Web 2.0 Podcast: The State of the Internet, Part 3by Daniel H. Steinberg
Mary Meeker returned to the Web 2.0 Summit to deliver part three of her annual State of the Internet address. Meeker is a managing director and serves on Morgan Stanley's Global Technology Research team.
This episode is sponsored by the Intel Software Partner Program.
Transcript created by Casting Words.
Announcer: Mary Meeker returns to the Web 2.0 Summit for the third time to deliver her annual state of the Internet. Meeker is managing director and serves on Morgan Stanley's global technology research team. Here is Mary Meeker's "State of the Internet" at Web 2.0 Summit 2006.
John Battelle: Moving right along, we are going to have, the first of our "High Order Bits" today, Mary Meeker. Mary and I used to run a conference together. You all laughed to me about calling the Internet summit from 1998-2001. It was great fun. Mary was a great executive producer. She comes back every year. That is what we have called it, State of the Internet Version 3. This is her third. She actually promises me, she has fewer slides than last year. Last year, she got through 45 slides in 11.5 minutes.
Get ready that your finger is limbered up. This year, she has told me she has fewer slides. She is actually going to have to spend a better time on video -- which is obviously a very big topic. Please, welcome.
Mary Meeker: Thank you. When John said, I did 40 and some slides in 11.5 minutes, Bob Pepper said that is a movie. We do not quite have a movie this year but we are close.
The topic is State of the Internet Part Three. Tim and John have two and half days to do that. I have 15 minutes. By the way, Tim and John, thanks again for organizing a great conference.
The title of the presentation is "The World Information Getting Organized and Monetized". John mentioned, I am going to stand for many time on video and this will not be a broad state of the Internet but it will focus on some of the opportunities related to the monetizing video.
To give us a sense of context from a public market standpoint of wealth creation standpoint which is something, I have spent a lot of time on with look at a lot of data, with look out a lot of numbers. By the way, the slides are on the web at morganstanley.com/techresearch. If the search engines out there any good, I will be able to find it. I will give you that URL in the presentation if you want the data because I will move fast here.
But, if we look at five most highly capitalized Internet companies of the world; Google, Yahoo, eBay, Yahoo Japan and Amazon.com, their market value today is 46 percent higher than it was at the march 2000 NASDAQ peak. That is largely due to the massive appreciation in Google.
Message continues to be, it is very tough to succeed. We publish a report almost every year, called "Technology IPO Yearbook". We look at all the technology IPO's in the United States since the Apple IPO. On average, two percent of technology companies in the public market to create about 100 percent of the net wealth. On average, two IPO's in the technology sector go public per year. In that being 10 baggers or companies that are up 1000 percent.
If we look at where the Internet is today, the status of thing is pretty good. These are things that we look at on a regular basis; we try to assess the lay of the land. We look at users and usage. We think Yahoo is a great proxy for that. 400 plus million users with 24 percent year to year page view growth.
Any company that has that many users and that kind of page view growth with that kind of size clearly has some strong momentum. Customer acquisition, we think of Google as one of the world's greatest customer acquisition tools. More than 500,000 advertisers and rising 30 percent plus of clicks are sponsored clicks and that percentage continues to rise.
Commerce and payments; PayPal has 123 million accounts of 41 percent year to year in the third quarter.
Advertising; about eight percent of the total US advertising was online in 2006. We think that goes 13 percent plus pretty easily in the next five years. We are seeing a lot of improvements in targeting and conversion. We think revenue per user has a lot of opportunity to go up over time.
Personalization continues to improve. The best example of that, in our view, is Amazon.com recommendation engine; people who bought this product but also bought this product. Personalization will also continue to improve.
In communications and telephony, Niklas Zennstrom was here last night and as you know, Skype has 136 million registered users of 20 percent sequentially in the third quarter. If Skype were a career which it is not, and we compare the registered user numbers for Skype with the subscriber numbers for the largest telecoms in the world, Skype would be the number three player in the market behind China Mobile's 204 million subscribers and Vodafone's 187 million subscribers based on eBay's Skype data.
If you look at the cross border connections for the Skype users in the first quarter this year and compare that with total cross border international calls for 2005, Skype would account of seven percent of cross border phone calls. It gives you a sense of size. There is no reason why that should not be able to double in contribution over the next year or two.
Video which we will spend a lot of time on per data cash logic about 60 percent of Internet traffic maybe prefer the file sharing of un-monetized video. We are extremely excited about the opportunities monetization of video in the coming few years that challenges related to copyright, infrastructure stress are significant but in the end, we think consumer demand will rule and content creators should also benefit.
Local momentum is solid should be a big story of the next years. Community in social media, you know a lot about. You can hear from Cyworld and how they monetizing digital content. We think one of the things, it is very interesting is that there will be a billion camera enabled mobile phones within one year. That will be more users then users of the Internet as we know it from the broadband Internet and narrowband Internet. We think that will change the way people think about citizen journalism' that already is starting.
In mobile, we are excited about how the plays out over the next five years or so. We will go to some data on how we are looking at that market. If we look at broadband users, about 17 percent of global Internet users are broadband users as wee see it today in about eight percent of global mobile users are 3G users which we can use them broadband equivalent. In the next five years called at 2009-2010, 3G will probably be about at 25 percent penetration level which will mean a true broadband or semi-true broadband is on mobile devices.
I just wanted to share some thoughts on user generated content, just put the context of the growth rate in perspective. This looks at, this is common core data, looks at its total global unique visitors for top 15 websites in September, Wikipedia, Fox with MySpace, etc. YouTube has shown an extra ordinary growth as you know that has just put in the context.
We have spent a lot of time looking at Internet companies around the world. It is notable that only 36 percent of Internet users were in North America in 2000 that will fall to 20 percent in 2007. It has never been more important to look at the markets around the world.
We publish a report every year called "T and T Database Report" you can see from the footnote it is painful to read through, however, there is a lot of good data in it. We look at the size, technology media, telecom products and services around the world and look at the number users. In 2006, China tested to pass the United States in absolute numbers of users of these products and services. We continue to be in the number one spot, we think for years to come with India rising and also Russia over time.
I have talked about broadband a little bit earlier but importantly broadband based on 25 percent plus penetration of the market in the US reaches the sweets pot of adoption in 2004. We think, we will continue to have good momentum there out to 2009-2010. We get the 50 percent penetration if we look at mobile and we assume that 2.5G is broadband, which is a little bit of a stretch. In 3G we are entering that sweet spot of the market in 2007. It's already a $20 billion market based on downloads of ringtones, wallpaper, screen savers and games, on a global basis, obviously much larger outside the US.
Our global Internet thesis is 10 percent to 15 percent user growth, 20 percent to 30 percent usage growth, 30 percent plus monetized growth; a faster growth outside the US.
Now moving on, the video Monetized idea; if we look at how text has become monetize over time; we started out with newsgroups, moved to the directory with Yahoo which was monetized via advertising. From the directory moved to search in part Overture and Google, which was monetized in music and videos. Started with a peer-to-peer sharing, moved to for-pay with Apple. We are about to move in that same zone for video on the Internet.
To give you a sense of how this may play out, we looked at the history of online advertising. In 2001 in about four percent of online advertising was search related, only about $200 million plus; in 2006 in up to 42% of online advertising revenue in five short years from four percent to 42 percent a $6 billion plus market.
Branded has shown very slow growth while search is growing 88 percent that was largely from monetized of text. We think a similar trend may play out as video gets monetized over the next five years as it is increasingly tagged and advertising is associated with it.
Search is a very important component of that; per comScore, 67 percent of global Internet users use search. Search is the number one costumer acquisition tool for online retailers. About 36 percent of customers that online retailers get come from search queries.
We continue to believe that online advertising will shift or advertising will shift online. Here is a great representative example of that. My favorite is as follows; over nine years the ratio of eBay US listings to newspaper classified listings has moved from a ratio of 1:35 to 9:1. The related newspaper revenue still outpaces eBay 25:1. Something is wrong with this picture and we think the shift will continue.
Moving on to video and then wrapping it up with monetized. This is the data of Cash Logic that I shared a little bit earlier. Peer-to-Peer file sharing traffic was 66 percent of Internet traffic in 2004. Video was the major portion of that at about 60 percent. The momentums for online video has continued to build these two next slides are eye sore with intent. In October of 2005 when the crew at Disney associated with Apple for the download of Lost and Desperate Housewives that was a bit of an eureka' moment for the online video industry as the other major players realizing they needed to figure out an Internet strategy. This is the 27 events that have happened last year kind of culminating with Google's acquisition of YouTube.
Online video has been out there, it has been largely available on peer-to-peer sites and increasingly it's becoming tagged, findable and easy to search. If we look at usage of video specifically, we believe that, this is again comScore data, that minutes' growth on the Internet it continues to outpace page view growth. We think a lot of that has to do with usage of video.
One of the things we think we'll see more of over time is effective editing, some of the stuff that Arthur and Barry talked about in their panel yesterday with John. A lot of times you know what you are looking for, a lot of times you don't.
We think Yahoo's The Nine is great example of effective editing, video content on the web. Importantly matched with sponsorship, Pepsi, clearly feels safe with Yahoo's editing, we think they should. They have done a good job of providing some interactivity with the site thru online voting and user participation.
One of the key questions that no one can answer, I was involved in a panel a couple of weeks ago with a group of great folks in the online video space. Someone asked the question, "In three years what percent of content used in the web will be amateur versus professional versus semi-professional?" No one was willing to give an answer. Our cop out answer was a third, a third, a third but no one knows, but we can certainly rest assured that it will be a combination of all the above.
There are a lot of questions about how video can be monetized. A lot of the traditional media players have been hesitant to jump of onboard. They been focused on lawsuits at the expense of making the bet they can make it on volume. We think the opportunity for keywords search and adjacent sponsorship is very interesting we just need to try it.
I'd almost take a poll but I won't because it would take an extra 10 seconds. I think it is pretty obvious we'd use your users really want 30 seconds pre-rolls if anyone does, please say yes. Oh you do. OK, we will have a debate. I'm sorry I'm not a big fan however I'm a big fan of the opportunity for adjacent sponsorship.
This is an example of two of my favorite videos; the dog on the bongos is fabulous and the idea here is that Purina can associate with certain keywords and they'll be a lot of keyword pollution and it will be challenging but the idea of watching this video had been non invasive branded that it would allowed you to do things. Perhaps, click thru and win a month of Puppy Chow, which maybe in interest of some people in the room for their animals and some people for themselves. However, the interactive feature is pretty interesting, more interesting might be each of the Nike's sweepstakes. After we have 500,000 entrants we'll pick one and the winner gets to play 18 holes with Tiger. I think that adds an interactive and a pretty interesting element to the web.
Compelling audio search technology exists. This is an example of what Nexcita offers. It is out there a not widely deploy. We think it will occur over in the coming years. To give a couple of examples of relative monetization opportunities; Sam says to warp it up in 45 seconds, here we go. If we look at what Apple has been able to accomplish in the last three years they've taken Apple's iPod and iTunes revenues from a $140 million to $16 billion. Again I think it help us size what the opportunity might be for video.
If we look at advertising revenue per user for some of the top sites on the Internet, Google gets about $13; YouTube gets less than $1. We think that help us to get a sense of what the monetization upside is for some of the other sites with Google as a benchmark at that level.
Last point almost, 10 years ago if we had asked everyone in this room, a lot of very smart people, who would be the top 15 Internet retailers in 2005 we wouldn't have this list. We might have voted Amazon at the top of the list. We wouldn't have had Newegg at number 10. We wouldn't have had a group of offline retailers dominating the other 13 spots. Our question for the media companies is "Why shouldn't the media companies be in the same spot for the mother load of video if they have the opportunity of monetize it?"
Google and Yahoo account for about 60 percent of US online advertising revenue, per IB data. In turn, they share 30 percent of that with their partners and affiliates. That's a lot money shared with a lot of other players. Eric talked about yesterday on his Google presentation we think the opportunity is there is on the video side and knows I'm closing. The key is to watch where the next generation goes, we all know that. Here are some sites that are interesting and this is the Morgan Stanley disclaimer, which is in four parts and that the URL.
Mary: Is that OK?
John: That was great. Thank you, as always.
Announcer: Mary Meeker's "State of the Internet, Part Three" from the Web 2.0 Summit 2006.
Daniel H. Steinberg is the editor for the new series of Mac Developer titles for the Pragmatic Programmers. He writes feature articles for Apple's ADC web site and is a regular contributor to Mac Devcenter. He has presented at Apple's Worldwide Developer Conference, MacWorld, MacHack and other Mac developer conferences.