MORGAN STANLEY
`
`U.S.
`Investment
`Research
`
`February 1996
`
`Technology/New Media
`
`Mary Meeker (212) 761-8042 / mmeeker@ms.com
`
`Chris DePuy (212) 761-6562 / depuyc@ms.com
`
`The Internet Report
`
`Morgan Stanley Global Technology Group:
`
`Other Contributors:
`
`Economist: Steve Roach
`Publishing: Doug Arthur
`Telecommunications Services: Stephanie Comfort
`Cable Television: Rich Bilotti
`Financial Services: David Hilder
`Emerging Growth: Mike Sorell
`
`Data Networking: George Kelly
`PC Software/Hardware & New Media: Mary Meeker
`Enterprise Software: Chuck Phillips
`Server Hardware: Steve Milunovich
`Telecommunications Equipment: Neil Danzger
`Computer Services: Mark Wolfenberger
`Semiconductors: Alan Rieper
`Semi. Equip., Wireless & Peripherals: Robert Maire
`Design Software: Alkesh Shah
`Distribution: Shelby Fleck
`Cross Industry: Bob Austrian
`
`European Technology: Angela Dean
`Japanese Technology: Takatoshi Yamamoto
`Japanese Technology: Mitsuko Morita
`Japanese Technology: Noriko Oki
`Asia/Pacific Electronics: Richard Wei
`
`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.
`
`1 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Acknowledgments
`
`The authors would like to thank the individuals who helped
`make this book possible. A report of this scope would not
`have been possible without a lot of hard work and a lot of
`support from many people.
`
`First, without the tireless efforts and extensive contributions
`of Samantha McCuen, the report would simply not have
`been published. Samantha worked with Morgan Stanley
`for almost six years, most recently in the technology equity
`research group, before joining Sandler Capital in January
`as an investor focusing on PC software and new media
`companies.
`
`In Morgan Stanley's equity research group, many analysts
`with expertise in various sectors contributed to the report.
`They include George Kelly (Data Networking); Chuck
`Phillips (Enterprise Software); Steve Milunovich (Server
`Hardware); Neil Danzger (Telecommunications
`Equipment); Mark Wolfenberger (Computer Services);
`Alan Rieper (Semiconductors); Doug Arthur (Publishing);
`Stephanie Comfort (Telecommunications Services); Rich
`Bilotti (Cable Television); David Hilder (Financial
`Services); Steve Roach (Economist); and Mike Sorell
`(Emerging Growth). Gillian Munson, Bob Austrian,
`Alison Manolovici, and Tony Scott offered invaluable
`sanity checks and feedback. Mayree Clark, Phil Friedman,
`and George Kelly were key advocates in committing the
`resources we needed for this enterprise.
`
`Morgan Stanley's Technology investment banking team has
`also been critical in helping us uncover emerging
`companies in all areas of technology, most recently related
`the Internet. In our (admittedly partial, but unqualified)
`opinion, our technology banking team is second to none.
`We would like to single out Frank Quattrone, Bill Brady,
`Jim Liang, Chris Pasko, Drew Guevara, Tim Walsh, and
`Dave Weiden for their contributions to "The Internet
`Report."
`
`While the aforementioned folks helped us get this report
`near the goal line, without Morgan Stanley's editorial and
`production group, the report never would have made it into
`the end zone. We would like to thank our two crack editors
`and technophiles, Fred Miller and Andy McCann, as well
`as our graphics and printing team, Alison Pitman,
`Claudette Bell, Ramona Boston, and Joe Darragh.
`
`In addition to the contributions of these and other Morgan
`Stanley employees, many pioneers in the field, experts,
`advisers, and friends have generously shared invaluable
`insights that have made their way into this report, not just
`over the last year, but over the last decade. To you, we
`hope that our descriptions of your companies and concepts
`do justice to your visions and entrepreneurial efforts. May
`the next ten years in technology be as exciting as the last
`ten years have been. . . .
`
`Mary Meeker, Chris DePuy
`New York, February 1996
`
`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.
`
`2 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`The Authors
`
`Mary G. Meeker
`
`Mary joined Morgan Stanley in 1991 as the firm’s PC
`Software/Hardware & New Media analyst. Earlier, she
`served as a technology research analyst at Cowen and at
`Salomon Brothers. Mary received an MBA in finance from
`Cornell University in Ithaca, New York, and a BA from
`DePauw University, in Greencastle, Indiana.
`
`Mary’s work has been recognized in various Wall Street
`Analyst Polls including those conducted by Greenwich
`Associates, Institutional Investor, The Wall Street Journal,
`Forbes, and The Red Herring.
`
`Mary’s research coverage includes PC software companies
`such as Adobe, Corel, Intuit, Macromedia, Microsoft, and
`Symantec. In PC hardware, she follows companies that
`include Apple, Compaq Computer, and Dell Computer.
`Her new media coverage includes America Online, Avid
`
`Technology, Broderbund Software, Electronic Arts, Maxis,
`Netscape, and The 3DO Company.
`
`Chris DePuy
`
`Chris DePuy is a research associate at Morgan Stanley
`covering the data networking and telecommunications
`equipment industries, with a special focus on Internet
`technology. He holds a Masters degree in engineering from
`Cornell University and a Bachelors degree from Union
`College in Schenectady, New York; he is also a registered
`New York State Professional Engineer. Before joining
`Morgan Stanley in 1995, Chris worked as a consulting
`engineer and as a corporate network administrator at Hill
`International. At Morgan Stanley he has been involved in
`coverage of Ascend Communications, Cascade
`Communications, Cisco, Bay Networks, and 3Com.
`
`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.
`
`3 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Trail Map: How to Read This Report
`• We have prepared this report with many audiences in mind, and believe it is possible to satisfy most investors seeking
`information on the subject of the rapidly growing, commercial Internet. We hope this report will be used as a reference for
`identifying risks, rewards, market opportunities, investment ideas, company competitive strategies, products, and how the
`Internet works. Since this report was published during the ski season, we offer some trail identifiers to help the reader
`navigate through the report.
`
`n I
`
`ntermediate — Browser-literate and knows own e-mail
`address:
`
`Read Chapters 1, 2, 3, 5, 6, 7, 8, 9, 10, 11, 12, 14, 15, 16,
`17, 18, and 19.
`
`uu
`
`Double Diamond — Already know the technology and
`companies but want to understand their strategies:
`
`Read Chapters 1, 3, 10, 15, 16, and browse 11.
`
`l N
`
`ovice — Never heard of Motley Fool, c|net, or Yahoo:
`
`u E
`
`xpert — Already read all those “other” reports:
`
`Read Chapters 1, 2, 3, 5, 6, 7, 9, 10, 14, 15, 16, 19, and
`browse 11.
`
`Read Chapter 1, and read Chapters 2 through 19.
`
`• Generally speaking, mastering Sections II, III, and IV can make the reader sound smart at cocktail parties; knowing
`Sections I and V can impress your accountant; and dropping a few URLs from Chapter 12 during dinner will wow the
`kids.
`
`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.
`
`4 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Table of Contents
`
`Section I: Introduction
`1.
`Summary and Investment Conclusion................................................ 1–1
`2.
`The Internet: Past, Present, and Future .............................................. 2–1
`3.
`Internet Market Size.......................................................................... 3–1
`
`Section II: Features and Uses of the Internet
`4.
`How to Use the Internet..................................................................... 4–1
`
`Section III: Infrastructure
`5.
`Worldwide Internet Infrastructure ..................................................... 5–1
`6.
`Internet Service Provider Infrastructure ............................................. 6–1
`7.
`Customer Premise Infrastructure ....................................................... 7–1
`
`Section IV: Software
`8.
`Software............................................................................................ 8–1
`
`Section V: Company-Related
`9.
`Technology and Administrative Issues............................................... 9–1
`10.
`Competitive Analysis ...................................................................... 10–1
`
`Section VI: Supporting Documentation
`11.
`Company Descriptions .................................................................... 11–1
`12. Morgan Stanley’s Internet Cool Sites ............................................. 12–1
`13.
`Internet Glossary ............................................................................. 13–1
`14. Morgan Stanley Internet Basket....................................................... 14–1
`15.
`Internet-Specific Stock Universe...................................................... 15–1
`16.
`Internet-Related Stock Universe ...................................................... 16–1
`17. Media Stock Universe...................................................................... 17–1
`18.
`Technology Stock Universe ............................................................. 18–1
`19.
`Internet/Internet-Related Company Financial Data.......................... 19–1
`
`FIGURES
`Chapter 1
`1.1
`Internet Host Growth......................................................................... 1–7
`1.2
`Life Cycles of Mainframe, Mini, PC and Internet Enabled Systems ... 1–9
`1.3
`Timing and Development of Internet Market Segments ................... 1–10
`1.4
`Competitive Analysis Internet Industry Over Next 2 to 3 Years ....... 1–13
`Chapter 2
`2.1
`Internet Backbone (NSFNet) and Regional Networks Service ............ 2–2
`
`Chapter 3
`3.1
`Estimated Numbers of Internet, E-Mail, PC Users
`In the U.S. and Worldwide, 1986–2000E........................................... 3–2
`
`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.
`
`5 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Chapter 3 (cont.)
`3.2
`Internet Growth Drivers 1990–2005E................................................ 3–3
`3.3
`Internet Host Growth (Normal Scale) 1969–95E................................ 3–7
`3.4
`Internet Host Growth (Semi-Log Scale) 1969–95E ............................ 3–7
`3.5
`Internet Traffic Usage on the NSFNet Backbone................................ 3–8
`3.6 Worldwide Distribution of Computers 1994..................................... 3–11
`3.7
`Share of Total Worldwide MIPS 1994 ............................................. 3–11
`3.8 Household Penetration of Consumer Electronics Products ............... 3–15
`
`Chapter 4
`4.1
`StreamWorks, RealAudio, Internet Phone and Worlds Chat Session.. 4–9
`
`Chapter 5
`5.1 A Corporate Network ........................................................................ 5–2
`5.2 A Corporate Internetwork.................................................................. 5–2
`5.3 Organization of Internet, 1986 through April 1995............................ 5–3
`5.4
`Internet Backbone (NSFNet) and Regional Networks Service ............ 5–3
`5.5 Worldwide Internet Connectivity....................................................... 5–4
`5.6 Organization of Internet, April 1995 Through 1998 .......................... 5–4
`5.7
`The New NSFNet Service, 1995 ........................................................ 5–5
`
`Chapter 6
`6.1 Netcom Points of Presence and Telecommunications Backbone......... 6–1
`6.2 UUNET DS-3 Backbone Network...................................................... 6–2
`6.3
`PSINet Leased and Dial-Up Connections........................................... 6–3
`6.4
`Typical PSI Point of Presence (POP) ................................................. 6–5
`
`Chapter 7
`7.1
`Client PC or Workstation Connection to a Network........................... 7–1
`7.2
`Client PC or Workstation Connection to an ISP................................. 7–2
`7.3
`Corporate Network Connected to the Internet .................................... 7–5
`
`Chapter 8
`8.1
`Components of an Internet Server ..................................................... 8–5
`8.2 Web Server Market Share by Operating System................................. 8–7
`8.3 Web Server Market Share by CPU..................................................... 8–7
`8.4 Web Server Market Share by HTTPd Server...................................... 8–7
`
`Chapter 9
`9.1
`Bandwidth Technology Adoption ...................................................... 9–3
`9.2 HTML Code Sample ......................................................................... 9–6
`
`Chapter 10
`10.1 Data Networking Equipment Competitive Analysis ......................... 10–2
`10.2 Internet Security Equipment & Software Competitive Analysis ....... 10–2
`10.3 Internet Service Providers Competitive............................................ 10–3
`10.4 PC, Servers and Semiconductors Competitive Analysis ................... 10–4
`
`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.
`
`6 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Chapter 10 (cont.)
`10.5 Telecommunications and Related Services Competitive Analysis..... 10–4
`10.6 Telecommunications Equipment Competitive Analysis.................... 10–5
`10.7 Application Software Competitive Analysis..................................... 10–6
`10.8 Enterprise and Networking Software Competitive Analysis ............. 10–6
`10.9 Internet/Online Consulting & Development Competitive Analysis... 10–7
`10.10 Organization/Aggregation Competitive Analysis............................. 10–8
`10.11 Information Competitive Analysis ................................................... 10–9
`10.12 Publications/Static Competitive Analysis......................................... 10–9
`10.13 Publications/Interactive Competitive Analysis ................................10–10
`10.14 Publishing (Traditional) Competitive Analysis ...............................10–10
`10.15 Transaction Processing & Financial Services Competitive..............10–11
`10.16 Commerce Competitive Analysis....................................................10–11
`
`TABLES
`Chapter 1
`1.1
`Recommended Internet Stock Portfolio.............................................. 1–3
`1.2
`Perspectives on Market Opportunities................................................ 1–7
`1.3
`Estimated Internet-Related Revenues 1995–2000E .......................... 1–12
`
`Chapter 3
`3.1 Worldwide Connectivity Market 1995E–2000E................................. 3–1
`3.2
`Internet Host Growth Rate 1990–95E ................................................ 3–7
`3.3 OSP Subscribers, August 1994 to December 1995 ............................. 3–9
`3.4
`ISP Subscribers, September 1994 to December 1995.......................... 3–9
`3.5
`Regional Host Growth on the Internet 1Q–4Q95 ............................. 3–10
`3.6
`Top 20 Internet Geographic Domains May 1995 ............................. 3–10
`3.7
`Browser and Operating System Statistics......................................... 3–12
`3.8
`Consumer Electronics Sales............................................................. 3–15
`3.9 Number of PCs, Modems, and Internet Users 1984–2000 ................ 3–16
`
`Chapter 4
`4.1
`Internet Resources and Enabling Applications................................... 4–4
`
`Chapter 8
`8.1
`Third-Generation Applications Available Today................................ 8–2
`8.2
`The “Big Four” Web Browsers .......................................................... 8–3
`8.3
`Proprietary Web Browsers................................................................. 8–4
`8.4 Web Server Software......................................................................... 8–6
`
`Chapter 9
`9.1
`Four Waves of Bandwidth ................................................................. 9–2
`Chapter 10
`10.1 Estimated Trends Over Next 5 Years............................................... 10–1
`
`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.
`
`7 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Chapter 11
`11.1 Internet Infrastructure Companies ................................................... 11–2
`
`Chapter 14
`Internet Basket: Performance, Valuation & Financial Statistics ................ 14–1
`
`Chapter 15
`Internet-Specific Stock Universe................................................................ 15–1
`
`Chapter 16
`Internet-Related Stock Universe................................................................. 16–1
`
`Chapter 17
`Media Stock Universe................................................................................ 17–1
`
`Chapter 18
`Technology Stock Universe........................................................................ 18–1
`
`Chapter 19
`Data Networking Equipment
`3Com — Income Statement....................................................................... 19–3
`Ascend Communications — Earnings Model 1993-1997E......................... 19–4
`Boca Research — Financial Summary F1993–F1995................................. 19–5
`Cisco Systems — Income Statement .......................................................... 19–6
`Motorola — Income Statement 1994–1997E.............................................. 19–7
`U.S. Robotics — Income Statement ........................................................... 19–8
`Xircom — Income Statement..................................................................... 19–9
`Zoom Telephonics — Financial Summary F1993–F1995..........................19–10
`
`Internet Security Equipment and Software
`Security Dynamics Technologies — Financial Summary F1993–F1995....19–11
`
`Internet Service Providers
`BBN Corporation — Financial Summary F1993–F1995 ...........................19–12
`Netcom — Financial Summary F1993–F1995 ..........................................19–13
`PSINet — Financial Summary F1993–F1995 ...........................................19–14
`UUNET Technologies — Financial Summary F1993–F1995 ....................19–15
`
`PCs, Servers, and Semiconductors
`Apple Computer — Income Statement Comparisons F1994–F1996E........19–16
`Compaq Computer — Income Statement Comparisons 1993–1996E ........19–17
`Dell Computer — Income Statement Comparisons F1994–F1996E ..........19–18
`Digital Equipment Earnings Model ..........................................................19–19
`Hewlett-Packard Earnings Model..............................................................19–20
`IBM Earnings Model................................................................................19–21
`Intel Earnings Summary 1994–1996E ......................................................19–22
`Silicon Graphics Earnings Model .............................................................19–23
`Sun Microsystems.....................................................................................19–24
`
`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.
`
`8 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`Telecommunications and Related Services
`AT&T — Income Statement.....................................................................19–25
`Comcast — Consolidated CATV Systems.................................................19–26
`Cox Communications — Consolidated CATV Systems.............................19–27
`MCI Communications ..............................................................................19–28
`Sprint — Consolidated Statement of Income 1994–96E............................19–29
`Tele-Communications — TCI Group — Consolidated CATV Systems .....19–30
`WorldComm — Consolidated Income Statement ......................................19–31
`Telecommunications Equipment
`ADTRAN — Earnings Model 1994-1997E...............................................19–32
`Cascade Communications — Earnings Model 1995–1997 ........................19–33
`DSC Communications — Earnings Model 1993–1996E ...........................19–34
`StrataCom — Earnings Model 1993–1995................................................19–35
`Application Software
`Adobe Systems — Income Statement Comparisons F1995–F1997E..........19–36
`FTP Software — Financial Summary F1993–F1995 .................................19–37
`Firefox Communications — Financial Summary F1993–F1995 ................19–38
`Intuit — Income Statement Comparisons F1994–F1996E.........................19–39
`Macromedia —Income Statement Comparisons F1995–F1997E...............19–40
`Microsoft — Income Statement Comparisons F1994–F1996E ..................19–41
`NetManage — Financial Summary F1993–F1995 ....................................19–42
`Netscape Communications — Income Statement 1994–96E .....................19–43
`Spyglass — Financial Summary F1993–F1996.........................................19–44
`Enterprise and Networking Software
`Informix — Sales and Earnings Summary Fiscal 1994–1996E .................19–45
`Novell — Sales and Earnings Summary Fiscal 1995–1997E.....................19–46
`Oracle Systems — Sales and Earnings Summary Fiscal 1995–1997E .......19–47
`Internet/Online Services Consulting and Development
`FIND/SVP — Financial Summary F1993–F1995 .....................................19–48
`Organization/Aggregation
`America Online — Income Statement Comparisons F1995–F1997E.........19–49
`H&R Block/CompuServe — Financial Summary F1994–F1995................19–50
`Publishing (Traditional)
`Dun & Bradstreet — Sales and Earnings Summary 1994–1995 ................19–51
`Gannett — Sales and Earnings Summary 1994–1996E.............................19–52
`Knight-Ridder — Sales and Earnings Summary 1994–1996E...................19–53
`McGraw-Hill — Sales and Earnings Summary 1994–1996E ....................19–54
`McClatchy Newspapers — Sales and Earnings Summary 1994–1996E.....19–55
`New York Times — Sales and Earnings Summary 1994–1996E...............19–56
`Times Mirror — Sales and Earnings Summary 1994–1996E ....................19–57
`Tribune — Sales and Earnings Summary 1994–1996E.............................19–58
`HNC Software — Income Statement Comparisons....................................19–59
`VeriFone ..................................................................................................19–60
`
`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.
`
`9 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`The Internet Report
`
`Section I:
`Introduction
`
`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.
`
`10 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`MORGAN STANLEY
`
`1-1
`
`Technology/New Media:
`Chapter 1: The Internet Report
`
`Introduction
`
`• Our recommended portfolio of Internet-related stocks consists of Cisco, Ascend, Cascade Communications, America
`Online, and Intuit. We also like Netscape, but given the volatility in the stock, its lack of liquidity, and strong performance
`since its IPO, we believe investors should hold off in the near term until it becomes more seasoned. Many other companies
`should also benefit from growth in the Internet, but we have attempted to select for our portfolio those with especially high
`levels of reward/risk related to the Internet. Investors have already rewarded all Internet-related companies with extremely
`high valuations: The five stocks in our Internet portfolio rose, on an unweighted average, 257% in 1995 and at year-end
`traded at, on average, 7.3 times C1996E revenue and 59 times C1996E EPS. Yes, we are excited about Internet invest-
`ment opportunities and the performance of the stocks, and yes, we are nervous about the valuation levels. In order to
`mitigate valuation/execution risk, investors must take a long-term, portfolio approach, and we recommend building posi-
`tions over time. While in the short term, making money in Internet-related companies has been like shooting fish in a bar-
`rel, over the long run, selectivity and patience will be key as companies/technologies/stocks come and go.
`
`• The companies we favor are leaders in three key areas of Internet development: Internet Infrastructure, Internet
`Software and Services, and Internet Content and Aggregation.
`
`• Infrastructure The three data networking equipment companies that our networking analysts, George Kelly and Neil
`Danzger, are recommending are Cisco, Ascend and Cascade; all three look well positioned as early beneficiaries of the
`rapid Internet build, which has only just begun.
`
`• Software and Services The companies we highlight — Intuit and Netscape — are in leadership positions in each of
`their respective operating spaces and should continue to support strong growth during the coming years.
`
`• Content and Aggregation We believe America Online has a share in each of four critical areas: service, content or-
`ganization and aggregation, and venture funding. We believe that the company is strategically well positioned (though not
`without risk to changes in its business model) to benefit from growth in online services and the Internet.
`
`• In this lengthy report, we describe various aspects of this arena (including Internet, Intranet, and Online products) and
`propose frameworks for analyzing its emerging markets. Two things are certain: Growth will be significant (in fits and
`starts) and investors will vacillate between riding the growth wave and worrying about risk/reward and valuations; and
`companies, strategies, and the very structure of the market will change rapidly. When we first set out to write this
`report, we wanted it to answer all the questions about the Internet. The goal was impossible to achieve; by its very nature,
`the Internet is chaotic and can only be described clearly in hindsight. Consider this report our puck on the ice at the begin-
`ning of a very long game.
`
`Summary and Investment Conclusion
`
`In this report we attempt to describe what may well be one
`of the hottest new markets to develop in years — the
`growth in PC-based communications and the Internet. We
`like the Internet investment theme for the following rea-
`sons:
`
`• Due to technological advances in PC-based communica-
`tions, a new medium — with the Internet, the World Wide
`Web, and TCP/IP at its core — is emerging rapidly. The
`market for Internet-related products and services ap-
`pears to be growing more rapidly than the early
`emerging markets for print publishing, telephony, film,
`
`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.
`
`11 of 322
`
`JCMS - EXHIBIT 2008
`CoxCom, LLC v. JCMS
`
`

`
`1-2
`
`MORGAN STANLEY
`
`radio, recorded music, television, and personal comput-
`ers.
`
`• In our opinion, we have entered what we call “The Great
`Communications Backfill Opportunity.” By our estimates,
`there are something like 150 million PC users worldwide
`who in time will become more active Internet users (we
`estimate about 7%, or 10 million, were active users in
`1995). In short, there’s lots of upside.
`
`By way of comparison, since 1980 and the sale of the first
`PC —an initial base of zero — the PC industry has created
`more than $250 billion in net shareholder value. Now we
`are embarking on an industry just beginning to tap the base
`of 150 million PC users. In the first 15 years of what might
`be called the enhanced-communications industry, or what-
`ever it ends up being called, we feel that over time the
`shareholder value created from developments in the Inter-
`net (starting in 1994, for the sake of argument) could ex-
`ceed that created in the first 15 years of the PC revolution.
`
`• Based on our market growth estimates, we are still at the
`very early stages of a powerful secular growth cycle for
`Internet-related stuff. Remember how Microsoft’s Win-
`dows cured for about seven years before it became a run-
`away hit in 1990 with the launch of Windows 3.0? Well,
`the Internet — TCP/IP in particular — has been curing for
`about 15 years, and the rollout of the graphical Web
`browser (Mosaic) in 1993 is having a significant impact on
`market growth analogous to the launch of Windows 3.0.
`
`• There are two major market opportunities for Internet
`usage: enterprise and consumer. A recent survey by Da-
`taquest showed that in 60% of 100 medium to large organi-
`zations in the U.S., all departments had some access to the
`Internet. Similarly, the rapid take-off of America Online
`shows that consumer adoption of online/Internet access,
`while still less than 8% of U.S. homes, is growing quickly.
`The enterprise market is dominated by access for