MORGAN STANLEY
`
`U.S.
`Investment
`Research
`
`December 1996
`
`Technology:
`Internet/New Media
`
`Mary Meeker (212) 761-8042
` mmeeker@ms.com
`
`• • One of the big unknowns concerning the Internet
`is Internet-based advertising. Will it work? How
`big could it be? How much money will companies
`spend to deliver advertising messages to potential
`customers? Is it much ado about nothing? Or is
`the Internet spawning the next mass medium? And
`what’s the likelihood of an Internet bandwidth
`meltdown, anyway?
`• • In our opinion, there are currently three good
`public-market proxies for the growth trends in
`Internet-related advertising: CNET, Yahoo! (which
`we don’t cover), and America Online.
`• • In this report we describe the trends, the
`terminology, and the outlook for Internet-based
`advertising. Based on our review of the
`development of new media in the past, we conclude
`that, in time, the opportunity for advertising and
`direct marketing on the Web will be significant.
`Even so, there will be fits and starts along the way.
`• • See our report on CNET for more details on the
`financial operations of a leading advertising-based
`Internet company.
`
`The Internet Advertising Report
`
`The Good News:
`Most Charts in This Report Look Like This One
`
`Time
`
`Revenue
`
`Contributing Analysts:
`
`Doug Arthur, Publishing (212) 761-4441
` arthurd@ms.com
`Chris DePuy, Internet Infrastructure (212) 761-6562
` depuyc@ms.com
`Michael Russell, Advertising (212) 761-6352
` russellm@ms.com
`
`This report will be downloadable from Morgan Stanley’s
`Web site (www.ms.com) in early January 1997.
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 1 of 143
`
`Google Inc.
`GOOG 1010
`IPR of U.S. Patent No. 6,286,045
`
`

`

`MORGAN STANLEY
`
`The Internet Advertising Report — Table of Contents
`Overview
`Background Thoughts....................................................................................................................... i
`Chapter Summaries...................................................................................................................... viii
`Public Internet Companies ........................................................................................................... xiii
`u Chapter 1: Assessing the Potential of the Internet as an Advertising Medium
`A Quick Backgrounder on Ad-Supported Media ............................................................................. 1-1
`
`Advertising Rules ........................................................................................................................... 1-2
`
`History Says the ‘Next’ Medium Always Must Offer Advantages Over the ‘Last’ Medium.............. 1-2
`
`Common Themes in the Creation of New Media............................................................................. 1-3
`
`High and to the Right: Growth in Advertising Revenue in Media.................................................... 1-4
`
`Each Medium has Pros and Cons for Advertisers............................................................................ 1-8
`u Chapter 2: Internet Advertising — Where the Money Is Today, Where It Might Be Tomorrow
`Advertising — The Big Spenders Spend the Big Bucks .................................................................. 2-1
`
`Internet Advertising Spending — Oh, We Would Love to Extrapolate the Current Trends! ............ 2-1
`
`Web Ad Growth Forecasting — Fun with Numbers ........................................................................ 2-3
`
`The State of Web Advertising ......................................................................................................... 2-5
`
`A Summary of How the Ad-Math is Done on the Web.................................................................. 2-10
`
`And Now a Look at Some of the Hot Areas by Channel/Category... .............................................. 2-11
`u Chapter 3: Where Are Advertising Dollars Spent in Traditional Media?
`What’s the Value of an Eyeball or an Ear?
`
`Traditional Advertising Market Is Huge.......................................................................................... 3-2
`
`Media Company Revenue Largely Generated by Ads...................................................................... 3-3
`
`What’s the Value of an Eyeball and an Ear, or an Advertising Impression? .................................... 3-3
`
`Similarities Between Cable TV and the Internet.............................................................................. 3-9
`
`Is the Internet Just Direct-Mail/Response Advertising? ................................................................. 3-13
`
`And There are Always the Home Shopping Channels ................................................................... 3-14
`
`Will Internet Advertising Growth Affect Other Media?................................................................. 3-14
`u Chapter 4: An Update on Internet Usage Trends/Forecasts
`A Perspective on the Evolution of the Internet ................................................................................ 4-1
`
`Internet Market Size—Big and Bigger............................................................................................ 4-1
`
`Web Usage — Noontime, During the Week.................................................................................... 4-4
`
`Web Demographics Are Compelling............................................................................................... 4-4
`u Chapter 5: The Latest and Greatest from Some of the Hottest Web Sites
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 2 of 143
`
`

`

`MORGAN STANLEY
`
`u Chapter 6: Buzzword Mania — The Nuts and Bolts of Internet Advertising
`Just What You’ve Been Waiting For — A Tutorial on Web Advertising Methods........................... 6-1
`
`Factors That Skew Page Views ....................................................................................................... 6-4
`
`Advertising Networks are Emerging for the Web .......................................................................... 6-10
`Other Revenue Models for the Web That Use An Advertising Front to Generate Transactions
` (Internet Interactivity Should be a Very Good Thing) ................................................................. 6-11
`
`The Web Provides One-to-One Marketing Capabilities ................................................................. 6-12
`
`Web-Based Subscriptions Models, Except for AOL’s, So Far Aren’t Sticking............................... 6-13
`u Chapter 7: The Whys and Hows of Advertising Measurement
`Traditional Advertising Measurement — Ratings Rule!.................................................................. 7-1
`
`Measuring Media, Anyway You Cut it, Is Weird Science................................................................ 7-2
`
`Site Measurement/Tracking — There’s Good News and Bad News................................................. 7-2
`
`The Demand (and Market) for Standards and Audit........................................................................ 7-3
`
`Auditing, Auditing, Auditing.......................................................................................................... 7-4
`u Chapter 8: How Companies Can Succeed in Internet Advertising
`So What’s an Advertiser to Do?...................................................................................................... 8-1
`
`A Thumbnail Sketch for Web Ad Success....................................................................................... 8-2
`
`Web Successes to Date.................................................................................................................... 8-2
`u Chapter 9: A Look at the Histories of Traditional Media
`Yes, Been There . . . Done That . . .
`Evolution of a Medium: U.S. Newspapers...................................................................................... 9-1
`
`Evolution of a Medium: U.S. Magazines........................................................................................ 9-2
`
`Evolution of a Medium: U.S. Radio ............................................................................................... 9-3
`
`Evolution of a Medium: U.S. Broadcast Television ........................................................................ 9-4
`
`Evolution of a Medium: U.S. Cable Television............................................................................... 9-6
`u Chapter 10: Emerging Companies in the Internet Ad Space
`Advertising Design and Delivery .................................................................................................. 10-3
`
`Market Research........................................................................................................................... 10-7
`
`Traffic Measurement and Analysis................................................................................................ 10-9
`
`Network/Rep Firms..................................................................................................................... 10-12
`
`Order Processing and Support..................................................................................................... 10-14
`u Chapter 11: Glossary of Internet Advertising Terms
`u Chapter 12: A Time Line of Internet Advertising 1994–96
`u Chapter 13: Advertising Data
`u Chapter 14: Rate Card Data
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 3 of 143
`
`

`

`MORGAN STANLEY
`
`December 1996
`
`Technology:
`Internet/New Media
`
`Mary Meeker (212) 761-8042
` mmeeker@ms.com
`
`The Internet Advertising Report
`
`Overview
`
`Background Thoughts
`
`By our math, one Internet year equals three PC years
`(imagine going from the 386 chip to the Pentium Pro in 12
`months!). Just one year ago, we spent a lot of hours de-
`scribing exactly what an Internet browser did and why it
`was, well, cool. Now, a little over a year later, more than
`46 million people are using Netscape’s Web browsers.
`Clearly, we can move from great unknowns to mass con-
`sumption very quickly these days. It took the world 15
`years to go from fewer than 1 million PC users to 150 mil-
`lion (1980–95) — we estimate that in no more than five
`years, the number of Internet users will jump from less than
`1 million to about 150 million (1995–2000). Since 15
`years divided by five years equals three years, one could say
`that it’s kind of a dog’s life to live at the Internet’s pace.
`
`Following our report of one year ago — Morgan Stanley’s
`“The Internet Report” — we think that enough visibility
`has developed that we can now more closely examine one
`of the biggest unknowns in the Internet arena — advertis-
`ing. In this report, we will try to answer a number of key
`questions: Will Internet-based advertising work? How big
`can it be? How much money will companies spend to de-
`liver advertising messages to potential customers? Is there
`lots of excitement over a lot, or very little? Is the Internet
`spawning the next mass medium? And, as demand for In-
`
`ternet services continues to surge, what’s the likelihood of
`an Internet bandwidth meltdown, anyway? Based on our
`review of the development of new media in the past, we
`conclude that, in time, the opportunity for advertising and
`direct marketing on the Web will be significant. Even so,
`there will be fits and starts along the way.
`
`Public Market Proxies for Internet Advertising Trends
`
`In our opinion, there are currently three good public-market
`proxies for the growth trends in Internet-related advertis-
`ing: CNET, Yahoo! (which we do not cover), and America
`Online. Watching these three companies should give inves-
`tors a good feel for the health and direction of the Internet.
`
`CNET, which went public in July 1996, is the first public
`company that is a pure play on Internet content. The com-
`pany generates revenue largely from selling advertising for
`its Web sites, which focus on technology-related news and
`information. CNET supported $2.7 million in September-
`quarter revenue from Internet advertising (up from zero in
`the previous year and up 54% on a quarter-to-quarter ba-
`sis). Traffic (based on average daily page views) grew 13%
`quarter-to-quarter, to 1.5 million page views per day from
`1.3 million in 2Q. CNET had 75 advertisers, up from 64 in
`2Q, taking up 78% of available inventory in the period.
`The CPM (cost per thousand impressions) for CNET.COM
`remained constant at $75 from 2Q to 3Q.
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 4 of 143
`
`

`

`ii
`
`MORGAN STANLEY
`
`Yahoo!, a leading search engine and content aggregation
`site on the Web, went public in April 1996. The company
`supported $5.5 million in 3Q revenue, all from advertising
`(up 1,815% from a year ago and 68% sequentially). Traffic
`grew 56% quarter-to-quarter, to 14 million daily page
`views from 9 million in 2Q. Yahoo! had 340 advertisers,
`up from 230 in 2Q. We estimate that, based upon its reve-
`nues, page views, and CPMs, Yahoo! was able to sell about
`25% of available inventory in the quarter. We estimate that
`the average CPM for Yahoo! in 3Q was $23, compared
`with $20 in 2Q.
`
`America Online, a public company since March 1992, is
`the largest Internet online service, with more than 7 million
`subscribers. In 3Q the company supported $5.2 million in
`revenue related to advertising (up 845% year-over-year and
`79% quarter-to-quarter). Traffic grew 15% quarter-to-
`quarter, to 92 million page views per day (including con-
`tent, Internet, main menu, and member services). If we
`included AOL’s People Connection (chat) and mail usage,
`average 3Q daily page views would have been near 166
`million. AOL had 50 advertisers, up from 29 in 2Q, taking
`up 70% of available inventory in the quarter. Average
`CPM, across various AOL channels/pages, is currently
`around $45.
`
`As a potential proxy, on an annualized run-rate basis,
`AOL’s advertising business is at nearly the same revenue
`run rate that MTV’s advertising business was in 1983, or at
`close to half the advertising revenue run rate of the entire
`cable industry in 1980. In 1983, MTV generated $25 mil-
`
`Table 1
`Morgan Stanley Technology Research
`Recommended Internet Stock Portfolio
`
`Price
`(12/6/96)
`$39
`69
`68
`65
`21
`76
`58
`74
`
`Mkt. Mkt. Cap./
`P/E
`Cap.
`C1997E
`($B)
`Rev. C1997E
`$4.3
`2.5
`NM
`8.8
`9.5
`47
`6.6
`11.5
`60
`43.9
`5.7
`27
`0.3
`8.3
`NM
`98.3
`9.7
`37
`5.3
`10.0
`105
`7.1
`2.2
`21
`
`1996
`YTD
`Return
`4%
`America Online
`70
`Ascend Comm.
`199
`Cascade Comm.
`74
`Cisco Systems
`31*
`CNET
`73
`Microsoft
`(17)
`Netscape
`69
`US Robotics
`63
`Mean
`* CNET’s public offering was on July 1, 1996, at $16 per share.
`America Online, CNET, Microsoft, and Netscape are covered by Mary
`Meeker. Ascend, Cascade, Cisco, and US Robotics are covered by George
`Kelly, Neil Danzger, and Chris DePuy.
`E = Morgan Stanley Technology Research Estimate.
`
`lion in advertising revenue; in 1996, MTV (plus VH-1)
`should garner over $400 million in ad revenue. We think
`it’s important, as well as symbolic, that AOL recently hired
`Bob Pittman, an early pioneer in the cable industry (and
`founder of MTV and Nickelodeon), to run AOL Networks.
`
`For now, we are using advertising trends for CNET, Ya-
`hoo!, and America Online to gauge market growth. We
`like these as proxy companies for several reasons: 1) Based
`on usage, they are leaders in their spaces — content,
`search, and online, respectively; 2) they have “skin in the
`game” — if these companies don’t generate revenue from
`advertising they will have big problems; and 3) general
`market data in emerging or fragmented markets can be
`suspect; in other words, we’ll take Intel as a proxy for PC
`unit growth, thank you, and for now we like such compa-
`nies as CNET and America Online for online/Internet ad-
`vertising. (In this report, we use the terms “online,”
`“Internet,” and “Web” interchangeably, as do most people
`nowadays, although there are technical differences.)
`
`In aggregate, these three so-called Internet advertising
`“leaders” generated a puny total of $13 million in Internet-
`related advertising revenue in 3Q. None of these compa-
`nies is operating at a profit (cid:190)
` cash burn in this area is ex-
`pected to last for a while (cid:190)
` and many advertising-
`supported Web sites are expected to fail. Heretofore, the
`advertising model on the Web simply has not worked.
`Nonetheless, these are early days, and we believe that some
`big winners in this space will emerge, in time.
`
`An Internet Portfolio
`
`For investors, Morgan Stanley’s Internet investment ap-
`proach continues to focus on a portfolio of companies
`(Table 1): Internet infrastructure companies, such as Cisco,
`Cascade, Ascend, and US Robotics (followed by George
`Kelly, Neil Danzger, and Chris DePuy); Internet software
`companies, such as Netscape and Microsoft; and Internet
`content/aggregation companies, such as America Online
`(Microsoft also fits here). We believe that rounding out an
`Internet portfolio with certain emerging companies that
`rely on Internet advertising, such as CNET, makes sense.
`
`We have some observations about this portfolio approach.
`First, these stocks, in general, have performed well, and we
`believe any investment in the current stock market is a
`market call as much as a stock call. Second, Internet ad-
`vertising is still in the very early stages and, in our opinion,
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 5 of 143
`
`

`

`MORGAN STANLEY
`
`iii
`
`business-model viability (for relevant companies, America
`Online and CNET) will become clearer in mid-1997.
`Third, investors in the rapidly emerging, and rapidly
`changing, Internet space must have a high-risk profile,
`must be selective, and must be nimble.
`
`Internet Advertising — Small but Mighty
`
`Advertising revenue in the Internet space has been small
`(Figure 1) but growing rapidly (Figure 2). According to 3Q
`data from Jupiter Communications’ AdSpend report, the
`annual revenue run-rate for Web advertising is $264 mil-
`lion (in comparison, cable industry ad revenue in 1982 was
`$230 million and is expected to top $6 billion in 1996).
`Further, Jupiter estimates that 1996 Internet-based advertis-
`ing (including online services like America Online and
`Web-based “push” services like PointCast) should be over
`$300 million, up from $55 million in 1995.
`
`While small, the Internet’s revenue ramp is fast. It was
`only about a year and a half ago that crazy little Netscape
`supported $14 million in quarterly revenue — the company
`just printed $100 million in revenue for 3Q96. So, things
`move quickly in the Internet world. If advertising on the
`Web works, then it makes sense that it will lag core Inter-
`net growth but should, on a relative basis, ramp just as
`rapidly.
`
`By its very nature, advertising is an inexact science. Com-
`panies spend millions of dollars on advertising and adver-
`tising research and, when push comes to shove, have a dif-
`ficult time proving the benefit of the effort. As retailer
`John Wannamaker once said, “Half the money I spend on
`advertising is wasted, and the trouble is, I don’t know
`which half.” Anyway, ads should be for TVs, radios,
`newspapers, magazines, envelopes, or towed by planes at
`the beach, right? Did the Fairchild Eight or Steve Jobs ever
`envision banner ads floating on PCs in the workplace?
`Probably not.
`
`So we were a little suspicious about this ad stuff, initially.
`But our spreadsheets, Internet companies’ “forward
`looking” statements, our Web-weary eyeballs, and our
`growing number of new media contacts in advertising and
`corporations have been telling us that the momentum is
`strong. We like momentum! If past is prologue, when a
`new medium emerges, advertising opportunities become
`significant — especially when a new mass medium is
`created.
`
`We define a mass-communications medium as communi-
`cation from one person or group of persons through a
`transmitting device (a medium) to a large audience or mar-
`ket. And, in looking at the evolution of other mass media,
`one can draw corollaries with the early stages of the Inter-
`net’s development.
`
`Figure 1
`1996E Advertising Revenue for Various Media
`($ Millions)
`
`Figure 2
`Internet Advertising Revenue Growth by Quarter
`($ Millions)
`
`$37,650
`
`$34,860
`
`$45,000
`
`$40,000
`
`$35,000
`
`$30,000
`
`$25,000
`
`$20,000
`
`$15,000
`
`$10,000
`
`$5,000
`
`$0
`
`$15,700
`
`$11,990
`
`$6,180
`
`$264
`
`$66
`
`$46
`
`$70
`
`$60
`
`$50
`
`$40
`
`$30
`
`$20
`
`$10
`
`$0
`
`$25
`
`$13
`
`Daily
`Newspapers
`
`Broadcast
`Television
`
`Magazines
`
`Radio
`
`Cable
`
`Internet
`
`CQ4:95
`
`CQ1:96
`
`CQ2:96
`
`CQ3:96
`
`Source: Veronis, Suhler Associates, Paul Kagan Associates, Jupiter Com-
`munications. (Internet revenue estimate based on annualized run-rate of
`industry’s 3Q96 revenue of $66 million).
`
`Source: Jupiter Communications.
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 6 of 143
`
`

`

`iv
`
`MORGAN STANLEY
`
`Figure 3
`Estimated Web Users vs. Advertising Revenue, Using Various Steady-State Assumptions, 1995–2000E
`
`Internet/Web Users (Millions)
`
`180
`
`160
`
`140
`
`120
`
`100
`
`80
`
`60
`
`40
`
`0
`
`02
`
`Ad Revenue @ $9/User
`
`Ad Revenue @ $25/User
`
`Ad Revenue @ $50/User
`
`Web/Internet Users
`
`$7,650
`
`$6,100
`
`$4,050
`
`$3,825
`
`$3,050
`
`$2,300
`
`$2,025
`
`$1,400
`
`$700
`
`$252
`
`$55*
`
`$1,150
`
`$414
`
`$729
`
`$1,098
`
`$1,377
`
`1995
`
`1996E
`
`1997E
`
`1998E
`
`1999E
`
`2000E
`
`$8,000
`
`$7,000
`
`$6,000
`
`$5,000
`
`$4,000
`
`$3,000
`
`$2,000
`
`$1,000
`
`$0
`
`Internet Advertising Revenue ($ Millions)
`
`Source: Morgan Stanley Technology Research.
`* 1995 contains actual revenue, as reported by Jupiter Communications.
`E = Morgan Stanley Technology Research Estimate.
`
`We have taken a pass at potential growth rates for Internet
`advertising (Figure 3). Extrapolating current advertising
`spending rates per Web user (of $9) to the year 2000 with
`an estimated 152 million Internet users) implies that Web-
`related advertising could become a $1.4 billion business in
`2000. If we tweak the spending rate per user to $25, we get
`to $3.8 billion in annual revenue, and it’s easy to ramp up
`the per-user spending. In our opinion, these assumptions
`may prove to be conservative. For example, the average
`amount spent in four of the top five mass media is $281 per
`user annually, so it seems like there could be lots of upside
`to our Internet estimate. The bottom line, though, is that
`it’s still too early to tell which scenario will play out —
`although, for now, things are looking good, feeling good,
`and we are bullish about the growth of advertising on the
`Web.
`
`Details of our analysis follow (cid:190)
` see pages 2-3 and 2-4. As
`a sanity check, we have compiled similar historical data for
`
`other media (newspapers, magazines, radio, broadcast, and
`cable TV) in Chapter 9.
`
`Just Give Those Ad-Types Some Eyeballs and Ears
`
`To us, the Internet potentially represents the creation of the
`greatest, most efficient distribution vehicle in the history of
`the planet. In time, an e-mail address will be as common
`as phone numbers are today. History has taught us that
`changes in the distribution of goods and services create
`substantial business opportunities for deft companies. With
`the Internet, which offers ubiquitous points-of-sale, adver-
`tising in time will become, in effect, transactions, thus
`making the total business opportunity created by the Web
`quite substantial.
`
`Advertisers will buy eyeballs and ears through any conduit
`or distribution vehicle that delivers a desirable audience —
`the opportunity to market goods and ideas gets advertisers
`stoked. And the direct, interactive marketing capability of
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
`Page 7 of 143
`
`

`

`MORGAN STANLEY
`
`v
`
`the Web is very intriguing to advertisers, compared with
`the hit-or-miss nature of broadcast marketing.
`
`For example, a master marketer would get a lot more
`jazzed about putting up a billboard for the hot BMW Z3
`roadster convertible in Woodside, Calif., than in Anchor-
`age. However, that same marketer should get even more
`interested if a Web site (such as CNET, at www.cnet.com)
`can route advertisements to a demographic group that in-
`cludes only males who are at least 35 years old, have
`household incomes in excess of $100,000, live in Califor-
`nia, and use Pentium PCs with Netscape Navigator — and
`then provide that demographic sample with a click-of-the-
`mouse option to visit BMW’s site (www.bmwusa.com),
`view color animated images of the BMW Z3 roadster, take
`a virtual test drive (complete with roaring engine), view
`color options and price packages, and then click to the local
`dealer’s site or to Auto-by-Tel (www.autobytel.com) to in-
`quire about or buy the car at the best price (taking care of
`any hassles via e-mail). Further, that same marketer could
`get pretty excited about using agenting technology to find
`Web users who have expressed interest in BMWs in the
`past, and sending them HTML-rich e-mail about BMWs.
`
`Here's a great Web marketing story: Cisco, the internet-
`working company, established a business-to-business com-
`merce area (Cisco Connection Online) on its Web site five
`months ago and recently indicated that it has generated $75
`million in sales to date. These are huge numbers, and the
`company’s products sell at prices ranging from hundreds to
`hundreds-of-thousands of dollars! Cisco believes its Web-
`related sales could reach a $1 billion run-rate by July 1997
`(upwards of 30% of its total sales). The efficiencies and
`gross margins that Cisco can achieve through selling on the
`Web can be pretty sweet (cid:190)
` and, yes, it’s keeping its cus-
`tomers happy and providing fast response time and round-
`the-clock service and support.
`
`Advertising on the Web is not just about advertising and
`distributing messages. It’s also about building customer
`relationships, building “cyber”-brands, providing customer
`services, generating electronic sales of goods and services,
`
`efficiently delivering marketing messages to appropriate
`audiences, and creating mass customization and interac-
`tive/direct marketing.
`
`At the same time, the onus is on the creators of Web sites to
`deliver audiences (eyeballs and ears) with compelling
`demographics to advertisers. Web publishers have to create
`information or content for their sites that will not only add
`new users but also keep the old ones coming back. Again,
`advertisers are simply buying space and time to nab eye-
`balls and ears, just as soap operas were created to sell de-
`tergent to housewives doing the ironing in the afternoon,
`while Monday Night Football was created to sell beer to
`couch potatoes in the evening. On the Web, one finds ads
`for Cisco routers on CNET, while the NFL has ads on
`ESPN SportsZone. Been there, done that? Yep.
`
`In the history of the Web (which generally is said to have
`been born in March 1993 with the debut of the Mosaic
`browser), advertising usually has taken the form of banner
`ads, which emerged in late 1994. Since then, a Web ad-
`vertising infrastructure has evolved; it includes companies
`that create ads, buy ads, sell ads, measure ads, and manage
`ads. Late 1996 marked the time when many advertisers
`shifted their Web advertising budgets from experimental
`status to advertising budget line items, along with maga-
`zines, radio, and TV.
`
`Recently, Advertising Age indicated that 46 of the 100 top
`domestic advertising spenders have purchased Web adver-
`tising in 1996 and nearly all have corporate Web sites. The
`biggest issue for advertisers continues to be market size
`(while 28 million users is a big number, the user “traffic” is
`very scattered), followed by the compiling of statistics for
`measurement. Frankly, though, the measurement of adver-
`tising efficiency has always been weird science. In our
`view, the good news/bad news about the Web is that, in
`time, efficiency tracking and the measurement of computer-
`generated ads to users will become precise — and this may
`add to the confusion about the accuracy of “soft” advertis-
`ing data in other media.
`
`This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to
`buy or sell or a solicitation of an offer to buy or sell the securities mentioned. Morgan Stanley & Co. Inc. and others associated with it may have positions in and
`effect transactions in securities of companies mentioned and may also perform or seek to perform investment banking services for those companies.
`
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`MORGAN STANLEY
`
`On the Horizon
`As Internet advertising ebbs and flows over the next 12–18 months, the key events to look for, in our opinion, include:
`• The launch of major Web-site sponsorships by corporate advertisers. Expect some excellent examples on AOL. The
`likes of Procter & Gamble and General Motors debut innovative Web advertising.
`• A rise in the cross-promotion of Web sites in TV, print, and radio.
`• An increase in cross-media events, like big TV ad campaigns launched simultaneously with Web events (recent ex-
`amples are the Olympics, the NCAA College Basketball Tournament, and the Super Bowl).
`• Appreciation of the emergence of cyberbrands (such as AOL, MSNBC, CNET, Yahoo!, and Motley Fool) becomes
`more pronounced.
`• Web content continues to improve — more users get hooked and usage rises, with the best sites getting better.
`• Improvements in Web-advertising creative — ads become more entertaining and useful. The competitive juices on
`Madison Avenue start flowing.
`• An increase in advertising budgets devoted to online advertising — Web ad spending continues to support strong se-
`quential growth.
`• Several major Web publishers go out of business (or are acquired at low prices) due to high cash burn. Business
`models that work on the Web remain minorities, and Web publishers continue to scramble for new types of Internet
`revenue streams.
`• The best Web sites remain inventory-constrained, subsequently limiting their revenue growth. CPMs rise for the best
`sites, but fall for the also-ran sites.
`• Nielsen ratings continue to indicate that TV viewership, especially for the 18