14 billion. In May 2010, Equinix acquired Switch & Data Facilities Co. Inc., for cash and stock valued at $683 million. In April 2011, CenturyLink purchased Qwest Communications International Inc. in a transaction worth $12.2 billion. Later that month, Verizon Communications Inc. acquired Terremark Worldwide Inc. for $1.4 billion, and Time Warner Cable Inc. purchased NaviSite Inc. for $230 million. In July 2011, CenturyLink Inc. bought Savvis Inc. in a transaction valued at $2.5 billion, and The Go Daddy Group Inc. was purchased for $2.3 billion by a group of private equity firms. In October 2011, Level 3 Communications Inc. acquired Global Crossing Ltd. in a transaction valued at $2.9 billion, and Web.com Group Inc. bought Network Solutions LLC in a deal worth $794 million. In December 2011, Windstream Corp. acquired PAETEC Holding Corp. in a transaction valued at $2.3 billion (including the assumption of $1.4 billion in debt).


Deal activity in 2011 and 2012 focused on targets in the top 20 in terms of market share, according to IDC: Savvis was No. 6 on the list, CenturyLink/Qwest Communications was No. 10, Go Daddy was No. 11, NaviSite/Time Warner Cable was No. 18, Web.com was No. 19, and Switch & Data was No. 20. In July 2013, IBM acquired SoftLayer Technologies, a cloud computing infrastructure provider, for $2 billion. In November 2013, Internap Network Services Corp., ranked No. 12, acquired iWeb Group Inc., an Internet hosting company in Canada, in a deal valued at some $150 million. In November 2013, CenturyLink acquired Tier 3 Inc., a technology and consulting services firm, reportedly for $200 million.

We think the acquisition activity in recent years reflects the potential seen in cloud computing, which increasingly will allow data, applications, platforms, and even infrastructure to be stored and accessed through the Internet. Participants in this market have sought to augment their offerings to provide expansive and complete solutions to companies wishing to consider, construct, and concentrate on cloud capabilities. We would not be surprised to see more deal making in this segment.

BROWSERS AND SECURITY: SIGNIFICANT INTERNET SOFTWARE SEGMENTS

Two major types of Internet-related software are browsers and security offerings.

Browsers A browser is software that allows users to retrieve and display information from the World Wide Web. It is the key software component of the Internet. Although browsers are not generally sold, and they do not directly generate revenues, they are used to increase traffic to company websites, and thus bolster companies’ brands and drive purchases of products and services.

Microsoft Corp.’s Internet Explorer browser leads the field for desktops, although it has been losing market share to rivals, which include Firefox (developed and distributed by Mozilla Corp.), as well as Google Inc.’s Chrome and Apple Inc.’s Safari. Notably, StatCounter, which analyzes Internet traffic, indicated that Chrome exceeded Internet Explorer’s market share for the first time on March 18, 2012, but just for that day. Again, in May 2012, Chrome’s share exceeded that of Internet Explorer, but this time for the entire month. Since then, Chrome has gained notable market share compared with Internet Explorer.

In August 2012, Internet Explorer’s global market share dropped to 53.6% from 67.6% in 2009, according to online utility provider Net Applications. As of August 2014, Internet Explorer’s worldwide share had increased to 58.2%, while Firefox’s had dropped to 16.6% from 20.1% in August 2012. Notably, Chrome and Safari gained substantially during this same period: as of August 2014, these browsers accounted for market share of 18.2% and 5.5%, respectively. In contrast, in January 2009, together they constituted only 8% share. Essentially, their combined share nearly tripled over the prior five years. We think Google and

H03: BROWSER MARKET SHARE

Internet Explorer (Microsoft)

53.6%

Firefox (Mozilla)20.1%

Chrome (Google)18.9%

Safari (Apple)5.3%

Others2.2%

BROWSER MARKET SHARE

Source: Net Applications.

AUGUST 2012

Internet Explorer

(Microsoft)58.2%

Firefox (Mozilla)16.6%

Chrome (Google)18.2%

Safari (Apple)5.5%

Others1.5%

AUGUST 2014


Apple’s global brands, worldwide distribution, and substantial resources have enabled their browsers to gain share. We also note that Firefox has at times been slowed down by embedded applications (referred to as “add-ons” by the company), and its success made it more of a target for security attacks.

In September 2008, Google entered the browser segment, promising a product that will provide more stability, speed, security, and simplicity, among other things. We think Google’s Chrome has enabled the company to better retain and gain search market share, and promote usage of its non-search services. We expect the substantial success of Google’s Android mobile operating system and the introduction of additional Chrome-powered computers to contribute to additional market share gains.

We think Safari has benefited from Apple’s market share gains in computers; the release of Safari for Windows, which can run on non-Apple computers; and the introduction of multiple successful mobile devices, such as the iPhone and iPad, in the US and around the world. Safari is the market leader in mobile, with 45% share as of September 2014, according to Net Applications. While Android has greater market share than Apple’s iOS, when it comes to mobile browsers, Android users employ many different browsers, including Chrome, but Apple users employ primarily Safari.

Security Web security includes URL filtering, anti-malware offerings, Internet application firewalls, and online content products, according to IDC. These solutions protect against both inbound and outbound threats. The web security segment generated $1.9 billion in revenues in 2011, and rose to $2.0 billion in 2012 (including software, appliances, and on-demand offerings). The worldwide market declined by 2.4% in 2013, bringing the revenue back down to $1.9 billion. IDC projects an increase to $2.5 billion by 2018, and a compound annual growth rate (CAGR) of 5.7% through 2018.

We think related interest and spending are being spurred by consistent, extensive, and prominent cyber-attacks. According to IDC, the leading online security providers in 2013 (latest available) included Blue Coat Systems Inc., with 20.6% market share in 2013 (a 17.7% increase from 2012), and Websense Inc. (17.9%), followed by Cisco Systems Inc. (9.5%). McAfee Inc. (5.0%) overtook Trend Micro Inc. (4.5%) in 2013; however, both providers exhibited market-share declines. Barracuda Networks Inc. suffered the same fate, dropping from 5.9% in 2012 to 2.5% in 2013.

A group led by Thoma Bravo LLC, a private-equity firm, acquired Blue Coat in February 2012. Blue Coat’s revenues in the web security market were adjusted by IDC in a July 2013 report after a product and business model re-evaluation (previously Blue Coat’s web-security product revenues were significantly lower, and most of its revenues were categorized in a different market). As a result, the majority of Blue Coat’s revenues were moved to the web security category, and its market share appeared to increase greatly. Barracuda Networks is a private company that provides content security, networking and application delivery, data storage, and protection and disaster-recovery solutions. Trend Micro is domiciled in Japan. In February 2011, McAfee was acquired by Intel Corp. for $7.7 billion.

Two additional areas of Internet security software are digital certificates (essentially, electronic signatures) and authentication and encryption. Two companies essentially share the digital certificates market: Symantec Corp. and Entrust Inc. In September 2006, digital storage giant EMC Corp. acquired RSA Security Inc., a leader in authentication and encryption, for $2.1 billion. In August 2010, Symantec bought VeriSign Inc.’s identity and authentication security business for $1.3 billion. In July 2009, private-equity firm Thoma Bravo LLC acquired Entrust for some $124 million.

In May 2012, computer company Dell Inc. completed the purchase of SonicWall Inc., a provider of network security and data protection solutions, for an undisclosed sum that was indicated by The New York Times at around $1.25 billion. (Thoma Bravo acquired SonicWall in July 2010 for $720 million.) In October 2012, Apple acquired AuthenTec, a mobile and network security company, for $360 million, according to S&P Capital IQ, and the related technology formed the basis for the Touch ID fingerprint technology included in the iPhone 5s. In September 2013, IBM acquired Trusteer Ltd., a privately held provider of cybercrime-prevention solutions, in a deal reportedly valued at $800 million to $1 billion. In October 2013, Cisco acquired Sourcefire, a cybersecurity technology firm, for $2.7 billion.


ACCESS SERVICES: ISPS IN TRANSITION

Users usually connect to the Internet through Internet Service Providers (ISPs), which increasingly provide other services, such as phone or cable offerings. The US broadband consumer ISP market—seen as valued at $38 billion in 2012—should gradually grow to $48 billion in 2017, reports IDC. Compound annual growth was projected at 4.7% from 2012 to 2017.

The consumer ISP business is evolving. Incumbent telecommunications and cable companies have been gaining market share by cross-selling and bundling offerings. In addition, more traditional ISPs have been providing voice and video services. It seems like the larger companies are taking advantage of established brands and businesses and bigger balance sheets to cut prices and scale operations.

AOL LLC (formerly a division of Time Warner Inc., which spun AOL off as a public company in December 2009) shifted its business model from paid subscriptions to a free, advertiser-based portal similar to those offered by Yahoo and Google.

For years, EarthLink Holdings Corp. had indicated that it wanted to be a segment consolidator, and in July 2009 it announced its first-ever dividend, indicating to us that it planned to allocate capital to dividend payouts instead of a large ISP purchase. However, in December 2010, the company completed the $524 million acquisition of ITC^DeltaCom, Inc., an integrated provider of telecommunications services to businesses and government entities across the southeastern US. In April 2011, it purchased One Communications Corp., an integrated telecommunications solutions provider serving small and mid-sized business customers across the US Northeast, mid-Atlantic, and upper Midwest states, in a deal valued at $370 million.

The dominant providers of Internet access services in the US are telecommunications and cable companies. Comcast Corp. and AT&T Inc. were the largest players in the US market as of late 2012 (latest available), with millions of business and consumer digital subscriber lines (DSLs), and other service offerings; they had Internet access market shares of 22% and 15%, respectively, according to StatOwl.com, a website focused on Internet usage statistics. Time Warner’s Road Runner was next (15% share), followed by Verizon Communications Inc. with its consumer and business offerings in fourth place (11%). Other leading ISPs included Cox Communications Inc. and CenturyLink (through its ownership of Qwest Communications and Embarq Corp.). In February 2014, Comcast announced the proposed purchase of Time Warner Cable in a transaction valued at some $44 billion in stock.

We think the top four ISPs control over half of the market. Other primarily regional and local ISPs battle over the remainder, though their numbers have been dwindling due to a lack of growth and scale, as well as what we consider questionable business models.

DESTINATIONS: INFORMATION, ENTERTAINMENT, AND COMMERCE

Destinations are generally websites that people can access for information, entertainment, or commerce. The top Internet properties as of July 2014 in terms of aggregate US home, work, and university locations were owned by Google, Yahoo, Microsoft, Facebook, AOL, and Amazon, according to comScore Inc., an Internet media and market research firm. According to comScore, Google topped the list of online video content properties (video ads not included), as well as the list of online video advertising properties. (See the accompanying table, “Top 25 Internet Properties,” for additional details.)

We note that Time Warner spun off AOL (No. 5) in December 2009, and another Time Warner property, Turner Digital, ranked 10th. In January 2011, General Electric sold 51% of NBCUniversal to Comcast (collectively ranked No. 15) in a complicated joint-venture transaction valuing the business at $25 billion. In February 2013, GE agreed to sell its remaining 49% stake in NBCUniversal to Comcast for $17 billion, and the deal closed in March.


Content providers: news and information These websites offer mostly original content (such as news articles and videos) to subscribers. Notable content providers include CBS Interactive (No. 9), which gained significant online traction after acquiring CNET

Networks Inc. for $1.8 billion in June 2008, The Weather Co. (formerly The Weather Channel, No. 11), and New York Times Digital (No. 35). As mentioned earlier, The New York Times Co. sold About.com in September 2012 for $300 million. In September 2008, privately held Landmark Communications Inc. sold The Weather Channel for $3.5 billion to a group that included NBCUniversal (now owned by Comcast). With new websites debuting every day—and many of the major players either privately held or part of larger companies—it is difficult to accurately estimate the size of this market.

Health information has been a growing area of interest, especially given recent prominent efforts to reform healthcare in the US. As of August 2014, WebMD garnered the greatest number of unique visitors in the health information category, ranking No. 26 overall.

Portals amass and distribute content These websites usually aggregate content rather than produce it themselves. Their parent companies typically rely on the sale of advertising space to generate revenue. (For US online advertising revenues, see the “Current Environment” section of this Survey.)

The three major established players in the traditional portal market are Microsoft, Yahoo, and AOL. However, Google offers iGoogle, which allows for substantial flexibility and customization. Interestingly, Google discontinued iGoogle in

November 2013. Facebook Inc.’s flagship website has become a starting point for many of its 1.3 billion monthly active users (as of June 2014). In June 2014, Twitter Inc. announced that its microblogging service, which has also become a portal proxy, had 271 million active users. Twitter’s frequent updates and considerable search capabilities are compelling differentiators. Twopcharts, a firm that helps track Twitter users and activity, estimated in April 2014 that Twitter had nearly one billion accounts, both active and inactive.

Search engines: Google remains unmatched Search services enable Internet users to find information online. When people think of the Internet search category, they often think of the company with a name and website synonymous with it: Google. The company, which established itself as the leader in keyword search advertising, has continued to take market share from competitors in recent years by offering a simple user interface and superior technology.

Based on the number of US-based queries conducted in July 2014, Google led the online search segment (67.4% market share), according to comScore. Other important players were Microsoft (19.3%), Yahoo (10.0%), Ask.com (2.0%), and AOL (1.3%). According to comScore, from June 2014 to July 2014, US core search queries rose 1% for both Google and Microsoft and 3% for Yahoo, and they fell 4% for Ask Network.

B02: TOP 25 INTERNET PROPERTIES

TOP 25 INTERNET PROPERTIES†(Data for July 2014; US only)

UNIQUE

VISITORS %

(THOUS.) REACH*

1. Google Sites 191,192 84.22. Yahoo Sites 165,121 72.73. Microsoft Sites 164,878 72.64. Facebook 143,945 63.45. AOL, Inc. 104,946 46.26. Amazon Sites 95,406 42.07. Turner Digital 67,606 29.88. Mode Media (formerly Glam Media) 61,856 27.29. CBS Interactive 61,521 27.1

10. Apple Inc. 61,329 27.011. Weather Company, The 61,254 27.012. eBay 59,271 26.113. Wikimedia Foundation Sites 54,615 24.114. Gannett Sites 49,344 21.715. About 48,150 21.216. Linkedin 47,539 20.917. Ask Netw ork 45,507 20.018. craigslist, inc. 40,762 18.019. Tw itter.com 40,440 17.820. Comcast NBCUniversal 38,196 16.821. Yelp 36,412 16.022. Demand Media 35,389 15.623. Hearst Corporation 34,874 15.424. Answ ers.com Sites 34,247 15.125. Wal-Mart 34,128 15.0

†Home, w ork, and university usage. *The percentage ofInternet-active individuals w ho visited a site at least onceduring the month. Source: comScore.


Microsoft’s search service, Bing, introduced in May 2009, has steadily gained share. In February 2010, Microsoft and Yahoo executed a search and advertising alliance, which has been completed in the US and a few other markets. Further, both companies expected to complete the alliance in some other markets over the next few months. As a part of the alliance, Bing powers all of Yahoo’s online search offerings. However, the partnership has not been executing in line with initial expectations, based on revenue per search metrics, which, we think, reflects challenges Microsoft has not yet overcome. Microsoft has been guaranteeing revenues per search for

Yahoo. Microsoft has twice pushed out the date by which the guarantee would expire. The arrangement concluded on April 1, 2014.

Communities flourish Online communities have something in common with content providers and portals: all provide information. While content providers and portals focus primarily on articles, communities emphasize communications among, and contributions by, participants.

Online communities are found within the confines of all kinds of websites, as companies have learned that a large, active, and loyal user base can be an extremely important element of a successful consumer Internet business. In fact, many consumer-facing online companies and traditional corporations alike have explored and pursued opportunities related to creating and promoting their own online communities.

The segment has experienced a renaissance over the last couple of years. Many community websites that focus on specific subjects or applications can take advantage of the breadth and power of the Internet to reach large audiences. The “network effect,” which refers to the tendency of companies that attract more users to attract ever more sellers, shoppers, and/or customers, also helps these community sites achieve success.

Newer communities are often referred to as social networking websites. Some of the most popular properties around the world, with at least 100 million users, include Facebook, Twitter, LinkedIn, Pinterest, Google+, Tumblr, Instagram, VK, Flickr, and Vine.

We note more than half of these sites are based and focused outside the US. Interestingly, LinkedIn and Renren completed initial public offerings (IPOs) in May 2011, raising more than $1 billion each. LinkedIn was recently valued at $20 billion.

In May 2012, Facebook launched its IPO that valued the company at more than $100 billion. After the company’s value fell by more than half over the summer of 2012, Facebook again reclaimed a 12-figure valuation in the summer of 2013. Facebook acquired Instagram in August 2013.

Notwithstanding considerable diversity across the globe in terms of social networking websites and users, Facebook has seemingly become the dominant player, in the category, gaining and keeping notable market share in many places. In fact, according to the World Map of Social Networks, as of July 2014, Facebook was the market leader in 130 of 137 countries around the world. Interestingly, while Facebook is dominant in the Western world, Eastern Europe, Asia, and the Middle East remain challenges.

Google+, Google’s competitor to Facebook and other social networking sites, has grown notably. Since launching on a limited scale in June 2011, and broadly opening up the service a couple of months later,

H07: SHARE OF US INTERNET SEARCHES

Google67.3%

MSN19.4%

Yahoo10.0%

Ask.com network

2.0%

AOL1.3%

SHARE OF US INTERNET SEARCHES(Leading five search engines, as of September 2014)

Totals may not add due to rounding.Source: comScore.


Google+ had 500 million total users as of December 2012. However, despite significant user numbers, usage of Google+ has come into question.

In September 2012, via Google+, former head of the business and former company Senior Vice President Vic Gundotra indicated the “social spine” (that enables a unified logon and integration of Google’s many services) had 400 million users and the social destination had exceeded 100 million active users. We strongly think that Facebook’s number of active users and engagement levels are much greater than Google+’s.

According to a February 2014 article in The New York Times, Google has 300 million people a month globally visiting the site, far less than Facebook’s 1.2 billion, but more than Twitter’s 241 million users. We note that Gundotra announced his departure from Google in April 2014, and that David Besbris, Google’s former Vice President for Engineering, replaced Gundotra in the position. In October 2014, Besbris addressed about Google+’s current challenges and longer-term future.

More regionally oriented properties lead in places like Iran (Facenama) and Russia (VK), but we note that Facebook recently became the leader in Latvia (over Draugiem) and Moldova (Odnoklassniki). We note that access to Facebook was (or is) restricted in whole or in part in China, Iran, North Korea, and Syria. Twitter and LinkedIn seem to be gaining market share and prominence around the world. (See the accompanying map, “Most Popular Social Networks,” for details.)

Match.com, where users look for romantic relationships, is a relatively mature example of an online community. Match, an online dating business owned by IAC/InterActiveCorp, had what we think are tens of millions of members, and 3.5 million paid subscribers as of June 2014. Notably, well over 100 million people have joined Match.com since 2000. In July 2009, Match acquired People Media, which owns and operates dating sites focused on specific demographic groups, for some $80 million. In February 2010, Match acquired SinglesNet, one of the world’s most visited dating websites. In April 2010, Match entered into an agreement to start powering Yahoo Personals. In February 2011, Match acquired OkCupid, an advertising-supported dating site, for $50 million. Match also owns a controlling stake in the popular mobile app, which “connect[s] people through fun experiences.” Match has become a global leader in this category, given its investment and acquisition efforts in recent years.

MOST POPULAR SOCIAL NETWORKS

MOST POPULAR SOCIAL NETWORKS(As of August 2014)

FacebookVkontakteQzoneFacenamaOdnoklassnikiNo clear favorite

Source: Vincos.it.


In June 2009, IAC sold Match’s European operations to Meetic, a leading European online dating company, in exchange for a 27% stake in Meetic and a €5 million note. On the closing date, we estimate the transaction was valued at around $180 million. In September 2011, IAC increased its interest in Meetic to some 81%, in exchange for $27 million. That same month, Match announced that it had taken a 20% stake in Zhenai Inc., which offers Internet and telephone matchmaking services in China. In August 2012, Match bought DateHookup.com, one of the largest domestic ad-driven dating sites. In September 2013, IAC increased its stake in Meetic from 80.8% to 87.5%.

Blogs are online journals that elicit and enable responses, often making them resemble Internet communities. We think that more than three-quarters of worldwide Internet users read blogs. Corporations are becoming increasingly aware of the power of bloggers, who can help generate buzz around a new product or spread

negative opinions. Some companies monitor blogs through their advertising agencies or segment specialists. Increasingly, companies have corporate blogs, and employ them as a means to communicate more comprehensively and creatively. Two of the largest platforms used for producing blogs are Tumblr and WordPress. As of September 2013, their users had collectively produced more than 200 million blogs and websites. Tumblr was bought by Yahoo for $1.1 billion in June 2013. It was Yahoo’s largest acquisition in a decade.

Wikis are similar to blogs, in that multiple people often contribute content. However, while blogs are largely written and

managed by one person or a few people, wikis often allow anyone to add or revise content. The most popular wiki is Wikipedia, which is hosted by the nonprofit Wikimedia Foundation Inc. According to comScore, as of July 2014, Wikimedia’s sites were the 13th most popular online destination in the US. Alexa, an online information company, ranked Wikipedia as the sixth most popular site in the world and the seventh in the US. As of September 2014, Wikipedia included 4.6 million articles in the English language.

Blogs and other websites increasingly include and feature videos. Google’s YouTube, which allows users to share video content, is the world’s most active video-focused Internet site. (Founded in February 2005, YouTube was acquired by Google in November 2006.) In January 2009, YouTube surpassed 100 million unique viewers for the first time, and in March 2013, it eclipsed a billion monthly users. Essentially, this viewership equaled about 10 Super Bowl audiences. As of August 2014, YouTube partner channels, including VEVO and Marker Studios Inc., accounted for more than 249 million unique viewers, according to comScore.

YouTube accounts almost entirely for Google’s leading 37% share of online video watched in the US, according to comScore. The next nine leading video properties (consisting of those owned by Facebook, AOL, VEVO, Microsoft, News Distribution Network, Yahoo, Viacom, Amazon, and Turner Digital) collectively accounted for only some 9%, despite notable investments in content and distribution over a number of years in some cases. VEVO, which ranked fourth according to comScore, calls itself the “world’s leading all-premium music video and entertainment platform.” News Distribution Network, which ranked sixth according to the comScore data, syndicates professional multimedia content from leading media organizations and niche providers.

BUSINESS-TO-CONSUMER E-COMMERCE GROWS

Worldwide business-to-consumer (B2C) Internet spending may increase from $1.3 trillion in 2014 to $2.1 trillion in 2018, according to IDC. Forrester Research expects US online retail sales to reach $294 billion in

Table B05: TOP US ONLINE VIDEO CONTENT PROPERTIES

TOP US ONLINE VIDEO CONTENT PROPERTIES(Ranked by number of unique viewers, in July 2014)

UNIQUE VIDEOS MINUTES

VIEWERS WATCHED PER

(THOUS.) (THOUS.) VIEWER

Google sites 167,894 17,717,106 544Facebook 61,320 741,336 22AOL, Inc. 57,857 792,719 50VEVO 49,635 613,794 42Microsoft sites 49,610 668,442 34New s Distribution Netw ork (NDN) 49,142 560,024 92Yahoo! sites 42,043 324,436 77Viacom Digital 39,721 446,401 48Amazon sites 37,990 146,291 26Turner Digital 30,627 254,803 39

Total 187,430 48,466,326 1,354Source: comScore.


2014. Domestic sales are projected to increase at a CAGR of 9.5% from 2013 to 2018, owing largely to the increased permeation of mobile devices and online shopping.

Since the dot-com crash, the online retail segment primarily consists of a number of “real-world” companies that have established successful Internet operations. However, a number of exclusively online retailers have also been successful. The largest and most successful online retailer by far, in our opinion, is Amazon.com Inc.

Significant M&A activity in the online retail segment recently has included eBay Inc.’s purchase of GSI Commerce Inc., a provider of e-commerce solutions and related marketing offerings, in June 2011. This transaction, valued at some $2.4 billion, was one of the largest e-commerce deals in recent memory. In June 2011, drugstore giant Walgreen Co. acquired Drugstore.com Inc. for more than $400 million. In June 2012, WellPoint Inc. acquired 1-800 Contacts Inc., a contact lens retailer, for an undisclosed sum. Amazon has also made a number of acquisitions, which we discuss below.

Several businesses offer travel products and services over the Internet. The leading players in this category are Expedia Inc. (which owns brands including Hotels.com and Hotwire), Orbitz Worldwide Inc., priceline.com Inc., and Sabre Holdings Corp. (which owns Travelocity).

In late 2012, two of the world’s major online travel companies announced significant transactions centered on Internet travel search. In November 2012, priceline agreed to acquire travel search company Kayak Software, which historically had focused on domestic and airline-related opportunities, for $1.8 billion in cash and stock. The deal closed in May 2013. In December 2012, Expedia announced an agreement (which closed in March 2013) to buy a 62% stake in European hotel search firm trivago for €480 million, or around $632 million.

Google has become more involved in the online travel area. In April 2011, it acquired ITA Software, a provider of airline travel data and solutions, for $700 million. Since then, Google purchased Zagat Survey LLC, a provider of restaurant reviews, in September 2011 for $151 million, and Frommer’s, an online travel publisher, from John Wiley & Sons Inc. for $22 million. It was reported in March 2013 that Google was discontinuing Frommer’s print publications. Google had been using its travel assets in offerings such as Flight Search and Hotel Finder. In April 2013, Arthur Frommer repurchased the company, without the related social media accounts. If Google’s activities on Twitter are any indication, Frommer’s followers were transitioned to Zagat’s travel properties.

IPO activity has been notable in the online travel segment. In January 2014, Travelocity filed for its IPO. Earlier, in July 2012, Kayak completed its IPO. In December 2011, TripAdvisor Inc. spun off from Expedia and became a public company. In July 2011, HomeAway Inc., an Internet vacation rental firm, went public. An Indian online travel company, MakeMyTrip Ltd., came public in the US in August 2010. A Chinese online travel-booking service, Qunar Cayman Islands Ltd., which was previously controlled by Baidu, completed its IPO in November 2013.

In fact, there has been a lot of M&A activity in the international arena over the past several years. In February 2011, European travel data and services company Amadeus IT Group SA and other investors sold Opodo, a large online travel business focused on that continent, to Spain’s Vacaciones eDreams S.L. and Go Voyages SA, a French tour provider. In June 2011, Chinese search giant Baidu Inc. became the largest shareholder in Chinese online travel company Qunar.com Information Technology Co. Ltd., investing about $306 million. In May and November 2011, eLong Inc., a Chinese online travel agency, received significant investments from Expedia and China’s Internet leader Tencent Holdings Ltd. eLong is considered an indirect subsidiary of Expedia, as Expedia owns 65% of the outstanding shares. Tencent owns about 16% of eLong’s shares. We think that, in response to Expedia’s acquiring control over eLong, priceline.com announced an alliance in August 2012 with Ctrip.com International Ltd., the largest Chinese Internet travel company. In August 2014, priceline announced a $500 million investment in Ctrip. We have thought for some time that priceline needed to do something focused specifically on China.


Amazon amasses successes… For a number of years, it seems like Amazon has been the breakaway leader in global e-commerce. In 2014, the company achieved its ninth straight year with revenue growth exceeding 20%. The retailer has achieved strong and sustained success by continuing to focus on its customers and making significant investments. Additionally, Amazon has looked to innovate and take risks, despite potential near-term negative impacts to its financial performance.

For example, the company has been focused on increasing its offerings of digital products and services, such as music and videos. In February 2011, Amazon announced that it would stream movies for free to its Prime subscribers, who pay an annual fee for preferential delivery times and other services. While this service seemingly restrains the company’s margins, its digital potential is important to Amazon. In September of 2011, 2012, and 2013, the company announced new Kindle products, including the Kindle Fire, the company’s first tablet, which has proprietary browser, syncing, and cloud storage offerings. In April 2014, Amazon introduced its Fire TV set-top box. In June 2014, Amazon introduced the Fire smartphone.

Over the past few years, Amazon has added to its franchises and offerings through acquisitions. Among its most notable consumer-facing purchases were online shoe-seller Zappos for nearly $1 billion (November 2009), Quidsi Inc. and its primary operating business Diapers.com for $545 million (November 2010), digital audiobooks company Audible Inc. for $300 million (March 2008), and e-commerce company Woot Inc. for a reported $110 million (July 2010). Amazon also bought Kiva Systems Inc., a provider of automated fulfillment technologies, for $775 million in May 2012. In March 2013, Amazon acquired Goodreads Inc., which operates a site for book enthusiasts. In October 2013, Amazon entered into an agreement to acquire Tenmarks, an online mathematics tutoring service provider. In April 2014, Amazon announced the proposed acquisition of Iconology Inc., which does business under the name comiXology, providing digital comic books content. In August 2014, the company announced the proposed purchase of Twitch Interactive, Inc., which operates the world’s leading video platform and community for people who play digital games, in a roughly billion-dollar transaction that could help accelerate competition with Google’s YouTube and Netflix. It is expected that the transaction will be completed by the end of 2014.

…while eBay battles on multiple fronts While Amazon seemingly continues to fire on all cylinders, eBay has been what we have called a tale of two segments. The once dominant Marketplaces unit, best known for its auction format, has faced challenges and questions associated with global growth. Competitors ranging from Amazon to Etsy have taken market share. As the battle for market share becomes more intense, the company has been active on various fronts to keep up with the competition.

eBay tangled with Amazon a few years ago by trying to increase its sales of new merchandise offered by big brands and businesses. This effort was unsuccessful, however, and eBay rededicated itself to collectibles, used merchandise, and out-of-season goods. The company has also invested more aggressively in technology and innovation, working to improve its search capabilities and user experience. GSI Commerce (now called eBay Enterprise) has made eBay a more appealing partner for large multinational merchants, in our opinion. Importantly, eBay has also made a number of acquisitions to enhance its mobile offerings, leveraging its payments business whenever possible. We think mobile and payments have helped promote growth.

In 2002, eBay purchased PayPal for $1.5 billion in stock. We think this deal was one of the smartest in the history of the Internet segment. PayPal made it easier for buyers and sellers to transact business on eBay, because it was secure and easy to use. While PayPal was largely seen at that time as a way to enhance the Marketplaces operations, it has become a very strong business on its own, due to its successful merchant unit that processes purchases for a wide variety of enterprises: everything from Apple and Dell Inc., to major airlines, to the NBA. In 2008, eBay acquired Bill Me Later for $820 million, to expand its payments market opportunity with credit-oriented purchases. In July 2011, eBay went further to strengthen PayPal in mobile payments and acquired Zong, a leading provider of payments through mobile carrier billing, for $240 million. In December 2013, eBay purchased Braintree Payment Solutions LLC, a provider of mobile payment solutions, for some $800 million. Months before the deal was announced, Braintree communicated that it “handle[s] more than $10 billion in commerce transactions per year.”


We see the Payments unit as the crown jewel of eBay, ironically, because of its substantial potential apart from the company’s marketplace businesses. Specifically, we see international and mobile as two significant growth drivers. However, we see growing competition, as other large Internet giants, credit card companies, and telecommunications firms increasingly focus on associated opportunities.

eBay has acquired or invested in more than 50 companies since the beginning of 2011. Many of these we think were small targets identified as owning key ancillary technologies and which had attracted and cultivated key talent that could add value to eBay’s plans for areas such as payments and mobile.

In September 2014, following calls from prominent investors, eBay announced plans to separate its namesake Marketplaces business and the PayPal payments unit. We see associated benefits, as the businesses should be able to better innovate and execute as independent entities. We expect PayPal to be spun off as an independent publicly traded company by the end of 2015.

INDUSTRY TRENDS

It has been found that the Internet is a useful tool for communicating, conducting research, and purchasing goods and services, as well as for many other purposes. Corporations have found that, although the Internet is challenging traditional business models, it can offer significant advantages to those that fully embrace it.

Fueled by the availability and affordability of PCs and Internet access, and the advent of Internet-enabled smartphones, the Internet is still in a growth phase, but the pace of expansion is moderating.

HEALTHY GROWTH DRIVERS

The Internet has been one of the fastest-growing commercial phenomena in history, by any measure. The number of web servers exploded from slightly over 10,000 in December 1994 to around 1 billion in 2013, according to Hobbes’ Internet Timeline in January 2014 (latest available), a history of Internet development compiled by the Zakon Group LLC. Netcraft Ltd.’s Web Server

Survey indicated that around 996 million websites existed in July 2014, up from 699 million in July 2013, 665 million in July 2012, and 357 million in July 2011. Although not the same, we think Netcraft’s “websites” and Hobbes’ “web servers” are comparable.

Increasing affordability of computers has been a key factor in the Internet’s growth. As component prices have fallen, manufacturers of PCs have passed a cost savings to their customers, resulting in computers priced at seemingly ever-lower levels. This makes PCs more attractive and affordable for first-time users, lower-income families, and bargain hunters. Low-cost PCs helped to significantly drive up PC penetration in US households over the past decade.

When consumers are asked why they purchased a PC, the most common answer is to connect to the Internet. According to 2014 first-half data from IDC,75.5% of US households had broadband access as of the end of 2013. Penetration was expected to increase to 79.8% of households by 2018. The US, Western Europe, and Japan were seen as having comparable current and future levels of broadband penetration, notably exceeding worldwide benchmarks.

H05: BROADBAND INTERNET PENETRATION

0

10

20

30

40

50

60

70

80

90

100

2012 2013 2014 2015 2016 2017 2018

United States Worldwide

Source: IDC's first-half 2014 forecast report.

BROADBAND INTERNET PENETRATION(Percentage of households that have broadband Internet connections)


In our view, as Internet usage continues to grow, broadband connectivity and Internet-enabled wireless devices will spur significant growth. Broadband connections generally promote increased Internet usage—not only because of their higher access speeds, but also because they are mostly “always on” and available.

Wireless fidelity (or Wi-Fi) has enabled users of laptop computers and other mobile devices to access the Internet from a variety of public locations (known as “hot spots”), such as cafes, hotels, and airports. We expect that the number of devices able to use Wi-Fi hotspots will surge as the technology becomes more affordable and available. We see continuing growth in related access, based on several factors. These include the growing adoption of Wi-Fi and similar personal hotspot offerings, tethering capabilities in smartphones that allow them to act as wireless modems for computers, and the potential advent of so-called “Super Wi-Fi” technology being considered by the Federal Communications Commission (FCC) that would cover entire cities with only a handful of hotspots.

Another important development is that new high-speed 4G or LTE (long-term evolution) mobile communications networks were launched by the likes of major domestic carriers like AT&T Corp., Sprint Nextel Corp., and Verizon starting around 2012. These companies and others have been investing in enhancing and expanding related capabilities.

ONLINE MUSIC: AN EVOLVING AND EXCITING WORLD

According to Internet research firm Ovum, the global market for digital music was expected to grow about 15% annually on average, and to reach $22.5 billion by 2017. Apple Inc.’s iTunes remains the category leader by far, but it has faced a backlash from record companies that believe that selling single songs is restraining overall music sales. Moreover, Apple’s lack of a subscription offering and unproven cloud service could eventually make iTunes vulnerable. Recent speculation suggests Apple might soon introduce a streaming music service. Further, other players have been innovating and combining to better compete and capitalize on opportunities, and new and familiar entrants are launching offerings.

Apple’s iTunes tops the charts Since it introduced the iTunes Music Store in April 2003, Apple Inc. has been a leader in the online music segment. Since then, iTunes has sold more than 25 billion songs, according to a company announcement made in February 2013. In its fiscal 2014 fourth quarter (ended September 2014), the company’s revenues from the segment including iTunes were $4.6 billion, up from $4.3 billion in the prior-year period. In the first quarter of 2008, iTunes surpassed Wal-Mart Stores Inc. to become the largest music retailer overall in the US based on units sold, reported market research firm NPD Group (figures included online and retail sales, but not mobile music sales). Around a quarter of US Internet users use iTunes, according to NPD.

In January 2009, Apple announced that most of its music would be offered without copyright protection and with flexible pricing. In December 2009, Apple acquired streaming music company La La Media Inc. In September 2010, Apple launched a music-focused social network called Ping, incorporating elements of La La, but leaving many waiting for the launch of an Internet version of iTunes. In March 2011, various sources speculated that Apple was trying to negotiate for unlimited numbers of downloads, perhaps paving the way for a streaming service. In October 2011, the company launched iCloud, a set of free cloud services that enable iTunes users to store and access their music. In April 2013, Apple noted that over 300 million subscribers used iCloud. In August 2014, Apple bought for some $3 billion, Beats Electronics LLC, which makes namesake headphones and speakers, and Beats Music, LLC, an affiliated nascent streaming music service.

Segment remains interesting The number of companies competing in the digital music category has declined over the years, largely due to the dominance of Apple, in our view. We think Rhapsody International Inc. (which was spun off from RealNetworks Inc. in March 2010) has held its own, although it has become increasingly vulnerable. Its offerings seem more flexible and varied than iTunes, because they are compatible with a variety of music players and provide multiple purchase options, including subscriptions. Rhapsody has made progress on mobile devices, especially with its app strategy, making its services available on Apple’s devices like the iPhone, iPod Touch, and iPad. In January 2012, Rhapsody acquired Napster Inc. (including domestic and European operations) from Best Buy Co. Inc., in exchange for a stake in the company. Rhapsody continues


to pursue opportunities with wireless carriers like key client MetroPCS Communications Inc. In April 2013, MetroPCS was acquired by Deutsche Telekom’s T-Mobile USA Inc. for $1.5 billion and 26% of the combined entity.

It comes as no surprise that Amazon.com, the world’s largest seller of music CDs, has been increasingly focused on the online music segment. In March 2008, Amazon acquired Audible Inc., the world’s largest purveyor of spoken-word audio content (most notably, audiobooks) for some $300 million. In September 2010, Amazon acquired Amie Street, an Internet music community and store in which Amazon had initially invested in 2007. Interestingly, according to NPD Group, over the last few years, Apple’s share of the music download market has steadily declined, and Amazon’s has steadily increased. Apple’s market share fell from 70% in early 2010 (as of the first quarter), to 64% in mid-2012 (as of the second quarter), to 63% as of late 2012 (as of the fourth quarter). Amazon’s share has increased over the same indicated periods from 12% in early 2010, to 16% in mid-2012, to 22% as of late 2012. In 2013, its market share reached 63%.

With the explosion of mobile devices from smartphones to tablets, and 40% and 56% of users of these devices, respectively, employing them to listen to music according to NPD, related new companies and offerings have emerged. Pandora Media Inc., which offers advertising-supported streaming music, came to prominence after providing one of the most popular music apps through Apple’s App Store. Although not yet profitable on a generally accepted accounting principles (GAAP) basis, Pandora went public in June 2011 and had a market capitalization of $7 billion in March 2014. Similarly, Europe-based Spotify Ltd. offers online music services, with features such as playlists and music sharing, and after garnering significant acclaim and success outside the US, an American offering launched in July 2011. According to published reports, Spotify raised $100 million in funding and achieved a valuation of $3 billion to $4 billion in late 2012. As of March 2013, Spotify had more than 24 million active users and six million subscribers in 20 countries, including the US and across Europe. In April 2013, Spotify announced expansion in Latin America and Asia. In May 2013, the company launched in Australia and New Zealand, and we think Spotify could look to file for an IPO by 2015.

Rdio and Songza are two other music services that have been garnering interest, praise, and popularity. Rdio was founded by Janus Friis, one of the creators of Skype. Songza Media Inc. formerly operated as a subsidiary of Amazon before Google acquired it in July 2014. In April 2013, Twitter released a music service enabled by integration with Spotify and Rdio, and offering iTunes purchases. In September 2013, radio station owner and operator Cumulus Media Inc. acquired an unspecific equity stake in Rdio (via parent Pulser Media Inc.), and Cumulus would help launch and support a new free Rdio service supported by advertising. In July 2014, Google announced the intended purchase of Songza for an undisclosed sum.

As of the second quarter ended September 2014, Pandora had 76.5 million active listeners—a 5.2% increase from the same period in 2013—who listened to 4.99 billion hours of music during the month, a 25% jump from the same period in 2013.Spotify, which is looking to gain share and add to its count of active users, launched its first ad campaign in March 2013. As of November 2014, in terms of all free apps, Spotify was ranked No. 25 in the App Store and No. 15 on Google Play, while Pandora was ranked No. 8 in the App Store and No. 3 on Google Play.

Google Music launched in November 2011, but three months later CNET reported the service was losing subscribers despite a large installed base of Android devices and users. In August 2013, Google launched a subscription music service called Google Play Music All Access across nine European countries. In October 2012, Microsoft introduced Xbox Music, a music service that would serve its 46 million Xbox Live subscribers via devices running Windows-based operating systems. Despite a lack of successes in the music category, given its past Zune digital music players and the Urge music service, Microsoft has been working with mobile phone manufacturers to help make the new service a success, likely by trying to leverage the Windows Phone 8 mobile operating system. A new version of Xbox Music was released in March 2013. In July 2013, Microsoft launched an Xbox Music app.

While upstarts and established players have made for considerable excitement and opportunity in the segment, we think it will be difficult to overtake Apple, especially since the company creates and controls many of the key mobile devices and platforms in the category. In the last issue of this Survey, which was


published in April 2013, we wrote, “Moreover, we believe Apple could increasingly pursue the digital music market with a streaming songs services and/or a radio offering.” In September 2013, Apple introduced a streaming radio service called iTunes Radio, and Apple indicated that during its first weekend of broad availability, it was used by 11 million unique listeners. Nonetheless, we do not think iTunes Radio has been as successful as some expected, and this contributed to the purchase of Beats Music.

ONLINE GAMES: GROWTH AND ACQUISITIONS

IDC projects that the number of online users who played Internet video games around the world will reach 2.4 billion by 2018. Related consumer spending was expected to more than double from $26.2 billion in 2013 to $49.5 billion in 2018.

S&P Capital IQ thinks that the category of downloadable games is one to watch. IDC forecasts that US sales of downloadable Internet games will climb substantially, from $10.3 billion in 2013 to $25.2 billion in 2017. Significant participants in the category range from gaming stalwarts like Electronic Arts Inc. (EA), to China-based competitors like Tencent Holdings Ltd., to newer companies like Zynga Inc., to media giants like The Walt Disney Co., Apple and Google are dominating the distribution channels for mobile apps.

In China, IDC expects online games to grow from revenues of $1.6 billion in 2012 to $8.6 billion in 2017, for a compound annual growth rate (CAGR) of 39%. This burgeoning market has been spurring US-oriented financial transaction activity.

In April 2009, Chinese Internet company Sohu.com Inc. spun off its gaming business, Changyou.com Ltd., in an IPO. In September 2009, Shanda Interactive Entertainment Ltd. spun off its gaming business, Shanda Games Ltd., in an IPO.

It is of interest to note that Asia-based Internet companies have been buying Western games companies more recently. In October 2010, ngmoco Inc., a mobile games company, was acquired for $400 million by DeNA Co. Ltd., a Japanese company operating e-commerce businesses. In February 2011, China’s Tencent Holdings Inc. acquired Riot Games Inc., a developer and publisher of video games, in a transaction valuing the company at nearly $250 million. In March 2013, Sony Corp. sold a 13% stake in DeNA to Nomura Securities Co. Ltd., in a deal valued at around $450 million. In October 2013, Japanese technology and telecommunications conglomerate SoftBank Corp. and games company GungHo Online Entertainment Inc. acquired a 51% stake in Finnish online games company Supercell Oy for $1.5 billion.

Gaming is becoming a very crowded and competitive category Online gamers play on a variety of so-called platforms. Computers are seemingly the most obvious option for many, especially since accompanying online access has become all but a given, and the screens and microprocessing power can provide a pretty nice gaming experience. Additionally, all three of the major game consoles—Microsoft’s Xbox One, Nintendo Co. Ltd.’s Wii U, and Sony’s PlayStation 4 (PS4)—offer Internet access and capabilities, and more than 100 million of these devices have been purchased. Moreover, all three companies introduced new consoles ahead of or during the 2013 holiday shopping season.

Increasingly, mobile devices, especially Apple’s iPhone and iPad, are being used as connected gaming devices. The growing popularity and prevalence of social networking has led to a new category called social gaming, where people can play Internet games (which are often free-of-charge) on social media sites such as Facebook. The introduction of new smartphones and tablets should make the Internet gaming segment even more interesting and exciting for consumers, and more confusing and challenging for companies.

Consider, for example, Electronic Arts Inc. (EA). It was once the world’s biggest and most successful game developer, with largely unmatched franchises, creative talent, distribution capabilities, and marketing money. More recently, however, the company has been struggling, given tough economic conditions and constrained consumer spending, pricing pressures in light of so many free alternatives, and growing costs and expenses to develop and distribute games for so many different technologies. In November 2009, EA acquired Playfish, a leading creator of games for social networks, for $300 million. It is unclear whether Playfish is (or ever was) profitable, but EA clearly believed that it needed to bolster its presence in this


burgeoning category. In August 2011, EA acquired casual games company Popcap Games Inc. for up to $1.3 billion in cash and stock. However, in August 2012, Popcap laid off around 12% of its North American workforce in an attempt to reduce costs. According to the company, the decision was a part of ongoing cost-management and reorganization efforts as consumers shift to free-of-charge and mobile games.

However, EA has implemented a turnaround of sorts. In 2013, a little more than a year ago, the company had a market capitalization of around $6.6 billion (with trailing 12-month revenues of $3.7 billion). By August 2014, the company’s valuation had appreciated significantly, to $11.9 billion (with trailing 12-month revenues of $3.5 billion). While revenues continued to decline, the company’s market capitalization had nearly doubled. We believe EA has benefited from restructuring efforts, reduced operating expenses, a better focus on fewer games, and investments in digital offerings.

Zynga Inc., the largest and most prominent company in the social gaming segment, went public in December 2011 at a valuation of $7 billion. Only months before, The Wall Street Journal had reported that the company could be worth up to $20 billion. In 2013, the company’s market cap shot up to $4.4 billion (with trailing 12-month revenues of $873 million). Zynga was facing significant competition and had made some questionable strategic decisions. For example, in March 2012, the company purchased OMGPOP Inc., purveyor of the then very popular Draw Something, for some $183 million. Within a few months, Zynga discontinued the development of some OMGPOP games and took an asset impairment charge of $95.5 million, more than half of the value of the transaction. Execution problems have persisted, and the company has continued to struggle. It has closed facilities, furloughed employees, and experienced executive departures. As of June 2014, the company’s market capitalization was $2.37 billion (with trailing 12-month revenues of around $700 million). In August 2013, the company appointed a well-respected industry executive as its new CEO, and he has embarked on a new strategy with new managers. The company’s somewhat polarizing prior CEO and co-founder became Chief Product Officer. Further, King Digital Entertainment, which developed and offers the world’s most popular game, Candy Crush Saga, completed an IPO in March 2014. The stock recently had a market capitalization of $4.4 billion (with trailing 12-month revenues of $2.4 billion).

Google invested what we think was $100 million to $200 million in Zynga in mid-2010 as part of its preparation to increasingly focus on social media. Google also has made multiple acquisitions in the social gaming area. Google is not the only major company other than EA to have committed resources over the last couple of years to the social gaming area. In July 2010, The Walt Disney Co. acquired social games company Playdom in a deal worth as much as $760 million. In the same month, GameStop Corp. announced the acquisition of Kongregate Inc. In September 2010, RealNetworks Inc. acquired Canadian company Backstage Technologies. In August 2012, Amazon.com launched Amazon Games Studio to develop proprietary social games. Digi-Capital, an investment bank focused on high-growth digital companies, reported that M&A and investment in the gaming segment increased by 18% in 2012 to $4 billion, and social and casual games accounted for 18% of M&A activity and 7% of private investment. In 2013, this sum rose 29% to $6 billion.

EVOLUTION OF ONLINE VIDEO INTO A THRIVING BUSINESS FOR SOME

For well over a decade, videos have been a notable part of the mainstream Internet, becoming more available based in part on innovations in related technologies and improvements in computing power and broadband access speeds. Two seminal M&A deals of the so-called Internet era were centered on the category: Yahoo buying Broadcast.com and Google acquiring YouTube. While the transactions are memorable for different reasons, both embodied the promise and peril of the segment. Although the former deal is generally considered a massive mistake by Yahoo and the latter is perceived as a very positive move by Google, we note that the world’s largest Internet company has definitely experienced its challenges in the video arena.

As of March 2014, 447 billion videos were viewed online, according to comScore. Over six billion hours of video are watched each month through YouTube, which equates to nearly an hour for every person on the planet. Internet video has been one of the fastest-growing US online advertising categories over the past few


years, according to the IAB Internet Advertising Revenue Report. We estimate revenue gains of 25% for 2014 and 14% for 2015.

While Yahoo bought Broadcast.com when the dot-com bubble was nearly at its biggest and Google took time to start monetizing YouTube, videos are now a big online business, generating what we expect will be billions in US advertising revenues in 2014—and this doesn’t include revenues from subscriptions or downloads, or even related hardware, software, and infrastructure. For example, Netflix Inc., the DVD and online streaming company, was generating revenues at an annual run rate of more than $4 billion as of 2013 related to streaming videos online. We also believe Apple generates hundreds of millions of dollars annually from sales of movies and TV shows. Countless companies produce hardware, develop software, and/or implement infrastructure related to and even reliant upon online video.

It appears as if a tipping point has been reached in online video. A decade ago, there were users, but marginal revenues. More than five years ago, there were sales, but limited profits. Now it seems that online video can be not only the basis of a viable business, but also a thriving business. Online video solutions company Brightcove Inc. completed its IPO in February 2012, achieving a valuation of as high as between $400 million and $500 million soon thereafter. Given the obvious opportunities, technology and Internet heavyweights—ranging from incumbents like Netflix and Apple, to new entrants like Google and Amazon.com, to smaller companies like Hulu—are all pursuing potential online deals in the category.

In January 2013, Twitter introduced Vine, an iPhone app that records six-second video clips that can be embedded in tweets. As of September 2013, Vine ranked as the top free social networking app for the iPhone, ahead of LinkedIn, Facebook, and Twitter itself. It was also the eleventh most popular free app across all categories. Vine ranked as the seventh most popular free Social app on Google Play, and No. 28 across all categories of Google Play. Further, in September 2014, Facebook Messenger ranked as the top free social networking app for iPhone followed by Facebook, Twitter, Skype, and Pinterest. In June 2013, Instagram released Video on Instagram, supporting 15-second video, including 13 filters exclusively for video, and allowing for editing. In September 2014, Instagram ranked as the fourth most popular free app on Google Play and eighth for the iPhone. We think video’s mobile possibilities are just starting to be realized. Stay tuned.

FAR-REACHING BENEFITS

The Internet has already had a substantial impact on both consumers and businesses, even though it is still evolving as a medium for communications and commerce. For consumers, the advent of online shopping has brought greater convenience and time savings, while businesses have realized significant productivity gains through use of the Internet.

Ease and convenience of online shopping In a relatively short amount of time, the Internet has provided consumers with a number of benefits, including greater convenience, more choices, and easier access to information. The convenience of online shopping has proven to be a major attraction for many consumers, particularly in the markets for computer hardware and software, apparel, and consumer electronics.

The product information available online is a boon to shoppers. It is easy to research various products using the Internet. Consumers can access information needed to make an informed decision about major purchases, such as PCs, consumer electronics, and cars. Features, performance, and prices all may be compared. Although the lowest-priced item is not always purchased, the nature of the Internet makes comparison-shopping so easy that prices in many categories of goods undoubtedly will decline over time.

Online sales offer opportunities and challenges for retailers. Companies are increasingly using the Internet to communicate with current and potential customers—not only by e-mail, but also by instant messaging, social media, and other technologies. To attract and retain customers, companies are competing not just on price, but also on selection, service, and shipping (the last sometimes provided at a discount). Of course, online retailing has its costs: companies need to invest in various kinds of technology, from website development to Internet-enabled customer service.


Both sellers and buyers can benefit when an online channel for sales or service is developed and deployed correctly. Years ago, for example, Dell Inc. launched DellConnect, a service that allows technicians to remotely diagnose and repair PCs under warranty: the technicians can talk through issues on the telephone with customers and connect to their PCs through a broadband link. We think the development of DellConnect and other services has helped Dell dampen criticism of its support offerings and increase customer satisfaction. Now, a variety of companies offers real-time online customer service. Anecdotal evidence indicates customers have benefited from such offerings from well-known consumer franchises from Fidelity Investments Inc., Microsoft, and Time Warner Cable Inc. Speaking of cable companies, Comcast Corp. has successfully used Twitter to respond to customer comments and inquiries through its @comcastcares profile, which had nearly 70,000 followers in September 2014.

Corporate productivity gains Several public and private companies have benefited from embracing the web, although some corporations, particularly real-world retailers, have lost market share to Internet-based competitors. Companies have used the Internet as a new sales channel and service delivery mechanism to improve internal communications, upgrade internal processes, change the supply chain, and for advertising purposes, according to management consulting firm A.T. Kearney Inc. Non-farm business productivity continues to outpace economic growth, according to the US Bureau of Labor Statistics. Retired Federal Reserve Chairman Alan Greenspan attributed productivity gains for the US economy in part to technology advancements and deployments.

The use of Internet-based applications and platforms—such as e-mail, instant messaging, Voice over Internet Protocol (VoIP) telephony, video conferencing, corporate intranets, blogs, and apps—has helped promote improved communications among employees, customers, and partners, while reducing associated costs. In the near future, Internet-based voice communications will likely be commonplace, which will further reduce communication costs. The Internet also enables companies to establish a national or even global presence without having to invest in physical infrastructure.

Dell saw early on how real-world corporations—those with significant physical assets—could improve operational performance by employing the Internet throughout their businesses. For many years, Dell was successful at selling its own and third-party products online. Customers could research products, customize orders, track shipments, and access useful technical information and support using the Internet. This direct-sales model helped Dell maintain a lean organization with little inventory on hand, enabling the company to adjust to market changes. Moreover, Dell was a pioneer in using the Internet to enhance customer service. However, Dell was forced to revisit its business model due to declining sales and stronger competition. It has since redoubled its efforts to improve its web-based sales and services to better meet customer needs, and it has ventured into retail sales. In 2013, the company became the subject of a takeover battle. In October 2013, the company was acquired by founder Michael Dell and global technology investment firm Silver Lake Partners in a transaction valued at $25 billion.

THE DARK SIDE OF THE INTERNET

The Internet is seen largely as a positive force for consumers and businesses. However, it does suffer from some issues that cast a negative light on the segment. Junk e-mail (commonly known as spam), computer viruses, and identity theft are just some of the problems posing serious threats to online users and corporate networks. Software security firm Symantec Corp. noted a 91% increase in targeted attack campaigns in 2013, more than double the 42% increase in the prior year. In the Symantec Internet Security Threat Report for 2014, themes highlighted include malicious attacks and data breaches, e-crime and malware delivery tactics, social media and mobile threats, and phishing and spam.

Targeted attacks can be directed at large companies and governmental entities, as well as small businesses and individuals. Senior executives (and even celebrities) are preyed upon to take advantage of their particular positions and resources, but lower-level employees with access to important data and/or information are often targeted, as well.

The growing prevalence and popularity of social networking sites enables attackers to target numerous new victims. In part as a result, more attacks occurred despite declines in the amount of spam activity and the


number of new vulnerabilities. Spam as a percentage of e-mail dropped notably in 2011, 2012, and 2013. Companies and users seem to have effectively focused on mobile in 2013, with a 69% drop in mobile vulnerabilities and fewer mobile malware families discovered monthly, however. We note that each mobile malware family had an average of 58 variants in 2013, up from 38 variants in 2012.

In March 2012, the nationally known and respected magazine show 60 Minutes aired a segment about the new era of cyber warfare, addressing the use of the Stuxnet virus to allegedly attack Iran’s nuclear capabilities and facilities.

Cybersecurity Cyber-attacks have supplanted terrorism as the top security threat to the US, according to the Director of National Intelligence. Notably, such actions have targeted a wide variety of interests, from government entities to banks, to consumer technology and Internet companies, disrupting the day-to-day lives of millions and threatening countless others.

According to the Government Accountability Office (GAO), federal agencies reported 61,214 cybersecurity “incidents” in 2013, up from 29,999 in 2009, perpetrated by the likes of actors sponsored by foreign countries, terrorists, criminals, and political activists (often called “hacktivists” in this context). In 2012 and 2013, banks across the US, such as JPMorgan Chase and Wells Fargo, and around the world, in places like Canada and South Korea, were attacked, resulting in significant outages. In 2013, a number of consumer technology and Internet companies were targeted, including Apple, Facebook, Microsoft, and Twitter. Spamhaus, a European nonprofit organization that helps identify spam for e-mail providers, indicated in March 2013 that it was subjected to large and lengthy attacks that slowed its global Internet services.

Spam battles continue, but abate somewhat Spam has been eating up bandwidth and infecting computers with viruses for years. However, there has been some positive movement on this front. According to Symantec, 66% of all e-mail sent around the world in 2013 was spam, compared with 59% in 2012, 75% in 2011, and 89% in 2010. A large part of unwanted e-mail employs malicious links or attachments, making it more difficult for conventional spam detectors to spot and filter it out.

Clever spammers were able to fight back and resume sending more spam messages, even though anti-spam companies battled spam successfully for a while by scanning sender information, content, and website links in e-mail messages. The Securities and Exchange Commission (SEC) has filed many cases against spammers over the years, and the federal Controlling the Assault of Non-Solicited Pornography and Marketing (CAN-SPAM) Act of 2003 forced domestic e-mail marketers to refrain from the activity or face imprisonment. As a result, spammers now operate out of the reach of US law in places such as Asia, Eastern Europe, and Russia. In addition, the CAN-SPAM Act has a significant loophole in that it allows bulk e-mailing if messages are marked as advertising and contain a way for recipients to decline e-mails. This blurs the line between spam and corporate marketing through e-mail.

According to Cisco Systems Inc., global spam volumes actually fell in 2010, 2011, 2012, and 2013, because of more sophisticated, more widely deployed, and more aggressively managed anti-spam technologies. Tougher Chinese domain registration laws may make it more difficult for spammers to establish and operate such businesses. As a result, miscreants have moved on to more vulnerable technologies and targets.

Spam has become a major issue for websites that prominently feature two-way communications—most notably in social media. For example, in mid-2009, nearly 11% of Twitter’s tweets were spam. However, the company worked to reduce this problem, and the percentage was around 1.5% in 2010. Companies have developed social networking spam blockers. Facebook partnered with McAfee to address the problem and developed spam prevention and filtering tools. In August 2010, Facebook joined the board of directors of the Messaging Anti-Abuse Working Group, an organization that targets emerging messaging issues. Nonetheless, we have noted some continuing issues, for example, involving Twitter and its direct messages. In fact, we think spam is becoming an increasingly important and troublesome issue for social networks. Nexgate Corp., a provider of social media security and compliance solutions, reported that the amount of social spam increased by 660% in 2013, with one of every 200 social media messages containing it.


HOW THE INDUSTRY OPERATES

The origins of the Internet date back to the late 1960s, when the US Department of Defense’s Advanced Research Projects Agency (ARPA) began to explore designs for a packet-switched communications network that could withstand the loss of any single part of the system. Called ARPAnet, this network transmitted military data through various computer facilities across the US. These facilities, called nodes, were interconnected by a series of telephone lines in such a way that the nodes were largely independent of one another.

What made this network revolutionary was its reliability. If one node was rendered inoperable, data could still flow among the others. In addition, the nodes could detect whether certain connections were congested and then would route the data accordingly.

Before 1985, ARPAnet was primarily a military resource. That year, ARPA ceded control of its network to the National Science Foundation (NSF), an independent US government agency that maintained the Internet from 1985 to April 1995. The NSF began to transform what was a military intelligence network focused on safeguarding data to an expanding civilian network linking universities and commercial users.

As the network grew, people began to communicate through a new medium: e-mail. The NSF expanded the backbone from six supercomputer sites in 1985 to 16 sites in 1995, including academic networks. In 1995, the NSF contracted with commercial entities to provide access to its backbone, and these licensees were charged with selling connections to groups, organizations, and companies. Since then, the NSF has moved beyond supporting the backbone, allowing independent for-profit companies—such as AT&T Inc., Sprint Nextel Corp., and Verizon Communications Inc.—to build and maintain, throughout the country, networks that now constitute a large part of the Internet.

THE WORLD WIDE WEB

Tim Berners-Lee primarily developed the World Wide Web for scientists at the Conseil Européen pour la Recherche Nucléaire (CERN), based in Geneva, Switzerland. The system was designed to facilitate research by allowing authors to reference documents available on the Internet. Years after this and after other contributions, Berners-Lee was awarded the Millennium Technology Prize, the world’s largest technology award (based on financial value), in June 2004. In July of that year, he was knighted by the Queen of England for his accomplishments.

The web uses hypertext markup language (HTML) to reference documents with a simple coding system and to format them for viewing by web users. Until 1992, the web remained text-based and was relatively unknown outside academic circles. The network was difficult to navigate, and most users were computer science college students or former university users at computer-related companies.

In the spring of 1993, a team of students at the National Center for Supercomputing Applications at the University of Illinois developed a software program called Mosaic. Its graphical interface was a browser—software that enables an Internet user to view both text and graphics. This visual interface simplified Internet use and sparked rising interest in the web. Although the web is actually just a part of the Internet, the creation of the browser made it so popular that it became synonymous with the Internet itself.

The web allows even novice users to surf the Internet. Using HTML, organizations and individuals can create home pages with text, graphics, and dynamic content such as audio and video clips. These pages are tied together by a series of links, which the Internet user clicks on to move to the referenced page. Increasingly, websites are employing extensible markup language (XML), which enables more flexible presentation and manipulation of data online.

As of August 2014, Microsoft Corp.’s Internet Explorer, which held more than a 50% share of the segment, is the most popular web-surfing software today. Netscape Communications Corp.’s browser, which was once the market’s leader, barely holds any discernible share, according to web utility provider Net Applications. The company (which was acquired by America Online, now AOL Inc., in March 1999) was co-founded by


Marc Andreessen, one of the students who created Mosaic at the University of Illinois, who was one of the industry’s most important pioneers and has become one of its most powerful venture capitalists.

A powerful global medium Its decentralized nature makes the Internet a truly global medium. The Internet is a virtual community owned by no one. The Internet empowers individuals and organizations by offering easy and equal access to billions of web pages, and the opportunity to communicate with hundreds of millions of Internet users. Low barriers to entry, relatively small capital expenditures, and electronic-payment technologies enable merchants to sell their products to a worldwide population of consumers regardless of geography, language, or currency.

Researchers can tap into an enormous source of information as the Internet serves as a continually growing global library, increasingly with multimedia content. With electronic mail, individuals have a low-cost, efficient way of keeping in touch with friends and family. Groups of people with similar interests can join online communities to exchange insights and debate topics regardless of location or time. Every client screen (i.e., every computer or other device accessing the Internet) becomes a gateway to a vast array of information and resources that is available on demand, 24 hours a day, from virtually anywhere.

INTERNET INFRASTRUCTURE

Many companies in different industries play integral roles in how the Internet functions. One way to study the industry is to examine the infrastructure of the Internet: hardware, software, and access services.

Hardware The computer and communications equipment industries provide the hardware that comprises the physical infrastructure of the Internet. More specifically, hardware companies make the equipment that connects, operates, and powers the networks that constitute a large portion of the Internet. Information about this hardware, which includes servers and networking equipment, can be found in the Computers: Hardware and Communications Equipment issues of Industry Surveys.

Web-hosting services Some companies maintain their websites on servers kept in-house. Other corporations employ web-hosting firms to ensure that their sites operate without interruption. Customers utilizing these services generally manage their own servers, while the data center operators offer safe, secure, and physical hosting space and direct service provider connections.

Software Software companies provide a variety of Internet-related offerings to both businesses and consumers. This Survey focuses on two of the more important types of Internet-related software: browsers and security software.

Browsers. Browser software enables online navigation by allowing users to view website text and graphics that are housed in servers. Microsoft dominates the current browser market.

Security software. The Internet has notable vulnerabilities and is rife with hackers and dangerous applications. While some hackers work for their own benefit, others, often referred to as “hacktivists,” work for a common cause. One such group that has come to prominence is Anonymous. Formed in 2003, the global group involves individuals who do not disclose their identities.

In mid-2009, the television program 60 Minutes included a segment entitled, “The Internet is Infected,” which highlighted notable online risks and concerns. Technology research firm IDC defines “web security” as including URL filtering, anti-malware software, Internet application firewalls, and online content solutions. These offerings safeguard against all kinds of threats.

URL filtering essentially protects users from visiting websites suspected of being malware gateways. Malware is malicious code or an application (more commonly known as viruses and worms) designed to do harm using the Internet. For example, it can help a criminal obtain another person’s online banking logon


information for perpetrating fraud, or infect and bring down small and large corporate applications and networks. Application firewalls are software that fortifies computers and networks from external threats. Online content solutions analyze Internet media to ensure that they are safe to view and consume.

Two other important areas of Internet security software are digital certificates (i.e., identification measures), and authentication and encryption software, which confirms parties involved in communications and/or transactions, and then safeguards such interactions.

Access services When consumers or businesses access the Internet, they connect to an Internet service provider (ISP). ISPs offer basic, flat-rate Internet access to customers, either through wholly owned networks or networks leased from other ISPs. Users generally access an ISP’s network through ordinary phone lines or through faster DSL or cable connections, using a browser to gain entry to the web.

Access fees for major dial-up ISPs are generally $5 to $35 per month for unlimited Internet use. Interestingly, prices for high-speed DSL and cable access have fallen so much in recent years that they now cost consumers roughly the same as dial-up connections. In light of a challenging economic backdrop and notable competition, companies have become adept at creating attractively priced service bundles, in an effort to maintain longer-term relationships with customers.

In September 2009, Julius Genachowski, the chairman of the FCC, indicated that he was going to push for net neutrality, where all Internet content and applications would essentially be treated and priced comparably. In May 2013, Genachowski left the agency. Nonetheless, this topic, often called “net neutrality,” continues to be debated. In September 2013, a federal appeals court heard arguments about whether net neutrality violates the First Amendment rights of Internet Service Providers (ISPs). In April 2014, the FCC, under the leadership of new chairman Tom Wheeler, who assumed this post in November 2013, took action that many believe will eventually lead to elimination of net neutrality. Chairman Wheeler communicated that his approach is consistent with “Open Internet” concepts adopted by the FCC in 2010, and that he intended to “have enforceable rules by the end of the year.” In 2014, the FCC proposed new rules on net neutrality despite protests, according to Reuters.

DESTINATIONS

A dizzying array of destination sites is available to view and explore, once a user has connected to the Internet. For the purposes of this Survey, these destinations can be broken down into two main categories: content and electronic commerce.

Content This sector consists of websites frequently and regularly updated with new information and media. While many providers produce original content, others (known as portals) aggregate content from outside sources and repackage it into well-organized and often customizable websites.

Original content providers. These companies either create material especially for the Internet or reconstitute their content for online consumption. Many established media companies, including news organizations and magazine and newspaper publishers, fall within this category, along with a growing number of upstarts that have established sites with content that is available solely on the Internet.

Given recent and projected significant growth in online advertising, many of these content providers generate revenues from Internet marketing. Types of advertising include keyword, display, classifieds, lead generation, and rich media. Not surprisingly, advertisers are attracted to heavily trafficked or leading niche sites to reach their intended audiences.

Some providers charge fees to access at least a portion of their content or services. Subscriptions on the Internet are like traditional subscription models used for magazines: over a finite period, users pay to obtain content that they would not be able to get elsewhere. Because users have shown a general reluctance to pay for online content, the success of this model has been somewhat mixed. However, a variety of entities—


including ESPN, RealNetworks Inc., and The Wall Street Journal—have shown that Internet users will pay for online content if it is unique, compelling, and reasonably priced. À la carte purchasing options, whereby users pay for a specific article or song, are growing increasingly prevalent, largely as a result of the success of Apple Inc.’s iTunes.

Portals. These are websites designed to be an Internet user’s initial starting point for online usage. A portal’s front page usually offers search options, e-mail capabilities, and a variety of other content and services ranging from news headlines, stock quotes, and sports scores, to shopping and entertainment offerings.

Unlike fee-based content providers, portal companies often do not charge fees for most of the wide range of services that they offer. Instead, these companies predominantly generate revenues by providing online advertising solutions. The rates advertisers pay frequently are closely related to the number of people who potentially will see and click on particular ads, and the degree of targeting that is employed. For example, a portal’s registered user who has a profile that includes a New York address, and who conducts a search at the site for the word “football,” could be shown ads for New York Giants paraphernalia or local sports bars.

Portals have increasingly been focusing on advertising opportunities. Google Inc. is providing more content and services to be able to offer more advertising and more targeted messages. To spur growth in users and activity, AOL shifted its business model to offer mostly free services. Yahoo! Inc. continues to pursue diversification with paid services, such as enhanced e-mail and domain-name registrations, in addition to its free e-mail and information services.

Communities. Unlike traditional portals, which offer information and services derived from typical mass-media sources, community-oriented websites depend heavily on their registered user bases for content. Advertisers can target communities that they believe would respond favorably. For instance, a maker of entertainment software would likely target communities dedicated to electronic games.

Increasingly, the differences between portals and communities have become blurred. Many portals have acquired or built communities and integrated them into their websites, and many communities have added portal-like content to their offerings.

Online postings, profiles, and polls, as well as newer technologies such as blogs, wikis, digital photographs, podcasts, and online videos, are examples of user-driven content. Blogs comprise a kind of community that has become popular. Blogs typically involve authors posting on the web their thoughts on particular subjects, with users responding. Initially, these kinds of forums generally focused on technology issues and politics, but they increasingly concern other topics as well. A wiki is a kind of website that allows users to easily add, remove, or revise content. The most popular wiki is Wikipedia, which is a community-maintained online encyclopedia.

Other Internet communities involve multimedia elements. Flickr, which is owned by Yahoo!, is a photo-sharing community. Instagram users post and communicate about pictures and videos through mobile devices. A podcast is an audio program that can be automatically distributed over the Internet to a person’s computer, often for later playing on a digital audio device such as Apple’s iPod.

Perhaps the most prevalent segment of the online communities category is social networking, which includes companies that facilitate personal connections among users with common interests and goals. Examples of popular social networks include Facebook, LinkedIn, and Twitter.

Search services. Search engines are used to locate information online. Users input keywords, which search engines check against extensive volumes of indexed websites and web pages. If matches are found, the search service provides them to the user in the order of most relevant to least relevant.

As the vast amount of information on the Internet continues to grow explosively, the importance of search services has increased. As a result, companies focused only on providing search services have become more popular. Although established players such as LexisNexis (owned by Reed Elsevier Group Plc) offer a variety of fee-based search services, the advertising-focused free search model has become increasingly prevalent.


E-commerce Electronic commerce, or e-commerce, generally is defined as business conducted through the Internet. This sector has two major segments—business-to-consumer (B2C) and business-to-business (B2B). Although the B2B market is estimated to be much larger than the B2C market, both areas are growing rapidly.

Although the online auction segment reflects only a small percentage of the overall e-commerce industry, it is nevertheless a part of the e-commerce sector. It includes B2C, B2B, and consumer-to-consumer (C2C), also known as peer-to-peer or person-to-person (P2P) transactions.

Business-to-consumer (B2C). This generally refers to transactions conducted between a consumer and an online retailer. Internet shoppers can browse through a company’s inventory of goods, which will display a picture of each item along with a detailed description and an indication of availability. Most sites allow users to search for items based on specified criteria. On some sites, most notably Amazon.com, an item’s description is accompanied by reviews by both professional and amateur critics. Comparative shopping sites (such as eBay Inc.’s Shopping.com or Google Product Search, formerly known as Froogle) offer applications known as shopping bots, which enable users to compare the prices of a specific product across multiple B2C e-commerce websites.

The relatively low cost of establishing a website has reduced barriers to entry in the retail market. It is now possible to target an extremely large market without spending the exorbitant amount of capital necessary to open brick-and-mortar stores. Companies aim to build brands and establish loyal users that will consistently purchase goods from their websites.

Traditional retailers often have advantages over new entrants: established brands and customer loyalty. Using these recognized and trusted names and existing (and sometimes longstanding) relationships as foundations, many traditional vendors have successfully expanded their sales capabilities to include the Internet. Conversely, many pure-play online retailers have gone out of business after incurring significant operating losses due to heavy sales and marketing expenditures, technology investments, and deep promotional discounting. The competitive and costly reality of running a large consumer e-commerce site has led many players to pursue outsourcing partners (which are responsible for some or all of their operations), such as Amazon.com Inc. or eBay Enterprise business (formerly GSI Commerce).

Business-to-business (B2B). In contrast to consumers’ sometimes impulsive purchasing, B2B transactions between companies tend to be very structured, and they are controlled by bureaucratic budgeting and buying processes. While a few vendors provide their goods solely via the Internet, many other firms take advantage of the Internet as an alternative distribution channel. Companies like Cisco Systems Inc. and Dell Inc. sell tens of millions of dollars of goods per day via the Internet.

From a corporation’s perspective, e-commerce can deliver significant cost savings. When customers order regularly from a website, they do not have to interact with salespeople, who thus can pursue other sales. Furthermore, because orders are entered and recorded electronically, buyers can monitor and update their cost ledgers more easily, sellers can manage their inventories more closely and efficiently, and transaction errors are much less frequent.

Auctions. Although auctions have been around for centuries, the Internet has given a new and enhanced life to this method of buying and selling goods. The best-known and most dominant online auction company, eBay, is perceived as primarily facilitating transactions between individuals. However, eBay is increasingly enabling sales by small businesses, large corporations, and government entities. There are many other smaller B2B and B2C auction sites as well, which usually specialize in certain categories of items.

A person or organization wishing to sell an item typically pays a small listing fee to the website operator, sets a minimum bid, and then waits a few days to see how the auction pans out. Sellers are usually held responsible for shipping goods to winning bidders. While there is always the potential for fraud in this process, many auction sites employ a rating system that helps to keep participants honest. Sellers who generate poor satisfaction ratings are unlikely to have much success in garnering significant bids for merchandise. In addition, eBay maintains a comprehensive fraud protection program, with a staff that


monitors the company’s sites for questionable activity. The company also offers escrow and insurance services for higher-priced items.

A kind of auction that was first deployed on the Internet is known as a reverse auction, which was developed and is employed by e-commerce company priceline.com Inc. Priceline’s website allows customers to name their own price for a variety of products and services, with customer offers guaranteed by credit cards. Priceline then communicates the bids to participating sellers. The company makes money on either the spread between the buyer’s and the seller’s prices or by charging a fee. Today, the website accepts bids for a variety of primarily travel-related goods and services, including airline tickets, hotel rooms, rental cars, vacation packages, and cruises. An unusual aspect of this reverse auction process is that it is patented. A patent for this business model, filed by priceline.com’s founder Jay Walker, was approved in August 1998. Its enforceability has been questioned, but the patent remains legally valid.

GOVERNMENT PLAYS A PROMINENT ROLE

If you think the government is playing more of a role in the policies and practices shaping the Internet, you are absolutely right. Public entities have been more active in addressing issues of significance to online users as the Internet has become more important for consumers and companies.

This heightened activity reflects government confidence in the Internet’s significance and staying power, as well as a belief that the rights of Internet users need to be protected. As the Internet has become increasingly essential in people’s lives, the government’s inclination to evaluate and regulate online activity has also grown.

In recent years, government entities have pursued the fight against identity theft. Interestingly, a few years ago, online gambling was made clearly and completely illegal, though now efforts have been undertaken to relax some of the related restrictions on a national level and in some states. The FCC made progress in promoting competition in broadband Internet access and protecting the rights of broadband users. In addition, several government bodies moved forward on matters regarding online privacy and taxation—two areas that continue to garner significant attention, for reasons explained in the text below.

Privacy Spyware, which is hidden software that tracks and reports user activity, has been an important issue considered and acted upon by the federal government. In September 2005, California enacted the first state law in the country that makes online phishing scams illegal. As mentioned previously, phishing consists of sending an e-mail purportedly from a legitimate enterprise in an attempt to con the recipient into providing personal information that could be employed for identity theft.

In the 111th US Congress (which ended in 2010), representatives and senators worked on issues related to Social Security numbers, and introduced legislation continuing to try to address privacy issues involving access to personal information provided/obtained via cell phone cameras, healthcare records, peer-to-peer software, and traffic stops. More recently, topics of concerns have included behavioral advertising, location-based services, and cybersecurity. In the 112th Congress, dozens of pieces of legislation focused on the Internet were offered, including a Do Not Track bill that would allow Internet users to “opt out” of targeted online advertising. In December 2010, the Federal Trade Commission encouraged Congress to create a “do-not-track” system, modeled after the “do-not-call” lists governing telemarketers. As of early 2012, a number of Internet companies, including Google, supported the notion of adding a do-not-track button in most Internet browsers. By the end of 2012, “do-not-track” options were available in Chrome, Firefox, Internet Explorer, and Safari.

In March 2011, senators John McCain (R-Arizona) and John Kerry (D-Massachusetts) started to push an Online Privacy Bill of Rights that would enable users to better understand what personal information companies have and how it is distributed; it would also offer the capability to better monitor and control these details. (Kerry is currently the US Secretary of State.) In February 2012, the Obama Administration proposed its own Privacy Bill of Rights. In 2014, the National Telecommunications and Information Administration led a review of the proposed Privacy Bill of Rights in 2012. This review was in response to a big data review ordered by President Obama earlier in 2014. In March 2012, Google implemented a new


privacy policy that allows its disparate businesses and offerings to share data and information, but a European Union Commissioner questioned its legality. European regulators have implored Google to change its privacy policy and related practices, or risk penalties. In January 2013, the Federal Trade Commission announced a settlement with Google intended to promote competition and increase consumer choices across a number of important technology areas, including online advertising. The company announced a similar settlement with the European Commission in February 2014.

Taxation After considerable debate, the Internet Tax Non-Discrimination Act was enacted in November 2001. The proponents of this law believed that it promoted greater health and growth for the Internet economy. Many others, however, believe that the ban on Internet taxes unfairly disadvantaged government entities. The moratorium has been extended multiple times and is now due to expire on December 11, 2014.

The latest version of the law prevents states from taxing Internet access services, but allows levies on fee-based consumer voice or video offerings. It does not specifically address the issue of a sales tax on goods purchased online. In April 2008, the state of New York implemented a law requiring out-of-state companies to collect state sales taxes on items they send to New York addresses. Amazon.com sued to overturn the new law. In March 2013, the state’s highest court rejected the company’s arguments. In August 2013, Amazon filed an appeal for the US Supreme Court to consider the case.

Since the New York law went into effect, a number of other states have taken similar actions, and Amazon has moved to distance itself from sales affiliates in those states. In March 2012, the company listed nine states on its website where its sales are subject to tax. Amazon has been working on a state-by-state basis to resolve some of these issues, such as offering local jobs in return for a temporary moratorium on local taxes. Amazon has been able to strike deals with multiple states, where it has started collecting taxes, and will continue to do so, into January 2016. Some of these states and others will be home to new Amazon distribution centers that will enable faster delivery times. In a September 2012 article in The New York Times, Amazon CEO Jeff Bezos was cited as saying that at a minimum Amazon “can work on making [deliveries] the next day.” However, Florida seems to have rejected Amazon’s proposal to bring some 3,000 jobs to the state in exchange for deferring collecting online sales taxes until 2014.

We note that while Amazon pursues agreements with some states, other online retailers like eBay continue to oppose Internet sales taxes. In May 2011, the Digital Goods and Services Tax Fairness Act was introduced to prohibit local jurisdictions from imposing multiple or discriminatory taxes on digital items,

STREAMLINED SALES TAX STATUS

STREAMLINED SALES TAX STATUS

As of February 18, 2014Full memberAssociate memberAdvisory stateProject stateNon- sales tax stateNon- partic ipating

Source: Streamlined Sales Tax Governing Board.


but allowing states to impose levies on retail sales based on a customer’s tax address. In November 2011, the Marketplace Fairness Act was introduced to support states wishing to tax online transactions consistent with existing laws. In February 2013, the Marketplace Fairness Act was re-introduced. That fall, the legislation had the support of 97 members of Congress, 26 governors, and 343 organizations, according to a website with information about the legislation (marketplacefairness.org), provided by TaxCloud, a purveyor of a tax service for online retailers. In April 2013, the Senate passed the bill, and in May, the House referred the legislation to the Judiciary Committee. In September 2013, the House Judiciary Committee released a set of principles supporting its proposal for a national Internet sales tax. The law was not enacted in 2013, reflecting some consumer and small-business push-back. We thought there was a good chance the bill was going to be made into law, perhaps as early as 2015. However, following recent mid-term elections we now see a greater possibility for a national Internet sales tax.

In March 2010, a bill was introduced in the House of Representatives that would have legalized online gambling and taxed the proceeds; the legislation had gained some support, but didn’t become law. A July 2010 article in The New York Times indicated the federal government could garner $42 billion in new taxes on Internet gambling over 10 years. In March 2011, the Internet Gambling Regulation, Consumer Protection, and Enforcement Act was introduced in the House to grant the Secretary of the Treasury regulatory and enforcement jurisdiction over online gambling. In June 2011, the Internet Gambling Regulation and Tax Enforcement Act was introduced in the House to provide for a system of related record keeping and tax collection.

While federal efforts have largely been unfruitful, states have been more successful. Perhaps not surprisingly, Nevada and New Jersey have been at the forefront. In February 2013, the governors of Nevada and New Jersey signed bills that legalized online gambling. H2 Gambling Capital, which tracks online gambling markets, has projected that online gambling in New Jersey could generate revenues of $410 million in its first year. The firm also forecasted that the US could generate revenues of $13.4 billion from legalized online gambling in its fifth year. However, from its launch in November 2013 through May 2014, online gambling in New Jersey generated a little more than $9.3 million.

As of August 2014, 23 states were full members and one state (Tennessee) was an associate member of the Streamlined Sales Tax Governing Board, which wants to tax online purchases, and two more states were associate members. We think many related state efforts reflect the recent challenging economic backdrop and the need for greater tax receipts. Interestingly, despite considerable momentum for more Internet-related taxes, in March 2010, the Los Angeles City Council unanimously voted to create a new and lower business tax category for Internet companies, to dissuade these firms from leaving the city.

The US is not alone in focusing more on Internet-related taxes. In early 2008, France’s President Nicolas Sarkozy proposed a tax on Internet access services to help replace revenues associated with a ban on prime-time advertising on public television; this was implemented for 2009. In early 2009, Sarkozy proposed a tax on Internet gambling, and in early 2010, he suggested a tax on Internet advertising. Mexico’s President Felipe de Jesús Calderón, in a 2009 budget submission, proposed a tax on Internet access that was approved in October 2009. In March 2011, the European Union announced a major consultation focused on Internet gambling. In mid-2012, it was reported that the United Nations was considering a European proposal to tax large domestic online content providers like Apple, Facebook, Google, and Netflix. Concerns mounted about an international Internet fee ahead of the late 2012 World Conference on International Telecommunications. In early 2013, France released a report indicating it was considering taxing the collection of digital personal data. In mid-2013, a French government official called on the European Union to regulate US Internet giants to promote greater competition, and implement tax rules to ensure that related revenues are levied appropriately. European leaders participated in a summit on the digital economy in October 2013. Around a year later, in October 2014, some 100,000 people in Hungary protested a proposed Internet usage tax, and soon thereafter the plan was scuttled.


KEY INDUSTRY RATIOS AND STATISTICS

Gross domestic product (GDP). GDP, the broadest measure of aggregate economic activity, is the market value of all goods and services produced by labor and capital in the US. To arrive at GDP, four major expenditure categories are totaled: consumption, investment, government purchases of goods and services, and net exports of goods and services. Growth in the economy is measured by changes in inflation-adjusted (or real) GDP. The US Department of Commerce reports GDP data each quarter.

The performance of Internet-related industries is affected by the health of the overall economy. As economic activity increases, the volume of communications traffic rises. This increased traffic requires that telephone, cable, and wireless companies raise the capacity of their networks, which spurs demand for network equipment. Healthy economic activity also spurs consumption of personal computers (PCs), servers, Internet access, and goods and services offered online.

US real GDP increased 2.5% in 2010, 1.6% in 2011, 2.3% in 2012, 2.2% in 2013, and 2.1% in the first quarter of 2014. As of April 2014, Standard & Poor’s Economics (which operates separately from S&P Capital IQ) was projecting increases of 3.0% for 2015 and 3.3% for 2016.

PC unit sales. PC industry growth is a key element in determining the overall growth of the Internet. PCs are the primary gateway devices for users accessing the World Wide Web, and Internet access is becoming the primary driver for home PC sales. According to IDC, an information technology research and consulting firm that compiles historical data and provides forecasts for PC sales, worldwide PC shipments totaled about 287 million units in 2008, 291 million in 2009, 347 million in 2010, 364 million in 2011, 349 million in 2012, and 315 million in 2013. Sales were projected to decline to 296 million units in 2014 and 287 million in 2018.

Historically low and declining PC prices, the popularity of the Internet, and advances in broadband technologies will continue to promote PC growth in US and international markets, in our opinion. Nonetheless, we think that the increasing accessibility and functionality of mobile devices, as well as material economic issues touched upon earlier will restrain growth, especially domestically.

Mobile devices. Wireless technologies and rapid adoption have made smartphones and tablets increasingly relevant in accessing the Internet. In fact, more mobile devices than PCs access the Internet, according to IDC. Worldwide, smartphone shipments amounted to more

than 1 billion in 2013 and were projected to increase to 1.2 billion in 2014 and 1.8 billion in 2018, for a compound annual growth rate (CAGR) of 12.3% from 2014 to 2018, according to IDC. The tablet market is newer and smaller than the smartphone market, but its expected growth rate is greater, according to IDC. In 2013, 218 million units were shipped, which the firm forecasts will increase to 245 million in 2014 and to 342 million in 2018, for a CAGR of 11.9%.

Internet and broadband penetration. This is the percentage of a population in a given geographic area that has online and high-speed Internet access. Lower penetration indicates greater subscriber growth potential; higher penetration generally contributes to more favorable usage metrics.

IDC estimated that as of mid-year 2014, 40% of people around the world had access to the Internet, and 34% of households had access to broadband Internet services. The US had 85% Internet penetration and

H11: AVERAGE TIME SPENT ONLINE IN THE US

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77% broadband penetration. A number of countries actually had greater percentages in both categories, including Belgium, Canada, Denmark, Holland, Sweden, and Switzerland. Around 49% of China’s population had Internet access and 43% of its households had broadband access. Of Brazil’s population, 54% had Internet access and 34% of its households had broadband access. India had only 16% Internet penetration and 7.4% broadband penetration.

Growth of Internet usage. Some growth figures describe the number of online subscribers, while data on page views offer more details about traffic patterns and behavior. Higher traffic rates could affect expenditures on hardware used to enhance the Internet’s capacity.

According to estimates contained in IDC’s mid-2014 release, the total number of unique Internet users worldwide will increase from 2.7 billion in 2013 to 3.5 billion in 2018, for average annual growth of around 5.3%. We think this anticipated growth could be largely attributed to increased usage of the Internet on an international basis and the proliferation of various access devices, including mobile phones and other communications appliances.

HOW TO ANALYZE AN INTERNET COMPANY

When analyzing an Internet company, it is important to remember that the industry was created relatively recently—over the last decade or so. Of all the new entrants, only a small number have managed to establish critical mass and sustain profitability. For these companies, analysts can use traditional measures when conducting comparative analyses, but they must pay close attention to quickly evolving market dynamics.

Different techniques should be used to evaluate start-up companies and those with more limited revenue and earnings profiles. Analyzing any relatively young business, especially one with a focus on the rapidly changing Internet segment, poses special challenges. Traditional methods of determining financial standing and underlying value may not be readily applicable. As a result, companies are often valued largely on their prospects for future growth.

In addition to the uncertainty surrounding specific companies, it is often difficult to estimate the potential size of the markets in which they compete, and forecasting category growth may be something of a guessing game. For these reasons, in our view, qualitative judgments are crucial in helping to determine an Internet company’s competitive position, growth opportunities, and value.

MAKING QUALITATIVE ASSESSMENTS

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

A model business model Although Internet businesses of the past were conceived mostly to capitalize on significant growth opportunities, the dot-com crash and subsequent global macroeconomic woes from 2000 into 2003 changed the priorities of online companies and their investors. Internet firms must do more now than simply generate growth in users and revenues; they also must deliver on the promise of profitability. The recent credit crunch and economic downturn have forced Internet companies to better prioritize spending and focus more on balance sheet strength.

The most successful Internet business models generally have diversified revenue streams, scalable expense structures, and limited capital requirements. Many online companies that were once high profile, including At Home Corp., Pets.com Inc., and Webvan Group Inc., were able to garner noteworthy growth and brand recognition, but ultimately failed because they could not generate sustainable earnings.

In addition, the most profitable online companies often have business models that capitalize on the Internet’s unique benefits, such as the ability to offer an extensive virtual inventory of products that can be easily


searched, researched, and purchased. An example is eBay Inc., which serves as a platform used by more than 125 million active registered users to buy and sell goods. Once the chosen item is located, a transaction can be completed in a matter of minutes. As more would-be purchasers flock to eBay, more sellers set up shop to win their business, which results in heightened consumer interest. This build-up of a greater number of buyers, begetting more sellers and leading to even more shoppers, is an example of the network effect. The power of this phenomenon is one of the reasons that eBay has been so successful, in our opinion.

Management expertise and ethics are key When analyzing an Internet company, it is essential to focus on the quality of its management. More than any other industry, the Internet demands managerial excellence, with a particular focus on vision and execution. Being able to generate new ideas, market new products, and foster an entrepreneurial, innovative, and effective corporate culture are invaluable skills when managing a young business in a rapidly evolving new industry.

Along with start-ups, many long-established companies are making successful forays into the Internet. In December 2007, after months of negotiations, media conglomerate News Corp. acquired Dow Jones & Co. Inc. for $5.6 billion. We expect News Corp. to aggressively pursue new online opportunities involving traditional Dow Jones properties, which include The Wall Street Journal newspaper, Barron’s magazine, and the website MarketWatch.com.

Largely as a result of the Dow Jones purchase, News Corp. is perceived by some as the traditional media company best positioned to capitalize on the promise of the Internet. Nevertheless, despite the proven prowess of Rupert Murdoch, the company’s chairman and CEO, the significant control of the company that he and his family have detracts somewhat from our perception of its corporate governance practices.

Interestingly, Viacom Inc.—the company that reportedly lost out to News Corp. in the battle for MySpace (which went from Internet company boom to bust and was finally sold by News Corp. in June 2011)—has done a good job in recent years of building out its online franchises through internal development around established brands and targeted acquisitions. Walt Disney Co. has perhaps been more aggressive, with more and larger investments and acquisitions such as Playdom Inc. (online games), which was purchased for consideration up to $760 million in mid-2010.

S&P Capital IQ believes that consideration of corporate governance is critical to investment analysis and decision-making, and consistently employs such considerations in making assessments related to stock recommendations. For example, corporate governance factors are often used in arriving at S&P Qualitative Risk Assessments (QRAs), which account for risk from an equity perspective. These QRAs are found in S&P Capital IQ Stock Reports.

Watch the competitive landscape As with any high-tech industry, analysts need to monitor the competitive landscape closely. Because of constant innovation, relatively low barriers to entry, and an emphasis on human capital, Internet companies face substantial competition. Market positions shift rapidly, and new products and business models are developed frequently. The costs of switching providers of content and services are generally extremely low, which makes for relatively high customer turnover, or churn, as it is called in the industry.

For example, in the late 1990s, Internet companies that were initially focused largely on search offerings, such as Yahoo! Inc., turned their attention to becoming multifaceted mass-media portals. This created a huge opportunity for Google Inc., which was solely an Internet search company at the time. Yahoo actually retained Google to power its search offerings in 2000. Overture Services, which Yahoo acquired in 2003 (and is now called Yahoo Search Marketing), created the concept of sponsored search—but Google perfected the process by marrying its powerful search technology and related advertising. Google remains the worldwide leader in search services, while Yahoo is still trying to recover from its strategic oversights. Interestingly, in July 2012, Yahoo announced that former Google executive and early employee Marissa Mayer had joined the company as CEO. Mayer became Yahoo’s fifth CEO (including interim appointees) over a period of less than 12 months.


Market position The sheer size of a company has a significant bearing on its ability to succeed as an Internet player. For example, Amazon.com Inc. has bolstered its customer base by undercutting competitors on price and offering free shipping promotions and subscriptions. Most other Internet retailers are not large enough to be able to absorb the resultant reduced revenues and higher expenses.

Yahoo has leveraged its leading market share positions in a number of global online content and communications categories to capture significant online advertising revenues. Google’s No. 1 position in the search segment has enabled the company to generate substantial profits and invest in the enhancement of existing offerings, the development of new products and services, and the acquisition of complementary technologies and businesses.

New products and services Internet companies must convert new ideas into saleable offerings quickly in order to capture and retain market share. Given the entrepreneurial nature of most Internet companies, competition is cutthroat and the companies that can achieve expeditious “time to market” often win.

However, there is a caveat. A company that wins share initially does not necessarily thrive over the long term. As the Internet evolves, a company’s vision could fall out of step with consumer tastes and/or market realities. Alternatively, an upstart could develop and provide a new and more compelling offering. Google is a good example of what a great new service and fortuitous timing can mean.

Internet companies place huge bets on their vision of the medium’s future. Therefore, in addition to monitoring which companies are the most nimble and effective over the short term, investors must be mindful of the long-term viability of these businesses.

Foreign operations Many Internet players have significant operations in international markets. Success in these markets is likely to play an important role in the long-term competitive positions of dot-coms. eBay and Google derive about half of their revenues from international operations. We expect larger Internet companies to increasingly rely on international revenues for growth, particularly as they pursue acquisitions and alliances abroad.

Amazon.com, eBay, Expedia, Google, IAC/InterActiveCorp, and Yahoo all announced or made significant investments in companies in China or India over the past decade. Even smaller players like CNET Networks Inc. (now owned by CBS Corp.), and Monster Worldwide Inc. made acquisitions in China, which is the country with the world’s largest Internet population. Notably, however, US Internet companies have had limited success in China, despite their interest, focus, and substantial financial commitments over the years. In fact, in June 2010, Google announced it had decided to discontinue its proprietary search business in China after allegations of cyber-attacks and censorship. However, more than two years later, Google is again pushing hard to gain entry into the world’s biggest Internet market, with 618 million Internet users and 500 million mobile Internet users as of December 2013, according to the China Internet Network Information Center. As of mid-2013, some two-thirds of smartphones in China were powered by Android, according to Chinese research firm Umeng. Google is looking to leverage this market position, its global brand, and marketing prowess to seize upon notable opportunities associated with Chinese companies looking to engage in digital advertising.

Multinational companies are subject to foreign currency risk. For firms based in the US, overseas sales are translated from local currencies into dollars. A strong dollar hurts reported earnings, a weak dollar helps. Additionally (as described later in this section), overseas operations often generate profits that can’t be repatriated (i.e., returned to the US) without material tax implications and impacts. Moreover, companies with global operations often benefit from lower corporate tax rates outside the US. Analysts and investors also should keep in mind other international risks, such as government regulation and political instability.


FINANCIAL STATEMENTS: LINE BY LINE

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

Income statement analysis The income statement portrays the operating results of a company over a stated period. Trends in growth rates, and any aberrations from the norm, should be assessed. In particular, analysts look at sales, gross margins, and operating expenses.

Revenues. Quarterly results should be compared with the year-earlier quarter and on a sequential basis (i.e., with the preceding quarter). Year-to-year changes reveal longer-term trends, while sequential fluctuations provide clues about sales momentum, seasonality, short-term events, and emerging trends. In reviewing these comparisons, an analyst must remember that most Internet-related companies enjoy more robust revenue growth in the short term because comparisons are made against a relatively small sales base. It’s unrealistic to project continued growth at this pace over the long term.

It is helpful to analyze sales data by segments—which might include advertising revenues, license revenues, service revenues, and subscriber revenues, for instance—in order to focus on the specific contributions to sales growth. For example, Amazon.com expects its service revenues, generated from providing technology and support to other retailers, to grow at a faster rate than its core media segment.

Gross margin. This measure—the percentage of revenues remaining after subtracting the cost of goods sold—is a key item to watch when examining income statement trends. Unlike other operating expenses, which are generally under the direct control of the company, costs of goods or services are more a function of demand for those products or services, as demand affects volume. Typically, a company with rising gross margins has either raised prices or achieved improvements in its supply chain.

In general, Internet companies enjoy high gross margins because their fixed costs are low. Historically, software and portal companies, for example, have enjoyed gross margins of 80% or more. However, online retailers selling products over the Internet have considerably lower gross margins, closer to those of traditional vendors. Gross margins are also affected by changes in shipping costs, in response to fluctuations in fuel prices.

When considering gross margins, it is important to know the components of cost of goods sold, particularly for purposes of peer analysis. Some Internet companies, such as Amazon.com, exclude fulfillment expenses from costs of goods sold. Although this practice does not affect a company’s bottom line, it does have a favorable impact on gross margins.

Operating expenses. The major operating expense line items—selling, general, and administrative (SG&A) expenses, and research and development (R&D) outlays—can yield important information regarding the efficiency and technological leadership of an Internet company.

For many Internet companies, SG&A represents the majority of total expenses. Since the industry is still in a relatively early stage, companies are trying to position themselves for future growth by generating traffic and building strong brands. The best way to accomplish these goals is through effective sales and marketing efforts. Increases in SG&A, either in absolute dollars or as a percentage of sales, should be examined closely to determine the effects of additional spending on traffic or revenues. For example, heavy spending on R&D, followed by product delays or the introduction of inferior services, could indicate poor management.

Stock options In 2006, dozens of companies, including Internet firms CNET and VeriSign Inc., were caught up in issues related to past stock option grants. These companies were investigated for and/or admitted to “backdating” options: changing the date of an option grant to benefit an issuee, such as a corporate manager, without making the proper disclosures. Backdating is illegal and can result in internal investigations, governmental


inquiries, financial restatements, tax liabilities, civil and criminal lawsuits, executive and director departures, and stock market delistings, among other things.

Companies must report their quarterly results according to generally accepted accounting principles (GAAP). Following a determination by government entities including the Securities and Exchange Commission (SEC), companies now have to treat stock-based compensation as an operating expense, a requirement that began in 2006. Previously, many companies and most Internet firms accounted for stock options as non-cash items that did not affect the income statement.

Nevertheless, many companies and equity analysts continue to emphasize non-GAAP financials. In fact, many analysts exclude stock option expenses from their published calculations of earnings—something to watch for when reviewing so-called “Street estimates.” We think that Street estimates for companies, including Akamai Technologies Inc., eBay, Expedia Inc., Facebook Inc., Google, IAC, and priceline.com Inc., exclude stock-based compensation expenses. However, S&P Capital IQ has long included stock option expenses in its calculations because we view such expenses as a real cost of doing business. We note that S&P Capital IQ consensus earnings data show normalized estimates excluding stock-based compensation for many Internet companies, but presents GAAP numbers as well.

Balance sheet analysis The balance sheet provides valuable clues about demand for a company’s products. Areas to watch include inventories and the net cash position.

Inventories. The inventory turnover ratio (cost of goods sold divided by average inventory) provides a measure of a company’s inventory management. A higher ratio indicates that inventory turns over rapidly, as product moves from manufacture to sale.

The number of days of inventory in stock (365 days divided by inventory turnover) is used to determine how long inventory is retained until it is sold. The lower the number of days sales outstanding (DSO), the faster products are getting to customers, which can signal a pick-up in demand or improved productivity. A higher DSO could reflect delayed purchases in anticipation of a new product upgrade release, or longer sales cycles, which might result from selling into larger and more bureaucratic organizations. If DSO gets too low, it might portend an inventory shortfall.

Absolute inventory levels should be monitored, given the Internet industry’s rapid product cycles and technological advancements that can render older inventory obsolete. If inventory levels are increasing faster than sales, this might indicate that existing products are not selling well. However, many high-tech companies build inventories in the early stages of a new product cycle.

Net cash position. The level of cash, cash equivalents, and marketable securities should be followed closely to assess the short-term liquidity of a company. Larger, more established companies with strong cash flows prefer to have cash on hand to repurchase shares or make acquisitions. A declining cash balance over time could signal competitive pricing pressures or company-specific operational problems.

Some Internet companies are not expected to generate profits for some time, and many are cash flow negative. For companies expected to post near-term losses, “cash burn” can be a major issue. Cash burn—an absolute decline in cash—occurs when a company is spending more on operating costs and capital expenditures than it can replenish with cash flow. A sequential decline in cash burn may point to improving prospects for the company’s ability to remain solvent and achieve profitability.

In considering a company’s cash position, the assessment of payment obligations—generally referred to on a balance sheet as long-term debt or convertible notes or securities—is increasingly important. These obligations need to be identified, aggregated, and subtracted from the value of liquid assets to calculate a company’s true cash position (referred to as net cash). Although a company might carry significant cash on its books, this apparent balance sheet strength might be attributable to prior debt and/or convertible financing not yet paid off. S&P Capital IQ advises investors to assess the dates when company obligations become due. This information is found in SEC filings, particularly 10-Ks.


Additionally, companies with significant overseas operations likely have substantial cash and equivalents in international markets. Repatriating these assets would trigger notable domestic tax obligations, and as a result, Internet multinationals like Google, eBay, and Yahoo have often targeted non-US acquisitions as a way to efficiently deploy this capital.

Amid a period of historically low interest rates, Internet companies have increasingly pursued debt offerings to provide additional financial flexibility. Some recent notable actions include Baidu issuing $1.5 million in bonds in November 2012 and another $1.0 million in bonds in July 2013, IAC issuing $500 million in debt in December 2012, and priceline.com selling $1.0 billion in convertible notes in May 2013.

EQUITY VALUATIONS

The price-to-earnings (P/E) ratio, when calculable and material, can be compared with the estimated long-term earnings growth rate for an individual company (the PEG ratio). A company’s shares may be undervalued if its P/E ratio is significantly below its long-term annual growth rate and if, after careful analysis, the investor or analyst concludes that the company’s fundamental position is healthy.

To forecast company growth rates, many analysts begin with the potential rate at which a certain market’s revenues can increase. For companies that may be more than a year away from profitability, growth rates can be measured in terms of revenues or even subscribers. Then, considerations are made regarding potential market share gains or losses.

After taking into account the high potential growth rates of many companies within the Internet industry, price-to-earnings multiples are often well above those of other publicly traded companies, even following the sharp correction from 2000 into 2003. One of the reasons for this discrepancy is investors’ keen interest in Internet-related stocks, perhaps due to their significant appreciation in the late 1990s and promise of future growth. In addition, some of these stocks have only limited floats (the amount of stock that is actively traded), so the available supply is significantly less than the actual demand. Such a disparity contributes to higher valuation. However, quantitative techniques still play an important role in understanding and properly valuing an Internet company.

A variety of methods can be used to value Internet stocks. Analysts often forecast future earnings, assign a multiple, and discount the projected price back to the present using a high discount rate. The same can be done with free cash flow, which is operating cash flow (net income plus amortization and depreciation) minus capital expenditures.

S&P Capital IQ often employs discounted cash flow (DCF) analysis in deriving the intrinsic values of Internet companies. Because definitions of revenues and operating expenses often vary significantly from company to company, cash flow statements can be more revealing than income statements. Using DCF methodologies also helps in avoiding pitfalls associated with relative analyses, where an overvalued stock may appear attractive because its price is less than another overvalued stock. However, we note that stock buybacks, which Internet companies have increasingly employed, detract from free cash flow.

Interestingly, some Internet companies have started to pay dividends, detracting from their cash balances. Companies that initiated dividends over the past couple of years include EarthLink Inc., Expedia Inc., and IAC. Blucora Inc. (which changed its name from InfoSpace Inc. in June 2012) and The9 Ltd. have paid material special dividends over the past few years. Nonetheless, the stocks of InfoSpace and The9, as well as RealNetworks, traded near or below the value of the cash and investments on their balance sheets in 2011 and 2012.

Nonetheless, we think peer analyses also have a place in company valuation assessments. S&P Capital IQ often considers metrics such as revenue per subscriber and revenue per employee. We think that comparing PEG ratios is one of the better ways to value Internet stocks. However, because some dot-coms do not have material earnings, price-to-sales (P/S) ratios, based on projected sales for the current year, offer a useful alternative method for evaluating Internet stocks.


GLOSSARY

App—Short for application or application software (most recently popularized by Apple Inc. and its iTunes App Store); generally refers to a small program designed to be downloaded to a mobile device (e.g., iPhone) or tablet (iPad).

ARPAnet—The Advanced Research Projects Agency (ARPA) network, which was the precursor to the Internet. Developed in the late 1960s and early 1970s by the US Department of Defense, ARPAnet was designed as a distributed network of computers that could survive a nuclear war.

Avatar—A graphical icon that represents a real person in a fictional online environment, such as an Internet game. Users can choose among avatars with different characteristics. More sophisticated three-dimensional versions can change appearance depending on their actions (walking, sitting, etc.).

B2B—Business-to-business (B2B) e-commerce companies enable customers to engage in wholesale transactions electronically. B2B websites allow for the streamlining of intercorporate communications and commerce.

B2C—Business-to-consumer (B2C) e-commerce companies sell or promote the sale of goods and services directly to individuals.

Bandwidth—The range of frequencies a device can handle without distortion. The amount of bandwidth a channel is capable of carrying is a measure of capacity and determines what kinds of communications can be carried on it.

Blog—Contraction of “web log,” which is generally a somewhat less formal way for a corporation or individual to communicate. Often, readers can comment on entries, which could result in a kind of community forum. Also used as a verb, to refer to the authoring of a blog. In recent years, the blog has evolved from a mostly personal method to communicate, to one adopted by companies and executives around the world.

Botnet—A number of Internet-connected computers that have been secretly set up by a remote “master” to forward harmful transmissions, such as spam or viruses, to other computers. “Botnet” refers to a robot network, sometimes called a “zombie army.” A computer that is part of a botnet is referred to as a “bot” or a “zombie.”

Broadband—A high-speed, large-capacity transmission channel capable of transmission speeds of 200 kilobits per second (Kbps) or more. Broadband channels are carried on coaxial or fiber-optic cables or other communications connections that have a wider bandwidth than conventional telephone lines, giving them the ability to carry video, voice, and data simultaneously.

Browser—A software program that retrieves and displays information from the web, allowing users to interact with the Internet.

Burn rate—How quickly a company uses its available cash reserves; employed in assessing a company’s financial health and viability.

Client—A personal computer (PC), workstation, personal digital assistant (PDA), wireless phone, or any other device that accesses data and programs from a server. Client computers are used to perform work, display images, and input data.

Cookie—Information about an Internet user’s computer, websites visited by the user, and/or information that is stored in a text file on the user’s hard drive. A server accesses this information when a person connects to a website that wants this information. For example, when a user first visits a website and enters a username and password, the browser saves this information to expedite future access.

Digital certificate—An electronic method of verifying the identity of a person or corporation; essentially, a digital signature. The certificate is designed to prevent fraud or impersonation in Internet-related transactions.

Digital subscriber line (DSL)—A method of providing connectivity at speeds of up to eight Mbps using the existing phone network.

Display ad—An advertisement on a web page that links to an advertiser’s website; the most common way to advertise on the World Wide Web. Banner ads are a kind of display advertising.

Domain name—A name that identifies one or more websites. The domain name standardandpoors.com, for example, represents multiple websites. Domain names are used in Uniform Resource Locators (URLs) to identify particular web pages. For example, in the URL https://www.capitaliq.com/home/contact-us, the domain name is capitaliq.com.


Dot-com—Shorthand term for an Internet company.

E-commerce—Business conducted over the Internet.

Encryption—The process of scrambling data using keys of a specified length. Encryption makes a file unreadable by anyone not in possession of the key needed to decipher it.

Extensible markup language (XML)—A specification for Internet documents. XML allows designers to create customized tags, enabling the definition, transmission, validation, and interpretation of data among both applications and organizations.

Firewall—A barrier or gateway that separates the Internet from a private network or local area network and restricts certain data from passing to or from external networks.

Home page—The first or front page on a website that serves as the starting point for navigation; it is where the presentation of the site’s information actually begins.

Host—The name often given to an Internet server.

Hot spot—A place where Wi-Fi Internet access is available. (See Wi-Fi.)

Hypertext markup language (HTML)—A simple system of codes (called tags) used to format documents for viewing by computers that are connected to the World Wide Web.

Internet—The global network of computer networks that grew out of ARPAnet.

Internet service provider (ISP)—An entity that provides access to the Internet.

Intranet—A private network within an organization that is only for internal or specified third-party use.

Linux—An operating system that has become a viable alternative to Microsoft Windows. Although Linus Torvalds is credited with Linux’s creation in 1991, the software was developed collaboratively over the Internet. Linux is considered a success in open source software development, which contributes to its reliability and flexibility.

Malware—Short for “malicious software,” this software is intended to secretly access a computer system or device without the owner/user’s knowledge or consent.

MPEG Layer 3 (MP3)—MP3 is a standard for audio compression and is the most common format used for transmitting music files over the Internet.

Net (network) neutrality—A phrase used to describe the notion that a network, such as the Internet, does not favor a certain online application or website over others. Certain Internet companies have argued that government entities should promulgate legislative and/or regulatory mandates for net neutrality.

Network effect—The concept that a network becomes more valuable as its number of constituents, such as users, increases. An example is eBay; its growing population of would-be buyers has attracted a larger number of sellers, which leads to even more prospective purchasers and additional vendors. This effect raises the value of the eBay network.

Peer-to-peer (P2P) network—System where each PC or client has equivalent capabilities and responsibilities, as opposed to client/server networks. These networks are often used for the sharing of files, most notably digital music.

Phishing—Sending an e-mail to a user and falsely claiming to be a legitimate enterprise in an attempt to con the user into providing private information. The e-mail directs the user to visit a website that requests an update to personal information (such as passwords and credit card, Social Security, or bank account numbers). However, the website is fraudulent, designed only to steal the user’s information.

Plug-in—A software module that adds a specific feature or functionality to a larger software program or platform.

Podcast—An automated transfer of a digital audio file directly to a user’s computer. A portable digital audio player, such as an iPod, is often used to listen to the file. Also a verb that refers to the act of creating a podcast.

Pop-up ad—An online advertisement that automatically appears on top of the browser window. In contrast to a pop-under ad (which appears behind the browser window), a pop-up is more obtrusive because it covers the content the user is trying to see.


Protocol—A common language among computers on a network.

Ransomware—Kind of malware that threatens a user in exchange for consideration seen as valuable, such as money or data.

Search engine—A software application embedded within a website that is designed to aid users in searching for and retrieving information on the web. A search engine maintains a database of abstracts from hundreds of millions of web pages.

Server—A computer that allows other computers to connect to it. Servers store information and allow client devices to retrieve information for users. (See Client.)

Social media—Also known as social networking, a category of digital offerings (such as Facebook and Twitter) that are notably social in nature, allowing users to create and share content. (See Web 2.0.)

Spam—Junk e-mail; also, any unsolicited e-mail.

Sponsored or keyword search—A practice whereby Internet advertisers bid to receive priority placement in a search engine’s results; also known as pay-for-performance search. Advertisers bid on keywords or phrases relevant to what they are selling, and are charged for each instance in which a user clicks on a result listing. Sponsored searches enable vendors to find and market to users interested in their offerings.

Spyware—Software that secretly gathers information through an Internet connection without the user’s knowledge, usually for advertising purposes; it is often included as a hidden component of free programs that can be easily downloaded online. Once installed, spyware monitors user activity and transmits often-sensitive information to third parties.

Trojan horse—A program in which a malicious or harmful code is contained inside programming or data that appears harmless. The code can get control of infected computers and conduct specific tasks, such as destroying files on a hard disk. The term comes from Greek mythology: the Trojan horse hid enemy soldiers who enabled the destruction of the city of Troy.

URL—“Uniform Resource Locator”; it is the address of a resource on the Internet. World Wide Web URLs begin with http://.

Virtual private network (VPN)—A network that uses shared public telecommunication infrastructure, such as the Internet, to provide remote offices or individual users with secure access to their organization’s network. A VPN uses security procedures and software to maintain privacy while using the shared network, and it can be more cost effective than a private network or leasing communications lines solely for the use of one organization.

Virus—A piece of a code or a program loaded onto a computer without one’s knowledge that can interrupt the functionality of a PC and/or network. Some viruses replicate themselves, causing memory overloads. Others bypass security systems and transmit themselves across networks.

VoIP (Voice over Internet Protocol)—A technology that uses the Internet instead of traditional telecommunications systems for voice conversations. Various communications and cable companies are rolling out VoIP service as an alternative to more expensive voice options.

Web 2.0—A second generation of online offerings that allow people to more easily collaborate and share information. According to Tim O’Reilly, who is largely credited with originating the concept, aspects of Web 2.0 include the Internet as a platform, harnessing collective intelligence, the importance and use of data, web services, simple programming models, flexible software, and appealing user experiences.

Website—The virtual location for an individual’s or organization’s presence on the World Wide Web.

Wi-Fi—Contraction of wireless fidelity. Generally refers to technology that enables a wireless connection between a computer or device and the Internet; also known as 802.11.

Wiki—A type of website that enables users to add, remove, or revise content. The most popular wiki is Wikipedia.org, which is a community-maintained online encyclopedia.

WiMAX—A protocol for connecting computers that is similar to Wi-Fi, but offers faster connections speeds and has better range. Short for “Worldwide interoperability for microwave access,” it is also referred to as IEEE 802.16.

World Wide Web—A segment of the Internet that combines graphics and text into interactive pages. Usually referred to simply as the web, it contains documents (or “pages”), most of which are connected via hypertext links.


INDUSTRY REFERENCES

PERIODICALS

Barron’s http://www.barrons.com Weekly; caters to a relatively sophisticated clientele interested in the financial markets and investing. Includes a “Technology Week” section.

Bloomberg Businessweek http://www.businessweek.com Weekly; general interest business news magazine. Includes a variety of technology-focused content, including “Information Technology” and “Technology & You” sections. Business Week was acquired by Bloomberg in late 2009.

Investor’s Business Daily http://www.investors.com Daily newspaper targeted at individual investors; its “Internet & Technology” section offers stories, interviews, and information on a variety of new economy topics.

The New York Times http://www.nytimes.com http://bits.blogs.nytimes.com Daily; general interest newspaper with a business section that includes articles on technology, as well as a section called “Circuits” every Thursday. The Bits blog focuses on “insights and discoveries about technology.”

The Wall Street Journal http://www.wsj.com Daily business and finance newspaper; contains a daily “Technology” section and weekly technology content. Publishes periodic special reports on the Internet industry.

Wired http://www.wired.com Monthly; covers the people, companies, and ideas that are changing the world technologically.

BOOKS

Delivering Happiness: A Path to Profits, Passion, and Purpose Tony Hsieh Business Plus, 2010 Tony Hsieh, CEO of Zappos, describes his experience as a dot-com entrepreneur and the way he took Zappos to new and unanticipated heights; he also offers some interesting anecdotes about, and perspectives on, success.

Empowered: Unleash Your Employees, Energize Your Customers, and Transform Your Business Josh Bernoff and Ted Schadler Harvard Business School Press, 2010 A follow-up to Groundswell, this book describes how organizations can marry the potential and power of social technologies with internal company champions to achieve business success.

The Facebook Effect: The Inside Story of the Company That Is Connecting the World David Kirkpatrick Simon & Schuster, 2010 Publishers Weekly wrote, “Written with the full cooperation of founder Mark Zuckerberg, the book follows the company from its genesis in a Harvard dorm room through its successes over Friendster and MySpace, the expansion of the user base, and Zuckerberg’s refusal to sell.”

Free: The Future of a Radical Price Chris Anderson Hyperion, 2009 The former editor-in-chief of Wired magazine offered some interesting and compelling thoughts about why free might make sense as a price point in the digital world in which we live, where many simply won’t pay for online content in traditional ways.

Googled: The End of the World As We Know It Ken Auletta Penguin, 2010 A well-known writer focused on the media business offers an extensive history of the company’s rise, profiling many of the people who made Google what it is today.

I’m Feeling Lucky: The Confessions of Google Employee Number 59 Douglas Edwards Houghton Mifflin Harcourt, 2011 The author, employee number 59 at the company, “offers the first inside view of Google, giving readers a chance to fully experience the bizarre mix of camaraderie and competition at this phenomenal company.”


In The Plex: How Google Thinks, Works, and Shapes Our Lives Steven Levy Simon & Schuster, 2011 An inside-out look at the world largest Internet company, which is “driven by its engineering mind-set and adoption of such Internet values as speed, openness, experimentation, and risk taking.”

Inside Apple Adam Lashinsky Business Plus, 2012 This long-time technology sector journalist offers a glimpse inside Apple following the loss of its former leader, Steve Jobs.

Newton’s Telecom Dictionary Harry Newton CMP Books, 2011 Best-selling reference on telecommunications, data communications, computing, and the Internet. Includes terms related to e-commerce, wireless, broadband, intranets, and IT. Written as a business book; de-emphasizes the complex nature of specific technologies.

The Oxford Handbook of Internet Studies William Dutton Oxford University Press, 2013 Designed to provide a resource for academics and students, with scholarly perspectives on how the Internet has been studied and how research should be pursued.

GOVERNMENT AGENCIES

Federal Communications Commission (FCC) http://www.fcc.gov Regulates interstate and international communications by radio, television, wire, satellite, and cable.

Federal Trade Commission (FTC) http://www.ftc.gov Ensures that the nation’s markets function competitively, and are vigorous, efficient, and free of undue restrictions; educates the public about the importance of personal information privacy.

US Department of Commerce http://www.commerce.gov http://www.ntia.doc.gov Promotes US competitiveness and manages resources to ensure sustainable economic opportunities; oversees national e-commerce policy; works to provide all Americans with access to the Internet and other crucial information technologies.

MARKET RESEARCH FIRMS

comScore Inc. http://www.comscore.com Provides a variety of data, information, and insights regarding a number of different aspects of the Internet economy, with a focus on e-commerce and audience measurement.

Digital Content Next http://digitalcontentnext.org/ Industry trade organization dedicated to representing online content providers to the advertising community, the media, government entities, and the public; disseminates relevant research online.

eMarketer http://www.emarketer.com Comprehensive, objective, and easy-to-use resource on the Internet; provides statistics, news, and other information on e-business, online marketing, and emerging technologies.

Forrester Research Inc. http://www.forrester.com Independent research firm that analyzes technology’s impact on businesses.

The Gartner Group Inc. http://www.gartner.com Researches and analyzes trends and developments in the information technology industry.

IDC http://www.idc.com Leading provider of information technology data, analysis, and consulting services.

Interactive Advertising Bureau (IAB) http://www.iab.net Association dedicated to helping online, interactive broadcasting, e-mail, wireless, and interactive television media companies increase their revenues. Provides the quarterly IAB Internet Advertising Revenue Report (based on research by PricewaterhouseCoopers), which is an industry standard for online ad revenue data and information.

The Pew Research Center http://www.people-press.org http://www.pewinternet.org Opinion research group that studies attitudes toward the press, politics, and public policy issues; launched the Internet & American Life Project, which issues reports based on its research, surveys, and analysis.


ONLINE RESOURCES

Bloomberg West http://www.bloomberg.com/tv/shows/bloomberg-west The content appears on Bloomberg TV as well as online, focusing on “innovation, technology, media and the future of business,” often featuring prominent personalities and companies that are shaping the digital economy.

Business Insider, Technology section http://www.businessinsider.com/sai Covers the intersection of the technology, media, and communications industries, and provides news and commentary about digital publishing, entertainment, news, music, social networking, and gaming.

CNBC, Technology section http://www.cnbc.com/id/19854910 Original and third-party articles and CNBC videos focused on technology, with considerable content related to the Internet, with areas dedicated to social media, gaming, and cybersecurity. CNET News.com http://www.news.com Comprehensive source for technology news, with an emphasis on the Internet.

GigaOM http://www.gigaom.com Leading destination site for “technology industry insiders, movers and shakers, and early adopter consumers.”

PandoDaily http://www.pandodaily.com Refers to itself as the “site of record for Silicon Valley.” PandoDaily was started by Sarah Lacy, a journalist, author, and speaker who has focused on Silicon Valley and technology since the 1990s. The site includes video interviews with Silicon Valley luminaries and leaders.

Re/code http://www.recode.net Re/code is an “independent tech news, reviews and analysis site, from the most informed and respected journalists in technology and media. Because everything in tech and media is constantly being rethought, refreshed, and renewed, Re/code’s aim is to reimagine tech journalism.” Led by long-time technology-focused journalist Kara Swisher and personal technology guru Walt Mossberg, Re/code emerging after All Things Digital announced in September 2013 that its relationship with The Wall Street Journal and its owner News Corp. was going to lapse by late 2013. While News Corp. retained the

All Things Digital Brand, Mossberg and Swisher introduced Re/Code in January 2014.

Seeking Alpha http://www.seekingalpha.com Includes news and commentary on the Internet industry, companies, and stocks, and offers free company conference call transcripts; formerly known as the Internet Stock Blog.

Tech Trader Daily http://blogs.barrons.com/techtraderdaily News, analysis, and insights on technology investing from the Silicon Valley bureau of Barron’s.

TechCrunch http://www.techcrunch.com Owned by AOL, this network of technology-focused sites offers a wide range of content and new media. It profiles and reviews new Internet products and companies. TechCrunch had been the subject of controversy, and its influential founder, Michael Arrington, left AOL in September 2011.

Webopedia http://www.webopedia.com Online dictionary and search engine for computer and Internet technology.


COMPARATIVE COMPANY ANALYSIS

Operating Revenues

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 1,577.9 1,373.9 1,158.5 1,023.6 859.8 790.9 A 161.3 25.6 14.8 14.8 979 852 718 635 533AOL † AOL INC DEC 2,319.9 2,191.7 A 2,202.1 2,416.7 D 3,257.4 4,165.8 NA NA (11.0) 5.8 ** ** ** ** NABCOR § BLUCORA INC DEC 574.0 A 406.9 A 228.8 214.3 A 207.6 156.7 160.1 13.6 29.6 41.1 359 254 143 134 130SCOR § COMSCORE INC DEC 286.9 255.2 234.0 A 178.9 A 127.7 117.4 A NA NA 19.6 12.4 ** ** ** ** NACNVR † CONVERSANT INC DEC 573.1 D 660.9 D 560.2 A 430.8 A 422.7 D 625.8 D 92.5 A 20.0 (1.7) (13.3) 619 714 605 466 457

TRAK § DEALERTRACK TECHNOLOGIES INC DEC 481.5 A 388.9 A 353.3 A 243.8 225.6 A 242.7 38.7 A 28.7 14.7 23.8 1,245 1,005 913 630 583DHX § DICE HOLDINGS INC DEC 213.5 A 195.4 A 179.1 129.0 A 110.0 155.0 NA NA 6.6 9.3 ** ** ** ** NADRIV § DIGITAL RIVER INC DEC 389.7 A,C 386.2 398.1 363.2 A 403.8 394.2 A 101.2 A 14.4 (0.2) 0.9 385 382 393 359 399EBAY [] EBAY INC DEC 16,047.0 14,072.0 11,651.7 A 9,156.3 8,727.4 C 8,541.3 2,165.1 22.2 13.4 14.0 741 650 538 423 403EQIX † EQUINIX INC DEC 2,152.8 1,895.7 D 1,606.8 1,220.3 A 882.5 704.7 117.9 33.7 25.0 13.6 1,825 1,607 1,362 1,035 748

FB [] FACEBOOK INC DEC 7,872.0 5,089.0 3,711.0 1,974.0 NA NA NA NA NA 54.7 ** ** ** ** NAGOOG [] GOOGLE INC DEC 59,825.0 50,175.0 A,C 37,905.0 29,321.0 23,650.6 A 21,795.6 A 1,465.9 A 44.9 22.4 19.2 4,081 3,423 2,586 2,000 1,613JCOM § J2 GLOBAL INC DEC 508.2 A 371.4 A 340.5 255.4 A 244.9 241.5 71.6 A 21.6 16.0 36.8 710 519 475 357 342LQDT § LIQUIDITY SERVICES INC SEP 505.9 475.3 A 327.4 A,C 286.8 A 236.3 263.9 NA NA 13.9 6.4 ** ** ** ** NALPSN § LIVEPERSON INC DEC 177.8 157.4 133.1 109.9 87.5 74.7 12.0 30.9 19.0 13.0 1,479 1,309 1,107 914 728

LOGM § LOGMEIN INC DEC 166.3 138.8 119.5 A 98.6 74.4 51.7 NA NA 26.3 19.8 ** ** ** ** NAMWW § MONSTER WORLDWIDE INC DEC 807.6 890.4 D 1,042.8 919.2 907.4 1,345.8 D 679.6 D 1.7 (9.7) (9.3) 119 131 153 135 134EGOV § NIC INC DEC 249.3 211.1 180.9 161.5 132.9 A 100.6 50.8 17.2 19.9 18.1 490 415 356 318 261PRFT § PERFICIENT INC DEC 373.3 A 327.1 A 262.4 A 215.0 A 188.1 231.5 30.2 28.6 10.0 14.1 1,237 1,083 869 712 623QNST § QUINSTREET INC JUN 305.1 370.5 A 403.0 A 334.8 A 260.5 A 192.0 A NA NA 9.7 (17.6) ** ** ** ** NA

RAX † RACKSPACE HOSTING INC DEC 1,534.8 1,309.2 1,025.1 A 780.6 A 629.0 531.9 NA NA 23.6 17.2 ** ** ** ** NASTMP § STAMPS.COM INC DEC 127.8 115.7 101.6 85.5 82.1 84.9 21.2 19.7 8.5 10.5 603 546 479 404 387VRSN [] VERISIGN INC DEC 965.1 873.6 772.0 680.6 D 1,030.6 D 961.7 D 1,054.8 (0.9) 0.1 10.5 91 83 73 65 98XOXO § XO GROUP INC DEC 133.8 A 129.1 124.3 111.9 106.4 103.9 36.7 13.8 5.2 3.6 365 352 339 305 290YHOO [] YAHOO INC DEC 4,680.4 4,986.6 4,984.2 6,324.7 6,460.3 7,208.5 1,625.1 A 11.2 (8.3) (6.1) 288 307 307 389 398

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC 74,452.0 61,093.0 A 48,077.0 A 34,204.0 24,509.0 A 19,166.0 5,263.7 30.3 31.2 21.9 1,414 1,161 913 650 466NILE § BLUE NILE INC DEC 450.0 400.0 348.0 332.9 302.1 295.3 128.9 13.3 8.8 12.5 349 310 270 258 234EXPE [] EXPEDIA INC DEC 4,771.3 4,030.3 3,449.0 D 3,348.1 2,955.4 C 2,937.0 2,339.8 7.4 10.2 18.4 204 172 147 143 126FTD § FTD COMPANIES INC DEC 627.3 613.5 587.2 NA NA 646.1 363.3 A 5.6 (0.6) 2.3 173 169 162 ** NANFLX [] NETFLIX INC DEC 4,374.6 3,609.3 3,204.6 2,162.6 1,670.3 1,371.2 272.2 32.0 26.1 21.2 1,607 1,326 1,177 794 614

NTRI § NUTRISYSTEM INC DEC 358.1 396.9 401.3 509.5 D 527.7 687.7 22.6 31.8 (12.2) (9.8) 1,586 1,758 1,778 2,257 2,338PETS § PETMED EXPRESS INC MAR 233.4 227.8 238.3 231.6 238.3 219.4 94.0 9.5 1.2 2.4 248 242 253 246 253PCLN [] PRICELINE GROUP INC DEC 6,793.3 5,261.0 4,355.6 3,084.9 A 2,338.2 1,884.8 863.7 22.9 29.2 29.1 787 609 504 357 271TRIP [] TRIPADVISOR INC DEC 944.7 763.0 637.1 484.6 NA NA NA NA NA 23.8 ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting changeD - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a f iscal year change.


Net Income

Million $ CAGR (%) Index Basis (2003 = 100)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2008 2003 10-Yr. 5-Yr. 1-Yr. 2013 2012 2011 2010 2009

INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 293.5 204.0 200.9 171.2 145.9 145.1 (29.3) NM 15.1 43.9 NM NM NM NM NMAOL † AOL INC DEC 92.4 1,048.4 13.1 (790.7) 248.8 (1,525.8) NA NA NM (91.2) ** ** ** ** NABCOR § BLUCORA INC DEC 24.4 22.5 31.5 9.3 7.4 (16.5) (6.3) NM NM 8.3 NM NM NM NM NMSCOR § COMSCORE INC DEC (2.3) (11.8) (15.8) (1.6) 4.0 25.2 NA NA NM NM ** ** ** ** NACNVR † CONVERSANT INC DEC 90.4 95.9 101.1 80.6 61.6 (218.5) 9.8 24.9 NM (5.7) 921 977 1,030 821 627

TRAK § DEALERTRACK TECHNOLOGIES INC DEC 5.9 20.5 65.1 (27.8) (4.3) 1.7 (3.3) NM 27.7 (71.2) NM NM NM NM NMDHX § DICE HOLDINGS INC DEC 16.2 38.1 34.1 18.9 13.5 14.8 NA NA 1.8 (57.3) ** ** ** ** NADRIV § DIGITAL RIVER INC DEC (18.5) (195.9) 17.2 15.7 49.8 63.6 17.1 NM NM NM (108) (1,143) 100 92 290EBAY [] EBAY INC DEC 2,856.0 2,609.0 3,229.4 1,801.0 2,389.1 1,779.5 447.2 20.4 9.9 9.5 639 583 722 403 534EQIX † EQUINIX INC DEC 94.7 131.6 94.0 36.9 69.4 131.5 (84.2) NM (6.4) (28.0) NM NM NM NM NM

FB [] FACEBOOK INC DEC 1,500.0 53.0 1,000.0 606.0 NA NA NA NA NA 2,730.2 ** ** ** ** NAGOOG [] GOOGLE INC DEC 12,214.0 10,788.0 9,737.0 8,505.0 6,520.4 4,226.9 105.6 NM 23.6 13.2 NM NM NM NM NMJCOM § J2 GLOBAL INC DEC 107.5 121.6 114.8 83.0 66.8 72.6 35.8 11.6 8.2 (11.6) 300 340 321 232 187LQDT § LIQUIDITY SERVICES INC SEP 41.1 48.3 20.7 12.0 5.7 11.6 NA NA 28.9 (14.9) ** ** ** ** NALPSN § LIVEPERSON INC DEC (3.5) 6.4 12.0 9.3 7.8 (23.8) (0.8) NM NM NM NM NM NM NM NM

LOGM § LOGMEIN INC DEC (7.7) 3.6 5.8 21.1 8.8 (5.4) NA NA NM NM ** ** ** ** NAMWW § MONSTER WORLDWIDE INC DEC 3.3 58.2 53.8 (32.4) 18.9 114.5 7.3 (7.6) (50.8) (94.3) 45 795 735 (442) 259EGOV § NIC INC DEC 32.0 26.3 22.9 18.4 13.9 11.9 6.3 17.6 21.9 21.6 506 416 363 290 220PRFT § PERFICIENT INC DEC 21.4 16.1 10.7 6.5 1.5 10.0 1.0 35.2 16.5 33.1 2,041 1,534 1,024 617 139QNST § QUINSTREET INC JUN (67.4) 13.0 27.2 20.6 17.3 12.9 NA NA NM NM ** ** ** ** NA

RAX † RACKSPACE HOSTING INC DEC 86.7 105.4 76.4 46.4 30.2 21.7 NA NA 31.9 (17.7) ** ** ** ** NASTMP § STAMPS.COM INC DEC 44.2 38.6 26.3 5.5 6.2 10.2 (9.3) NM 34.1 14.5 NM NM NM NM NMVRSN [] VERISIGN INC DEC 544.5 312.5 138.6 70.0 197.5 92.6 (259.9) NM 42.5 74.2 NM NM NM NM NMXOXO § XO GROUP INC DEC 5.8 8.7 6.0 3.7 (4.9) 4.1 1.1 18.5 7.0 (33.5) 546 821 569 344 (459)YHOO [] YAHOO INC DEC 1,366.3 3,945.5 1,048.8 1,231.7 598.0 424.3 237.9 19.1 26.3 (65.4) 574 1,659 441 518 251

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC 274.0 (39.0) 631.0 1,152.0 902.0 645.0 35.3 22.7 (15.7) NM 777 (111) 1,788 3,265 2,557NILE § BLUE NILE INC DEC 10.9 8.4 11.4 14.1 12.8 11.6 27.0 (8.7) (1.3) 29.6 40 31 42 52 47EXPE [] EXPEDIA INC DEC 232.9 302.7 324.0 421.5 299.5 (2,517.8) 111.4 7.7 NM (23.1) 209 272 291 378 269FTD § FTD COMPANIES INC DEC 12.5 21.2 15.7 NA NA 39.0 9.3 3.0 (20.4) (41.0) 135 228 169 ** NANFLX [] NETFLIX INC DEC 112.4 17.2 226.1 160.9 115.9 83.0 6.5 33.0 6.2 555.3 1,726 263 3,472 2,470 1,779

NTRI § NUTRISYSTEM INC DEC 7.4 (2.8) 12.3 33.9 29.0 46.4 0.8 24.7 (30.8) NM 908 (345) 1,510 4,172 3,576PETS § PETMED EXPRESS INC MAR 18.0 17.2 16.7 20.9 26.0 23.0 5.8 11.9 (4.8) 4.7 309 295 287 359 447PCLN [] PRICELINE GROUP INC DEC 1,892.7 1,419.6 1,056.4 527.5 489.5 193.5 11.9 NM 57.8 33.3 NM NM NM 4,427 4,108TRIP [] TRIPADVISOR INC DEC 205.4 194.1 177.7 138.8 NA NA NA NA NA 5.9 ** ** ** ** NA

Note: Data as originally reported. CAGR-Compound annual grow th rate. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. **Not calculated; data for base year or end year not available.


Return on Revenues (%) Return on Assets (%) Return on Equity (%)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 18.6 14.8 17.3 16.7 17.0 10.6 8.2 8.6 7.7 7.4 11.8 9.1 9.3 8.7 8.8AOL † AOL INC DEC 4.0 47.8 0.6 NM 7.6 3.2 37.3 0.5 NM 5.6 4.2 48.6 0.6 NM 7.3BCOR § BLUCORA INC DEC 4.3 5.5 13.8 4.3 3.6 3.1 4.6 8.4 2.7 2.4 5.2 5.8 9.6 3.2 2.7SCOR § COMSCORE INC DEC NM NM NM NM 3.1 NM NM NM NM 1.9 NM NM NM NM 2.8CNVR † CONVERSANT INC DEC 15.8 14.5 18.1 18.7 14.6 10.5 10.8 13.5 13.7 10.5 16.5 16.6 19.5 18.3 16.2

TRAK § DEALERTRACK TECHNOLOGIES INC DEC 1.2 5.3 18.4 NM NM 0.6 2.6 11.6 NM NM 1.0 3.8 14.4 NM NMDHX § DICE HOLDINGS INC DEC 7.6 19.5 19.0 14.7 12.3 4.2 11.2 10.6 6.5 4.9 9.1 19.1 17.6 11.6 9.9DRIV § DIGITAL RIVER INC DEC NM NM 4.3 4.3 12.3 NM NM 1.3 1.4 4.8 NM NM 2.6 2.3 7.7EBAY [] EBAY INC DEC 17.8 18.5 27.7 19.7 27.4 7.3 8.1 13.1 8.9 14.1 12.8 13.5 19.4 12.4 19.2EQIX † EQUINIX INC DEC 4.4 6.9 5.9 3.0 7.9 1.4 2.2 1.8 1.0 2.5 3.9 6.1 4.9 2.4 6.7

FB [] FACEBOOK INC DEC 19.1 1.0 26.9 30.7 NA 9.1 0.5 21.5 NA NA 11.0 0.7 34.3 NA NAGOOG [] GOOGLE INC DEC 20.4 21.5 25.7 29.0 27.6 11.9 13.0 14.9 17.3 18.0 15.4 16.6 18.7 20.7 20.3JCOM § J2 GLOBAL INC DEC 21.2 32.7 33.7 32.5 27.3 10.0 14.8 19.4 17.5 18.2 16.5 21.2 23.3 21.6 22.8LQDT § LIQUIDITY SERVICES INC SEP 8.1 10.2 6.3 4.2 2.4 10.0 15.4 10.5 7.9 4.1 14.6 23.5 15.1 11.1 5.7LPSN § LIVEPERSON INC DEC NM 4.0 9.0 8.4 8.9 NM 3.4 8.1 7.9 8.3 NM 4.1 9.9 10.0 10.7

LOGM § LOGMEIN INC DEC NM 2.6 4.8 21.4 11.8 NM 1.4 2.8 12.8 9.8 NM 2.1 4.0 18.4 26.7MWW § MONSTER WORLDWIDE INC DEC 0.4 6.5 5.2 NM 2.1 0.2 3.1 2.7 NM 1.0 0.4 5.7 4.7 NM 1.7EGOV § NIC INC DEC 12.9 12.5 12.7 11.4 10.5 19.7 18.2 17.9 15.6 11.5 37.5 36.6 38.8 30.6 20.8PRFT § PERFICIENT INC DEC 5.7 4.9 4.1 3.0 0.8 7.2 6.6 5.0 3.3 0.8 8.7 7.4 5.7 3.8 0.9QNST § QUINSTREET INC JUN NM 3.5 6.8 6.1 6.6 NM 2.5 5.7 6.4 8.8 NM 3.7 8.4 11.3 28.0

RAX † RACKSPACE HOSTING INC DEC 5.7 8.1 7.5 5.9 4.8 6.2 9.1 8.5 6.5 4.5 9.1 14.6 14.7 11.8 9.8STMP § STAMPS.COM INC DEC 34.5 33.3 25.9 6.5 7.5 27.8 32.3 31.8 7.5 6.8 31.0 37.3 38.0 9.2 8.0VRSN [] VERISIGN INC DEC 56.4 35.8 17.9 10.3 19.2 23.1 15.9 6.4 2.9 7.8 NA NA 47.1 11.4 65.8XOXO § XO GROUP INC DEC 4.3 6.7 4.9 3.3 NM 3.0 4.7 2.9 1.6 NM 3.9 5.9 3.3 1.8 NMYHOO [] YAHOO INC DEC 29.2 79.1 21.0 19.5 9.3 8.1 24.7 7.1 8.2 4.2 9.9 29.1 8.4 9.8 5.0

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC 0.4 NM 1.3 3.4 3.7 0.8 NM 2.9 7.1 8.2 3.1 NM 8.6 19.0 22.8NILE § BLUE NILE INC DEC 2.4 2.1 3.3 4.2 4.2 6.7 5.8 7.7 10.0 11.6 39.8 34.2 27.0 30.6 40.9EXPE [] EXPEDIA INC DEC 4.9 7.5 9.4 12.6 10.1 3.1 4.5 4.9 6.7 5.1 10.5 13.5 13.3 15.7 12.0FTD § FTD COMPANIES INC DEC 2.0 3.5 2.7 NA NA 1.9 3.1 NA NA NA 4.4 7.9 NA NA NANFLX [] NETFLIX INC DEC 2.6 0.5 7.1 7.4 6.9 2.4 0.5 11.2 19.4 17.9 10.8 2.5 48.5 65.7 42.4

NTRI § NUTRISYSTEM INC DEC 2.1 NM 3.1 6.6 5.5 7.3 NM 8.2 21.1 17.6 13.1 NM 16.4 33.2 23.7PETS § PETMED EXPRESS INC MAR 7.7 7.5 7.0 9.0 10.9 23.7 20.9 16.9 19.8 27.9 26.8 23.6 18.7 21.5 30.3PCLN [] PRICELINE GROUP INC DEC 27.9 27.0 24.3 17.1 20.9 22.2 26.9 30.7 22.3 30.8 35.0 43.9 48.2 33.7 47.7TRIP [] TRIPADVISOR INC DEC 21.7 25.4 27.9 28.6 NA 14.8 18.2 22.8 NA NA 25.8 38.0 42.7 NA NA

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year.


Debt as a % ofCurrent Ratio Debt / Capital Ratio (%) Net Working Capital


INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 3.9 3.6 7.6 5.9 2.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0AOL † AOL INC DEC 1.4 1.7 1.6 2.2 0.9 2.4 2.5 3.0 2.2 1.3 26.1 14.9 22.5 7.5 NMBCOR § BLUCORA INC DEC 1.5 3.1 8.2 5.8 6.4 16.5 13.5 0.0 0.0 0.1 81.3 48.0 0.0 0.0 0.1SCOR § COMSCORE INC DEC 1.3 1.2 1.1 1.1 2.3 6.3 3.2 3.4 4.6 0.5 30.4 23.5 95.6 135.6 0.9CNVR † CONVERSANT INC DEC 2.0 2.2 2.0 2.9 2.6 21.7 18.3 21.8 0.0 0.0 97.8 78.5 116.4 0.0 0.0

TRAK § DEALERTRACK TECHNOLOGIES INC DEC 2.4 2.9 2.3 6.9 6.6 20.2 20.0 0.0 0.0 0.1 125.4 94.3 0.1 0.1 0.1DHX § DICE HOLDINGS INC DEC 0.7 0.8 1.0 0.9 1.4 39.1 18.3 4.6 15.8 23.6 NM NM NM NM 276.4DRIV § DIGITAL RIVER INC DEC 2.6 2.8 2.7 2.9 1.8 42.9 41.2 35.9 34.1 1.3 68.9 59.8 68.4 65.5 4.1EBAY [] EBAY INC DEC 1.8 2.0 1.9 2.4 2.3 14.8 16.4 7.8 8.9 0.0 38.7 39.2 25.7 22.8 0.0EQIX † EQUINIX INC DEC 1.6 1.2 1.7 2.4 2.3 60.6 54.3 56.3 50.5 54.0 NM NM 539.4 439.3 344.2

FB [] FACEBOOK INC DEC 11.9 10.7 5.1 5.8 NA 1.5 14.5 7.5 14.5 NA 2.0 19.5 10.7 19.8 NAGOOG [] GOOGLE INC DEC 4.6 4.2 5.9 4.2 10.6 2.4 3.9 4.9 0.0 0.0 3.9 6.5 6.8 0.0 0.0JCOM § J2 GLOBAL INC DEC 3.4 4.8 3.7 2.0 8.9 24.9 27.8 0.0 0.0 0.0 89.6 82.1 0.0 0.0 0.0LQDT § LIQUIDITY SERVICES INC SEP 1.9 1.5 2.9 2.2 2.9 0.0 11.3 0.0 0.0 0.1 0.0 60.2 0.0 0.0 0.1LPSN § LIVEPERSON INC DEC 3.0 3.8 4.8 3.6 2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

LOGM § LOGMEIN INC DEC 1.9 2.6 2.9 3.2 3.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0MWW § MONSTER WORLDWIDE INC DEC 1.0 1.0 0.9 0.9 1.3 13.2 14.2 0.0 3.4 3.7 NM NM NM NM 32.5EGOV § NIC INC DEC 2.0 2.0 1.7 1.8 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0PRFT § PERFICIENT INC DEC 2.5 2.8 3.2 2.7 4.3 6.8 1.2 0.0 0.0 0.0 33.2 5.4 0.0 0.0 0.0QNST § QUINSTREET INC JUN 2.7 2.5 3.3 3.4 1.3 21.7 21.4 21.3 21.2 27.6 69.6 89.3 59.1 50.3 270.0

RAX † RACKSPACE HOSTING INC DEC 1.7 1.7 1.1 1.0 1.2 2.2 6.4 9.8 12.9 23.4 13.9 36.7 281.9 NM 346.8STMP § STAMPS.COM INC DEC 6.3 3.1 5.1 2.2 4.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0VRSN [] VERISIGN INC DEC 0.9 2.4 2.2 3.3 1.9 229.7 64.9 74.4 37.1 45.3 NM 73.6 87.5 38.1 69.8XOXO § XO GROUP INC DEC 4.2 3.8 4.3 7.5 7.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0YHOO [] YAHOO INC DEC 3.7 4.4 2.9 2.7 2.7 7.7 0.0 0.0 0.0 0.0 30.1 NM NM NM NM

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC 1.1 1.1 1.2 1.3 1.3 33.4 31.9 15.4 8.5 4.6 315.0 167.0 54.5 19.0 10.4NILE § BLUE NILE INC DEC 1.2 1.0 1.2 1.3 1.3 1.4 4.2 1.9 1.5 1.8 2.5 NM 3.4 2.1 2.7EXPE [] EXPEDIA INC DEC 0.7 0.9 0.9 0.9 0.7 29.8 32.4 33.5 36.0 23.5 NM NM NM NM NMFTD § FTD COMPANIES INC DEC 1.1 1.0 1.1 NA NA 38.8 40.7 43.6 NA NA NM NM NM NA NANFLX [] NETFLIX INC DEC 1.4 1.3 1.5 1.6 1.8 28.4 35.6 40.2 44.7 54.3 58.5 72.9 71.3 92.8 128.1

NTRI § NUTRISYSTEM INC DEC 1.5 1.9 2.9 2.9 3.6 0.0 0.0 28.6 28.6 0.0 0.0 0.0 39.3 40.5 0.0PETS § PETMED EXPRESS INC MAR 9.2 7.8 9.3 10.0 12.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0PCLN [] PRICELINE GROUP INC DEC 5.4 3.9 2.8 4.2 2.5 19.4 17.5 0.0 19.9 0.0 28.6 20.9 0.0 32.0 0.0TRIP [] TRIPADVISOR INC DEC 2.6 3.2 2.1 1.2 NA 25.5 31.5 55.1 0.0 NA 77.4 77.8 256.9 0.0 NA



Price / Earnings Ratio (High-Low) Dividend Payout Ratio (%) Dividend Yield (High-Low, %)

Ticker Company Yr. End 2013 2012 2011 2010 2009 2013 2012 2011 2010 2009

INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 32 - 20 36 - 23 48 - 17 56 - 25 31 - 14 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0AOL † AOL INC DEC 39 - 25 4 - 1 NM- 77 NM- NM 11 - 9 0 45 0 NM 0 0.0 - 0.0 34.7 - 11.7 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0BCOR § BLUCORA INC DEC 51 - 24 33 - 19 14 - 9 47 - 25 43 - 24 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0SCOR § COMSCORE INC DEC NM- NM NM- NM NM- NM NM- NM NM- 57 NM NM NM NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0CNVR † CONVERSANT INC DEC 26 - 15 18 - 11 16 - 11 17 - 9 20 - 8 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

TRAK § DEALERTRACK TECHNOLOGIES INC DEC NM- NM 67 - 49 18 - 9 NM- NM NM- NM 0 0 0 NM NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DHX § DICE HOLDINGS INC DEC 36 - 24 18 - 11 36 - 14 49 - 18 32 - 10 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0DRIV § DIGITAL RIVER INC DEC NM- NM NM- NM 85 - 29 93 - 55 31 - 14 NM NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EBAY [] EBAY INC DEC 26 - 22 26 - 15 14 - 11 23 - 14 14 - 5 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EQIX † EQUINIX INC DEC NM- 80 77 - 36 61 - 46 NM- 83 61 - 23 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

FB [] FACEBOOK INC DEC 94 - 37 NM- NM NA - NA NA - NA NA - NA 0 0 NA NA NA 0.0 - 0.0 0.0 - 0.0 NA - NA NA - NA NA - NAGOOG [] GOOGLE INC DEC 31 - 19 23 - 17 21 - 16 24 - 16 30 - 14 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0JCOM § J2 GLOBAL INC DEC 24 - 13 13 - 9 13 - 10 17 - 10 17 - 11 42 33 16 0 0 3.2 - 1.7 3.7 - 2.6 1.6 - 1.2 0.0 - 0.0 0.0 - 0.0LQDT § LIQUIDITY SERVICES INC SEP 34 - 16 42 - 20 53 - 17 39 - 23 56 - 22 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0LPSN § LIVEPERSON INC DEC NM- NM NM- NM 65 - 40 69 - 32 45 - 10 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

LOGM § LOGMEIN INC DEC NM- NM NM- NM NM- NM 52 - 18 57 - 37 NM 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0MWW § MONSTER WORLDWIDE INC DEC NM- NM 20 - 10 59 - 14 NM- NM NM- 37 0 0 0 NM 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EGOV § NIC INC DEC 53 - 32 42 - 25 41 - 27 35 - 21 43 - 19 71 62 71 196 136 2.3 - 1.3 2.5 - 1.5 2.7 - 1.7 9.3 - 5.6 7.1 - 3.2PRFT § PERFICIENT INC DEC 34 - 14 25 - 18 34 - 16 55 - 34 NM- 62 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0QNST § QUINSTREET INC JUN NM- NM 42 - 20 42 - 14 46 - 21 NA - NA NM 0 0 0 NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NA

RAX † RACKSPACE HOSTING INC DEC NM- 52 96 - 52 79 - 50 88 - 41 94 - 16 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0STMP § STAMPS.COM INC DEC 18 - 8 14 - 8 19 - 6 43 - 23 27 - 20 0 0 0 526 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 22.7 - 12.2 0.0 - 0.0VRSN [] VERISIGN INC DEC 16 - 10 25 - 16 45 - 32 95 - 54 24 - 16 0 0 327 769 0 0.0 - 0.0 0.0 - 0.0 10.2 - 7.3 14.1 - 8.1 0.0 - 0.0XOXO § XO GROUP INC DEC 66 - 37 29 - 21 58 - 32 95 - 63 NM- NM 0 0 0 0 NM 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0YHOO [] YAHOO INC DEC 32 - 15 6 - 4 23 - 14 21 - 14 43 - 26 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC NM- NM NM- NM NM- NM 72 - 41 70 - 23 0 NM 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0NILE § BLUE NILE INC DEC 56 - 33 70 - 36 81 - 38 66 - 42 76 - 21 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0EXPE [] EXPEDIA INC DEC 40 - 26 28 - 12 28 - 11 20 - 12 26 - 6 32 42 23 19 0 1.2 - 0.8 3.4 - 1.5 2.1 - 0.9 1.5 - 0.9 0.0 - 0.0FTD § FTD COMPANIES INC DEC 55 - 44 NA - NA NA - NA NA - NA NA - NA NA NA NA NA NA NA - NA NA - NA NA - NA NA - NA NA - NANFLX [] NETFLIX INC DEC NM- 47 NM- NM 71 - 15 68 - 16 30 - 14 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0

NTRI § NUTRISYSTEM INC DEC 79 - 28 NM- NM 51 - 24 28 - 13 36 - 11 269 NM 159 61 74 9.7 - 3.4 9.7 - 4.5 6.7 - 3.1 4.6 - 2.2 6.8 - 2.1PETS § PETMED EXPRESS INC MAR 20 - 12 16 - 11 22 - 11 26 - 16 18 - 11 73 186 65 51 26 6.0 - 3.7 17.5 - 11.4 6.2 - 2.9 3.2 - 1.9 2.3 - 1.5PCLN [] PRICELINE GROUP INC DEC 32 - 17 27 - 16 26 - 19 39 - 16 20 - 6 0 0 0 0 0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0TRIP [] TRIPADVISOR INC DEC 63 - 29 34 - 18 23 - 18 NA - NA NA - NA 0 0 0 NA NA 0.0 - 0.0 0.0 - 0.0 0.0 - 0.0 NA - NA NA - NA


20092013 2012 2011 2010


Earnings per Share ($) Tangible Book Value per Share ($) Share Price (High-Low, $)


INTERNET SOFTWARE & SERVICES‡AKAM [] AKAMAI TECHNOLOGIES INC DEC 1.65 1.15 1.09 0.97 0.85 10.05 8.61 9.34 8.91 7.13 53.61 - 32.63 41.88 - 25.90 52.72 - 18.25 54.65 - 24.50 26.27 - 12.29AOL † AOL INC DEC 1.19 11.51 0.13 (7.42) 2.35 8.80 12.02 10.32 12.89 6.16 46.98 - 29.16 43.93 - 14.84 24.91 - 10.06 29.45 - 19.61 27.00 - 22.01BCOR § BLUCORA INC DEC 0.59 0.56 0.83 0.26 0.21 (0.31) 1.28 7.82 7.01 6.63 30.12 - 14.25 18.63 - 10.67 11.95 - 7.83 12.16 - 6.62 9.00 - 5.07SCOR § COMSCORE INC DEC (0.07) (0.35) (0.49) (0.05) 0.13 1.78 1.46 1.03 0.93 3.20 29.86 - 13.84 23.93 - 11.30 31.28 - 12.50 24.47 - 12.64 19.58 - 7.47CNVR † CONVERSANT INC DEC 1.25 1.24 1.26 0.99 0.71 1.01 0.99 0.15 3.16 2.51 32.25 - 18.62 21.86 - 13.80 19.73 - 13.35 17.23 - 8.60 13.94 - 5.47

TRAK § DEALERTRACK TECHNOLOGIES INC DEC 0.14 0.48 1.58 (0.69) (0.11) 1.95 3.19 3.83 5.40 5.53 50.30 - 26.28 31.98 - 23.31 28.46 - 14.01 21.27 - 13.33 21.80 - 9.27DHX § DICE HOLDINGS INC DEC 0.29 0.62 0.52 0.30 0.22 (2.70) (1.27) (0.36) (1.00) (0.68) 10.43 - 6.83 10.99 - 6.95 18.75 - 7.02 14.82 - 5.55 7.13 - 2.10DRIV § DIGITAL RIVER INC DEC (0.58) (5.90) 0.47 0.42 1.35 6.78 9.09 9.35 9.27 10.06 20.29 - 12.80 19.10 - 12.87 39.85 - 13.53 39.10 - 23.22 41.20 - 19.07EBAY [] EBAY INC DEC 2.20 2.02 2.50 1.38 1.85 10.39 8.66 6.34 6.60 5.30 58.04 - 48.06 53.15 - 29.55 35.35 - 26.86 31.64 - 19.06 25.80 - 9.91EQIX † EQUINIX INC DEC 1.92 2.74 1.76 0.84 1.80 24.86 22.37 20.08 20.69 19.09 231.56 - 152.82 212.00 - 99.00 107.00 - 80.85 110.57 - 69.42 109.21 - 41.36

FB [] FACEBOOK INC DEC 0.62 0.02 0.47 0.28 NA 5.40 4.37 3.10 1.24 NA 58.58 - 22.67 45.00 - 17.55 NA - NA NA - NA NA - NAGOOG [] GOOGLE INC DEC 18.35 16.49 15.09 13.35 10.31 103.85 81.38 75.75 60.60 47.72 560.50 - 347.76 387.19 - 278.26 323.38 - 236.51 315.42 - 216.82 312.99 - 141.38JCOM § J2 GLOBAL INC DEC 2.31 2.63 2.46 1.86 1.52 0.55 0.48 3.80 1.11 4.88 56.24 - 30.49 33.37 - 23.55 32.67 - 25.15 30.96 - 18.79 25.19 - 16.22LQDT § LIQUIDITY SERVICES INC SEP 1.30 1.57 0.75 0.44 0.21 2.36 0.96 4.06 2.58 2.40 44.40 - 20.37 66.57 - 31.00 39.76 - 12.58 17.32 - 10.00 11.80 - 4.55LPSN § LIVEPERSON INC DEC (0.06) 0.11 0.23 0.18 0.16 2.08 2.18 2.08 1.52 1.10 15.19 - 8.03 19.60 - 11.37 14.95 - 9.18 12.43 - 5.71 7.24 - 1.60

LOGM § LOGMEIN INC DEC (0.32) 0.14 0.24 0.91 0.41 5.47 6.42 5.92 5.41 4.33 34.56 - 16.12 42.95 - 18.74 49.50 - 26.74 47.54 - 16.71 23.50 - 15.15MWW § MONSTER WORLDWIDE INC DEC 0.03 0.52 0.44 (0.27) 0.16 (1.41) (0.36) (0.17) (0.50) 1.37 7.30 - 4.02 10.40 - 5.01 25.90 - 6.34 25.01 - 10.01 19.28 - 5.95EGOV § NIC INC DEC 0.49 0.40 0.35 0.28 0.22 1.39 1.21 1.00 0.81 1.02 25.99 - 15.51 16.83 - 9.95 14.48 - 9.39 9.81 - 5.90 9.44 - 4.20PRFT § PERFICIENT INC DEC 0.71 0.54 0.39 0.24 0.05 1.29 1.82 1.98 1.95 2.09 24.11 - 10.00 13.54 - 9.78 13.16 - 6.41 13.13 - 8.16 9.50 - 3.10QNST § QUINSTREET INC JUN (1.57) 0.28 0.59 0.46 0.38 1.82 0.53 1.64 1.87 (5.07) 9.71 - 5.41 11.90 - 5.66 24.91 - 8.43 21.38 - 9.79 NA - NA

RAX † RACKSPACE HOSTING INC DEC 0.63 0.78 0.59 0.37 0.25 6.73 5.45 3.89 2.93 2.56 81.36 - 32.62 74.78 - 40.57 46.49 - 29.52 32.69 - 15.15 23.51 - 4.00STMP § STAMPS.COM INC DEC 2.81 2.40 1.78 0.38 0.38 10.55 7.29 5.76 2.99 4.79 49.40 - 22.35 33.29 - 18.62 33.73 - 10.95 16.45 - 8.81 10.43 - 7.65VRSN [] VERISIGN INC DEC 3.77 1.99 0.84 0.39 1.03 (3.56) (0.40) (0.89) 3.60 1.29 59.89 - 37.55 50.15 - 32.81 37.73 - 27.00 37.18 - 21.21 24.99 - 16.89XOXO § XO GROUP INC DEC 0.24 0.35 0.21 0.11 (0.15) 4.22 3.91 3.77 4.79 4.57 15.78 - 8.81 10.04 - 7.22 12.18 - 6.67 10.49 - 6.90 11.99 - 5.51YHOO [] YAHOO INC DEC 1.30 3.31 0.82 0.91 0.42 7.86 9.49 7.05 6.59 6.04 41.05 - 18.89 19.97 - 14.35 18.84 - 11.09 19.12 - 12.94 18.02 - 10.81

INTERNET RETAIL‡AMZN [] AMAZON.COM INC DEC 0.60 (0.09) 1.39 2.58 2.08 14.04 10.83 11.33 10.98 7.78 405.63 - 245.75 264.11 - 172.00 246.71 - 160.59 185.65 - 105.80 145.91 - 47.63NILE § BLUE NILE INC DEC 0.87 0.64 0.80 0.98 0.88 3.13 1.11 2.53 3.36 2.93 49.13 - 28.90 44.99 - 22.94 64.45 - 30.32 64.38 - 40.70 67.16 - 18.34EXPE [] EXPEDIA INC DEC 1.73 2.26 2.39 2.98 2.08 (20.27) (11.50) (10.64) (12.90) (12.05) 69.76 - 45.69 62.80 - 28.02 65.78 - 27.28 59.70 - 36.60 55.02 - 12.62FTD § FTD COMPANIES INC DEC 0.67 1.17 0.87 NA NA (11.82) NA NA NA NA 36.99 - 29.42 NA - NA NA - NA NA - NA NA - NANFLX [] NETFLIX INC DEC 1.93 0.31 4.28 3.06 2.05 22.37 13.40 11.60 5.47 3.70 389.16 - 90.69 133.43 - 52.81 304.79 - 62.37 209.24 - 48.52 61.65 - 28.78

NTRI § NUTRISYSTEM INC DEC 0.26 (0.10) 0.44 1.14 0.94 1.82 2.10 2.66 2.67 4.16 20.54 - 7.18 15.55 - 7.21 22.64 - 10.45 31.90 - 15.26 33.54 - 10.28PETS § PETMED EXPRESS INC MAR 0.90 0.86 0.81 0.93 1.15 3.43 3.14 3.95 4.31 4.18 17.75 - 11.01 14.03 - 9.15 18.04 - 8.51 24.63 - 14.68 20.28 - 13.14PCLN [] PRICELINE GROUP INC DEC 37.17 28.48 21.27 11.00 11.54 79.25 63.49 37.54 21.78 17.53 1,198.75 - 627.67 774.96 - 469.28 561.88 - 402.25 428.10 - 173.32 231.49 - 64.95TRIP [] TRIPADVISOR INC DEC 1.44 1.39 1.33 1.04 NA 2.18 1.52 (1.63) NA NA 90.43 - 42.04 47.81 - 24.57 30.62 - 23.99 NA - NA NA - NA

Note: Data as originally reported. ‡S&P 1500 index group. []Company included in the S&P 500. †Company included in the S&P MidCap 400. §Company included in the S&P SmallCap 600. #Of the follow ing calendar year. J-This amount includes intangibles that cannot be identif ied.

The analysis and opinion set forth in this publication are provided by S&P Capital IQ Equity Research and are prepared separately from any other analytic activity of Standard & Poor’s.

In this regard, S&P Capital IQ Equity Research has no access to nonpublic information received by other units of Standard & Poor’s.

The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.


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