Web 2.0 Summit 2006 - Day 2 / Mary Meeker gives Morgan Stanley's "State of the Internet, Part 3" talk - "The World's Information is Getting Organized

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Day 2 notes from Web 2.0 Summit in San Francisco, CA:

[my analysis and notes are in these square brackets.]

Mary Meeker, Morgan Stanley: The State of the Internet Part 3

  • Overview of State of the internet can be summarized in this sentence: “The World’s Information is Getting Organized and Monetized”
  • Powerpoint can be found here
  • Highlights:
  • The Top 5 companies are worth 46% more now than they were worth in the Year 2000: The Top 5 Global Internet Market Leaders have gone from $2B market value (pre 2000) to $178B (peak in 2000) to $32B (trough in 2002) and all the way back up to $259B (Nov 2006), which is 46% higher than their last peak.
  • It’s tough to succeed: ~2% of technology companies have created ~100% of net wealth; on average, 2 companies have 1000% gains per year
  • Users / Usage — Yahoo! has base of 418MM+ unique monthly
    visitors (+19% Y/Y growth)
  • Customer Acquisition — Google now has 500,000 – 1M advertisers and they’re making them more money all the time through more effective targeting and metrics.
  • Commerce / Payments — PayPal has 123MM accounts, (+41% Y/Y,
    CQ3); Shopping.com has 40MM+ products in 325+ categories
  • Advertising — 8% of total US advertising online in 2006E growing to
    estimated 13%+ within 5 years – Google + Yahoo! = key drivers +
  • Significant targeting / conversion improvements (related
    to technology improvements + data leverage) — could bolster annual
    global revenue per unique user of $9 for Google (+42% Y/Y) and $10 for
    Yahoo! (+29% Y/Y) 2-3x in next 5 years
  • Personalization — Recommendation engines improve monetization
    – examples include Amazon.com + Yahoo! Music
  • Recommendations systems getting better.
  • [As pointed out in The Long Tail, as you address more niches, you get more noise (stuff you don’t want) and the way to sift through that noise is with filters such as recommendation systems. As the volume of potential purchases, songs, websites, etc. increase, the way to find what you want is through better filtering and recommendation systems.
  • Communications/Telephony: Skype would rank #3 in the world for telecom providers (behind China Mobile and Vodafone). It may still have the title of “fastest product ramp in history”. Skype carries approximately 7% of all global cross-border calls and that should double in the next year or two.
  • Video: It is estimated that approximately 60% of internet traffic may be Peer to peer filesharing of “unmonetized” video (read that as it could be illegal or it could be legal but just not have an economic transaction attached to it.)
  • “Local” is getting to be important: Buying your software from Russia or China might be okay, but if you want to buy bagels, you need to find the bagel shop near your house. Google and eBay local classifieds continue to expand.
  • Communities are exploding: Myspace, YouTube, Flickr, CyWorld are all exploding. Blogs continue to double every 7 months (now at about 57M blogs)
    • [I like Matt Mullenwegg’s quote on Technorati (the blog search engine): “There are over 50 million blogs. SOME of them have to be good!”]
    • [See further down for the interview with Hyun-Oh Yoo from CyWorld – they’re awesome!]
  • Social media is at the very beginning of the curve
    • [Digg, Reddit, NowPublic, and many more sites are springing up to take advantage of people’s energy and desire to be involved in reporting the news (and fact-checking on the major news sites.]
  • Mobile continues to ramp up quickly. The shocking statistics from the presentation included American Idol receiving 63M votes (via mobiles + internet) in the final 4 hour round.
    • [I’m not sure which is more shocking. That 63M people were watching that ridiculous show or that 63M people were able to vote using a system that didn’t crash. I think they’re equally unbelievable.]
    • [I’m also intrigued by this voting thing on phones. We’re starting to see some interesting uses of phones that fit the form factor: GPS-enabled mapping, instant messaging, voting.]
    • [For another interesting company to look at in this area, a friend of mine, John Merrells, has launched Embrace Mobile, which will specialize in very focused mobile applications that can be run over SMS.
  • User Generated Content based sites have moved into the top 15 global websites (based on number of unique visitors per month). Wikipedia, MySpace, and YouTube drove those numbers.
    • [That means that the principle “users can (and will) generate more content at the edge than you can at the center.”]
    • [Some other interesting notes are that the growth rates of Wikipedia (110% y/y), Myspace (303% y/y) and YouTube (2662% y/y) mean that by next year, they will likely dominate the list.]
    • [Another interesting side note is that the only other site on the list with a relatively high growth rate is Apple at 38% y/y. I would think that bodes well for their continued success selling hardware and music.]
  • North America is becoming less dominant on the internet:  NA will go from 36% of users in 2000 to 20% of the internet in 2007.
  • Broadband penetration has finally hit the 25-30% “sweet spot”
    • [Who defined this as the sweet spot?]
    • [Does this mean that this is a tipping point that enables new services to be built upon it?]
    • [In case Americans feel smug about this, their broadband penetration should be compared to Korea which is at 60-70%]
  • Global Mobile 2.5G/3G penetration has hit the 30-35% “sweet spot”
    • [Again, what does that mean? They didn’t really explain that.]
  • Global Internet Thesis: We have had 10-15% user growth this year; 20-30% usage growth (time/pages/etc.); and an increase of 30%+ in monetization.
  • Online text/music/video – paths to monetization:
    • Text:
    • Newsgroups (usenet) turned into Yahoo Directory which led to $$$
    • [I don’t understand that transition. I don’t get how Usenet converted to Yahoo Directory…]
  • Directories turned into Search (Overture, Google, etc.)
    • [That transition makes sense – the indexes and directories were HUUUGE.]
  • Music:
    • Peer to peer (Napster and Bit Torrent) gave way to For-pay (Apple & others)
  • [The slide doesn’t say this but Meeker basically suggested that video would take a similar path. So that would look like:
    • YouTube (no monetization) to _______?
  • [I have noticed that people will both tag and transcribe the contents of videos on YouTube which means that you can quickly find what you are looking for amongst a sea of millions of videos. Transcription + tagging + search + ads = monetization. I agree that this will happen VERY quickly.]
  • [There was always this assumption that moving all of the world’s video to the web would probably not happen because of the incredible amount of work required to transcribe the scripts and tag the media appropriately. I see now that this is not only possible but indeed likely. Humans have a built-in need to organize and categorize and they are proving it on sites all across the web. Just give people the tools to do it and it will happen!]
  • Slide 15: US Internet Advertising has mostly been driven by text. Rich media advertising has not grown at nearly the same rate. Morgan Stanley predicts that rich media will be the next avenue for US internet advertising spend growth.
    • [Another interesting note on that slide is that the number of internet users in the US went from 141 to 205M  between 2001 and 2006. And the number of households went from 51M to 73M in the same time span. The maybe-not-surprising-but-still-good-to-know part is that the spending per household has also gone up at the same time. Summary: More people are getting online and they’re spending more when they get there. So the pie is growing in both dimensions.]
  • Slide 16: 67% of Global Internet Users use search [that seems low…]. Search is the top customer acquisition tool for online retailers. Search engine marketing was responsible for 36% of customer acquisition, and 29% from organic traffic [what was their definition of that?] Everything else was a distant second, third, fourth place.
    • What’s the take-away? Search rules. Therefore, your company must have a dynamic website (not a static HTML site) and you must blog. NOW. Blogging is the single best way to increase GoogleRank. Period. Search is also the cheapest customer acquisition channel. I have referred to this before but Dr. Paul Kedrosky showed the following customer acquisition costs in his Vancouver Enterprise Forum Oct 2005 Web 2.0 presentation: Direct sales: $22,000/customer; Indirect Sales: $5,000/customer; Direct Mail: $70/customer; E-mail: $60/customer; Online banner ads: $50/customer; Yellow Pages: $20/customer; SEARCH: $8.50/customer. He did not articulate which industry or sector this was from but even if the numbers change, the ratios are the most interesting part and the lesson is the same.
  • Slide 17: Internet ad spend is increasing.
    • [I have heard numbers that say it represents 8% of all ad spend and that will increase to 13% by 2010. Source ???]
  • Slide 18: eBay has outstripped classifieds 9:1 but the newspapers still make all the money – a correction is inevitable: eBay listings have gone from zero to 921M listings in 8 years while classified listings have gone from 141M listings down to 111M listings. The weird part is that the newspapers have maintained a relatively solid revenue base! eBay listings to newspaper listings have gone from 1:35 to 9:1….but the revenue at the newspaper end is still 25x higher than the eBay revenues… Is this a massive correction waiting to happen?
    • [I don’t get this one. I wonder about their sources. Did the newspapers increase their classifieds charges to compensate for the losses? If they dropped by nearly 25% in terms of their listings but their revenue went up 20%, then they would have had to increase their charges by something like 50%?!!?]
    • [The other thing that surprises me is that there is much talk of how the eBay and Craigslists have “disrupted” and “decimated” the classified industry (Yes, even I have used those phrases), but the newspapers seem to be holding their own in terms of revenues. I wonder if this is a delayed reaction and what we will see is a radical collapse of that revenue base in the next couple of years – a sort of tipping point delayed reaction?]
  • Slide 19: Rapid peer to peer (video) growth is stressing the internet and is undermonetized: Morgan Stanley included a very cool chart (that for some reason ends in 2004) showing the mix of content types: changing over time and how video has come to dominate the stream.

  • Slides 20: Video is most of the P2P traffic – no surprises there.
  • Slides 21/22: Some very dense data points on the momentum of online video – again, just evolutionary steps along the curve. Well okay, there is a minor acquisition for $1.65B!
  • Slide 23: Online video is getting tagged/searchable/findable.
    • [The slide talks about the fact that much of the content is now tagged/findable/searchable. This is because of the earlier comment I made about how people are doing the categorizing/tagging/transcribing on a massive scale. Kevin Kelly wrote:

      “No Web phenomenon is more confounding than blogging. Everything media experts knew about audiences—and they knew a lot—confirmed the focus group belief that audiences would never get off their butts and start making their own entertainment…. What a shock, then, to witness the near instantaneous rise of 50 million blogs, with a new one appearing every two seconds….These user created channels make no sense economically. Where are the time, energy, and resources coming from? The audience.”

      • [I would add to that a corollary. Aside from blogging, another confounding aspect of the web is who is transcribing, tagging, and categorizing these millions of pieces of music and video? Again, the audience. The media companies need to stop suing their customers and begin taking advantage of this rabid, passionate, and FREE workforce. A great question to ask yourself is: How can my company take advantage of my most passionate users in such a way that they benefit, their fellow customers benefit, and our company benefits?]
    • Slide 24: The time people spend on the internet is outstripping the number of pages they are viewing – is this again evidence that video is dominating their time?
    • Slide 25/26: Yahoo is doing this stuff well. (user generated content + social network + video blog + good ad placement / monetization)
    • Slide 27: Rise of the pro-amateur videocaster.  In three years, what % of video will be: amateur, pro, semi-pro? We don’t have a clue.
    • Slide 28: Some reference to more good examples of advertising embedded in viral video clips.
      • [This slide asks the question: “do users want 30 second pre-rolls?” Let me answer that for Morgan Stanley. Of course not. Users don’t want commercials, they don’t want billboards, and they don’t want stupid commercials in front of the movie they just paid $12 to see. I absolutely loved the quote from Jim Buckmaster, CTO and lead programmer for Craigslist) on Day 3, when commenting on how many people keep telling Craigslist that “they will make more money – maybe tens of millions of dollars” by adding text ads to their site. He headpanned: “so far, we don’t have users asking for them – and since we do what users want that means we haven’t added them.” That was a hilarious and fantastic answer.]
      • [There has been a common theme over the course of the last few days and it centers around: “how much do you optimize your business for revenue or profit generation and at what point do the users tip over from
        ‘this service loves me’ to ‘this service is trying to just make money off of me’ and start to leave in droves? Bob Parsons, CEO of GoDaddy.com commented on how analysts kept telling him he had to fire a bunch of his support staff. But that generic principle (lower your overhead costs and costs of servicing the customer) in that case were inappropriate when his entire value proposition is: “the cheapest domain names on the internet with great human tech support.”]
      • [I can’t find it any more (maybe in Michael Gerber’s e-Myth Revisited?) but there is a great tale about this little meat shop in Italy that has a thriving business. The owner wants to expand, so he brings in a manager. The first thing that the manager does is cut off the most expensive suppliers and replace them with cheaper ones. Revenue dips a bit but profits go up. Then he looks at the customer demands and stops bringing in the meat that only a few customers want. Again, revenue dips, but net profits go up. Next, he gets rid of the oldest meat-cutter in the shop who costs too much money and hires a young kid who is half the price. Revenue dips once more as people stop coming back to see their friend the old butcher. But predictably the profit goes up. Finally the new manager decides to cut back the store hours to only the most profitable hours of the day. At this point, things break and the revenue drops off a cliff. One by one, the cuts decreased revenue but increased profit. Until the proverbial “straw that broke the camel’s back” and the customers almost all stop going to the little meat shop at the same time. “They used to have a friendly butcher, great hours, incredible variety, and good quality – but that’s all gone” they lament. The owner of the shop fires the manager but it’s too late and he goes bankrupt. This little tale was echoing through my head throughout this conference for some reason.]
      • Of course, the predictable thing happens.
    • Slide 30: Apple has sold $16B worth of iPods and music/videos in only three years.
      • [I tried graphing this but without the interim quarters to fill in a curve, the graph was meaningless. Nothing in 2003 and $16B in 2006. Doing a trendline on that was also useless. It would be interesting to go back and get the interim data from their annual reports and graph it out.]
      • [Interesting side note, many people don’t know this but Steve Jobs has said repeatedly that they make no actual profit and in fact often lose a little bit of money on the $1.8B worth of music and videos. Their business model is based on using that to drive iPod sales (where they make 25-30% margins) and also to take advantage of the “halo effect” of having a Windows PC owner like their iPod so much that they convert to a Mac computer for their next purchase. This is good to remember the next time somebody says, “We want to be the iTunes of _______”. Soooooo….you want to lose a bit on every sale….but make it up in volume? Then you better have a backup plan for that business model.]
      • [Another interesting note is that having been a Mac geek since the days of the Apple II+, I have had a long history with this company and have ridden up and down their success curves many times over the years. Let nobody ever forget that in its darkest hour, when Jobs came back on board, the company was in chaos, it was something like 11 days away from bankruptcy, and Jobs stated firmly and emphatically, “We are going to innovate our way out of this recession”. He (and they) stuck to their promise, poured more money into more tightly focused innovative projects and they are now finally savouring the success that they won. I think about that dark time when the world contemplated having Windows as the only OS and Apple as a footnote in computer history, and like to tell that story to people who say things like “We just need to build something as cool as the iPod.” Great idea. I hope you have the stick-to-it-iveness to suffer the long cold dark winter of innovation and that your will and commitment (and spare cash) carries you through until the spring when your innovations blossom.) I’m so happy that Apple is riding high these days. They paid for the success they are now enjoying.
    • Slide 31: “Inventory monetization should still have significant upside”
      • [Seems to say in plain english: “There should still be lots of ad revenue in them thar hills.” They are basing this on the fact that Google makes $12.28/unique visitor, while most sites make a lot less than that. That is a great benchmark number!!]
    • Slide 32: Only 13% of Top 15 Online Retailers are Internet Pure-plays – what about the media? Meeker commented that the big-box retailers that had brick and mortar operations dominated the “online retailer” category, which seemed surprising. There is the question then…will social media turn regular media upside down and dominate it or will big media be able to hold their ground and dominate the media category in the same way as the brick and mortar retailers had been able.
    • Slide 33: Google + Yahoo = ~58% of US online ad revenue.
      • [WOW – I knew it was concentrated, just not THAT concentrated. What that leaves out is what are the big Google/Yahoo customers that are actually the display medium for those ads? In other words, aside from MySpace, what sites are resulting in that massive spend? I have heard that MySpace, Wikipedia, and some other sites like that that have a huge number of pages work well. Even though with a zillion pages, you begin to wonder if anybody ever sees most of them? Another thing I have heard is that apparently building public wikis with lots of pages is another way to generate large ad revenue.]
    • Slide 34: Google and Yahoo share approximately 30% of their revenue with their partners
      • [I have been looking at a lot of network related theory and really trying to get a handle on viral spread – what counts, what makes it real, and how fast can something spread? The simplest answer for long-term sustainable network build out seems to be: PAY PEOPLE. Let them make money. eBay now has something like 500,000 people making a living on their site!]
    • Slide 35-37: Watch where the global younger generation goes. This means ringtones, net access on the mobile phone, social networks, video, web applications, in-game advertising (which is becoming a huge business), community ranking, user generated content, instant messaging, tagging/categorizing, blogs, peer to peer filesharing, social media, and personalization/recommendation engines.
      • [That’s a simple concept and a pretty darned good list of hot areas. It’s also “where the puck is” (you Canadians will get that reference), rather than “where the puck will be” since most of their analysis is based on what is at the fast part of the curve NOW. Which means the window may be rapidly closing on all or some of those areas. Of course, my time sense is a bit out of whack and I often think something is over before it is, so I have to be careful of my built-in time drift. Still, the point is the same. Starting a video site NOW probably makes no sense. Starting a social media site might still make sense. Starting a company that lets OTHER people start social networks (because they’re all late to the party) like Ning is doing….that might make sense. ]
    • Additional useful links: