The Future in Digital Media

Equity Research
Technology Digital Media and Internet

May 16, 2011 Industry Report (11-056)
The Future in Digital Media

Emerging Digital Advertising Platforms and Business Models
Update on the Internet and digital media Industry. Our eighth edition of The Future in Digital Media focuses on the rapidly evolving digital advertising market, spurring the creation of new, disruptive models. Many of these models combine elements of advertising, digital media, e-commerce, and technology. Social media is not just a fad, in our view; our conversations with digital advertising executives revealed that the rst dollars of campaigns are now being directed to this category. Proprietary framework and model forecasts greater than $34 billion in 2015 from new digital advertising channels, more than triple the estimated total in 2011. In 2015, we peg the user-generated video market at $7.7 billion, group buying at $7 billion, Facebook at $5.6 billion, over-the-top (OTT) video at $4 billion, and Internet radio at nearly $2 billion. Collectively, these ad-supported verticals compose roughly 77% of our projected forecast. Verticals that can transition to platforms will take ad dollars. If ad verticals (e.g., Internet radio) can build disruptive platforms (e.g., integrate social tools and features), we believe these would then be the best markets for continued ad-dollar growth. For example, if a vertical can capture and maintain engagement through social tools, we believe it is the best positioned to build a platform for other services to layer on to keep engagement levels fresh and at high levels. Is SoLoMo loco? There is a lot of debate over whether the convergence of social, local, and mobile (SoLoMo) media is a passing fad or has legs. With nearly 700 million Facebook users, local advertising media budgets projected to nearly double to $42.5 billion in 2015, and a projected 220 million smartphone users in the United States alone, we expect the increasing attention on the digital advertising market to focus on localization. Facebook: Display ads only rst inning of long-term potential. Advertising on Facebook, where roughly one of every 10 people in the world has an account, is an immense opportunity. Notwithstanding privacy implications, perhaps the larger opportunity lies in the companys ability to license its wealth of user data for off-Facebook advertising, thereby doubling the revenue potential for the company at the existing cost structure.
Ralph Schackart, CFA 312.364.8753 rschackart@williamblair.com
Kristopher Barney, CFA 415.248.2862 kbarney@williamblair.com
Tim Compton, CPA 312.364.8414 tcompton@williamblair.com
William Blair & Company, L.L.C. 222 West Adams Street Chicago, Illinois 60606 312.236.1600 www.williamblair.com
Please consult pages 106, 146, and 147 of this report for all disclosures.
William Blair & Company, L.L.C. receives or seeks to receive compensation for investment banking services from companies covered in this research report. Investors should consider this report as a single factor in making an investment decision.
William Blair & Company, L.L.C.
Contents
Emerging Digital Advertising Technologies Overview ..............................................3 Global Advertising Industry..........................................................................................7 Emerging Digital Advertising Is a Large Venture-Capital-Funded Vertical ..............8 Local Markets Group Buying Services ..................................................................................10 Recommendation Services ............................................................................17 Mobile Display and Rich Media .................................................................................22 Location Based ...............................................................................................29 Text/SMS..........................................................................................................37 Online Video and Guidance Interactive Program Guides ...........................................................................41 Livecasting and Over-the-Top Video ............................................................46 User-Generated Video ....................................................................................54 Socially Focused Facebook .........................................................................................................63 Microblogging .................................................................................................72 Social and Casual Videogaming ...................................................................79 Stand-Alone Models Digital Cinema .................................................................................................88 Internet Radio .................................................................................................93 Paid Blogging ...............................................................................................100 Appendix A: Venture Capital Financing Process ...................................................107 Appendix B: Profiles of Public and Private Digital Advertising Companies and Properties ...................................................................................................................108
Ralph Schackart 312.364.8753
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Emerging Digital Advertising Technologies Overview

We believe the global Internet media markets are poised for increased media spending based on the shift in media consumption demonstrated by more than 1 billion tweets per week, 700 million Facebook users, 90 million passionate Pandora listeners, and 70 million Grouponers, among other structural changes. Moreover, as smartphones become a daily utility, we believe that there is an undeniable structural shift in mobile computing trends worldwide that will increase Internet consumption and monetization opportunities. Based on the potential for the large and growing $70 billion worldwide Internet media market to capitalize on these trends, we believe worldwide media budgets will continue to shift to the Internet. We calculate that online advertising and related markets received $3.6 billion in venture and private-equity funding in 2010, making these areas some of the largest digital media investing verticals over the last year. We believe the combination of new models, channels, and funding creates many new emerging digital advertising market opportunities for investors. Goal of the Report In this report, we focus on emerging digital advertising technologies. The goal of this report is twofold. First, we want to provide a framework for portfolio managers and analysts to help them wrap their arms around emerging models and platforms; gure 1 illustrates the William Blair framework.
Figure 1 Emerging Digital Advertising Landscape
Text/SMS
Interactive Program Guides Pr
Location Based
Mobile
Display & Rich Media
User-Generated Video
Online Video & Guidance

Livecasting & Over-the-Top Video
Emerging Digital Advertising Universe

Facebook Group Buying Services Social & Casual Videogaming
Socially Focused
Local Markets
Microblogging Recommendation Services Digital Cinema IP-Based Radio
Stand-Alone Models
Mainly Display Ads Mainly Text Ads Mainly Coupons Mainly Video Ads Mainly Paid Placement Hybrid Revenue Model
Paid Blogging
Source: William Blair & Company, L.L.C.
Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx
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While there are myriad ways to segment the digital advertising landscape, we chose to divide the industry into the following ve verticals, each of which comprises multiple subsectors. We believe this framework offers investors a simpler way to assess the market. Local Markets Group Buying Services Recommendation Services
Mobile Display and Rich Media Location Based Text/SMS
Online Video and Guidance Interactive Program Guides Livecasting and Over-the-Top Video User-Generated Video
Socially Focused Facebook Microblogging Social and Casual Videogaming
Stand-Alone Models Digital Cinema Internet Radio Paid Blogging
Second, we have built an Excel model with domestic market sizes for each emerging advertising market in signicant detail. Table 1 highlights various market sizes and operational metrics we have constructed through detailed industry research via numerous conversations with both private and public companies. On the next few pages, we discuss some global industry statistics and the role of venture capital funding in the emerging portions of the digital media industry. The remainder of the report provides a detailed look into each of the ve verticals we have dened in our framework for this sector. Lastly, in the appendices we offer an overview of the nancing process and proles of digital advertising companies. What Is Not in This Report Our goal with this report is not to replace worldwide media market forecasts, remind investors that several ofine media markets will continue to be market share donors, redene the already well-understood traditional media marketplace, or provide investors with information about Google that they already know. Nor do we know if these emerging models will be accretive to the holistic digital advertising market or take share of media spending from other areas. Last, we do not pretend to have all the answers for emerging media channels, but we believe we have provided a reasonable framework to help investors appreciate these dynamically changing media verticals.
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Market
Table 1 Aggregate Forecast: Emerging Digital Advertising Markets Projected Market Revenues ($millions) 2011 2012 2013 2014 2015 $2,904 $160 $497 $117 $503 $113 $1,456 $3,006 $2,575 $251 $896 $779 $637 $729 $14,623 44% $4,304 $189 $756 $212 $577 $217 $2,113 $4,496 $3,465 $383 $1,147 $833 $1,005 $823 $20,521 40% $5,580 $218 $1,064 $323 $656 $456 $3,002 $5,946 $4,470 $456 $1,374 $890 $1,448 $923 $26,805 31% $6,998 $246 $1,532 $455 $713 $736 $4,192 $7,745 $5,584 $534 $1,645 $947 $1,934 $1,031 $34,292 28% 36% Percentage of Total Revenues 2011 2012 2013 2014 2015 15.8% 1.3% 3.5% 0.7% 4.2% 0.6% 9.6% 21.5% 17.9% 1.3% 7.0% 7.1% 3.6% 5.9% 100.0% 19.9% 1.1% 3.4% 0.8% 3.4% 0.8% 10.0% 20.6% 17.6% 1.7% 6.1% 5.3% 4.4% 5.0% 100.0% 21.0% 0.9% 3.7% 1.0% 2.8% 1.1% 10.3% 21.9% 16.9% 1.9% 5.6% 4.1% 4.9% 4.0% 100.0% 20.8% 0.8% 4.0% 1.2% 2.4% 1.7% 11.2% 22.2% 16.7% 1.7% 5.1% 3.3% 5.4% 3.4% 100.0% 20.4% 0.7% 4.5% 1.3% 2.1% 2.1% 12.2% 22.6% 16.3% 1.6% 4.8% 2.8% 5.6% 3.0% 100.0%
Local Markets: Group Buying Services $1,612 Local Markets: Recommendation Services $132 Mobile: Display & Rich Media $361 Mobile: Location Based $68 Mobile: Text/SMS $424 Online Video & Guidance: Interactive Program Guides $60 Online Video & Guidance: Livecasting & Over-the-Top Video $973 Online Video & Guidance: User-Generated Video $2,186 Socially Focused: Facebook $1,822 Socially Focused: Microblogging $137 Socially Focused: Social & Casual Videogaming $712 Stand-Alone Models: Digital Cinema $719 Stand-Alone Models: IP-Based Radio $363 Stand-Alone Models: Paid Blogging $602 Total Emerging Digital Advertising Dollars $10,172 Year-Over-Year Growth Rate CAGR (2011-2015)
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What Is Proprietary We believe the following elements are proprietary. First, we have discretely modeled (with many operational drivers) and forecast market sizes for each of the emerging media channels. These forecasts were built from both the top down and the bottom up through numerous conversations with many executives and companies. We believe our foundation and industry information is sound for our forecastsalthough admittedly not perfectand our estimates will undoubtedly change given the highly dynamic market. Second, we provide investors with an easy-to-use Excel model to run their own scenarios on the market forecasts for the emerging markets. (Please consult your William Blair institutional salesperson for an Excel model.) Third, we provide investors with a framework to conceptualize the new media channels (gure 1, on page 3). Last, this is one of a few (if any) reports that have focused discretely on emerging media channels, and the report serves as a good resource, in our view, with its many industry estimates, facts, and data points, to be used as both a solid industry primer and a deep dive. Key Conclusions We highlight the seven key conclusions from this report. 1. Cross-platform campaigns are an area of increasing focus from marketersaided by technology advancements and consumption shifts. 2. Mobile will evolve from an extension platform to a primary ad platform; integrating social and location metrics will enable hyper-targeting and drive CPM rates many times higher than todays prevailing rates. 3. Social is real, holds great opportunity, and will grow over time, but its Holy Grail potential largely remains untapped. 4. Connected devices will enable more targeting and interactivity, another factor likely to result in increasing CPM rates over time. 5. Companies that will sustain competitive advantages must have scale and reach to attract dollars. Those that can transition from ad verticals to platforms will be the most successful. 6. Facebook has only begun to tap its revenue-generating potential; off-site advertising could be a massive opportunity for the company to at least double eCPMs without changing cost structure. 7. Content companies will be pressured to nd new advertising channels, as the worldwide TV ad market has grown at a 2.7% compound annual rate (2005-2010), while cost of premium content has grown at a 5.2% rate.
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Global Advertising Industry

According to Magna Global, the strategic global media unit of IPG, global advertising is estimated to be a $400 billion-plus market in 2011. Magna forecasts the market to grow at a 6.3% compound annual rate from 2011 to an estimated $558 billion globally in 2016. Internet growth is the fastest major growth segment. It is forecast to grow at a 10.6% compound annual rate through 2016, from more than $70 billion in 2011 to nearly $120 billion in 2016, representing 21% of global media spending.
Figure 2 Worldwide Advertising Forecast (dollars in billions)
$600 $500 $400 $300 $200 $100 $0 2005A 2006A 2007A 2008A Radio 2009A 2010E 2011E 2012E 2013E 2014E 2015E Television 2016E Out-of-Home
Source: Magna Global
Magazines
Newspapers
Total Internet
We believe that global Internet spending is an attractive market given its size and growth trajectory, and it is stealing market share from many other forms of traditional media spending. Moreover, within Internet, online video media spending is expected to grow at a 19.6% compound annual rate through 2016, totaling an estimated $11.4 billion market, and mobile is forecast to grow 19.4%, totaling $6.6 billion in 2016.
Figure 3 Worldwide Fast-Growth Digital Advertising Forecast (dollars in billions)
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 2005A 2006A $0.6 $0.7 2007A $1.2 $1.5 2008A $1.5 $2.2 2009A $3.3 2010E $2.1 $4.7 $5.8 $2.7 $7.0 $8.3 $9.8 $4.0 $3.3 $11.4 $4.8 $5.7 $6.6
2011E
2012E Mobile
2013E
2014E
2015E
2016E
Online Video
On a domestic basis, trends are similar and equally as attractive, in our view. Magna projects core media spending domestically to grow at a 4.6% compound annual rate from 2011 to 2016, totaling nearly $184 billion in 2016. Internet media spending is forecast at $28.6 billion Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx -7-

in 2011 and expected to grow at a 9.1% compound annual rate, totaling $44 billion-plus in 2016 and representing 24% of domestic media spending. Mobile Internet is forecast to grow at a 22.6% compound annual rate through 2016, totaling $1.6 billion; the forecast for a 16.8% CAGR for online video results in the market totaling nearly $3.8 billion in 2016.
Figure 4 U.S. Advertising Forecast (dollars in billions)
$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 2005A 2006A 2007A Television
2008A
2009A
2010E
2011E
2012E
2013E Radio
2014E
2015E
2016E
Total Internet
Newspapers
Magazines
Out-of-Home
Emerging Digital Advertising Is a Large Venture-Capital-Funded Vertical

Digital media and advertising is a rapidly evolving market, with new industry verticals (e.g., social networks, gaming-as-a-service, group buying) and new technologies (e.g., 3-D video and gaming, mobile video, tablets) emerging on an almost monthly basissome of which have mid- or long-term potential to affect and disrupt existing business models. Digital media and advertising is an industry heavily invested in by venture capital (VC) rms, providing a window into potential up-and-coming industries, technologies, and business models. We calculate that in 2010, digital advertising and its associated end-market platforms received VC nancing in excess of $3.6 billion, demonstrating signicant interest in the industrys growth potential (for additional information, see our February 18, 2011, report, 2010 Digital Media and Internet Funding Trends: Analyzing Trends for Venture Capital and Private-Equity Investors). Signicant Transactions In table 2, we highlight nine companies that completed a funding round of $30 million or more in 2010. In our view, the data support our belief that early-stage investors believe emerging digital advertising platforms and companies are poised to scale to be larger companies over the longer term.
Table 2 2010 Digital Advertising Industry VC FundingTop Deals ($30 Million-Plus) Company Industry Vertical Deal Size Date LivingSocial Niche Internet Site/Portal $175 Dec-10 Zynga Videogames (Casual, Mobile, Online, Social) $147 Jun-10 Groupon $135 Apr-10 Niche Internet Site/Portal Ustream Internet Video Delivery/Technology/Search $75 Feb-10 Glam Media Niche Internet Site/Portal $50 Feb-10 AppNexus Online Advertising & Analytics $50 Oct-10 Tremor Media Internet Video Advertising $40 Apr-10 Playdom Videogames (Casual, Mobile, Online, Social) $33 Jun-10 Inflection Search Engines and Web Navigation $30 Sep-10
Sources: Digitalmediawire.com, Venturebeat.com, Venturesource, CEA Daily
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Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx -9-9-
Figure 5 2010 Digital Advertising VC Funding by Industry Vertical (dollars in millions)

Niche Internet Site/Portal (Includes Group Buying) Videogames (Casual, Mobile, Online, Social) Online Advertising & Analytics Mobile Technologies & LBS Social Networking Internet Video Advertising Online Video Content or Portal Search Engines and Web Navigation Online Music/Music Technology $0.0 $100.0 $200.0 $300.0 $400.0 $500.0 $600.0 $700.0 $800.0 $900.0
Q1-2010
Q2-2010
Q3-2010
Q4-2010
Sources: Digitalmediawire.com, Venturebeat.com, Venturesource, CEA Daily, Consumer Electronics Daily (deals $5 million or larger from all sources)
Local Markets: Group Buying Services

E-commerce for the Local Merchant
Market size and opportunity. Group buying services (GBS) is a rapidly growing segment of the U.S. local advertising market. According to BIA/Kelsey, the local advertising market was $136 billion in 2010 and is forecast to scale to $153.5 billion in 2015 (a 2.1% CAGR). Within the local market vertical, BIA/Kelsey forecasts the online market will scale from $21.7 billion in 2010 to $42.5 billion in 2015 (14.4% CAGR). We believe that GBS will be a material part of the online local markethaving already grown from nonexistent to billions of dollars in sales over the past three years. Industry statistics and nancial metrics. The leader in the GBS market is Chicago-based Groupon, followed by LivingSocial in the No. 2 spot. In addition, there are now more than 1,000 GBS companies worldwide, up more than tenfold from March 2010. In our view, the increased competition is a function of the land grab for a huge market opportunity; we project that the GBS market in the United States alone will generate $1.6 billion in sales in 2011 and will scale to sales of nearly $7.0 billion by 2015. We note too that the GBS market growth is a worldwide phenomenon, with markets such as China forecasting GBS revenue of about $3.6 billion in 2011. Advertising methods. GBS is a straightforward advertising/promotion tool. A local merchant contracts with a GBS to offer a discounted deal for its business or an item at its business. The day the deal is offered, it is featured on the GBS sites home page for the specied city/region, and it is also distributed via e-mail, Facebook, Twitter, and other social services to all GBS subscribers within the city or region. Recent trends. We have noticed two key themes emerging in the GBS market over the past few years. First, national brands are beginning to use GBS in addition to local merchants. Second, although customers feel some loyalty to specic GBS rms, evidence indicates that they also gravitate toward the best deal offerings. Outlook and evolution. We see four key trends occurring in the GBS market in the coming years. First, we believe the market is likely to consolidate. Second, we believe national deals will become more prevalent as national retailers and companies become more comfortable with GBS. Third, we believe winners will be decided by scale, reach, and the GBS with the best salesforce; consumers are gravitating toward the best deals, and the GBS with adequate scale and the best salesforce will acquire the best deals to offer. Fourth, we believe realtime GBS offerings may become as large as the core group buying daily deals are today.
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Market Size and Opportunity

Group buying is a rapidly growing segment of the U.S. local advertising market. According to advisory services rm BIA/Kelsey, the local advertising market was $136 billion in 2010 and is forecast to scale to $153.5 billion in 2015 (2.1% CAGR). Within the local market vertical, BIA/Kelsey forecasts the online market will scale from $21.7 billion in 2010 to $42.5 billion in 2015 (14.4% CAGR). Market research is difcult to nd for the group buying market given the industrys torrid rate of growth and newness. However, there are some country-specic forecasts and deal-specic data that combined allow us to frame the U.S. market potential over the next few years. Specically, we tracked publicly available sales and pricing data for Groupon, the market leader, to ascertain average daily revenue and average daily revenue per market population (i.e., markets standardized by population) in the United States. We then use these metrics as the primary driver of our top-down market analysis to determine the market potential. An alternative method of forecasting the market potential would be a bottom-up, subscriberbased approach. However, given the actual, conrmable metrics we are able to glean from public sources, we believe the top-down approach will provide more accurate results. As detailed in table 3, we believe the U.S. group buying market could generate $1.6 billion in 2011, scaling to $7.0 billion in 2015. We believe growth will be driven by two primary factors; increased user penetration and increased purchase frequency. We also note that most of the inputs driving our forecast are factually determined and vetted, but the one item we have limited visibility into is the average percentage fee of deal price. Currently, GBS services take about 50% of the deal value as a fee, but we believe some competitors struggling to gain share in the market could opt to compete on price and potentially drive this rate lower over time. Our model does not include real-time deals, which could be as large as the core business today, longer term.
Table 3 Group Buying Market Size Forecast 2011 2012 U.S. population (in millions) 307 308 Estimated percentage age 15-60 62% 62% Estimated percentage living in urban or suburban areas 79% 79% Estimated addressable U.S. market (in millions) 150 151 Estimated percentage that will use GBS 35% 55% Activated U.S. market (in millions) 53 83 Average purchases per year 1.75 2 Average deal value purchased $35 $35 Average percentage fee of deal price 50% 50% Revenue (in $millions) $1,612 $2,904 Year-over-year growth rate 80% Note: Average annual revenue per urban/suburban population
2013 309 62% 79% 151 65% 98 2.5 $35 50% $4,304 48% $18
2014 310 62% 79% 152 70% 106 3 $35 50% $5,580 30% $23
2015 311 62% 79% 152 75% 114 3.5 $35 50% $6,998 25% $28
$7
$12
Country-Specic Market Research As detailed above, some country-specic market research exists for the group buying market. Although we are not attempting to explicitly forecast worldwide market growth: Chinas group-buying market is expected to nearly triple in 2011 to 24 billion yuan (about $3.6 billion) from 8.86 billion yuan in 2010, according to the China Electronic Commerce Research Center. Australian research rm Telsyte forecasts the group buying market will grow by 284% in 2011 to A$242 million.
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Industry Statistics and Financial Metrics

As of March 2011, we estimate that Groupon had more than 65 million registered users and LivingSocial had more than 25 million. Worldwide, the number of GBS companies has exploded, moving from practically zero three years ago to more than 1,000 companies worldwide, generating billions of dollars in revenue annually. In our opinion, some of the most important metrics to track for GBS companies are average deals per day, average daily revenue, and average daily revenue per market population. Groupon is the largest GBS, so we ran a statistical study on these metrics from August 2009 through January 2011 to discover how rapidly the rm had grown and how these metrics were trending over time. Specically, we sampled four markets: Chicago (Groupons rst market); Dallas (representative large market); Columbus, Ohio (representative medium market); and Charleston, South Carolina (representative small market). We believe there are two key trends embedded in the data we gathered: Finding. Each market is trending toward the Chicago market in average daily revenue per market population (the key, normalized metric, in our opinion). Read-through implication. Markets throughout the United States are approaching or already at the sales rate of the rst market (Chicago)the growth drivers from this point forward will be increased penetration in existing markets and increased transactions.
Finding. Charleston, our representative small market, which was launched many months after the large and medium markets, beneted from pent-up demand for GBS, registering signicantly higher average daily revenue per market population in its rst months relative to the other markets. Read-through implication. Leading GBS companies have developed national brand recognition.
Figure 6 Groupon, Inc. Average Daily Revenue Per Market Population
$0.080 $0.070 $0.060 $0.050 $0.040 $0.030 $0.020 $0.010 $0.000 Feb-10 Mar-10 Aug-09 Sep-09 Aug-10 Sep-10 Nov-09 Jan-10 Oct-10 Oct-09 Apr-10 Dec-09 Nov-10 Jun-10 Dec-10 May-10 Jan-11 Jul-10
Chicago
Source: www.groupon.com
Dallas
Charleston
Columbus
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Figure 7 Groupon, Inc. Average Deals Per Day (Months After Market Launch)
6.00 5.00 4.00 3.00 2.00 1.00 0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
17
Months After Launch Chicago

Dallas
Charleston
Columbus
Figure 8 Groupon, Inc. Average Daily Revenue (Months After Market Launch)
$250,000 $200,000 $150,000 $100,000 $50,000 $0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Months After Launch Chicago
Dallas
Charleston
Columbus
Figure 9 Groupon, Inc. Average Daily Revenue per Market Population (Months After Market Launch)
$0.08 $0.07 $0.06 $0.05 $0.04 $0.03 $0.02 $0.01 $0.00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Months After Launch Chicago
Dallas
Charleston
Columbus
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18
18
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Advertising Methods
Group buying is a relatively simple, but powerful, promotion and advertising tool for local (and occasionally national) companies. Online advertising is typically a high-impact and cost-effective method of advertising (especially compared with ofine methods), but many local businesses lack the technological sophistication or marketing budgets to wage digital advertising campaigns. Aside from recommendation service sites (e.g., Yelp) and some new location-based technologies (e.g., Foursquare), local businesses typically lack effective digital advertising opportunities. Group buying helps ll this void, in our view, offering local companies the opportunity to promote their business to a large group of opt-in users. Interested businesses offer users a discount of 50% or more in the form of a for-purchase deal or coupon (e.g., $50 for $100 worth of merchandise at XYZ Outtters). Each group buying site typically offers only a primarily deal and one or two side deals per market (such as a small or midsize city, or a neighborhood within a large city), per day, guaranteeing the local business signicant reach among a user base that has already opted to receive the promotions. Interested users purchase the deal, and if enough users make a purchase, the deal becomes active. Businesses pay a relatively high price for the advertising/promotion, considering both the 50% discount on the deal and the fee of 50% of the deal proceeds a GBS typically takes. However, the benets (wide-scale promotion plus new customer acquisition) outweigh the costs for the vast majority of local businesses, making GBS a highly cost-effective advertising tool for the underserved local market, in our view.
Recent Industry Trends

National Brands Are Beginning to Use Group Buying Services GBS typically focus on deals with local businesses to offer to customers, but some national brands have also begun to experiment with the service in the last 12 months. Unlike local deals, GBS typically offer deals with national customers in all of their markets, and deals are usually redeemable at any store nationwide or online (if applicable). Groupon and LivingSocial have been the top users of national deals so far, as detailed below: Groupon has offered deals from American Apparel, Barnes & Noble, Blockbuster Express, Gap, Dominos Pizza, Nordstrom, and Redbox, among others, within the last 12 months. LivingSocial has offered national deals with Amazon, the American Red Cross (LivingSocial matched user donations through a pay $5 for a $10 donation deal for the Japan Earthquake & Pacic Tsunami fund), Fandango, Vistaprint, and Wine.com, among others, within the last 12 months.
Consumer Allegiance Appears Equally Aligned With the Coupon and Deal Provider In August 2010, Groupon offered a national deal with Gap, selling a record of more than 400,000 deals. At one point throughout the day, Groupon was selling 10 deals a second, which CEO Andrew Mason noted was unusually high volumeseveral multiples above the average. In January 2011, LivingSocial offered a national deal with Amazon, setting a new GBS record of 1.3 million deals sold. Before the Amazon deal offering, it is estimated that LivingSocial had roughly 15 million registered users, about one-third of our estimate of Groupons registered user base (between 45 million and 50 million); the Amazon deal materially accelerated subscriber growth. We believe the volume spike Groupon realized during its Gap offering and the record sales LivingSocial realized during its Amazon offering provide strong evidence that consumers are discriminating value seekers.
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Figure 10 Group Buying Sample Deals
Sources: www.groupon.com, www.livingsocial.com
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Outlook and Evolution

GBS With Best Scale, Reach, and Salesforce Will Likely Be the Most Successful As detailed above, we believe the winners will have a large user base with signicant national reach, and the strongest salesforce will be able to nd the best consumer deals. Certainly, to be successful, a GBS must have signicant reach; the latest estimates peg Groupons user base at about 65 million and LivingSocial about 25 million, and all else equal, we believe Groupons larger user base gives it an advantage over the competition. However, companies that have a critical mass of registered users (and qualied buyers) can position themselves to provide the best deals. The salesforce becomes critical in this environment; the GBS with the superior salesforce will recruit better businesses to offer deals, thus driving more deal purchases by customers. Said another way, we believe that salesforce talent will become a key competitive differentiator in the GBS industry. Moreover, the companies that can scrub their data to nd and target qualied buyers will also be competitively positioned, in our view. National Brands Will Become More Prevalent As the largest GBS companies continue to add registered users, national brands are increasingly warming to the idea of using GBS as an advertising and promotion tool. Purchase rates for national businesses drastically exceed purchase rates for local businesses, and a GBS can help drive brand awareness and foot trafc for national retailers. Real-Time Deal Offerings Emerging; Could Be as Large as the Core Business Longer Term GBS are a strategic and high-value-added tool for local merchants, but most GBS allow a business to offer a deal only once a year (if they are even accepted), and businesses have little control over when customers will use a purchased deal during its active life (i.e., rst week, six months, last week). Some industry experts predict that the market will evolve (or a new, related market will develop) in which short-term deals are offered to dynamically manage available inventory. For example, restaurants typically have lower table use on Sunday through Wednesday nights relative to Thursday through Saturday nights, and most restaurants can approximate customer foot-trafc by analyzing their reservations relative to historical trends. Industry experts see a market where a GBS enables a restaurant to offer a deal (e.g., $25 for $50 of food/drinks) to customers in real-time (e.g., on a Tuesday afternoon when reservations for that night are light) and redeemable only at a specic time (e.g., on that night). This would enable restaurants to provide added motivation to potential customers in real-time, leveraging table inventory more effectively. Groupon, via Groupon Now!, and Living Social have launched pilot programs that allow consumers to purchase and use time-specic deals immediately (or within a specied period) based on their location. We suspect that these daily, real-time deals are gaining traction and should be rolled out nationwide longer term.
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Local Markets: Recommendation Services

The Power of Stars
Market size and opportunity. We dene recommendation services as Web-based businesses whose primary function is to provide reviews and recommendations (typically written by peers). The market comprises a couple of large, well-known companies and a handful of smaller entities. Recommendation services are part of the local advertising market, which BIA/Kelsey pegs at more than $130 billion annually. We forecast that recommendation services will generate revenue of about $137 million in 2011, scaling to nearly $305 million in 2015. Industry statistics and nancial metrics. Recommendation services are unique, in our opinion. The majority of recommendation service companies monetize their business through advertising, but we forecast that advertising accounts for only about 10% of the markets revenue. Rather, the leaders in the eld have successfully amplied their revenues by being able to charge a subscription fee to either businesses or users. Market valuations for leading recommendation service companies indicate both signicant value and an interest from tech giants; for example, market leader Yelp raised VC nancing in early 2008 at a $200 million valuation and reportedly declined a $550 million bid from Google in late 2009 and a $700 million bid from Microsoft in early 2010. Advertising methods. Methods of advertising employed by recommendation service companies span a wide gamut; most typically use banner ads, but some leading sites have also been successful at search-based advertising by selling businesses on paid placement when users search key words (e.g., Italian food in zip code 94104). Recent trends. We see two key trends occurring in the market. First, leading recommendation service companies are branching into new tangential markets, such as check in services and group buying/daily deal offerings. Second, the advertising business model for recommendation service companies is evolving. Recommendation service companies are implementing new advertising models, such as cost-per-click (CPC), to encourage more businesses to pay for advertising or enhanced site functionality for their business, and our research found that some companies are contemplating or testing cost-per-call ad models. Outlook and evolution. We believe recommendation service companies will become increasingly important for businesses to manage over time. Whether businesses like it or not, recommendation service companies enable customers and potential customers to read and analyze customer compliments and complaints, inuencing their purchase decisions. Therefore, businesses will need to increasingly monitor their online reputation and address customer complaints to maintain or increase market shareespecially businesses in competitive markets with signicant substitute options (e.g., restaurants).
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Recommendation services are difcult to tightly dene, but in this report we classify recommendation services as Web-based businesses whose primary function is to provide reviews and recommendations (typically written by peers). The market comprises a few market leaders (Angies List, TripAdvisor, Yahoo! Local, Yelp) and a host of smaller players (e.g., Metromix, Urbanspoon). The market has grown signicantly over the past couple of years, driven by demand for real, reliable user reviews; the proliferation of location-aware, Internet-connected smartphones; and the rise of social networks. According to Vlado Herman, chief nancial ofcer of Yelp, the companys website had 45 million visitors in January 2011, up from 39 million in November 2010, and the site hit 16 million reviews in February. Recommendation services are a rapidly growing vertical within the $130 billion-plus local advertising market. As detailed in table 4, we forecast that the recommendation services market will generate revenue of $137 million in 2011, scaling to $305 million in 2015 (22% CAGR). We note, however, that recommendation services proved to be the most difcult vertical for us to forecast, and that our model could materially understate the markets potential; businesses choosing to advertise on recommendation service sites are difcult to forecast (especially with new business models/features such as cost-per-click being launched and click-to-call being tested) and a material increase in business advertising would have a very signicant impact on our forecast. In addition, our forecast includes only direct advertising and subscription revenues garnered by the recommendation services sites; new services such as group buying/daily deals offered by some recommendation service companies are not included.

As we dene it, recommendation service companies derive revenue in three ways (as noted above, new methods such as group buying/daily deals are not included): Display/text/click-based advertisements User subscriptions Business subscription/advertising
Most recommendation service companies derive revenue primarily from text/display advertisements, but we believe revenue from text/display advertising constitutes about 10% of the markets overall revenue. Rather, the most successful companies signicantly amplify revenues by charging a subscription fee, either to businesses for advertisements or to consumers for access, which we believe accounts for about 90% of the markets total revenue.
Table 4 Recommendation Services Market Size 2011 2012 Estimated Web visitors to recommendation sites, including mobile apps (in millions) 780 1,014 Advertisements seen per visit 4 4 Estimated eCPM rate* $4.50 $4.75 Display/text ad revenue (in $millions) $14 $19 Number of small businesses in the U.S. (in millions) 30 30 Percent who pay a subscription ad/promotion fee 0.050% 0.065% Estimated average monthly fee $350 $350 Business subscription revenue $63 $82 User subscribers (in millions) 1 1.1 Annual fee $60 $60 User subscription revenue $60 $66 Revenue (in $millions) $137 $167 Year-over-year growth rate 22%
*Sites price on a CPM, CPC, and CPA basis; we use effective CPM (eCPM) as a standardized metric Source: William Blair & Company, L.L.C.
2013 1,268 4 $5.00 $25 30 0.085% $350 $107 1.2 $60 $72 $204 22%
2014 1,521 4 $5.25 $32 30 0.110% $350 $139 1.3 $60 $78 $249 22%
2015 1,749 4 $5.50 $38 30 0.145% $350 $183 1.4 $60 $84 $305 23%
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As an example of the value that recommendation service companies can garner, marketleader Yelp raised VC nancing in early 2008 at a $200 million valuation and reportedly declined a $550 million bid from Google in late 2009 and a $700 million bid from Microsoft in early 2010.
Advertising Methods
There is no standard recommendation service business model, and thus the methods of advertising and promoting a business span a relatively wide spectrum. Many of the sites are ad-supported, but a few have capitalized on their trafc and demand for recommendations to amplify their respective business models. For instance, Yelp makes revenue in three primary ways: the majority is provided by business subscriptions (typically $300 to $1,000 per month), with display and text advertisements and a nascent daily deals offering providing additional revenues. Angies List primarily garners revenue from user subscription fees, but also has a modest advertising business.
Figure 11 Recommendation Services Daily Deal
Yelp Sponsored Business Ad
Display Ads
Sources: Yelp.com, Zagat.com, Metromix.com
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Leading Recommendation Service Companies Are Branching Into New Businesses Recommendations are a powerful asset, and sites that establish themselves as leaders in the eld are discovering incremental business opportunities beyond traditional advertising and subscription. Most notably, Yelp has launched a location-based check in service and a daily deal service (includes traditional e-mailed deals and standing deals). Both are nascent, but each is a complementary business that enhances the overall value proposition for users, in our opinion. Check in has the potential to offer additional metrics beyond peer reviews. For example, in the future, Yelp may aggregate the number or frequency of user check-ins to provide a popularity rating in addition to a peer review rating. Group buying is a natural business extension, in our opinion; recommendation services can leverage peer review ratings to offer users deals at highly ranked businesses. In addition, standing deals are potentially evergreen deals offered to users who visit the companys pageuniquely offering a consumer a deal during the business selection process.
Figure 12 Recommendation Services Daily Deal
Source: www.yelp.com/deals/la
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The Advertising Business Model Is Evolving As detailed in our market forecast, we believe a very small percentage of the small businesses in the United States opt to advertise with recommendation service companies. We believe price is one of the top three reasons businesses choose not to advertise, and we believe recommendation service companies are adjusting their business models to combat this resistance. For example, in 2010 Yelp unveiled a CPC (i.e., cost per click, meaning the advertiser pays only when the consumer clicks through) advertising product in addition to its traditional CPM advertising product (meaning the advertiser pays when the ad is displayed, regardless if it prompts an action or engagement), which many businesses have said they prefer. Similarly, we believe Yelp is exploring and testing additional advertising technologies, such as click-to-call. If launched, the participating business would pay a fee every time a consumer viewing its Yelp business page on a mobile device clicked on the businesss phone number, initiating a call. Should Yelp implement this feature, we believe it has signicant potential; mobile searches already make up 35% of Yelps search volume, and click-to-call functionality would make it easy for users to immediately interact with businesses (i.e., higher conversion rates).

Recommendation Services Will Become Increasingly Important for Businesses to Manage Business reputation and quality was historically communicated through word-of-mouth and occasionally the Better Business Bureau, but the rise of Web-based recommendation services over the past few years has altered this dynamic. Especially in urban environments, businesses are being peer-reviewed by customers on recommendation sitesand the reviews are having an increasingly material impact. Top-rated businesses have cited recommendation services as an important business factor and driver of incremental revenue; conversely, numerous businesses have cited poor online reviews as a reason for lower sales. As recommendation services continue to grow in popularity (and thus usage), businesses will need to manage their online reputation, and we believe businesses that fail to do so will lose an increasing number of sales. Recommendations Will Become Personalized Leading recommendation service companies have arguably crossed the critical mass threshold for reviews for a number of businessesespecially in urban areas. Although the peer-review data is powerful, one of the weaknesses inherent in the data is that it suffers from crowd bias. To state the obvious, each user is unique, and while aggregate crowd data is useful, it may not always provide an accurate recommendation given users unique tastes. We believe the next evolution in the market will be to deliver personalized recommendations to users. To use Yelp as an example, many users cite that they use star ratings as a triage tool, eliminating businesses with less than four starsa useful strategy to weed out businesses you likely want to avoid, but potentially also weeding out a business that could be a perfect t for you (just not for everyone). If statistical analysis was applied to users ranking of businesses, and combined with social data and user prole data, we believe recommendation service companies could derive at least a semi-accurate prole of a users taste. With this, Yelp could, for example, present the average ranking of a business as determined by the top 10% of users who are most like the user conducting the searcha personalized approach with results arguably superior to the entire population in aggregate.
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Mobile: Display and Rich Media

A Picture Ad Is Worth a Thousand Words
Market size and opportunity. With the proliferation of smartphones and the growth in the display advertising industry, the mobile display advertising market is expanding rapidly and by most estimates is poised to become a billion-dollar industry domestically by 2015. We estimate that the mobile display market will almost double from $210 million in 2010 to $361 million in 2011 and will grow at a compound annual rate of 49%, to $1.5 billion, in 2015. Industry statistics and nancial metrics. We estimate that in 2010, the typical smartphone user was shown three display/rich media advertisements per day, compared with one display/rich media impression per day for feature phone users. The difference is a result of the form factor of smartphones (larger screens and touch panels) and faster connectivity speeds (typically 3G and 4G), which encourage the user to interact with content more and spend more time on the device. Premium CPM rates vary wildly, with some CPMs over $100 for sharply dened audiences with a guaranteed reach. Typically, a premium CPM is in the $5 to $20 range. From our research and channel checks, we believe the general ll-rate for premium ads is only about 10% for mobile display/rich media advertisements, leaving a large growth market. Advertising methods. There are two places advertisers can place mobile display/rich media ads: in applications or in mobile websites. In both examples, the developer or publisher creates space on the app or website to sell advertising. The sales techniques are also similar; developers and publishers sell advertising space directly to advertisers and sell the remaining ad inventory to ad networks or place it in ad exchanges. Recent trends. There has been recent consolidation, with Google and Apple acquiring Quattro and AdMob, respectively. In addition, there has been strong investor attention in the form of venture-backed nancings totaling about $175 million, from the deals we tracked. While Apple is estimated to be the second-largest mobile display/rich-media ad network, there have been recent reports that iAd is not performing well. In March, Apple reduced the minimum ad commitment for an iAd campaign from $1 million to $500,000. Outlook and evolution. Like the digital display advertising market, recent technological advances have enabled marketers to target the exact audiences they desire, based on socioeconomic backgrounds, age, location, and other factors. We expect this trend to accelerate and be more important for mobile advertising than other forms of digital advertising, particularly in local advertising. We also expect further investment in this space through acquisitions or nancings. Because of the power of scale, we expect mobile display ad networks to continue consolidating into larger networks.
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With the proliferation of smartphones and the growth in the display advertising industry, the mobile display advertising market is expanding rapidly and by most estimates is poised to become a billion-dollar industry in the United States by 2015. We estimate that the mobile display market will almost double from $210 million in 2010 to $361 million in 2011 and will grow at a compound annual rate of 49%, to $1.5 billion, in 2015.
Table 5 U.S. Mobile Display + Rich Media Advertising Market Estimates 2010 300.0 27% 73% 80.0 3 220.0 1 167,900.0 $1.25 $210 2011 308.0 38% 62% 117.0 4 191.0 1 240,578.8 $1.50 $361 71.9% 2012 315.0 47% 53% 148.1 5 167.0 1 331,128.0 $1.50 $497 37.6% 2013 321.0 55% 45% 176.6 7 144.5 1 503,809.5 $1.50 $756 52.1% 2014 326.0 62% 38% 202.1 9 123.9 1 709,180.4 $1.50 $1,064 40.8% 2015 330.0 68% 32% 224.4 12 105.6 1 1,021,416.0 $1.50 $1,532 44.0% CAGR 1.9%
U.S. mobile devices (in millions) Smartphone percentage Feature phone percentage Smartphones (in millions) Impressions per day* Feature phones (in millions) Impressions per day Total impressions (in millions) Effective CPM Total market size (in $millions) Year-over-year growth rate
* Web-based or app-based
22.9%
-13.7%
43.5% 48.8%
Sources: eMarketer and William Blair & Company L.L.C.
Our growth projection is driven by two main factors; smartphone market penetration and mobile display/rich media ad growth. Based on a report from the Nielsen Company, we estimate the smartphone penetration rate at 27% in 2010 and steadily growing to 68% in 2015. The increasing penetration is caused by declining smartphone prices. We project the number of display/rich media ad impressions shown per viewer to increase as users continue to spend more time on their phones and as publishers (both mobile website owners and app owners) publish more graphical advertisements.

The metrics for mobile display/rich media advertising are similar to those of other digital advertising markets. As users interact with apps or websites designed for mobile phones, they are shown advertisements, or impressions. We estimate that in 2010, the typical smartphone user was shown three display/rich media advertisements per day, compared with one display/rich media impression per day for feature phone users. The difference is a result of the form factor of smartphones (larger screens and touch panels) and faster connectivity speed (typically 3G and 4G), encouraging the user to interact with content more and spend more time on the device. Like other digital advertising industries, the mobile display/rich media market most frequently uses the CPM (cost per thousand impressions) metric to charge advertisers. Every time a user sees an advertisement, it counts as one impression; a CPM is a thousand impressions. Also similar to other forms of digital advertising, mobile display/rich media ads are typically sold as premium or remnant, with hybrid forms in between.
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Premium ads are sold most frequently by the publishers own sales team to advertisers that want to advertise specically in that content. Remnant ad inventory is sold through third parties (ad networks or exchanges) to advertisers that are advertising for reach and are not paying for targeted advertising. In between the two methods are hybrid methods, such as third parties selling ad space (or audiences) that advertisers specically want and are willing to pay premium prices for.
Figure 13 Ad Fill Rate and CPM Relationship in Display Advertising
$45 $40 $35 $30 CPM $25 $20 $15 $10 $5 $0 0% 10% 20% 30% 40% 50% Fill rate 60% 70% 80% 90% Remnant Hybrid Premium Branding Performance
Premium CPM rates vary wildly, with some CPMs over $100 for narrowly dened audiences with a guaranteed reach. Typically, a premium CPM is in the $5 to $20 range. However, the advertising inventory (or supply) is currently signicantly higher than demand for display/rich media mobile advertisingresulting in a low ll rate, or the percentage of ad inventory that is lled with premium advertising. We expect it to increase over time, however, driven by the growth in mobile computing. The ll rate has an inverse relationship with the CPM. Figure 13 shows the general relationship between the ad ll rate and the CPM. We estimate that the growth in ad inventory will match the growth in demand for display/rich media mobile advertising, and the average CPM will likely remain fairly constant. The CPM is the most common metric used to value advertising in the display/rich media mobile advertising market. However, cost-per-click (CPC) and cost-per-action (CPA) are popular measuring metrics as well. In a CPC environment, the advertiser pays only when its advertisement is clicked on by a user. Similarly, an advertiser pays for an advertisement under the CPA model only when a user performs a predetermined action, such as making a purchase. Remnant inventory is frequently lled with advertisements that are charged on a CPC or CPA basis. From our research and channel checks, we believe the general ll rate for premium ads is about 10% for mobile display/rich media advertisements. This is modestly higher than PC-based display/rich media advertisements; mobile-based advertisements can be more appealing to advertisers since the inventory supply is smaller.
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Advertising Methods
There are two places advertisers can place their mobile display/rich media ads: in applications or in mobile websites. Both applications are quite similar, except for content. Applications are created by developers, which are then downloaded onto the users device and download information from the Web onto the application. Websites are created by publishers and a user accesses the website through the mobile devices browser. In both examples, the developer or publisher creates space on the app or website to sell advertising. The sales techniques for the advertising methods are also similar; developers and publishers sell advertising space directly to advertisers and sell the remaining ad inventory to ad networks or place it in ad exchanges.
Figure 14 Mobile Display/Rich Media Advertisement
Mobile Display Advertisement
Source: William Blair & Company L.L.C.
Figure 14 shows an example of an advertisement placed in a mobile website. The display advertisement is quite similar (in many cases the same) to a display advertisement seen on a traditional website on a PC. This advertisement is dened as a display advertisement because it contains graphics but is not interactive.
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Figure 15 Mobile Rich Media Advertisement
In contrast, gure 15 is a rich media advertisement because the advertisement contains graphics (and possibly sound) and is interactive (users are encouraged to pop the bubbles). It is not clear if this ad is from an application or a website.
Figure 16 In-App Display Ad
In-App Display Ad
Figure 16, however, is from an app (Words With Friends). In this instance, a developer has created ad inventory within the application itself, which it then sells to an advertiser, Walgreens in this example.
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Participants. The mobile display and rich media advertising industry has grown rapidly, attracting many new participants. Googles AdMob, Apples iAd, and Millennial Media are the largest mobile display ad networks in the eld. However, none of the largest three control more than 20% of the market and there are dozens of smaller networks as well. In addition to these large networks, individual publishers will sell directly to advertisers and advertising agencies will go directly to the publishers they desire. IDC estimated the market composition of the mobile ad networks based on revenue in December 2010. As seen in gure 17, Google is the market leader, with Apple and Millennial Media close behind. Both Google and Apple achieved their positions through acquisitions; Google with AdMob and Apple with Quattro Wireless. With the industry growing incredibly fast and companies competing for control, we expect further consolidation and acquisitions, particularly among the remaining independent networks (Millennial Media and JumpTap, among others).
Figure 17 Mobile Display Advertising Market Share by Revenue Estimate
Google Apple Millennial Media Yahoo! Jumptap Microsoft Other
Sources: IDC and William Blair & Company, L.L.C.

As mentioned in the previous section, there has been recent consolidation, with Google and Apple acquiring their way into this high-growth market. In addition, strong investor attention has taken the form of venture-backed nancings. In table 6, we outline recent nancial activity among the major players.
Table 6 Recent Transactions in the Mobile Display Advertising Market (dollars in millions) Company AdMob Quattro Tremor Media Tremor Media Millennial Media Millennial Media Smaato Smaato Amobee Jumptap InMobi Mojiva Greystripe Size $750.0 $275.0 $20.0 $40.0 $16.0 $27.5 $4.5 $7.0 $22.0 $25.0 $8.0 $7.0 $2.5 Date Nov-09 Jan-10 Aug-09 Apr-10 Nov-09 Jan-11 Dec-09 Jan-11 Aug-08 Apr-11 Jul-10 Apr-10 Sep-09 Type Acquisition Acquisition Series C Series D Series C Series D Series B Series C Series C Series E Series B Series B Series C
Sources: TechCrunch and William Blair & Company, L.L.C.
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While Apple is estimated to be the second-largest mobile display/rich-media ad network, there have been recent reports that iAd is not performing that well. In March, Apple reduced the minimum ad commitment for an iAd campaign from $1 million to $500,000. It has also reportedly had difculty attracting new advertisers and retaining ad salespeople.

The mobile display/rich media advertising market is nascent but quickly evolving. We estimate the market at $210 million in 2010, growing to $361 million in 2011 and $1.5 billion in 2015. EMarketer projects similar growth trends. This explosive growth is being driven by more users spending more time on their phones (adding eyeballs to the medium) and developers/publishers creating more mobile content that can be monetized through advertisements. Ad networks, exchanges, and other supporting companies are also quickly improving the effectiveness of ad campaigns by better matching advertisements with the target audience. Like the digital display advertising market, recent technological improvements have allowed marketers to target the exact audiences they desire, based on socioeconomic backgrounds, age, location, or other factors. We expect this trend to accelerate and be more important for mobile advertising than other forms of digital advertising, particularly when it is applied to local advertising. We also expect further investment in this space through acquisitions and nancings. To take advantage of the power of scale, we expect mobile display ad networks to continue to consolidate into larger networks.
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Mobile: Location Based

Location, Location, LocationBased Services?
Market size and opportunity. For the purpose of this report, we are framing our market as websites or applications that allow users to interact with businesses and services in their vicinity in a social wayfor example, through check-ins. For 2010, we estimate the geosocial location-based services market at $46 million, growing to $68 million in 2011 and $455 million in 2015. Driving this 58% CAGR is the growth in smartphones. Because check-ins are done almost exclusively using a smartphone, the number of smartphone users in the United States is the main driver of the market estimate. Based on data from the Nielsen Company and the CTIA, we estimate that there were 80 million smartphone users in the United States in 2010, projected to grow to 224 million in 2015. Industry statistics and nancial metrics. The location-based advertising market uses similar metrics to other advertising venues as well as a more unique metric, check-ins. CPM (cost-per-thousand views) is used for displaying traditional display advertisement to users. CPM rates are typically higher when an advertiser is able to target dened geographies and demographics. With typical CPM rates for traditional display ads around $20, we estimate CPM rates for location-based display ads at $30-$35. Advertising methods. There are two general ways for geosocial companies to advertise: reward-based and proximity-based. The two leaders in the industry, Gowalla and Foursquare, operate on the reward-based advertising systemencouraging users to go to destinations for a reward. In the case of Gowalla, it is to earn badges for checking in; Foursquare emphasizes multiple check-ins to earn a mayor title. Proximity ads are more typical display ads that target users based on their location. Recent trends. Recent trends for geosocial companies have been mixed. Although Gowalla and Foursquare have seen their user base steadily grow, the activity at these sites appears to be decreasing. Compete.com reports that visits to both sites have decreased during the past three months and user numbers announced by these sites show a much lower growth rate than in previous years. Check-in fatigue and consumer pushback against providing too much data could be the culprits. Outlook and evolution. Local advertisers, which control about half of total advertising dollars, have been slow to engage in Internet advertising, partly because of the high cost. However, with advancements in technology and the popularity of smartphones with location-enabling technology, local advertisers have been expanding their use of Internet advertising. With the proliferation of smartphones and popularity of social networks, there are incredible commercial possibilities. However, the model used by popular geosocial companies does not appear to have completely harnessed these trends. Companies like Gowalla and SCVNGR create geosocial games for users to complete, but like individual social games, users may experience fatigue without innovation.
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Market Denition Location-based services are services offered to consumers that allow them to discover and interact with their local community using technology. In practical terms, location-based services are offered to consumers by search engines, mobile carriers, specialty websites, and application developers to let consumers connect with their peers or interact with local businesses, typically through their mobile devices. With the recent ubiquity of smartphones and the applications for them, several new businesses have emerged that combine social interaction with detailed geographical information. In addition, traditional search engines and other marketers have created new services that enable detailed advertising in very specic geographical areas. For purposes of this report, we will focus on specialty websites and mobile applications that integrate social features with location-based services, the geosocial market. Market Size Based on the market we frame above, for 2010 we estimate the geosocial location-based services market at $46 million, growing to $68 million in 2011 and $455 million in 2015. Driving this 58% CAGR is the growth in smartphones. Because users check in almost exclusively by using a smartphone, the number of smartphone users in the United States is the main driver of the market estimate. Based on data from the Nielsen Company and the CTIA, we estimate that there were 80 million smartphone users in the United States in 2010, growing to 224 million in 2015. The Pew Research Center conducted a survey in November 2010 that revealed only 4% of online Americans use location-based services like Gowalla or Foursquare and only 1% of online Americans use the service daily. The survey also revealed that use of these services had actually declined from May 2010 when 2% of online Americans reported using a geosocial service within the past day. The product of the estimate of the percentage of daily active users and total smartphone users is our estimate of the number of daily active users of geosocial services. The survey by Pew Research was conducted before Facebook released Facebook Places, which we believe will be a signicant growth driver for the market.
Table 7 Check-inSpecific Location-Based Services Industry Size 2010 80.0 2011 117.0 2012 148.1 2013 176.6 2014 202.1 2015 224.4 CAGR 22.9% 56.4%
U.S. smartphone users (in millions) Daily active LBS users (%) Active LBS users (in million) LBS ads per day eCPM LBS market size (in $millions) Year-over-year growth rate
1.5%
1.2 3.0 $35.00 $46
1.5%
1.8 3.0 $35.50 $68 48.4%
2.0%
3.0 3.0 $36.00 $117 71.0%
3.0%
5.3 3.0 $36.50 $212 81.4%
4.0%
8.1 3.0 $36.50 $323 52.6%
5.0%
11.2 3.0 $37.00 $455 40.7%
58.1%
*Among IP-based geo, search, explicit profile data, behavioral, mobile/location based, and contextual Source: William Blair & Company, L.L.C.
Compete.com, a website analytics service, notes that both Gowalla and Foursquare have a ratio of total daily visits to daily unique visitors between 1 and 2, meaning that users typically visit the site between once and twice a day, or the typical daily user checks in once or twice a day. From our experience, it appears that users receive one or two ads during each check-in. Combining the last two metrics, we estimate that daily users receive an average of three ads per day. We estimate that on average, geosocial ads cost $35 per thousand impressions, increasing slightly to $37 in 2015. We believe that the price of advertising will grow only modestly, as the supply and demand for ad inventory will increase in sync.
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Opportunity Local advertisers, which control about half of total advertising dollars, have been slow to engage in Internet advertising; one reason for this has been the high cost of purchasing ad inventory. However, with advancements in technology and the popularity of smartphones with location enabling technology, local advertisers have been expanding their use of Internet advertising. BIA/Kelsey, a market research rm, expects local advertising to increase at a 2.4% compound annual rate from $136.3 billion in 2010 to $153.5 billion in 2015, but projects online/interactive advertising within local advertising will increase at a 14.4% compound annual rate from $21.7 billion in 2010 to $42.5 billion in 2015. Geosocial services offer a compelling service to local advertisers, and if these companies could acquire 1% of the local online market, it would be a tremendous accomplishment.
Table 8 Local Advertising Market (in billions) 2010 $136.3 $21.7 15.9% 2015 $153.5 $42.5 27.7% CAGR 2.4% 14.4%
Local advertising Online/interactive Online/interactive (as a % of total local advertising)
Sources: BIA/Kelsey and William Blair & Company, L.L.C.
Geosocial services have a difcult task gaining share in the local-online advertising market. A survey by Merchant Circle and eMarketer showed that services like Gowalla and Foursquare are relatively unknown by local advertisers and even less used. In comparison, large Internet companies like Google and Facebook are well-known incumbents with massive market share.
Table 9 Local Marketer Survey Results Do You Advertise With Not yet, but plan to soon 8.9% 7.0% 7.0% 6.8% 7.8% 8.5% 9.5% 7.5% 5.4% 5.8% 10.3% 6.1% 12.2% 16.4% 5.4% 11.9% 7.7% 7.6% 13.0% 8.0% 5.5% 5.2% Never heard of this 0.7% 0.9% 5.7% 6.5% 1.3% 5.2% 2.0% 9.2% 3.8% 9.6% 3.8% 16.0% 11.5% 2.1% 19.1% 5.6% 2.9% 27.6% 14.3% 26.9% 35.2% 36.4%
Facebook Google LinkedIn Google Places Yahoo! Yahoo! Local Twitter Citysearch YellowBook.com Superpages.com Bing Yelp Facebook Places YouTube YP.com Ask.com Myspace foursquare Groupon LivingSocial Gowalla Bizzy
Yes 70.3% 66.2% 58.2% 51.4% 49.2% 45.0% 39.8% 39.7% 39.3% 33.3% 33.2% 32.2% 32.2% 26.8% 25.6% 19.9% 19.2% 8.7% 6.6% 5.0% 3.4% 2.5%
No 20.1% 25.8% 29.2% 35.3% 41.7% 41.3% 48.8% 43.6% 51.4% 51.3% 52.6% 45.7% 44.2% 54.8% 49.9% 62.7% 70.1% 56.1% 66.1% 60.1% 55.8% 55.9%
Sources: MerchantCircle, eMarketer, and William Blair & Company, L.L.C.
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The location-based advertising market uses metrics similar to other advertising venues (CPM, CPA, registered users) as well as a more unique metric, check-ins. CPM (cost per thousand views) is used for serving traditional display advertisements to users. CPM rates are typically higher when an advertiser is able to target dened geographies and demographics. With typical CPM rates for traditional display ads around $20, we estimate CPM rates for location-based display ads at $30-$35. Google uses the CPC (cost per click) business model more than any other company. In its location-based advertising program, advertisers pay for each click as well. It is not clear if other location-based advertisers also use this model. CPCs vary widely depending on the location and key word. Gowalla and Foursquare are based on users proactively checking in to locations. Checking-in involves a user opening the services website or mobile application or sending a text message, notifying the service where the user is. On average, users check in less than once a day. There has been evidence that checking in, along with overall activity in geosocial services, has declined. Foursquare is the largest geosocial service, and at the end of 2010, it announced that it had 5 million registered users and received 2 million check-ins per day.
Advertising Methods
There are two general ways for geosocial companies to advertise: reward-based and proximity-based. The two leaders in the industry, Gowalla and Foursquare, have implemented the reward-based advertising system, encouraging users to go to destinations to receive a reward. In the case of Gowalla, it is to earn badges for checking in; Foursquare emphasizes multiple check-ins to earn a mayor title. Proximity ads are more typical display ads that target users based on their location. Custom Stamps and Badges Gowallas service is positioned more as a game for users to try to accumulate stamps on their virtual passports. For example, users can check in at a Los Angeles Lakers game for a stamp at the Staples Center or at their favorite taco stand. Gowalla allows any location to add itself to its directory to allow users to get stamped when they check in. Gowalla also offers customized stamps for $250 for businesses to attract customers.
Figure 18 Gowalla Passport Stamps
Sources: Gowalla and William Blair & Company, L.L.C.
Mayors In contrast to Gowalla, Foursquare focuses more on users checking in repeatedly at the same location to earn points or become mayors. Mayor titles can be earned by being the user who checks in the most often at that location over 60 days. Businesses that partner with Foursquare offer perks to mayors as a loyalty reward. Ralph Schackart 312.364.8753 - 32 -

Group Buying Foursquare offers businesses the opportunity to advertise group buying to users. When users check in to a location, they immediately receive a notication. Businesses can pay Foursquare for the ability to advertise on the check-in, with group buying being an option. For example, a user might check in to her favorite bar and receive an ad, served by Foursquare, telling the user that if 19 other people check in to the same bar within one hour, one round of drinks will be free.
Figure 19 Foursquare Group Buying Example
Sources: Foursquare and William Blair & Company, L.L.C.
Location-Based Display Ads Geosocial service companies like Foursquare and Gowalla offer advertisers display advertising to users based on search queries and location. These ads are similar to those offered by search engines like Google and are charged on a CPM or CPA/CPC basis on similar pricing terms. A major differentiating factor between a geosocial company and a large search engine is scale. Figure 20, on the following page, is a search result from Foursquare and gure 21, on page 35, is a search result from Google. Because Google offers massive scale in terms of users, reviews, and advertisers, it can create much deeper and more valuable advertisements.
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Sources: Foursquare and William Blair & Company, L.L.C.
Figure 20 Local Advertising on Foursquare
Foursquare Ad
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Figure 21 Local Advertising on Google Places
Google Places Ad
Sources: Google Inc. and William Blair & Company, L.L.C.
Types of Service Providers There are several different types of companies offering location-based services. In addition to the geosocial companies that we have highlighted, Gowalla and Foursquare, there are other types of companies that offer location-based services. Google offers the largest location-based services program for advertisers. Through its Google Maps service and opensource developer language (Keyhole Markup Language or KML, of which both Foursquare and Gowalla use), Google can provide accurate map locations of local businesses as well as search information and reviews. Google is also hard at work making Google Maps more social with its Latitude product, and it has candidly acknowledged that it is making all of its products more social. Yahoo and Microsoft also offer location-based services with their search engines, although neither has the breadth of Googles. Facebook offers a location-based service, Facebook Places, that is similar to some geosocial services. Facebook Places allows users to check in and announce their location (similar to Gowalla and Foursquare). Facebook Places also offers local advertising, which, as seen in the survey results previously shown in table 9 (on page 31), has been embraced by local advertisers and should continue to grow.
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As mentioned in the Market Size and Opportunity section above, recent trends for geosocial companies have been mixed. Although Gowalla and Foursquare have seen their user base steadily grow, the activity at these sites appears to be decreasing. Compete.com reports that visits to both sites have decreased during the past three months and user numbers announced by these sites show a much lower growth rate than in previous years. There have also been recent articles in the press regarding people having check-in fatigue. Geosocial companies offer users stamps, badges, or some other virtual item or reward, but after time users grow tired of gathering virtual rewards. There has also been a backlash over people sharing too much information. Pleaserobme.com was created by developers using user data from Foursquare to show when people were away from their homes. The purpose of this website was to show how much information people share and how it could be used negatively (the site has since been shut down).

There has been a lot of discussion in the VC world about SoLoMosocial, local, mobile and for good reason. With the huge and growing number of smartphones in use and the popularity of social networks, there are incredible commercial possibilities. However, the current model used by popular geosocial companies does not appear to have completely harnessed these trends. Companies like Gowalla and SCVNGR create geosocial games for users to complete, but like individual social games, users may have fatigue without innovation. At a press event at SXSW, the CEO of Gowalla said, In a lot of ways, badges are bullshit, lets be honest. Checking in for social purposes, to tell peers where you are and what you are doing, appears to have a more sustainable life. Twitter and Facebook are better comparisons, as users of these websites will document what they are doing, and these sites have shown no sign of slowing. Monetizing this trend has been the great puzzle. No company has shown that it knows clearly how to monetize the location-based services market on a large scale. Most likely, the company or product that will monetize this trend has yet to emerge.
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Mobile: Text/SMS
OMG! TXT ads = $700m @ 2015 :)
Market size and opportunity. Today, there are nearly as many cell phone plans as there are people in the United States, and texting is the second-most-popular activity on a cell phone after making a call. Hence, text-based advertising is a large and growing market. EMarketer estimated the text-message advertising market at $324 million in 2010 and projected it would grow to $603 million in 2014, a compound annual growth rate of 21%. We estimate the text-message advertising market at $324 million in 2010, growing to $713 million in 2015. This growth is driven by the increased adoption of smartphones and participation in text-based advertising by users. Industry statistics and nancial metrics. The text (or short message service, SMS) message advertising business model is available only to mobile phone owners. The operations of the advertisement campaign (connecting the advertiser with the user) are typically run by a third partyGroupTexting is a leader in this eld. Customers can pay $0.05 per text message with no monthly fee, or $149 a month and $0.04 per text message, with four other levels in between. Charging advertisers on a per-message basis is the industry standard, with $0.03-$0.10 the typical price. It should be noted that this charge is separate from the charge that users pay to send or receive text messages. According to the Mobile Marketing Association, text-message ad campaigns average $75,000-$100,000. The response rate for text-message ads is about 2%, quite high compared with other advertising methods, and even higher for smartphone users. Advertising methods. There is one general form of text-message advertising: users contact an advertiser by calling or texting a number they are given and that puts the users phone number on the distribution list. Once on the list, the user receives applicable messages. The technology to create mass text-messages is not difcult and the barriers to entry are not insurmountable; thus, there are many participants in the highly fragmented market. Popular advertisements include coupons for the advertisers products, information on the advertiser, interactive campaigns (for example, voting for a favorite avor), or providing information (weather, sports scores, etc.). Recent trends. A market participant with a unique business model, Zoove offers an easy-touse StarStar system. We believe this system has the opportunity to gain traction because of its ease of use and consumer retention. Zoove has come to terms with all four major American carriers (the last two agreed in March 2011) and will begin rolling out its service in the United States soon. Outlook and evolution. We estimate text-message advertising will grow steadily through 2015. Growth will be driven by increased smartphone adoption and users acceptance of the new medium. As mentioned previously, smartphone users are much more likely to accept and respond to text-message advertisements; therefore, as smartphone use increases, we believe text message advertising will as well.
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Considering that there are nearly as many cell phone plans as there are people in the United States and texting is the second-most-popular activity on a cell phone after making a call, it makes sense that text-based advertising is a large and growing market. EMarketer estimated the text-message advertising market at $327 million in 2010 and projected it will grow to $603 million in 2014, a compound annual growth rate of 21%. We estimate the textmessage advertising market at $324 million in 2010, growing to $713 million in 2015. This growth is driven by the increased adoption of smartphones and participation in text-based advertising by users.
Table 10 SMS/Text-Based Advertising Market 2010 300 27% 80 $0.05 $324 2011 308 29% 95 $0.05 $424 30.9% 2012 315 31% 103 $0.05 $503 18.5% 2013 321 33% 109 $0.05 $577 14.8% 2014 326 35% 115 $0.05 $656 13.6% 2015 330 36% 120 $0.05 $713 8.6% CAGR 1.9% 8.4% 17.1%
Mobile phone subs. (in millions) SMS ad market participation Ads, per year, per participant Price per ad Market size (in $millions) Year-over-year growth rate

The text (or short message service, SMS) message advertising business model is unique because it is available only to mobile phone owners, and recipients of the advertisements have to opt in to receive advertising. Most commonly, a user will text or call an advertised number to send or receive information. When the number is called, the advertiser stores the phone number and will send information or advertising. The advertiser will then use the received phone number as a marketing contact and will send promotional text messages to the recipient.
Figure 22 Text Message Advertisement Example
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The operations of the advertisement campaign (connecting the advertiser with the user) are typically run by a third party, which usually charges the advertiser on a per-message basis. GroupTexting is a leader in this eld. It charges a per-month fee, with a per-text fee that changes based on the per-month fee. Customers can pay $0.05 per text message with no monthly fee, or $149 a month and $0.04 per text message, with four other levels in between. Charging advertisers on a per-message basis is the industry standard, with $0.03-$0.10 the typical price. It should be noted that this charge is separate from the charge that users pay to send or receive text messages. According to the Mobile Marketing Association, textmessage ad campaigns average $75,000-$100,000. Advertisers typically send coupons, product announcements, or interactive messages to recipients as text-message ads. The response rate for text-message ads is about 2%, quite high compared with other advertising methods. When the recipient is using a smartphone, the response rate is even higher. Millennials also show a much higher response rate. GfK MRI, a market research rm, noted that Millennials are 57% more likely to have looked at an ad sent via text message and 93% more likely to respond to a text-based ad than the general population. Advertisers must abide by strict rules, as text messaging can be obtrusive and expensive. For that reason, marketers must mention to recipients that they can opt out of the distribution list by replying stop. However, textsmsmarketing.com, a text-message marketing rm, noted that only 3% of responders opted out.
Advertising Methods
There is one general form of text-message advertising: users contact an advertiser by calling or texting a number they are given and that puts the users phone numbers on the distribution list. Once on the list, the user receives applicable messages. The technology to create mass text messages is not difcult and the barriers to entry are not insurmountable; for those reasons, there are many participants in the highly fragmented market. Popular advertisements include coupons for the advertisers products, information on the advertiser, interactive campaigns (for example, voting for a favorite avor), or providing needed information (weather, sports scores, etc.). One competitor, Zoove, has created a unique business model. Zoove recently got all four of the major U.S. carriers to agree on a StarStar numbering system, which it controls. Marketers can rent vanity numbers from Zoove that begin with users entering two stars on their phones: **. For example, Ford can rent **FORD from Zoove, then use the vanity phone number to advertise to consumers and market to them using text messages through the **FORD phone number. This system is easy for advertisers to work with and for consumers to adopt (words are simpler to remember than a 5- or 6-digit number).

Zoove came to terms with the last two of the four major American carriers in March 2011 and will begin rolling out its service in the United States soon. The StarStar system has the opportunity to gain traction, in our view, because of its ease of use and consumer retention.
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We estimate text-message advertising will grow steadily through 2015. Growth will be driven by increased smartphone adoption and users acceptance of the new medium. Smartphone users are much more likely to accept and respond to text-message advertisements; therefore, as smartphone use increases, we believe text-message advertising will as well. Although text-message advertising is expected to grow considerably over the next four years, it is expected to be surpassed by other mobile advertising methods. EMarketer, which has projections for text-message advertising similar to ours, estimates that text-message advertising, currently the leader in mobile advertising, will be surpassed by mobile display and search within the next four years. However, text messagings usurpation has more to do with the other methods success than text messagings oundering (mobile display and search are estimated to grow at a compound annual rate of 58% and 59%, respectively).
Table 11 eMarketer Mobile Advertising Estimates (in millions $) Method Messaging Display Search Video Total 2009 $228.8 $91.4 $83.2 $12.6 $416.0 2010 $327.3 $202.5 $185.0 $28.3 $743.1 2011 $422.0 $334.5 $295.1 $50.8 $1,102.4 2012 $476.7 $489.1 $451.4 $84.0 $1,501.2 2013 $528.5 $693.4 $681.1 $133.8 $2,036.8 2014 $602.5 $887.6 $858.2 $201.3 $2,549.6 CAGR 21% 58% 59% 74% 44%
Sources: eMarketer and William Blair & Company, L.L.C.
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Online Video and Guidance: Interactive Program Guides

Discovering a New Market
Market size and opportunity. Interactive program guide (IPG) advertising is a nascent but potentially large market opportunity at the cusp of a natural secular trendthe shift from static cable guides to IPGs that build in multiple content sources. We estimate the market is less than $100 million today, but could be as large as $2 billion-plus within the next 5 to 10 years. The opportunity is signicant, as IPGs provide a more robust platform for consumers to interact with and support for multiple platform brand campaigns. A few facts are already clear: 87% of households interact with the guide weekly and accessing households use the guide on average nine times a day for an estimated 13 minutes daily, or more than 90 minutes per week, resulting in a highly engaged consumer. Industry statistics and nancial metrics. In early 2011, there were 70 million ad-capable IPGs in the market, via a combination of 24 million set-top-boxes and 46 million connected CE devices. An estimated 40% of the roughly 250 million TVs sold per year worldwide are expected to have Internet connectivity in 2011, growing to nearly 100% over the longer term. This is a natural footprint for OEMs and marketers to begin building an emerging ad platform on a large and growing base. Furthermore, OEMs have a nancial incentive to build in the connectivity, as it creates a revenue source (typically 50/50 split) in addition to a more targeted and interactive platform for an advertiser. We estimate traditional advertisers pay CPM rates several times higher than entertainment ads ($4.00 or more versus about $0.50, respectively). In 2011, we believe traditional advertisers will account for about 1.5% of advertisements, scaling to roughly 20% by 2015. Assuming no increase in entertainment CPM rates, we believe the mixed CPM rate will increase from $0.57 in 2011 to $1.40 in 2015, with a longer-term CPM rate around $6.00. Advertising methods. The IPG platform enables standard banner ads, call-up banners, in-commercial pop-up, and complementary banners. Moreover, IPGs are being built into new devices (e.g., iPhone, TV, Blu-ray, iPad), potentially enabling cross-platform campaigns that typically generate higher CPMs and better brand awareness. Recent trends. Rovi is building out a cloud-delivered interactive advertising platform to be incorporated into IPGs for CE OEMs and operators. There is early evidence that traditional advertisers are using IPGs, and we believe marketers will demand more interactive ads. Outlook and evolution. Although projected to be only $2 billion of the $58 billion U.S. TV advertising market, we believe the market may have the opportunity to be larger with the rollout of connected TVs, Blu-ray players, tablets, and other connected devices. We believe new and innovative advertising products will emerge and cross-platform campaigns will be increasingly demanded by advertisers.
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Interactive program guide (IPG) advertising is a nascent market (less than $100 million) with a long-term opportunity of more than $2 billion. IPGs are primarily accessed through two devices: set-top boxes (provided by an MSO) and connected CE devices (mainly TVs, but also Blu-ray players and tablets). In the United States, 9 of 10 consumers start a TV viewing session by using the IPG, and 7 of 10 consumers who start a TV viewing session do not have a specic piece of content that they plan to watch (i.e., they start at the guide to see whats on). This user activity results in frequent guide access; according to Rovi, 87% of households access the guide weekly, and accessing households use the guide an average of 9 times a day for a total of 13 minutes. In January 2011, there were 70 million ad-capable IPGs in the market, a combination of IPGs for 24 million set-top boxes and 46 million connected CE devices, and we estimate about 30 million are actively used guides (many CE guides are infrequently accessed). In 2015, we believe the U.S. market will have about 120 million actively used guides, which dovetails closely with Nielsens estimate of 116 million U.S. TV households in 2011, especially considering many households will have multiple guides.

Given the entertainment-centric use of IPGs, the vast majority of advertising in this vertical to date has also been tune-in or entertainment based; typically, TV networks promoting shows, infomercials promoting their air-time/product, and movie studios or MSOs promoting VOD offerings. As the number of deployed ad-capable IPGs continues to expand, however especially IPGs that are Internet-connectedtraditional advertisers are warming to the idea of IPG advertising and a select few have already run campaigns (e.g., Ford, Radio Shack, and Toyota). Traditional advertisers are drawn by two main benets. First, relative to TV commercials, consumers are actively engaged when using an IPG, so the advertiser stands a better chance of being noticed. Second, IPG advertising allows interested customers to click through for additional information, queuing up videos, photos, and text information. The desire to attract traditional advertisers to the IPG is straightforward; it increases demand (higher sell-through) and traditional advertisers can be paid CPM rates many times higher than non-prime entertainment ads ($4.00 or more versus about $0.50, respectively). We note, however, that the highest CPM rates have remained prime-time tune-in rates for banners located on guide screens detailing primary network channelswhich our research indicates can sell for eCPM rates as high as $35. In 2011, we believe about 1.5% of advertisements will be from traditional advertisers, scaling to about 20% by 2015. Assuming there is no increase in entertainment CPM rates (a conservative assumption), we project the mixed CPM rate will increase from $0.57 in 2011 to $1.40 in 2015. In addition, we note that eCPM rates are an estimation; banner ads can be (and are) also sold in a number of other ways, such as a xed fee per hourly rotations and in bundles (e.g., banner ad + video spot ad). In the long term, Rovi Corp. believes the IPG advertising market could exceed $2 billion annually. We take heed of its forecast, as Rovi is the worldwide leader in IPG technology and owns a 5,000-plus worldwide patent portfolio covering IPG technology, including advertising in IPGs. Through this, Rovi has a license agreement with practically every CE manufacturer and MSO in the United States using IPGs, which requires that Rovi be paid 50% of advertising revenue garnered from serving ads on IPGs. Further, Rovis advertising division is responsible for signing up advertisers and serving practically all the advertisements into IPGs in the U.S. market.
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Rovis long-term forecast is detailed in table 12. We believe an overall average $6.00 eCPM estimate is aggressive (even though eCPM pricing has been on the rise, with traditional advertisers paying in the $10 to $15 range recently), but we also believe the 15 impressions per day estimate is conservative, given that recent market tests have found that households load the guide about an average of 10 times per day, receiving an average of about 40 impressions.
Table 12 Market Analysis: Interactive Program Guides Advertising 2011 $0.50 98.5% $5.00 1.5% $0.57 40 18.0% 365 40 $60 2012 $0.50 96.0% $5.00 4.0% $0.68 40 19.0% 365 60 $113 2013 $0.50 93.0% $5.00 7.0% $0.82 40 21.5% 365 85 $217 2014 $0.50 88.0% $5.00 12.0% $1.04 40 25.0% 365 120 $456 2015 $0.50 80.0% $5.00 20.0% $1.40 40 30.0% 365 120 $736 Rovi Corporations Long-Term Forecast*
Entertainment CPM rate Percent of total impressions Non-entertainment CPM rate Percent of total impressions Mixed CPM rate Impressions per day (visits impressions per visit) Sell-through rate Days per year Actively used IPGs (in millions) Revenues (in $millions)
*Provided by Rovi Corp. at December 2009 analyst day Sources: Rovi Corp. and William Blair & Company, L.L.C.
$6.00 15 50.0% 365 121 $1,987
Advertising Methods
To date, advertising on IPGs has focused largely on banner ads, but experimentation with more interactive ads has also begun. Companies seeking to advertise on IPGs have a few options, depending on the advertising strategy (tune-in, brand awareness, brand building, etc.) as well as the deployed ad-capable IPG technology (not all IPGs can handle all ad types). The most common types of ads are detailed below, although we note that the list is not inclusive, and more interactive types of ads are likely to be offered as robust nextgeneration IPGs are launched and deployed. Standard bannertypically runs at the bottom of the IPG screen. Click functionality calls up a new screen with additional text information and play/record/watch options. Call-up-video bannertypically runs at the bottom of the IPG screen. Click functionality plays a movie or takes a user to a VOD purchase screen. Complementary bannertypically runs at the bottom of the IPG screen in conjunction with paid programming infomercials. Click functionality calls up a new screen with additional text information.
In addition, interactive TV advertising is also beginning to gain traction. This market is technically separate from IPG advertising, but there are signicant similarities between the two. Interactive TV advertising seeks to make TV-based advertising more of a dialog with viewers versus a message spoken to viewers. For example, FourthWall Media offers technologies that enable an ecosystem for advertisers, programmers, and operators to enhance TV ads with features such as click-to-call, click-for-information, voting/polling, and other technologies that engage the user. An example of an interactive TV ad is detailed in the bottom-right corner of gure 23, on the following page.
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Figure 23 IPG Advertising Methods Standard Banner Complementary Banner
Source: www.rovicorp.com
Interactive TV Enhanced Engagement Ad

Video Banner
Source: www.fourthwall.com

Traditional Advertisers Are Beginning to Use IPG Advertising Given the platform focus of IPGs, the vast majority of advertising to date has been entertainment-centric. There has been a concerted effort, however, to attract traditional advertisers to the platform, and a couple of traditional advertising campaigns have already been conducted. Importantly, the IPG platform is delivering performance above expectations; in 2010, a consumer goods company ran a campaign expecting a click-through rate (CTR) of about 1%, but received a CTR closer to 4%. Rovi is compiling market research/usage data, which is critical to convincing marketing departments to develop and run IPG advertising campaigns. The data thus far has been persuasive, however. A combination of strong CTRs, the broadening reach of IPGs (will approach the number of U.S. TV households in a couple of years), and a more engaged audience (relative to TV commercials) are increasingly drawing advertiser attention. Advertising Is Transitioning From Static Banners to More Interactive Ads IPGs are becoming more robust, and with the transition, advertisements are becoming more interactive. Next-generation guides such as Rovis TotalGuide are capable of handling interactive and rich media advertisements, as well as video ads, which should garner higher CPM rates. Further, Rovis Media Cloud technology extends robust advertising functionality to other IP-connected CE devices that want to incorporate some portion of guide/search/ recommendation technology, which is likely to extend the IPG advertising opportunity beyond the TV. For example, multiple cable MSOs have launched IPG apps for tablets.
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IPG Advertising Will Become Increasingly Important to Viewership According to Magna Global, the 2010 domestic TV advertising market in the United States was nearly $160 billion, projected to grow to $224 billion in 2015. IPGs have become consumers primary interaction tool for TV content, and we believe the enhanced functionality built into next-generation IPGs will drive incremental usage. As the IPG becomes increasingly central to the user experience, we believe it will serve a larger role in directing consumers to content. As a result, the importance of advertising on IPGs to drive user viewership will increase (as detailed above, nearly all IPG advertising today is entertainment-centric, and in 2015 we estimate that 80% of advertising will be entertainment-centric). Said another way, we believe the TV networks and movie studios will increasingly adopt IPG advertising over time to drive incremental viewership; a small IPG advertising investment can protect or grow a TV networks much-larger TV advertising business or drive incremental VOD transactions. New and Innovative Advertising Products for the IPG Will Likely Emerge IPG advertising is a nascent market, and like most other nascent markets with a large longterm opportunity, we see potential for innovative new advertising products. For example, we believe TV commercials could eventually have a selectable tell me more icon, which when selected links the user to a dedicated product page or perhaps to a Web address. Another example could be a selectable icon during a commercial that will e-mail a user a coupon for a product. A third example could be a branded guide background skin. We note that we are not predicting that all, or even one, of these examples will ultimately occur; rather, the IPG has evolved over time, and we believe advertising products will evolve in tandem. Still, some of the next generation advertising methods detailed above have been claimed in interactive TV advertising patent lings in the United States within the past 10 yearsproviding evidence that industry participants have been contemplating new IPG advertising methods for many years.
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Online Video and Guidance: Over-the-Top Video

OTT: No Cable(s) Needed
Market size and opportunity. For the purposes of this Internet advertising report, we dene OTT as advertising-supported premium content accessed through a connected device primarily in a persons home. We believe advertising will shift toward a more customer-focused experience via Internet TV compared with the pure reach focus of traditional television advertising today. Historically, TV promotions have been dumb and new platforms such as Hulu can make advertising smart. We estimate that advertising generated $624 million in 2010 on connected devices and will generate $973 million in 2011, growing to $4.2 billion by 2015. Industry statistics and nancial metrics. With the explosive popularity of connected consumer electronics devices such as Blu-ray players and TVs, we estimate that the number of households with an OTT-enabled device will increase from 20 million to almost 50 million. We estimate that in 2010, the typical OTT household watched 4 hours of OTT content per week, and we project this will grow to 9 hours per week in 2015. Multiplying the number of OTT households by the time spent watching OTT, we believe the total number of hours of OTT content watched will more than quintuple between 2010 and 2015. Advertising in OTT content is similar to advertising in the $67 billion traditional television market: broadcasters play advertisements between segments of content. Advertisers pay for advertisement space based on the characteristics and reach of the content. Specically for OTT, we believe the number of ads played per hour will remain constant at about six (well below the 16-22 minutes per hour for traditional TV). We also believe that the price of advertising will grow modestly from $25 per CPM to $30 per CPM in 2015. Advertising methods. Pre-roll ads are the most effective advertisement in over-the-top advertising. This is because the viewer is very likely watching, since he or she initiated the content. Overlay ads, or advertisements that are displayed over the desired content, are also used. Premium branded canvases or skins are also a growing trend. Recent trends. There has been no shortage of news ow from Google, Apple, Netix, Hulu, Rovi, and other prominent market players on the movement into OTT content. The large market is attracting elephants. Outlook and evolution. Improved audience targeting has the potential to be a major revenue driver for the OTT industry, and may increase CPMs. In our sensitivity analysis, we highlight the market potential if our 2015 $30 CPM estimate proves conservative. For example, at a $30 CPM, we estimate the OTT advertising opportunity at $4 billion-plus. At a $40 CPM, the market forecast totals nearly $5.6 billion; if CPM rates ever approach $50, this potentially becomes a $7 billion market.
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Market Denition For the purposes of this Internet advertising report, we dene OTT as ad-supported, premium content accessed via a connected device primarily in a persons home. We believe advertising will shift toward a more customer-focused experience via Internet TV compared with traditional television advertisings focus on reach. Historically, TV promotions have been dumb and new platforms such as Hulu can make advertising smart. For example, Hulu has been testing choice-based advertising and other innovative ad methods. Over the past few years, over-the-top video has expanded from the early adopters to the general public and is poised to continue its rapid growth. Over-the-top video, that is, watching video content from the Internet on a consumers television, has burgeoned lately as a result of the proliferation of connected devices, particularly televisions, Blu-ray players, and gaming consoles. On the content side, Hulu, YouTube, Netix, Pandora (music today), and others are providing content to these connected devices that are driving demand for connectivity. At an estimated $67 billion traditional TV advertising market, we believe the market is big enough to continue to attract more consumer and advertiser interest.
Figure 24 Best Buy Weekly Circular Ad for Connected Blu-ray Players
Sources: Best Buy and William Blair & Company, L.L.C.
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Market Size Every OTT content provider has a different business model. Netix is subscription based (no advertising) for long-form catalog content, YouTube is ad based for user-generated content, and Hulu and Pandora are hybrids of the two models. We estimate that advertising generated $624 million in 2010 on connected devices and will generate $973 million in 2011, growing to $4.2 billion by 2015. Powering this growth is the increasing amount of time spent watching OTT content by consumers. We estimate that in 2010, 20 million U.S. households owned a device that was capable of playing OTT content, and we project this number growing to 50 million in 2015. In addition, households that have OTT capability are increasingly streaming more digital content. We estimate that in 2010, the typical OTT household watched 4 hours of OTT content in 2010 and forecast this will grow to 9 hours in 2015. Combined, we believe the total number of hours of OTT content watched will more than quintuple between 2010 and 2015.
Table 13 OTT Industry ModelAdvertising 2010 100 20% 20 35 11.4% 4.0 6.0 24,960 $25 $624 2011 102 24% 24 35 14.3% 5.0 6.0 37,440 $26 $973 56.0% 2012 103 28% 29 35 17.1% 6.0 6.0 53,914 $27 $1,456 49.5% 2013 105 33% 35 35 20.0% 7.0 6.0 75,479 $28 $2,113 45.2% 2014 106 39% 41 35 22.9% 8.0 6.0 103,514 $29 $3,002 42.0% 2015 108 46% 50 35 25.7% 9.0 6.0 139,744 $30 $4,192 39.7% 46.4% CAGR 1.5% 20.0%
Total cable households (millions) Percent of cable HH OTT enabled OTT households (millions) Hours of TV watched per week/HH Percent of time spent watching OTT OTT hours per week per household Ads per hour Total ads (millions) eCPM Total revenue ($ millions) Year-over-year growth rate
17.6% 41.1%
Advertising in OTT content is similar to advertising in traditional television: broadcasters play advertisements between segments of content. Advertisers pay for advertisement space based on the characteristics and reach of the content. For OTT, we believe the number of ads played per hour of content will remain constant at about six, or roughly 3-4 minutes (well below the 16-22 minutes per hour for traditional TV). We also believe that the price of advertising will grow modestly from $25 per CPM to $30 per CPM in 2015. Opportunity With a domestic household penetration rate of nearly 100%, the television offers an incredible medium to advertise. EMarketer estimates the 2011 domestic TV ad market at $67 billion. Over-the-top advertising also offers the possibility of personalizing advertisements to the individual viewer. Combined, these two qualities create a signicant opportunity for overthe-top advertising, in our view. Like most other broadcasting mediums, the cost per thousand viewers, CPM, is used as the measurement of choice for pricing advertisements. In our model, we estimate the industry average CPM at $25. Our estimate of this CPM was calculated based on our reverse-engineered Hulu CPM model and industry statistics. This rate appears reasonable compared with other CPM rates, such as prime-time TV at about $45, network/local TV near $20, TechCrunch.com at $18, WSJ.com at $90, and a Super Bowl ad at about $30. Calculating Hulu CPM as a benchmark. Although not perfect for lack of complete information, we estimated Hulus CPM rate for 2009 and 2010 based on revenue estimates released by management and video ad numbers published in comScores Video Metrix report. Hulu generated $108 million in 2009, all of which was from advertising. ComScore published total video ads viewed for the last six months of 2009 and we estimated the rst Ralph Schackart 312.364.8753 - 48 -

six months. Dividing the estimate of total video ads by $108 million leads to a CPM of $43.20. We acknowledge that the comScore ad number might not be all-inclusive (excluding our estimate), and Hulu also generated advertising revenue from nonvideo sources, such as display; however, we believe this framework is reasonable and the calculated CPM number is similar to other CPM rates.
Table 14 Estimated Hulu CPM (dollars in thousands, except CPM) 2009 $108,000 $0 $108,000 2,500,000 $43.20 2010 $263,000 $3,000 $260,000 9,000,000 $28.89
Reported total revenue Estimated subscription revenue Advertising revenue Estimated viewing ad impressions Calculated CPM
Our industry model is driven by the growth in the number of households with a connected device that is connected to the Internet. This metric is directly linked to the number of connected devices sold in the United States. Sales of connected devices have been growing steadily over the past year; iSuppli, a market research rm, expects growth to be 77% in 2011 and 56% in 2012. Although there are many similarities between OTT advertising and traditional broadcast advertising, a notable difference is the lower ad load for OTT. The ad load, the ratio of advertising to desired content, for online content is signicantly less than traditional broadcasting. The Nielsen Company reported that online video had on average four minutes of commercials for every hour of content, less than broadcast TV with about 22 minutes of commercials every hour. ComScore has mentioned that it believes consumers are willing to accept more advertisements in online video; however, it has also been reported that because consumers have been treated to a lower ad load than traditional television, they will not accept an increased ad load overnight. We estimate that the ad load for OTT content, which we consider to be a segment of online video, will remain constant or increase slightly over time. Our forecast may prove conservative, but we believe it is prudent given that the market is in early stage of transition and, as usual, new advertising models have to be proved to advertisers and consumers.
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Advertising Methods
Pre-roll Ads The most effective advertisement in OTT advertising is the pre-roll ad. A pre-roll ad is an advertisement that plays before the desired content. There is no standard length of a preroll, but they are typically between 15 and 120 seconds. Pre-roll ads are the most effective because the viewer is very likely watching, since he or she just initiated the content, and the viewer will most likely watch the entire clip to get to the desired content shortly after. Pre-roll ads are sold on a CPM basis.
Figure 25 Hulu Pre-roll Advertisement
Sources: Hulu and William Blair & Company, L.L.C.
Overlay Ads An overlay ad is an advertisement that is displayed over the desired content. Overlay ads are meant to be unobtrusive but also get the viewers attention. Overlay ads can be either static display ads (like the example in gure 26) or animated graphics. Overlay ads are sold on a CPM basis.
Figure 26 Overlay Advertisement Example
Overlay Ads
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Premium Branded Canvases/Skins In many cases, music for instance, the visual content can be compressed and rich display advertisements can be added. The example in gure 27 is from Pandora, which provides music through mobile devices, an Internet browser, and OTT devices to consumers. In the gure (OTT consumer CE devices), the advertiser pays for a skin of the player while the consumers music is playing. There is no interference with the content itself. This example also effectively shows that content providers can charge premium rates because of their ability to target the audiences desired by advertisers. Because Pandora users enter their birth date to create an account, Pandora can sell advertising to marketers that want a specic age demographic, among other targeting data.
Figure 27 Premium Branded Skin
Sources: Pandora Media, Inc. and William Blair & Company, L.L.C.
Other There is no standard form of OTT advertising and any content provider can create any form of advertising to best suit the content. Hulu has been testing ad selectors, advertisements that the viewer selects out of two choices, and has more than 350 advertising clients. Choice-based advertising, such as ad selectors, has shown increased viewer retention and interaction, meaning better results for advertisers and higher CPMs. Viewers can also be given the choice of duration for the advertisements; for example, offering viewers the option of watching four 30-second commercials or one 2-minute commercial. We expect new advertising methods to appear as the industry becomes larger and more mature. For example, Hulu states that its ads are 55% more effective versus broadcast, according to a Nielsen study (based on recall and brand recall). Similar to Netix, Hulu also has an algorithm that uses consumer statistics of viewership to power a recommendation ad enginee.g., you just watched XYZ show, viewers of XYZ show also tend to like these other types of shows. Types of Content Providers Netix, Hulu, YouTube, and Pandora are the leaders in OTT content, with dozens of other rms also participating. Generally, there are two types of content providers: subscriptionbased and advertisement-based. Netix and Hulu Plus are the two biggest players in the subscription-based content segment (not our area of focus here). In both of these examples, users pay a fee ($7.99 for Hulu Plus and Netix) to access content. Advertising-based content providers, such as YouTube, rely solely on advertising and display as many ads as possible. In between these two models are hybrids such as Pandora (music) and Hulu, which offer a free service or an enhanced service for a subscription. Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 51 -

Types of Service Providers Content is delivered to users through native applications on the connected device or installed through an app store. The applications advertised in gure 28 are pre-installed and can be accessed by using the native operating system. Other devices, such as AppleTV and certain Samsung TVs, offer an app store that allows users to install third-party applications created by independent developers. Samsung has a ourishing application market, which offers hundreds of apps, for free or purchase, spanning genres as diverse as social networking and tness videos. The apps offered by Samsung are similar to the App Store operated by Apple. Samsungs application store has been successful, with more than two million apps downloaded. According to Samsung, it took 10 months for the rst million apps to be downloaded and 2 months for the second million apps to be downloaded.
Figure 28 Samsung Connected TV Applications
Sources: Samsung and William Blair & Company, L.L.C.

Over the past year, Google has introduced Google TV and Apple has introduced Apple TV. Both offer consumers the ability to download third-party applications to access on their TVs. This development has led to the creation of many applications that allow users to view specic content for their needs. If the success of the Android and iOS operating systems for mobile devices is an indication of the potential of these TV-based platforms, the market for TV apps will grow. Content owners have been experimenting with different ad formats, from choose-your-own-ad to branded skins. As no perfect ad format will probably ever be found, we expect the trend of continued experimentation to continue. In just the rst few months of 2011, a battle over content has emerged between OTT content providers such as Netix and YouTube and traditional pay-TV providers such as HBO. Netix recently purchased the exclusive rights to House of Cards, a new original program, beating HBOs and Showtimes bids. Google recently purchased Next New Networks to help less well-known lmmakers make original videos designed for YouTube.
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Rumors have also surfaced that YouTube parent Google has considered purchasing its own original content.
As these OTT content providers accumulate more exclusive content, their demand increases, and we therefore expect their advertising revenues to increase as well (when these rms display advertising). As reported by Hulu, it is writing checks that are very material to content owners.

With the synergies of consumers demanding content on their terms, OTT content providers acquiring more content, and hardware makers making connected devices more effective and prolic, it is clear that the OTT advertising market will continue its strong growth. Beyond strong growth, we expect new advertising models to emerge, including new methods of targeting audiences. Improved audience targeting is a major theme in Internet display advertising and we expect it to cover OTT advertising as well. Improved audience targeting has the potential to be a major revenue driver for the OTT industry. In gure 29, we highlight the market potential if our 2015 $30 CPM estimate proves conservative and increases over time. For example, at a $30 CPM, we estimate the OTT advertising opportunity at $4 billion-plus, and at $40, the market forecast totals nearly $5.6 billion; this increases to potentially a $7 billion market if CPM rates ever approach $50. Through our research, we discovered CPM rates in the online advertising industry vary widely, with some niche content able to command triple-digit CPMs. We believe that with improved targeting technologies, OTT providers can increase CPM rates, but the ultimate CPM potential is still unknown, in our view.
Figure 29 OTT Advertising2015 Sensitivity Analysis (dollars in billions,except CPM)
$8 $7 $6 $5 $4 $3 $2 $1 $0 $30.00 $35.00 $40.00 CPM
$7 $6 $6 $5 $4
$45.00
$50.00
We expect the emergence of standard operating systems, such as Google TV, Linux, and possibly Apple iOS, for connected TVs will be a major catalyst for the industry. With a standard operating system that is open for third-party developers, other parties will be able to create apps that contain content for OTT consumption and advertising. Content creators such as ESPN and AccuWeather already have TV apps that are available for downloading and contain advertising. It is safe to assume that the number of these applications will only multiply, in our view.
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Online Video and Guidance: User-Generated Video

Home Videos Grow Up
Market size and opportunity. Since the launch of YouTube in November 2005, usergenerated videos have been one of the largest growth drivers of Internet video. Accustream estimates there were 230 billion U.S. online video views in 2010. Because YouTube and others are either privately held or part of much larger tech companies, it is difcult to obtain nancial and operational information. However, it is estimated that YouTube, which is roughly half of the user-generated video market, will generate $1 billion in 2011 revenue, up from an estimated $800 million in 2010. We estimate the U.S. market for user-generated video at $1.5 billion in 2010 and $2.2 billion in 2011, growing to $7.7 billion in 2015. Driving this growth is the increase in viewership of user-generated videos and the monetization of the videos. Industry statistics and nancial metrics. Google stated that it monetizes about 14% of YouTubes videos. Factoring in views where users quickly close the screen and shut down all ads, as well as other platforms that do not monetize as well, we estimate the overall monetization rate is 4.5%. We estimate the ll rate of premium advertising for user-generated video is 2% and the average CPM for this premium ad space is $5. Industry sources indicate the industrywide average CPM for user content was roughly $0.50 in 2010. This rate is expected to grow modestly as advertisers become more comfortable with advertising in online video and the industry becomes more efcient. Advertising methods. Advertisers have the option to place ads in traditional user-created content, professional content, and enterprise user-generated video. Recent trends. There are three big trends we see right now. First is that the model for how publishers pay advertisers is migrating from a CPM to a cost-per-view (CPV) basis. Second are the changes in advertising methods; because video sites draw in users specically to watch media, media ads are much more effective than standard ads. The third major shift in the user-generated video market is the blurring of the line between user-generated, semiprofessional, and professionally generated video content. With the cost of creating high-quality content continuously declining and the ease of use of YouTube channels and white-label video services such as Brightcove and Ooyala, amateur video producers can create content that rivals professionally created content. Outlook and evolution. Monetization continues to improve. Google has invested heavily in better monetizing user-generated video clips, and we expect it and competitors to continue to improve the monetization of user-generated video. We expect this will then drive the growth in professional quality content. Content creators and distributors have discovered that professional and semiprofessional content is easiest to monetize. Because of this, we expect more resources to be pushed into this area of content, with the result being an increase in quantity and quality.
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Market Since the launch of YouTube in November 2005, user-generated videos have been one of the largest growth drivers of Internet video. However, although YouTube and other usergenerated video sites are content giants on the Internet, they have not come close to the nancial giants that search or display advertising have created. Because YouTube and others are either privately held or part of much larger tech companies, there is a lack of nancial and operational information available. However, it is estimated that YouTube, which is roughly half of the user-generated video market, will generate $1 billion in 2011 revenue, up from an estimated $800 million in 2010. Extrapolating YouTube to the rest of the industry, it is clear that this is a large and growing market. Market Size We estimate the U.S. market for user-generated video at $1.5 billion in 2010 and $2.2 billion in 2011, and project it will grow to $7.7 billion in 2015. Driving this expansion is the growth in viewership of user-generated videos and the monetization of the videos. Accustream, a market research rm, reported that there were 230 billion U.S. online video views in 2010. We multiplied this total by the percentage of videos that are monetized (have an ad placed with them). Google has mentioned that it monetizes about 14% of YouTubes videos. Factoring in videos that are quickly closed, shutting down all ads, as well as other platforms that do not monetize as well, we estimate that the overall monetization rate is 4.5%. We multiplied the monetization rate by the total viewings to calculate the total user-generated viewings that are monetized. Like other online advertising markets, published material attracts premium and nonpremium (run-of-network) advertising. We estimate that the ll rate of premium advertising for user-generated video is 2% and the average CPM for this premium ad space is $5. The product of the monetized views, premium ll rate, and premium CPM equals the premium revenue for user-generated video. Ad inventory that is not sold to premium advertisers is sold for pennies on the dollar on ad exchanges. We estimate that 98% of ad inventory is lled with run-of-network advertising. Like premium revenue, the product of monetized user-generated views, run-of-network ll rate, and CPM equals run-of-network revenue for user-generated video. The sum of premium and run-of-network advertising is the total market size for user-generated video.
Table 15 User-Generated Video Market Size, Domestic 2010 230,000 4.5% 10,350 2.0% $5.00 $1,035 98.0% $0.05 $507 $1,542 2011 287,500 4.5% 12,938 2.0% $6.00 $1,553 98.0% $0.05 $634 $2,186 41.8% 2012 316,250 4.5% 14,231 2.5% $6.50 $2,313 97.5% $0.05 $694 $3,006 37.5% 2013 347,875 5.0% 17,394 3.0% $7.00 $3,653 97.0% $0.05 $844 $4,496 49.6% 2014 382,663 5.0% 19,133 3.5% $7.50 $5,022 96.5% $0.05 $923 $5,946 32.2% 2015 420,929 5.0% 21,046 4.0% $8.00 $6,735 96.0% $0.05 $1,010 $7,745 30.3% CAGR 12.8% 15.3%
User-generated videos viewed (millions) Monetization rate Monetized UGVs (millions) Premium fill rate Premium CPM Premium revenue (millions) Run-of-network fill rate RoN CPM RoN revenue (millions) Total UGV Advertising Market (millions) Year-over-year growth rate
45.4%
14.8% 38.1%
Sources: comScore Video Metrix, Accustream, Google Inc. and William Blair & Company, L.L.C
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Opportunity Based on comScore data from its Video Metrix report, we estimate there will be nearly 300 million viewing sessions in 2011. We estimate that this number will grow at a 10% rate as more people watch more content online. However, we expect content from traditional entertainment companies to grow faster than content from users, and as a result, the percentage of user-generated content is expected to decrease. In its latest quarterly earnings announcement, Google stated that it was monetizing oneseventh of all YouTube viewings. Given that professional content is monetized at a much higher rate than user-generated content, we believe the current industrywide rate is about 4.5%. This rate is expected to increase as the percentage of professionally created content increases and new techniques to monetize all content are developed. Industry sources indicate that the industrywide average CPM for user content was $0.50 in 2010. This rate is expected to grow modestly as advertisers become more comfortable with advertising in online video and the industry becomes more efcient.
Advertising Methods
Types of Content Providers, Financial Trends User-generated videos are loosely dened as videos created by amateur videographers for the purpose of entertainment and sharing. Although amateur video has been in existence for decades (e.g., Americas Funniest Home Videos), it has only been in the past six years that the software and technology to allow the content to spread virally has been in existence. Since the explosive growth of amateur user-generated video recently, businesses and professionals have entered the space, blurring the distinction of user-generated video. Business and professionals use user-generated services like YouTube to broadcast their videos for marketing, business development, or personal gain. Amateur user-generated videos are typically created and shared to connect and entertain. These videos make up the vast majority of videos on user-generated video sites. However, these videos are difcult to monetize for several reasons. First, the networks that host these videos have not perfected the technology of associating the videos with the content that is contained. Unless the uploader describes the video, the hosting service struggles to recognize what advertising would t with the content. Second, advertisers do not want to associate their ads with content that does not t the message they are trying to convey. For example, the amateur video seen in gure 30 has only one advertisement.
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Figure 30 Amateur User-Generated Video
Because it is free to post videos to most hosting sites and the cost to produce a quality video continues to decline, professionals, or amateurs who turn into professionals, have become a major producer of user-generated videos. These professionals post their videos on YouTube and other hosting sites to advertise their products or services as well as earn money from the advertising on their content. This professional content is much more capable of being monetized for the hosting site as well. Because the producers of the content typically take the time to make the content recognizable by search algorithms and describe the content, the hosting site can place relevant ads with the content. The content is also typically of high enough caliber that companies are willing to advertise on the content without fear of the content lowering their brands equity. In the example in gure 31, on the following page, the professional content contains three ads, including one pre-roll ad, all of which are relevant to the content.
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Figure 31 Professional Video
Enterprise user-generated video is the third type of user-generated video. Companies and organizations have realized the reach that user-generated video hosting sites have and have determined that they need a presence in them, similar to their approach on social networking. To shape the message that they want and to self-promote, enterprises publish their own user-generated content on hosting sites. Frequently, these organizations will create their own channel, allowing them to maintain the image they want and making it easy for viewers to navigate through the different videos. Because these organizations want to control their image, advertisements are not included, eliminating monetization possibilities. The enterprise video seen in gure 32 contains links to the videos owner and enterprise information, but it does not show third-party advertisements.
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Figure 32 Enterprise Video
Professional user-generated content is the most appealing to hosting sites, because, as mentioned above, it is one of the easiest to monetize. Google has made a strong effort supporting professional video creators, including the acquisition of Next New Networks for about $40 million in March 2011. Google plans to use this acquisition to help amateurs and semiprofessionals create higher-quality (i.e., professional) videos and more easily monetize them. In our opinion, professional user-generated video represents the best content form for the industry to monetize. Types of Service Providers There are two methods by which user-generated video can be viewed and shared. Creators can upload the content directly to a third-party hosting site or it can be embedded into the creators website using third-party technology. YouTube, Facebook, and Justin.tv are examples of the rst type. In these examples, creators upload content to the hosting site and send links to those whom the creators want to view the content. The hosting sites will typically display the video in the users page as well as brand the page according to the hosts wishes and include advertising, with proceeds going to the host. Livestreaming is a form of this type of hosting, with Justin.tv and Ustream the leaders in this niche. The second option for sharing user-generated video is to host the video on a video platform and embed it in the creators own website. This is done almost exclusively by professionals and enterprises, as it typically costs money and creates a more professional look (something amateurs typically do not require). Brightcove and Ooyala are leaders in this eld. These
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companies allow creators to upload content to the hosting platform, edit the video, add advertising, and place the video in the creators own website. Revenue from advertising typically goes to the content creator. Users of the video typically cannot tell that a video hosting platform is used. We believe there is a clear and growing market for these video platforms.
Figure 33 Hosting Platform Embedded
Sources: Discovery Communications Inc. and William Blair & Company, L.L.C.
The example above is a video clip from The Science Channels (part of Discovery Communications) website. Discovery Communications uses Brightcove as its online video platform, thus the actual video is on Brightcoves servers and all advertising on the video is run through Brightcove. However, the user never leaves Discoverys website, and there is no Brightcove branding. Signicant Players YouTube is by far the largest participant in the user-generated video market. According to comScores Video Metrix report, YouTube (which is owned by Google and makes up almost all of Googles video sites) accounted for almost 40% of all viewing sessions in January 2011. It should be noted that comScores report also includes professional content from sites such as MTV and Hulu, which means YouTube makes up more than 40% of the user-generated video sites. Portals are the second-largest source of video content on the Web, but most of the content is from news, sports, and other organizations and not user-generated. In terms of user-generated content, Facebook is the second-largest property after Google (YouTube).
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Besides rapid growth, the user-generated video market is undergoing three substantial shifts. First, there is a shift in how publishers charge advertisers. The most common method is charging advertisers by cost per thousand impressions (CPM) of an advertisement. However, because users frequently leave videos quickly and do not pay attention to ads that are irrelevant to them, it has become more effective to charge advertisers when their video advertisement is watched in its entirety or if a user chooses to watch it. This cost-per-view (CPV) model is used for video advertisements, which make up a large share of advertisements on user-generated video sites. Second, changes in advertising methods are another shift in the market. Because video sites draw in users specically to watch media, media ads are much more effective than standard ads. Advertisers have been addressing this by creating and playing more video advertisements. ComScore reported 3.6 billion video ads viewed in July 2010 and 4.3 billion in January 2011, a 19% increase in only six months. This compares with a 14% increase in display ads for all of 2010 (also according to comScore). YouTube has experimented with many different formats of video ads. One of the more common of these video ad formats is the pre-roll ad. Pre-roll ads are video ads shown before the desired video, typically less than 30 seconds. YouTube and others have further experimented with the pre-roll ad by allowing viewers a choice of which advertisement they would like to see, or skipping the ad entirely. Pre-roll ads are gaining in both popularity and sophistication. Since video ads are online, they can be interactive and engage the user. In its 2010 survey, online video advertising network BrightRoll Media said that 54% of executives and media buyers plan to allocate their creative budgets to interactive pre-roll. Ninety-four percent of the same survey sample also said that pre-roll ads with accompanying banner ads exceeded their expectations. Midroll and post-roll ads are similar to pre-roll ads, except, as indicated by their names, they are shown in the middle and after the desired video clip, respectively. Because they are shown after the viewer has engaged with the desired content, these types of ads are not as effective as pre-roll ads. The third major shift in the user-generated video market is the blurring of the line between user-generated, semiprofessional, and professionally generated video content. With the cost of creating high-quality content continuously declining and the ease of use of YouTube channels and white-label video services such as Brightcove and Ooyala, amateur video producers can create content that rivals professionally created content. This shift is a positive for the industry since higher-quality content is more appealing to users and advertisers. Higher-quality content also tends to be more focused, which lends itself to much better monetization rates. Google recently acquired Next New Networks for an estimated $40 million. Google will use Next New Networks to help amateur video creators improve the quality of their content. Notably, Google/YouTube wants to make it easier for celebrities to create their own channel and monetize the content. Accustream recently reported that partner channels now account for a majority of views and music channels/videos now constitute 56% of total views. Display advertising and contextual-based advertising are both common on user-generated video sites. Like most media websites, the advertisements are typically remnant inventory, with only a small fraction sold as premium advertisements.
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Monetization Continues to Improve Google has invested heavily in better monetizing user-generated video clips, and we expect it and competitors to continue to improve the monetization of user-generated video. This improvement includes new ad formats that are more appealing as well as more relevant ads. The effect of this monetization improvement is seen in our model, Table 15 (on page 55), in the change in premium ll rate and premium CPM. Growth in Professional Quality Content creators and distributors have discovered that professional and semiprofessional content is most capable of being monetized. We therefore expect more resources to be devoted to this area of content; the result should be an increase in quantity and quality.
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Socially Focused: Facebook

Display Ads Only First Inning of Platform Capabilities?
Market size and opportunity. In rst quarter 2010, Facebook accounted for 16.2% of online display ad impressions, according to comScore. By third quarter 2010, it had scaled to 23%, and in the full year, Facebook displayed more than one trillion display ads. Moreover, in March 2011, Facebook accounted for roughly 33% of online display ad impressions. With more than 5 billion domestic display ads (and growing), Facebook still has a long runway of growth ahead of it, in our view. We forecast domestic Facebook revenue can grow from an estimated $700 million in 2010 to $5 billion-plus in 2015. Industry statistics and nancial metrics. We believe that consumers are treating Facebook like a utilitywith nearly 700 million users, an average of 2.8 visits per day per daily user totals an average of 25 minutes per usage day, and exiting 2010 the site accounted for 12.3% of time spent online, according to comScore. Moreover, the companys eCPMs still lag the industry. We estimate Facebook eCPMs totaled $0.66 in 2010 and should grow to $0.90 in 2011 and $1.70 in 2015 as it optimizes its ad platform. Even at a $1.70 eCPM, it would still trail the Internet $2.43 eCPM average, as reported by comScore. Advertising methods. As a social networking site, Facebook offers advertisers an appealing opportunity: Facebook users provide a signicant amount of information about themselves on the site, giving advertisers the opportunity to target a highly specic user based on certain metrics, events, and interests. At a high level, targeting metrics available to advertisers on Facebook include location, language, demographics, education (work, likes, interests), and connections. Recent trends. Facebook is adjusting its advertising platform to increase monetization. Facebook offers display advertisers a choice of advertising on a CPM or CPC basis. In May 2010, the company informed advertisers that it was adjusting its ad system to improve effectivenessspecically noting that CPC advertisers were likely to receive more clicks and CPM advertisers were likely to receive less clicks. Also, new Facebook-specic ad agencies are emerging to adjust to its ad platform. Outlook and evolution. In addition to the on-Facebook advertising opportunity, we believe Facebook has a potentially larger off-site advertising opportunity, wherein it would license its wealth of user data to drastically increase ad targeting on other websites (potential to double revenue without changing its cost structure). We believe new site features and redesigns will increase the usage/page views/ads-served metric over time. We expect the company will continue to innovate, as demonstrated by its unied messaging product. Moreover, we believe it has a chance to be a premium content destination source, as evidenced by Warner Bros. decision to offer movie rentals on Facebook. Last, the company will likely become a meaningful player in search, with 1% to 2% of searches already occurring on Facebooka metric we believe could climb to as high as 5% to 6% over the next couple of years.
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In rst quarter 2010, Facebook accounted for 16.2% of online display ad impressions, according to comScore. By third quarter 2010, it had scaled to 23%, and in March 2011, Facebook accounted for roughly 33% of online display ad impressions. For full year 2010, Facebook displayed more than one trillion display ads in the United States alone, roughly double the No. 2 player (Yahoo! sites) and more than quadruple the No. 3 player (Microsoft sites).
Figure 34 Top 10 U.S. Online Display Publishers
ESPN eBay Glam Media Turner Digital Google Sites AOL, Inc. Fox Int. Media Microsoft Sites Yahoo! Sites Facebook.com 0 200,000 400,000 600,000 800,000 2010 Ad Impressions (in millions) 32,405 32,884 44,054 74,958 128,247 130,159 200,175 243,879 529,378 1,019,891 1,000,000 1,200,000
Source: comScore Ad Metrix, January 2010 through December 2010
Beyond display advertising, Facebook also offers a number of promotional opportunities and methods for companies, brands, and advertisers to connect with Facebooks nearly 700 million worldwide users. Facebook offers companies/brands the ability to create their own Facebook pages to inform, demonstrate, and promote their productand users can connect with these pages through wall postings (to ask a question, complain, compliment, etc.) and by indicating that they like the company/brand. This can be a powerful tool for companies, which use it to enhance user loyalty or prompt incremental purchase activity (the value of a user who likes a product can vary signicantlyfrom nearly $0 to $100-plusall dependent on the level of engagement a brand creates/prompts). As detailed in table 16, the top 10 brands on Facebook each have more than 13 million users who like their product.
Table 16 Top 10 Brands on Facebook by Category (as of March 2011) Rank 1 2 3 4 5 6 7 8 9 10 Brand Facebook YouTube Coca-Cola Starbucks Disney MTV Oreo Red Bull Skittles Converse All Star Likes (in mm) 35+ 28+ 22+ 19+ 17+ 17+ 17+ 15+ 15+ 13+ Likes Music Artist (in mm) Eminem 30+ Lady Gaga 29+ Michael Jackson 29+ Rihanna 26+ Linkin Park 24+ Shakira 23+ Justin Bieber 22+ Bob Marley 21+ Lil Wayne 20+ Katy Perry 20+ Actor Megan Fox Vin Diesel Selena Gomez Adam Sandler Jackie Chan Will Smith Mr. Bean Taylor Lautner Ashton Kutcher Johnny Depp Likes (in mm) 21+ 21+ 15+ 15+ 12+ 12+ 9+ 8+ 8+ 5+ Series/TV Show House Two and a Half Men Greys Anatomy Glee How I Met Your Mother The Big Bang Theory NCIS Friends Jersey Shore Scrubs Likes (in mm) 20+ 17+ 13+ 12+ 10+ 11+ 10+ 10+ 9+ 8+
Source: www.facebook.com
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In this section, we detail only the display advertising opportunity on Facebook and avoid forecasting the nancial value of brand-building opportunities such as the Like button. As detailed above, there are many ways companies can use Facebook to advertise and promote their products, and the additional brand-building opportunities have signicant value. However, the value of an opt-in (i.e., like) user base is heavily dependent on what a customer does to generate and enhance loyalty, drive sales, etc., and we believe attempting to quantify the value holistically would be guesswork at best. In our display ad analysis, we use a top-down market approach, beginning by forecasting the number of display ads that we believe will be served in the United States each year. We then forecast what percentage of the display advertising market Facebook will garner and an estimated eCPM rate, which solves for our display ad forecast. Within our analysis, we believe Facebook will continue to take share within the display advertising market, moving from an estimated 38% in 2011 to 47% in 2015. We also forecast growth in the eCPM rate over time, although the eCPM rate is the variable we have the least visibility into. Facebook offers display ad pricing on both a CPM and CPC basis, and recently implemented a change that we believe emphasized CPC ads over CPM ads, making eCPM forecasting trickier. Facebook display advertising is nascent, but the platform has signicant potential given detailed targeting options. Still, in June 2010 comScore determined that Facebooks eCPM rate was about one-sixth the CPM rate for all sites excluding social networks$0.56 versus $2.99. We believe that Facebook will drive higher eCPM rates over time as it optimizes its advertising platform; we forecast eCPM rates of $1.70 in 2015, which we believe is fair, but we would not be surprised if rates were signicantly higher.
Table 17 U.S. Facebook Display Advertising Market Forecast 2011 Display ads served (in trillions) Facebook percentage Facebook display ads (in millions) eCPM Facebook Display Ad Revenue (in $millions) Year-over-year growth rate Notational Data U.S. Facebook users (in millions) Average ad revenue per U.S. Facebook user Average ads shown per user Average monthly page views per user Advertising revenue per 1,000 page views Average number of ads per page view 5.3 38% 2,023,994 $0.90 $1,822 2012 5.7 41% 2,341,015 $1.10 $2,575 41% 161 $15.97 35,421 687 $1.94 1.8 2013 6.1 44% 2,665,075 $1.30 $3,465 35% 168 $20.67 36,544 700 $2.46 1.9 2014 6.5 46% 2,979,952 $1.50 $4,470 29% 174 $25.64 37,564 714 $2.99 2.0 2015 7.0 47% 3,284,431 $1.70 $5,584 25% 181 $30.79 38,539 729 $3.52 2.1 Note 1 2 3
155 $11.75 34,363 673 $1.45 1.6
1. ComScore estimates that there were 4.9 trillion display ads served in 2010 in the U.S. On a go-forward basis, we use Magna Global's "Other Internet Advertising" growth rate as the rate of growth in display ads served. 2. ComScore reported that Facebook had 1.02 trillion display ads served, which compared with 4.9 trillion total in 2010, solves for market share of 21%. However, as of March 2011, Facebook had gained significant share and accounted for more than 33% of online display ads. 3. In June 2010, comScore conducted an analysis determining the CPM rate for display ads on Facebook to be about $0.56, below the Internet at large average of $2.43 and the estimated excl-social networks CPM rate of $2.99. But in April 2010, Facebook changed its advertising policies to emphasize clients selecting to advertise on a CPC basis versus a CPM basis. Although Facebook constitutes a substantial portion of the online display advertising market, its advertising platform and methods of advertising are relatively new. We believe Facebook will implement additional changes to its platform and structure over time to enhance advertising revenue (i.e., we believe eCPM rates will rise over time, perhaps significantly). As an example of the recent change, one advertiser noted that it had been paying around $0.40 on a CPM basis, but the change emphasizing a CPC basis would likely double its costs (i.e., eCPM of $0.80). Over time, we believe the CPM will increase. 4. As of April 2011, it is estimated that Facebook had about 152 million U.S. users. According to eMarketer, the U.S. Internet population in 2010 was about 205 million, and we project growth of about 2% per year. We estimate Facebook penetration will grow at a rate faster than Internet adoption, and we forecast Facebook user growth of 4% per year through 2015. 5. According to Pingdom.com and Google Ad Planner, in January 2010, Facebook users viewed an average of 662 pages per month. We believe this metric will grow by about 2% annually due to the network effect and Facebook becoming increasingly central. Sources: comScore, Magna Global, Facebook, eMarketer, Pingdom.com, Google Ad Planner, and William Blair & Company, L.L.C
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Market research rm eMarketer has also published a forecast for Facebooks advertising market. As detailed in gure 35, eMarketer believes Facebooks U.S. advertising revenue will be $2.19 billion in 2011 and $2.87 billion in 2012. In addition, in 2012, eMarketer believes Facebook will generate the same amount of advertising revenue from foreign markets as the company does in the U.S. market.
Figure 35 eMarketer Facebook Ad Revenue Forecast (in $ billions)
$7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 $0.18 $0.56 2009
Source: eMarketer
$2.87 $1.86 $0.65 $1.21 2010 $2.87
$2.19
2011
2012
Non-U.S. Ad Revenue
U.S. Ad Revenue
Advertising Methods
As a social networking site, Facebook offers advertisers an appealing opportunity: Facebook users provide a signicant amount of information about themselves on the site, giving advertisers the chance to target a highly specic user based on certain metrics, events, and interests. For example, an advertiser could target single women between the ages of 30 and 35 living in Chicago who attended Indiana University and have a stated interest in playing soccer, if they so desired. At a high level, targeting metrics available to advertisers on Facebook are as follows: Location: Facebook uses prole information and IP address to determine each users location. With this, advertisers can select to target users by country, state/province (when applicable), city, or radius from a city (e.g., users residing within 50 miles of Dallas). Language: Facebook has been translated into more than 70 languages. This enables advertisers to target users in a preferred language. Demographics: On Facebook, users are required to provide some demographic information and have the option of providing more. Facebook then makes this information available as a lter to advertisers. Options include age, birthday, gender, relationship status, and preferred language. Education, work, likes, interests: Users may optionally identify their educational institution(s), status at an institution (e.g., current student, alumnus), employer, and as many items, activities, and companies that they like as they want. Advertisers can take full advantage of any of these items as lters to segment the audience that receives their advertisements. Connections: As detailed above, users have the option to like as many brands, activities, companies, and other items that they want. This information creates a powerful web of information about each user, and Facebook offers advertisers the capability to leverage
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this in additional ways. For instance, advertisers may select to target users who like their product or have engaged or interacted with an application, not to target users who already like their product, or to target the friends of users who like their product.
Figure 36 Facebook Display Ad Filtering/Targeting Application
After targeting the desired audience, advertising on Facebook is relatively straightforward. Facebook serves ads into a sponsored section of its pages, including the welcome/home page, user proles, and topical pages. All advertisements are required to have a picture or graphic of a certain size, and accompanying writing typically of one or two short sentences. An example of a Facebook ad is detailed in gure 37, on the following page.
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Figure 37 Facebook Display Ad
Facebook Display Ads

Facebook Is Adjusting Its Advertising Platform to Increase Monetization Facebook offers display advertisers a choice of advertising on a CPM or CPC basis. In May 2010, the company informed advertisers that it was adjusting its ad system to improve effectivenessspecically noting that CPC advertisers were likely to receive more clicks and CPM advertisers were likely to receive fewer clicks. Display advertising on Facebook has grown rapidly over the past few years, but in our opinion is still a nascent market. As advertising on Facebook evolves and the company gathers more data, we anticipate that Facebook will make additional changes to its ad system to further improve ad effectiveness and thus monetization. Some advertisers may complain as changes are implementedjust as some advertisers or sites complain when Google adjusts its search algorithmbut making adjustments to rapidly growing platforms over time as additional data is analyzed is a natural evolution, in our opinion. New Facebook-Specic Ad Agencies Are Emerging Facebook has two approaches to advertising; 1) an internal team that sells premium ads directly to large marketers and 2) a self-service tool. Many advertisers have complained that Facebooks advertising infrastructure was not built for large advertisers, although we believe this problem will be solved over time. However, given Facebooks rapid growth in advertising, a host of new Facebook-specic ad agencies have emerged that are helping solve the problemwhich Facebook supports, given the new customers and increased capabilities the agencies offer to large advertisers to support large-scale campaigns. An article in The Wall Street Journal cites Groupon as an example. The company was placing a couple of dozen ads on Facebook manually, with limited targeting. Now, Groupon has hired a Facebook ad agency and supports a couple of thousand ads a day, with much more specic targeting. Over the longer term, we Ralph Schackart 312.364.8753 - 68 -

believe the agencies will remain in existence given the support and ease-of-use they provide to marketersbut we also believe Facebooks advertising platform will be upgraded over time to adequately support large agencies and/or marketers that desire direct access.

Off-Facebook Advertising Opportunity Could Be Massive and Not Appreciated, in Our View As detailed above, Facebook has a large and rapidly growing display advertising opportunity. Beyond that opportunity, however, we have been trying to understand from advertisers where Facebook can scale in the future and what is the market missing about the platform. We believe that the truly massive advertising opportunity for Facebook is to use its data for display (and other) advertising on websites off-Facebook. Facebook houses a wealth of data; descriptive personal data (e.g., age, gender), social data (e.g., personal interests), friend network data, and, through Facebook Connect, signicant Web browsing/history/afliation information. We believe that the data, if mined correctly, could drastically increase targeting efciencypotentially enabling Facebook to command eCPM rates of $10 of more for their data. For example, either using the Facebook connect feature (or not), Facebook has a tremendous amount of user data that is unique to an individual, identied by IP address, tracking data analytics that links Web trafc and behavior together, or other new-age tracking metrics that move beyond traditional cookie information. For example, if a consumer likes BMW on his home page, and recently posted an update that he was looking to buy a new car, that same prole information can likely be identied when the user is accessing other websites, enabling BMW and/or ad networks to know to serve a BMW advertisement to the user when he is visiting www.wallstreetjournal.com, for example. Ad effectiveness is one of, if not the, critical component(s) that online advertisers care about. Data that can drastically increase targeting efciency should have a highly correlated impact on ad effectiveness, and is therefore quite valuable. The eCPM rates online are determined by multiple factors, but ad effectiveness is one of the primary attributes. Nonsocial display eCPM rates are about $3.00, display ad eCPM rates on newspaper sites are nearly $7.00, display ads on premium brand websites (e.g., New York Times, Wall Street Journal) can command eCPM rates in the $20 to $30 range, and video ads on these premium sites can command eCPM rates of $75 to $90. Holding all else equal, we believe that advertisers should be willing to pay about double the display ad eCPM rate for double the effectiveness (one can argue for more or less than double, but we believe double is fair). And if Facebook data can increase effectiveness by double (or more), we believe it should be able to charge an attractive eCPM rate for it. In other words, Facebook has the ability to potentially double pricing without changing its cost infrastructure, highlighting the potential massive leverage in its business model. New Site Features and Redesigns Will Increase Usage/Page Views/Ads Served Facebook frequently launches new products and features and occasionally redesigns its site to enhance the value proposition or usability. These changes typically both attract new users and increase the amount of time users spend on Facebookwhich, as a result, also drives an increase in page views and the number of ads served. Over time, we expect this trend to continue as Facebook evolves from a social networking site to a central part of the Web ecosystem, perhaps best described as a utility. Recent examples of new product launches to support this predicted evolution are: Unied messaging. In November 2010, Facebook announced the launch of its unied messaging system, which will allow users to communicate with one another across multiple mediums, such as e-mail, text messaging, and online messaging services. In - 69 -

the long term, Facebook envisions a world without phone numbers or e-mail addresses; rather, users would simply select a friend and communicate with her instantly via that users set preferences. Premium content hosting. Warner Bros. recently began offering movies for rent on Facebook. Although the offering to date is just a test, Warner Bros. has already expanded the number of movies offered. As detailed below, we believe Facebook could garner as much as 35% of premium online content, generating as much as $1.6 billion in annual sales ($486 million in revenue to Facebook) by 2015. Further, as detailed in gure 38, the current video hosting method Facebook uses also supports advertising on the sidebar (unless a user opts for full-screen mode). If Facebook maintains this methodor switches to a similar onewe also believe it could garner premium CPM rates because of the length of time that each of these ads would be displayed (the entire movie). Facebook could also offer discounted movie rental prices for users who opt to be advertised to over time, in which case the side advertisements may change (e.g., every ve minutes), or Facebook could also branch into video advertising.
Facebook Could Become a Meaningful Player in Search; Unique Social Data Set Could Give It an Edge It is estimated that 1% to 2% of searches are already conducted via Facebook, and we believe this could climb as high as 5% to 6% over the next couple of years as Facebook becomes increasingly central to the Web. At present, Facebook uses Microsoft Bing for Web-based search, but over time, we believe Facebook could develop its own search engine technology. Unlike Google, which uses a highly sophisticated algorithm to drive its search engine, we believe Facebook would emphasize semantic search technology, which seeks to understand user intent to deliver superior search results. In April 2010, Facebook had over 1 billion likes registered, and it is predicted that this data will grow exponentially over the next couple of years. Leveraging like data, user prole information, and screen content/context prior to searches being conducted gives Facebook a wealth of user intent knowledge. This information could be coupled with algorithm-based search technology to deliver more-relevant search resultswhich could then be leveraged into a search engine marketing business. Facebook Could Take a Meaningful Share of the Premium Online Video Market In March 2011, Warner Bros. began testing online video rentals through Facebook (users pay with Facebook credits). The market is nascent, but Facebook has a signicant presence on both PCs and mobile devices and a rapidly growing presence on CE devices. Given this, we believe Facebook may become a platform for online content and could take meaningful share of the rapidly growing premium video market. Moreover, we believe Facebooks ability to take material share of the premium online video market would increase page views and customer retention, and enhance the value proposition to Facebook usersperhaps equally important as the incremental revenue. For example, a user who wants to watch a movie would rst open Facebook, providing an advertising opportunity and potentially encouraging the user to browse Facebook for a few minutes before launching a movie (i.e., incremental page views). After the movie is completed, Facebook could drive a user back to her home screen for another advertising opportunity, and again prompt the user to interact or browse to drive additional page views. Said another way, premium online video could become an important tool to prompt users to interact more with the sitejust as social games have done. Social Information Will Power the Interest GraphPotentially De-cluttering the Web Experience Social information is powerful, but our industry research and industry channel checks continually nd a common complaint; the social graph varies signicantly from the interest graph, and the interest graph is more relevant. As we see it, this observation is largely correct for most markets, but not all; to state the obvious, for example, social graphs are signicantly more relevant than interest graphs for social activities. Ralph Schackart 312.364.8753 - 70 -

More importantly, however, we believe this observation ignores the potential of social information, and we posit that social will become the primary building block in developing the sought after interest graph. While this may seem confusing to some, we remind readers of the potential data capture available in social; descriptive user information, identied likes, context of status updates, context of commentary/interaction with friends, context of photos, screen/photo/game/page viewing history/frequency, and other interaction attributes. Further, we note that the aforementioned data are components of social information, which is much broader and more encompassing than the social graphwhich seeks to dene relational or dependency connections (friends, family, professional associates, etc.). All in, social networks (and the associated social information that can be compiled and linked to a user) are rich with data capable of populating a users personal interest graph, as noted above. This information can be enhanced by applying statistical analysis and ltering algorithms, the combination of which we believe is capable of creating a relatively robust personal interest graph for each user (although user opt-in may be required to create/distribute the data). Over time, we believe users will become increasingly comfortable with the amount of information they are willing to share, assuming they receive a benet in return. For most, we believe a custom-tailored interest graph is a powerful tool that users would nd valuable (i.e., accept the information for value trade-off), capable of being used to cut through the clutter of information in a variety of Web applications. In theory, content discovery, news, recommendations, search, e-commerce, and multiple other Web experiences could all be enhanced.
Table 18 Facebook Digital Video Opportunity (dollars in millions) Actual Results 2008 2009 2010 $21,000 $19,400 $18,800 7.6% 10.8% 13.3% $1,600 $2,100 $2,500 2015 Scenario Analysis Weak Base Strong $18,500 $18,500 $18,500 20.0% 27.5% 35.0% $3,700 $5,088 $6,475 5.0% 15.0% 25.0% $185 $763 $1,619 30.0% 30.0% 30.0% $56 $229 $486
U.S. Home Entertainment Market Forecast - Estimated Percent Digital Digital U.S. Home Entertainment Market Forecast - Facebook Share Facebook Home Entertainment Forecast Facebook Credits Fee Total Digital Video Opportunity
Sources: DEG, William Blair & Company, L.L.C.
Figure 38 Facebook Video Example
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Socially Focused: Microblogging

#bigmarket #opportunity @microblogging
Market size and opportunity. Mircoblogging is the same as blogging in the sense that they are both platforms for people or organizations to make announcements and receive feedback from viewers. The difference between the two is the size of the content. Blogs typically contain large packages of content in the form of essays, annotated pictures, and videos. Microblogs are made up of short messages (frequently limited to only 140 characters) and single pictures or video links. These shorter messages are quick to create and give the user the ability to be incredibly current. For the purposes of this report, we are framing our market as websites or service providers that allow users to easily publish short messages. For 2010, we estimate the microblogging market at $51 million, growing to $137 million in 2011 and $534 million in 2015. Industry statistics and nancial metrics. The primary market driver, in our view, is the increase in the user base. We estimate that in 2010 there were 40 million daily active domestic users of microblogs (in the form of either publishers or readers). We believe the current effective cost per thousand viewers for microbloggers is $2. Using Quantcast and other Web analytics platforms, we estimate that the daily active user base for microblogs will grow 25% in 2011 and will continue to grow at a compound annual rate of 10% through 2015. Advertising methods. The microblogging market has tried many different ad formats in its short existence. The microblogging leader, Twitter, has developed some innovative advertising methods that are generating increasing revenue. Twitters three advertising offerings are Promoted Accounts, Promoted Trends, and Promoted Tweets. Recent trends. The largest trend in microblogging is nding and executing the best monetization strategy. Twitter has created several ad offerings as well as a marketplace to purchase the ads. All of Twitters offerings are incredibly young and have not achieved critical mass yet. As history has shown with Internet search advertising, display advertising, and social advertising, it takes time to prove the value to marketers and achieve the scale of an effective advertising marketplace. It also takes time to nd the right advertising medium. In time, however, we believe the short form of communication and advertising will scale as it has time to season. Outlook and evolution. With this tool comes an incredible monetization opportunity, in our view. We believe that over the next 18 months, more marketers will invest more ad dollars in microblogging ad methods. Because Twitter has the largest user base by more than a factor of 20, we expect advertiser attention to be almost universally focused on this market leader. We also expect Twitter to experiment with new advertising offerings. From our own user experience, it does not appear that Twitter is monetizing its assets as much as other Web 2.0 companies. Extrapolating from more established Web 2.0 properties like YouTube, Facebook, and LinkedIn, it appears reasonable that Twitter will experiment with new ad methods as well as increase the use of advertising.
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Market Denition Microblogging is the same as blogging in the sense that they are both platforms for people or organizations to make announcements and receive feedback from viewers. The difference between the two is the size of the content. Blogs typically contain large packages of content in the form of essays, annotated pictures, and videos. Microblogs are made up of short messages (frequently limited to only 140 characters) and single pictures or video links. These shorter messages are quick to create and give the user the ability to be incredibly current. Market Size For the purposes of this report, we are framing our market as websites or service providers that allow users to easily publish short messages. For 2010, we estimate the microblogging market at $51 million, growing to $137 million in 2011 and $534 million in 2015. Driving this market growth is the increase in the user base, ads per user, and the effective CPM. We estimate that in 2010 there were 40 million daily active users of microblogs (in the form of either publishers or readers). Based on data from Quantcast and other Web analytics platforms, we believe the daily active user base for microblogs will grow 25% in 2011 and will continue to grow at a compound annual rate of 10% through 2015.
Table 19 Microblogging Market Size (in millions, except eCPM) 2010 80.0 50% 40.0 1.8 $2.00 $51 2011 100.0 50% 50.0 3.0 $2.50 $137 167.9% 2012 110.0 50% 55.0 4.2 $3.00 $251 83.3% 2013 120.0 50% 60.0 5.0 $3.50 $383 52.7% 2014 125.0 50% 62.5 5.0 $4.00 $456 19.0% 2015 130.0 50% 65.0 5.0 $4.50 $534 17.0% CAGR 10.2% 10.2% 59.9%
Microblogging users Percent daily active users Daily active users Ads per day per user eCPM Market size Year-over-year growth rate
Sources: eMarketer and William Blair & Company, L.L.C.
Our growth rate estimates are based on the premise that the pace of growth will continue to decelerate in established Western markets (the United States, Western Europe, and Japan), but will accelerate in less established markets (Asia-Pacic, Latin America, and the Mideast). From our testing and discussion with industry leaders, it appears that the average daily user is exposed to almost two ads per day. We believe that the microblogging market will follow other markets, notably the social networking market, and will increase the ad rate. By 2015, we believe the average daily user will receive ve ads per day. Of course, we could reread this report in 2015 and perhaps laugh at the way we underestimated this market, but for conservatism, we will forecast one ad per day. We believe the current effective cost per thousand viewers for microbloggers is $2. This estimate is based on our research on CPM rates for social networks and market research. We expect this rate to increase consistently to $4.50 as better monetization and targeting methods emerge. We acknowledge that CPM is one of many metrics used by microblogging companies to monetize its ad inventory. For simplicity, we have decided to combine other metrics and use an effective CPM rate for our calculations. The product of the number of daily users, ads per day per user, effective CPM, and 365 days in a year, divided by 1,000, equals our estimate of the annual market size for the microblogging market.
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Opportunity Microblogging services, notably Twitter, have become an incredibly popular and powerful medium. As seen in gure 39, the registered user base of Twitter has grown incredibly fast, from under a million in 2008 to about 200 million in 2011. In addition to its sheer popularity, Twitter has become a very powerful tool for the worlds Internet users. The service played a major part in the downfall of Hosni Mubarak in Egypt and the revolts of other Arab states. Twitter was also the rst service to break the news of Osama bin Ladens death. More frequently, though, Twitter is used by millions of people and organizations to quickly make announcements. Most politicians and corporations use Twitter to make announcements to their respective constituencies and stakeholders.
Figure 39 Twitter Registered User Base (in millions)
250 200 150 100 50 0 2/1/2008 4/1/2008 6/1/2008 8/1/2008 2/1/2009 4/1/2009 6/1/2009 8/1/2009 2/1/2010 4/1/2010 6/1/2010 8/1/2010 10/1/2008 12/1/2008 10/1/2009 12/1/2009 10/1/2010 12/1/2010 2/1/2011
Sources: Nielsen Company, Twitter, and William Blair & Company, L.L.C.
With this incredible tool comes an incredible monetization opportunity. The monetization opportunity is most evident when looked at a per-user level. We estimate that Google will make $13 billion in revenue in 2011 and will have about 140 million users, equal to $93 per U.S. user per year. Perhaps a stretch, but if that rate is applied to Twitter and its estimated 80 million U.S. users, its revenue potential is more than $7 billion.

The number of registered users is the most frequent yardstick by which microblogging services measure themselves. In early 2011, Twitter announced that it had about 200 million registered users. It was recently estimated that the next-largest microblogging service was Tumblr, with about 3 million registered users. Registered users are the number of individual accounts that have been created by a service life-to-date. Because this number includes users who have not been active, registered user totals are becoming less relevant. The retention rate, or the percentage of users who remain with the service in any given month, has gained extra attention recently. The Nielsen Company reported in April 2009 that Twitter had a retention rate of only 40%. In comparison, Nielsen estimates Facebook has a retention rate of about 80%. The retention rate is difcult to estimate, as many Twitter users sign up for the service at the companys website but then use the service through a third party. There is no ofcial retention rate, but it is a metric that directly drives active usership and, in effect, revenue.
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Microblogging companies use a variety of metrics to measure and charge advertising campaigns. The most common is the cost per engagement (CPE). CPE is similar to the cost per click (CPC) metric used in search engine marketing. An engagement counts when a user not only clicks on the advertisement, but also when he or she replies to it, forwards it, or begins to follow the author of it. The CPE basis is preferable to advertisers because it charges advertisers only when a viewer engages with the ad, thereby showing interest. In addition, Twitter uses a cost per follow (CPF) metric, which measures how many additional users become followers of an account. Twitter has also been testing cost per retweet and cost per reply (CPRp) to measure when a user forwards a tweet and replies to a tweet, respectively.
Advertising Methods
The microblogging market has tried many different ad formats in its short life. One of the difculties of the industry is that users frequently post and read microblogs using applications other than the microblogs website or native application. For example, users of Twitter can post tweets using a feature phone or Facebook and read tweets on LinkedIn or other applications, all of which are off the microblogs properties. This openness has helped make Twitter incredibly popular, but it also creates a risk to the company that it will not be able to control or monetize the content on its platform. For this reason, Twitter purchased Tweetdeck for a reported $40 million-$50 million. Tweetdeck makes a popular application for iOS, Android, and the PC for users to interact with Twitter. Microblogging leader Twitter has developed some innovative advertising methods that are generating increasing revenue. Twitters three advertising offerings are Promoted Accounts, Promoted Trends, and Promoted Tweets. Promoted Accounts are accounts that companies pay to have displayed within a listing of suggested accounts that a user should follow. For example, Ford may pay Twitter to be listed as a suggested account for users who also follow Car and Drivers Twitter account. Twitter uses the CPF metric to charge advertisers using Promoted Accounts. Promoted Trends is Twitters simplest advertising offering. Like YouTubes home page takeover, Promoted Trends is a once-a-day offering by Twitter to have a Twitter account listed as one of the current most popular trends. Twitter offers only one Promoted Trend per day. A report by Fortune magazine noted that Verizon Wireless paid as much as $120,000 per day to be listed as a Promoted Trend. Promoted Trends can be incredibly powerful. Coca-Cola reported that its Promoted Trends campaign garnered 86 million impressions and an engagement rate of 6% during its 24-hour runimpressive stats for an Internet campaign.
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Figure 40 Promoted Trend Example
Promoted Trend Promoted Tweet
Content Advertising
Sources: Twitter and William Blair & Company, L.L.C.
Promoted Tweets are messages that advertisers pay to amplify beyond just their own followers. The messages are displayed just like other Twitter content, but are clearly marked as a promotion. These tweets can be interacted with just like any other Twitter message (retweeted, replied to, or clicked on). Advertisers pay Twitter on a cost per engagement (CPE) basis.
Users of microblogging services can also advertise in the form of inuencer advertising and content advertising. Inuencer advertising involves paying an inuential microblogger to write about the product. In gure 41, Twitter user Kim Kardashian has more than 7 million users, a fact not lost on QuickTrim as it hopes followers of the user will purchase the product.
Figure 41 Influencer Advertising Example
Sources: Twitter and William Blair & Company, L.L.C.
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Advertisers can also use microblogs to directly advertise to readers through content advertising. Advertisers of all sorts can create microblog accounts and send advertisements in the form of microblog messages just like any other user. In gure 40, an advertisers organic tweet is included with other messages and paid advertisements related to the search term Las Vegas. In both inuencer advertising and content advertising, the host does not receive consideration. It seems reasonable that at some point microblogging hosting sites will be able to monetize this transaction. Types of Service Providers Twitter is by far the leader in the microblogging industry. It has a registered user base of about 200 million, whereas the next-largest microblogging service, Tumblr, has an estimated 3 million. Twitter is both a website and a platform, offering its API to developers to use and build their own applications and websites that use Twitters platform. In gure 42, we show how LinkedIn, a popular social network service, uses the Twitter platform to allow users to update their status and communicate to others in their social network.
Figure 42 Twitter as a Platform Example
Twitter Third-Party Use
Source: LinkedIn and William Blair & Company L.L.C.
Tumblr is the second-largest microblogging service after Twitter. Unlike Twitter, Tumblr offers users the ability to post pictures, videos, and other rich media. With the additional offerings, Tumblr hugs the lines between microblogging service, blogging service, and social network. Tumblrs emphasis on quick, easy postings to a users blog, though, cements it as a microblogging service. Although Tumblr has less than a twentieth of Twitters user base, it appears that Tumblr has a higher retention rate as well as a loyal following. Tumblr does not appear to have a clear business model, though (as least from what we can discover). The company does not display advertising on its websites and its services are free.

The largest trend in microblogging is nding and executing the best monetization strategy. Twitter has created several ad offerings as well as a marketplace to purchase the ads, but all of Twitters offerings are young and have not achieved critical mass yet. As history has shown with Internet search advertising, display advertising, and social advertising, it takes time to prove the value to marketers and achieve the scale of an effective advertising marketplace. It also takes time to nd the right advertising medium. There is no doubt of Twitters popularity. When the news of the death of Osama bin Laden broke on the evening of May 1, 2011, trafc on Twitter reached its highest sustained level at 3,000 tweets per second for 3 hours and 35 minutes. That night also had a peak of 5,106 tweets per second, surpassing Super Bowl 2011 and second only to New Years Eve 2010. It appears that with each major world news event, Twitter sets new records. Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 77 -

The microblogging industry is still in its early days and, just like other innovative digital industries before it, has not reached the point of having a clear advertising method for mainstream marketers. We believe that over the next 18 months, more marketers will invest more ad dollars in microblogging ad methods. Because Twitter has the largest user base by a factor of more than 20, we expect advertiser attention to be almost universally focused on this market leader. We also expect Twitter to experiment with new advertising offerings. From our own user experience, it does not appear that Twitter is monetizing its assets as much as other Web 2.0 companies. Using more established Web 2.0 properties like YouTube, Facebook, and LinkedIn as a guide, it appears reasonable that Twitter will experiment with new ad methods as well as increase the use of advertising. The broadcast TV industry has increased the amount of commercials from 9 minutes per hour to 21 minutes per hour over time and has yet to feel pushback against the ad load in terms of consumers leaving the medium. With history as an example, we expect all Web companies, microblogging included, to continue to increase their ad loads.
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Socially Focused: Social and Casual Videogaming

Game OverBuy More Digital Coins (Or Sign Up for One Year of Netflix)
Market size and opportunity. Social and casual gaming is a rapidly growing market with strong investor interest. In our Future of Digital Media: Social Gaming report earlier this year, we estimated the U.S. 2010 social gaming market at $2 billion, growing to $4 billion by 2015. Of the $2 billion, it appears that 25%-30% of the revenues come from advertising (with microtransactions representing the other 70%-75%). There are three ways game publishers can sell advertising on social and casual games: display advertising, lead generation, and brand engagement. The three methods vary in terms of user interaction, complexity, and cost, with cost generally increasing as the other two variables increase. Industry statistics and nancial metrics. We contacted several industry insiders on both the publishing and ad buying sides of the business to get a clear picture of the current metrics. Premium display advertisements can vary in cost from a CPM of $5 to $140 depending on the type of inventory offered. Publishers that can guarantee user interaction or attention (for example, an ad displayed immediately after the user interacts with the publisher) command higher CPMs, as do niche audiences that are in high demand. Ads with limited inventory, such as deal-of-the-day ads, can also command a premium. Run-of-network advertisements can frequently have CPMs less than $0.10. Low-value display advertisements have historically had low CPMs and we do not see a change in this trend. As audience measurement and targeting improves, however, we expect the ll rate of premium ads to improve at the expense of run-of-network ads. Advertising methods. Display advertising is the simplest and most common form of advertising (both for game publishers and all other digital publishers). Unlike most other forms of digital entertainment, games require user interaction. This user interaction is both an advantage and challenge for advertisers and publishers. Recent trends. There are two major trends in advertising in social/casual games: new creative ideas (such as brand engagement) and shifting display inventory to ad exchanges. Although brand engagement is only a portion of advertising in social games (and an even smaller portion of total revenue for social games), it shows how game developers and advertisers can be creative and build a powerful new advertising device. We expect innovation to continue in this eld. Outlook and evolution. From conversations with developers, we estimate the rate of ad exchanges and networks placing premium ads within a games inventory at between 1% and 5%. As display ad delivery methods continue to improve (real-time bidding, better audience targeting, etc.), we expect this rate to increase slowly, similar to display advertising in general. Although we expect game developers to continue to outsource their display advertising, we believe that developers will become closer to advertisers through enhanced use of embedded branding and other built-in advertising methods.
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Social and casual gaming is a rapidly growing market with strong investor interest. We estimate the U.S. 2010 social gaming market at $2 billion, growing to $4 billion by 2015. Of the $2 billion, it appears that 25%-30% of the revenues come from advertising, with microtransactions representing the remainder. Game publishers have developed three options for selling advertising on social and casual games: display advertising, lead generation, and brand engagement. The three methods vary in terms of user interaction, complexity, and cost; the cost generally goes up as the other two variables increase.
Table 20 Social/Casual Gaming Advertising Methods Complexity low medium high Interaction low medium high Brand Awareness low/medium low high Cost low medium high
Display advertising Lead generation Embedded branding
Display advertising is the oldest and simplest form of digital advertising. We estimate that in 2010, display advertising in social games was a $115 million market, growing to $172 million in 2011 and $477 million in 2015. Lead generation is the second-largest advertising form, with estimated revenues of $162 million in 2010, growing to $189 million in 2011 and $286 million in 2015. Brand engagement appears to be the largest advertising driver, making up an estimated $240 million in 2010 and growing to $351 million in 2011 and $883 million in 2015. Compared with display advertising, brand engagement and lead generation are harder to measure, as transactions are almost always between advertiser and publisher, with prices varying widely.
Table 21 Social Gaming Advertising Model (dollars in millions) 2010 $115 $162 $240 $517 2011 $172 $189 $351 $712 37.7% 2012 $223 $211 $462 $896 25.9% 2013 $318 $238 $591 $1,147 28.0% 2014 $387 $257 $729 $1,374 19.7% 2015 $477 $286 $883 $1,645 19.8% CAGR 32.9% 12.0% 29.8% 26.1%
Display advertising Lead generation Brand engagement Total social gaming advertising revenue Year-over-year growth rate

Like other digital media publishers, social/casual game publishers sell their ad inventory to either premium buyers or a network/ad exchange. We contacted several industry insiders in both the publishing and ad buying sides of the business to get a clearer picture of the current metrics. Premium display advertisements can vary in cost from a CPM of $5 to $140 depending on the type of inventory offered. Publishers that can guarantee user interaction or attention (for example, an ad displayed immediately after the user interacts with the publisher) command higher CPMs, as do niche audiences that are in high demand. Ads with limited inventory, such as deal-of-the-day ads, can also command a premium.
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Run-of-network ads carry a very small CPM, like they do in traditional digital advertising frequently less than $0.10. Low-value display advertisements have historically had low CPMs and we do not expect a change in this trend. However, as audience measurement and targeting improves, we expect an improvement in the ll rate of premium ads at the expense of run-of-network ads. We estimate that advertising (in its three forms) makes up 25%-30% of the revenues from social games and less from casual games. Advertising in casual games (games played on a PC with little to no social interaction) represents an even smaller piece of the casual gaming market. The Casual Games Association estimates that the market for casual games in the United States was $3 billion in 2009; most of this is attributed to social games. Within the nonsocial, casual gaming market, we estimate advertising makes up a small fraction, with the bulk of the revenue coming from game sales and to a lesser extent microtransactions.
Figure 43 2010 Social Gaming Industry Market Composition (Millions of $)
Advertising, $517
Microtransactions, $800
Subscriptions and purchases, $500
Figure 44 2010 Social Gaming Advertising Composition (Millions of $)
Brand engagement, $240
Display advertising, $115
Lead generation, $162
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Advertising Methods
Display advertising is the simplest and most common form of advertising (for both game publishers and all other digital publishers). Developers create spaces in their games (inventory) and sell the space directly to advertisers or third parties (ad networks or exchanges). Inventory that is sold directly to advertisers that have a very specic target audience command high CPMs. Inventory that is not sold at a premium (estimated at about 98% of total inventory) is sold through third parties or used as house ads to advertise other products of the developer. Based on industry consultations, we have framed an industry model for display advertising within social games.
Table 22 Social Gaming Industry ModelDisplay Advertising 2010 27 45 1,215 443,475 1.5% 6,652 $14 $93 98.5% 436,823 $0.05 $22 $115 2011 30 45 1,350 492,750 2.0% 9,855 $15 $148 98.0% 482,895 $0.05 $24 $172 49.6% 2012 32 45 1,440 525,600 2.5% 13,140 $15 $197 97.5% 512,460 $0.05 $26 $223 29.5% 2013 33 50 1,650 602,250 3.0% 18,068 $16 $289 97.0% 584,183 $0.05 $29 $318 42.9% 2014 33 50 1,650 602,250 3.5% 21,079 $17 $358 96.5% 581,171 $0.05 $29 $387 21.7% 2015 34 50 1,700 620,500 4.0% 24,820 $18 $447 96.0% 595,680 $0.05 $30 $477 23.0% CAGR 4.7%
Daily active social game users (millions) Impressions per player per day Impressions per day (millions) Total annual impressions (millions) Premium as a % of total Premium impressions (millions) Premium CPM Premium revenue ($millions) Run-of-network as a % of total Run-of-network impressions Run-of-network CPM Run-of-network revenue ($millions) Total display advertising revenue ($millions) Year-over-year growth rate
6.9%
30.1% 36.8%
6.4% 6.4% 32.9%
We estimate that overall run-of-network display ads for game publishers can have a CPM as low as $0.01, possibly even less, and rarely more than $1.00. It should be noted that individual game companies and games can have vastly different CPMs because of their audience and game play. Specialty display ads with limited inventory and high (or guaranteed) user engagement can have CPMs over $100. Deal-of-the-day ads that are displayed once when a user opens the game are an example of a display advertisement that can command a high CPM. Advertising in social and casual games differs considerably from advertising in other forms of media. Unlike most other forms of digital entertainment, games require user interaction. This user interaction is both an advantage and challenge for advertisers and publishers. Advertising in games is a challenge because users are much more focused on the content of a publisher (the game) than users are in other media. Game players are typically much more focused on the game play and do not notice display ads as frequently as users in more traditional media, such as news. As a result, display ads that do not require interaction have a low CPM. The screen shot in gure 45 is from Bejeweled, a popular casual game from PopCap. The two display ads are run-of-network ads for Yahoo and another casual game (Jewel Quest). Neither display ad probably commands a strong CPM, as is customary in the industry. However, like other casual game developers, PopCaps business derives mostly from microtransactions, thus the ad revenues are incremental to its core revenue stream.
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Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 83 - 83 -
Figure 45 Bejeweled Advertisements
Run of network ad
Purchase ad
Run of network ad
Sources: Yahoo Games, PopCap Games, Inc., and William Blair & Company, L.L.C.

Geographic disparity can also be a major hindrance for display advertising. Through our industry research, we discovered that more than half of the users of many U.S. social games live outside the United States. Because of language and cultural issues, run-of-network display ads perform very poorly with users in other countries, signicantly decreasing the effective CPM for the publisher. The increased user interaction and focus on game content is a disadvantage for display advertising, but an advantage for other types of advertising. Users play games because they want the satisfaction of winning and sharing that accomplishment with others. Like any other game, players of social and casual games are willing to make sacrices to achieve their goals. When publishers and advertisers create an opportunity for players to accept a form of advertising to achieve their goal, the resulting advertising is exceptionally effective. There are two common ways to tie this type of advertising into games: lead generation and brand engagement. Lead generation involves offering a gamer an advantage in the game by completing a task offered by an advertiser. Advertisers like this form of advertising because it guarantees user interaction, frequently a sale or customer information. Advertisers also typically only pay for lead generation if a user interacts or completes the task the advertiser is offering. This relationship guarantees that the advertiser only pays when it achieves its goal. Lead generation is relatively easy to set up and it is a well-established practice, making publishers and advertisers comfortable with the method. Unlike display advertising, which uses CPM as the currency of measuring the cost of a campaign, lead generation typically uses a cost per action (CPA) model.
Figure 46 Lead Generation Advertisement on Cityville
Sources: Facebook, Inc., Zynga Inc., and William Blair & Company, L.L.C.
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From conversations with industry executives, we believe 15% to 25% of users participate in lead generation and it constitutes 5%-15% of a game developers total revenue. Revenue from lead generation is highest in the rst 30 days of the campaign and then quickly tapers off. Although lead generation is the smallest revenue driver, we still expect it to grow considerably, from $162 million in 2010 to $286 million in 2015.
Table 23 Social Gaming Industry ModelLead Generation 2010 27.0 25% 6.8 24.0 162 $1.00 $162 2011 30.0 25% 7.5 24.0 180 $1.05 $189 16.7% 2012 32.0 25% 8.0 24.0 192 $1.10 $211 11.7% 2013 33.0 25% 8.250 24.000 198 $1.20 $238 12.5% 2014 33.0 25% 8.3 24.0 198 $1.30 $257 8.3% 2015 34.0 25% 8.5 24.0 204 $1.40 $286 11.0% CAGR 4.7% 4.7% 4.7% 12.0%
Daily active social game users (millions) Lead generation participation Lead generation participants (millions) Annual engagements per participant Annual lead generation engagements CPA Total lead generation revenue (millions) Year-over-year growth rate
Brand engagement is the most complex but perhaps most rewarding form of advertising within social and casual games. In fact, Lisa Marino, chief executive ofcer of RockYou, has stated, The real money is in brand engagement. Brand engagement involves developing a brand into the game itself. This can involve home page takeovers, unique game items (branded virtual goods), and cross-marketing. A recent example of this was Paramount Pictures promoting its movie Rango in Zyngas Frontierville. Zynga made developments to the game to encourage players to nd Rango (an oddly dressed chameleon) in the game and perform tasks to help Rango achieve a goal. The tasks the players were given were similar to the plot of the movie. Players who completed the tasks received an exclusive Rango reward.
Figure 47 Embedded Branding in Frontierville
Sources: Facebook, Inc., Zynga Inc. and William Blair & Company, L.L.C.
The advertiser, Paramount Pictures in this example, likes this form of advertising because it can keep the user engaged with the brand for minutes or even hours. It also allows the brand to send a tailored message. Brand engagement is the most complex form of social/casual Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 85 -

game advertising because it requires the game publisher to alter the game and sometimes the games mechanics. In an article by Inside Social Games, Zynga stated that it typically takes a month to plan and build a brand engagement campaign. Game developers also must be cognizant of how the campaign will alter the game so as to make sure the campaign ts within the game and will not turn off other users. Also of importance are the resources it takes to create this type of campaign. A brand engagement campaign requires diverting production and development teams that could be working on other projects. Brand engagement can be a major selling point for games. For instance, Angry Birds Rio (a version of the popular mobile game Angry Birds featuring the birds from the movie Rio) became the top paid app in Apples App Store its rst day. This tie-in clearly boosted sales of the game and provided a strong branded message for the movie. To overcome the complexity of developing a brand engagement campaign, game developers typically require a large initial production fee, followed sometimes by a charge for each engaged user. Table 24 illustrates the revenue potential that brand engagement can have for a game developer. If a developer of social games has two popular games (which we will dene as 500,000 or more daily active users) and runs two brand engagement campaigns per month per game, and each brand engagement campaign generates $300,000 in revenue, total annual revenue from brand engagement will be $14.4 million.
Table 24 Brand Engagement Model Popular games* BE campaigns per month per game Total BE campaigns (annual) Average campaign revenue Total BE revenue
* Popular defined as 500,000 DAU or more Source: William Blair & Company, L.L.C.
2 2 48 $300,000 $14,400,000
We do not believe the typical mid- to upper-tier game developer is performing two brand engagement campaigns per game; however, we are attempting to frame the revenue potential if the game developer accelerated this form of advertisement. Table 25 is a similarly designed extrapolation of the size and growth of brand engagement in the social gaming industry.
Table 25 Social Gaming Industry ModelBrand Engagement 2010 80 0.50 480 $0.50 $240.0 2011 84 0.60 605 $0.58 $350.8 46.2% 2012 86 0.70 722 $0.64 $462.3 31.8% 2013 88 0.80 845 $0.70 $591.4 27.9% 2014 90 0.90 972 $0.75 $729.0 23.3% 2015 92 1.00 1,104 $0.80 $883.2 21.2% CAGR 2.8% 18.1% 29.8%
Number of popular social games* BE campaigns per game per month Total BE campaigns Average revenue per campaign (millions) Total BE campaign revenue (millions) Year-over-year growth rate
*Defining "popular" as a daily-active-user base of 500,000 or more Sources: Inside Network, Inc. and William Blair & Company, L.L.C.
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There are two major trends in advertising in social/casual games: new creative ideas (such as brand engagement) and shifting display inventory to ad exchanges. The latter trend is one that is common to most forms of display advertising in digital media. Although brand engagement is only a portion of advertising in social games (and an even smaller portion of total revenue for social games), it shows how game developers and advertisers can be creative and build a powerful new advertising device. We expect innovation to continue in this eld.

Game developers, especially social game developers, are very skilled at creating games that keep audiences entertained and willing to make sacrices to keep playing. Game developers are not trained marketers with connections to advertisers and agencies. Because of this, we believe that specialization will continue in the industry and game developers will continue to outsource their display ad inventory to ad exchanges. From conversations with several developers, we estimate the rate of ad exchanges and networks placing premium ads within a games inventory at between 1% and 5%. As display ad delivery methods continue to improve (real-time bidding, better audience targeting, etc.), we expect this rate to increase slowly, similar to display advertising in general. Although we expect game developers to continue to outsource their display advertising, we believe developers will become closer to advertisers through enhanced use of embedded branding and other built-in advertising methods.
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Stand-Alone Models: Digital Cinema

Captive Audience Watching Cinema Advertising
Market size and opportunity. At roughly $658 million in 2010, cinema is less than 1% of the 2010 estimated U.S. advertising market of about $150 billion. The market has grown at roughly a 17% compound annual rate from 2002 to 2010. As traditional media budgets shift to digital platforms, we believe digital cinema advertising is poised for continued growth. According to the Cinema Advertising Council, there are roughly 40,000 movie screens in the United States, and 90% of these sell advertising. The market is effectively a duopoly with National CineMedia (NCMI) and Screenvision. Moreover, our market forecast does not include group buying, buy-it-now deals, or coupon codes that will likely be introduced to audiences via mobile devices. Advertisers will likely have options for cross-platform buys, in our view. Industry statistics and nancial metrics. CPM rates average about $37, which is quite high because the moviegoer is captive in the movie seathe is unlikely to go anywhere and cannot fast forward through the commercial. Moreover, the brand recall rate for cinema advertising is roughly twice the TV recall rate. There are 14 local advertising slots in each preshow block, costing an estimated average $17 per screen/per week, with an estimated 35% sell-through rate. Advertising methods. Preshow advertising is quite simple at its core; commercials are played as customers enter the theater and wait for the movie to start. The block is broken up into four segments, with segment four the earliest and segment one just preceding the movie. About 22 minutes before show time, local and regional ads are shown in segments four and three; CPM rates are lower, since the audience attendance is lighter 20 minutes before the show. Commercials with entertainment content (e.g., upcoming movie trailers) as well as beverage/concessionaire ads and national advertising are shown in segments two and one. Recent trends. There are two notable recent trends. First, it is estimated that 3-D preshow advertising CPMs are roughly 50% to 100% above the forecast $37 CPM for cinema advertising, and in some instances even higher. Second, 2010 saw a signicant increase in the number of major marketers and their agency buyers and planners, and more brands are planning to include cinema as an integral part of their media mix to reach younger demographics and light TV viewers. Outlook and evolution. The continued rollout of digital theaters is a positive trend. Moreover, 3-D television channels, full-length motion pictures, and screens are in the early stages of expansion, which helps boost CPMs and attract new clients to cinema advertising. We expect mobile devices to become integrated into the preshow experience, as idle consumers will likely have buy it right now offers provided, a benet of a captive and locally focused consumer base, in our view. However, movie attendance declined 5% in 2010, to 1.34 billion; continued decline in audience size, along with collapsing windows and a limit on CPM growth, could hamper industry growth.
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At roughly $658 million in 2010, cinema is less than 1% of the 2010 estimated U.S. advertising market of about $150 billion. The market has grown at roughly a 17% compound annual rate from 2002 to 2010. As traditional media budgets shift to digital platforms, we believe digital cinema advertising is poised for continued growth. According to the Cinema Advertising Council, there are roughly 40,000 movie screens in the United States; 90% of these sell advertising. The market is effectively a duopoly with National CineMedia (NCMI) and Screenvision. It is estimated that the companies combined have roughly 80% market share. While the two companies have a comparable number of screens, each has a different emphasis. NCMI screens come primarily from its founding membersRegal, AMC, and Cinemarkand with 17,000-plus screens, it has an estimated 40%-plus market share of domestic movie screens. Screenvision has nearly 40% market share and is more geographically dispersed, with 93% of DMAs covered. We believe that the cinema advertising opportunity is compelling, offering high impact impressions with high recall, in part because of its large (1.3 billion domestic tickets per year) and highly measurable base. Moreover, 3-D movie growth is in its infancy, and 3-D advertising CPMs are reported by NCMI to be 50% to 100% higher than traditional 2-D CPMs based on a higher recall rate.

In 2010, the combined market grew 12.7%, to about $658.3 million. Regional and national advertising sales grew 13.9% and account for roughly 80% of the industry, while local grew 8.2%, accounting for about 20% of the market. On-screen revenues accounted for 91.5% of the market and grew 10.8% year-over-year, while off-screen revenue, delivered by lobby and concession digital video and audio programming, increased 38.4% and accounts for 8.5% of the market. We forecast the market to grow at a 7% compound annual rate through 2015, totaling nearly $950 million. We have a more conservative model than Magna Global, which forecasts cinema advertising to grow at a 9.8% compound annual rate from 2011 to 2016, totaling $1.1 billion in 2015 and nearly $1.2 billion in 2016. Our model is constructed by slightly decreasing attendance year-over-year. According to NCMI, there is inventory for 14 local 15-second units, and 11 to 14 national 30-second ad units for each preshow advertising run (totaling about 22 minutes). Impression ratings increase the closer to show time the ad is viewed, as the audience size builds. NCMI CPM rates total about $37, which is quite high because the moviegoer is captive in the movie seat; the viewer is unlikely to go anywhere and cannot fast forward through the commercial. Moreover, the brand recall rate for cinema advertising is roughly twice the TV recall rate. The 14 local advertising slots cost an estimated $17 per screen/per week with an estimated 35% sell-through rate.
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Annual movie attendance (in millions) Year-over-year growth percentage
Table 26 Market Analysis: Digital Cinema (Excludes Beverage Advertising) a b c d e = a * b * c * d/1,000 f g h=f*g i j k l = h * i * 52 * j * k m=e+l 2011 1,350 11 103% $37.00 $563 40,000 90% 36,000 14 $17.00 35% $156 $719 9% 2012 1,343 11 108% $38.11 $608 40,000 92% 36,600 14 $17.34 37% $171 $779 8% 2013 1,337 11 112% $39.25 $646 40,000 93% 37,200 14 $17.69 39% $187 $833 7% 2014 1,330 11 116% $40.43 $686 40,000 95% 37,800 14 $18.04 41% $204 $890 7% 2015 1,323 11 120% $41.64 $727 40,000 96% 38,200 14 $18.40 43% $220 $947 6% Notes 1 2 2 3
National advertising opportunities per movie/visit Sell-through/utilization rate National CPM rate Revenue from national advertisements ($millions) U.S. movie screens Percentage ad-capable Screens available for local/regional advertising Local/regional advertising opportunities per week Weekly rate Sell-through/utilization rate Revenue from local/regional advertisements ($millions) Total digital cinema advertising revenue ($millions)
1. Assuming a 50-basis-point reduction in attendance each year. 2. To keep standards constant retroactively, NCMI (the market leader) uses 11 opportunities per film as the denominator, but it has expanded the number of ad opportunities over time to 14 per film, and we expect this number will increase. Thus, the sell-through rate can and does exceed 100% and full sell-through would be 127% (14/11). 3. Industry expert believes can grow about 2%-4% per year. 4. Local/regional advertisers typically pay a flat fee per screen, per week. Sources: National CineMedia and William Blair & Company, L.L.C.
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Advertising Methods
Preshow advertising is quite simple at its core; commercials are played for roughly 20 minutes before a movie starts. The block is broken up into four segments, as illustrated in gure 48. Approximately 22 minutes before show time, local and regional ads are shown in segments four and three. CPM rates for these segments are lower, since the audience attendance is lighter 20 minutes before the show. Upcoming movie trailers as well as beverage/concessionaire ads and national advertising are shown in segments two and one. Digital cinema is a signicant enabler for preshow advertising, and while it does not boost CPM rates, it creates more inventory and enables this inventory to be changed on the y before show time. It is comparable to static versus digital billboardsstatic billboards allow only one advertisement to be shown for a long duration, whereas digital billboards allow multiple advertisements that can be changed more frequently.
Figure 48 Digital Cinema Prefilm Advertising Lineup
Local / Regional Advertising 14 Local / Regional 15-Second Units Segment 4 Segment 3
All National Advertising 11 National 30-Second Units

(Ability to Add 2 Additional Units Depending on Demand)
Segment 2
Segment 1
Founding Member House Ads 1:15
Founding Member House Ads :30
Founding Member House Ads :15
Local/Regional Advertising 2:00
Local/Regional Advertising :90
Beverage Concessionaire :60
Content Segment Three 2:30
Content Segment Two 2:30
Content Segment One 2:30
Digital Carousel NCM House Ad :15 Filler 1:00 Regional Advertising 3:00
National Advertising 2:00
National Advertising 4:00
NCM House Ad :60
Button
Show Close :80
Show Open :15
Impression ratings increase closer to showtime as audience size builds
Source: National CineMedia

Commercials in 3-D Could Boost CPMs It is estimated that 3-D preshow advertising CPMs are roughly 50% to 100% above the forecast $37 CPM rate in cinema advertising, and in some instances could be even higher. The current growth in 3-D screens and lms is lending itself to natural growth in 3-D preshow commercials. Another related secular driver is the increase in number of 3-D television channels. For example, if Ford has a national 3-D commercial, it will likely want to run in multiple capacities across more 3-D channels and platforms. More Ad Dollars Shifting to Cinema Advertising As reported by the Cinema Advertising Council, 2010 saw a signicant increase in the number of major marketers and their agency buyers and planners, and more brands are planning to include cinema as an integral part of their media mix to reach younger demographics and light TV viewers. We believe the cinema advertising market will continue to grow at the expense of traditional advertising, compounded by the shift to digital and 3-D, which should boost inventory and engagement levels.
Showtime
Approx. 22 Min.
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Secular Tailwinds The continued rollout of digital theaters is a positive trend, creating more advertising inventory that can be changed in real time. Screen Digest forecasts digital screens to grow 58% in 2011, to 57,000 worldwide. While there are essentially four implementations that work for preshow advertisingslide shows, digital connected to analog projectors, digital connected to digital projects, or ads embedded directly into digitalthe secular backdrop of more digital screens is positive for the industry, in our view. Moreover, 3-D television channels, full-length motion pictures, and screens are in the early stages of expansion. In 2011, there are only 35 3-D movies planned (out of roughly 600 movies), an increase of 13 movies from 2010, or up 60% year-over-year. And 3-D screens should add an incremental 11,000 screens worldwide in 2011, to 33,000, or up 50% year-over-year. Last, we believe new clients will continue to move to cinema advertising, as supported by the 51 new clients that NCMI added in 2010; among these are many marquee brands, including Google, Kraft, Microsoft, and Walgreens.
Figure 49 Worldwide 3-D Screens (in thousands)
140 120
45
100
69
54 86 112 109 104 40 33 22 1 5 3 6 9 7 14 24 34 43 43
80 60 40 20 0
CY07
CY08
CY09
CY10 3-D Screens
CY11E
CY12E
CY13E
2-D Digital Screens
Total Screens
Sources: RealD, Screen Digest, and William Blair & Company, L.L.C.
Secular Headwinds While not unduly concerning in the near term, movie attendance declined 5% in 2010 to 1.34 billion; attendance has been relatively at since 2001, when 1.43 billion people saw a movie. Moreover, the studios are experimenting with premium video on demand, which if successful could lead to collapsing movie windows. Last, cinema advertising CPM rates (now at $37) could start to bump into broadcast primetime CPM rates of about $45-$46, which might result in some pushback on increasing CPMs.
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Stand-Alone Models: Internet Radio

Customized Stations On-Demand, From Wherever You Are
Market size and opportunity. In the United States, about 4 billion hours of radio are listened to every week, comprising 90% to 92% traditional terrestrial radio, 4% to 5% satellite radio, and 4% to 5% Internet radio. According to the Radio Advertising Bureau, the U.S. radio advertising market generated $17.3 billion in revenue, up 6% from 2009 ($16.0 billion) but down 20% from the $21.7 billion generated in 2006. Internet radio has continually taken share from terrestrial radio over the past ve years, and we anticipate this trend will continue. Users prefer Internet radio because it can be customized to their preferences, offers the potential to skip songs, and is easily accessible on a variety of electronic devices. Advertisers prefer Internet radio for incremental advertising opportunities (display and video advertising), a lower advertising load versus terrestrial radio (ads are heard instead of lost in the clutter), and incremental targeting opportunities (e.g., age, gender). Industry statistics and nancial metrics. We estimate that the Internet radio market will total $363 million in 2011 and will scale to $1.9 billion in 2015 (a 52% CAGR). In 2011, we believe there will be an average of 8.5 ads delivered to PC users and 5.5 ads will be delivered to mobile users per hour (combination of display, video, and audio ads). We believe that the mixed CPM rate for PC ads will be $7.50 in 2011, scaling to $12.00 in 2015. For mobile, we believe the 2011 mixed CPM will be $2.50, scaling to $4.00 in 2015. Advertising methods. Internet radio offers signicantly more advertising opportunities relative to traditional terrestrial radio. At a high level, Internet radio offers display, video, and audio advertising opportunities. The market continues to evolve, however, and Internet radio companies are innovating new advertising opportunities as wellsuch as a unique banner ad that is a custom-designed skin on the browser home page hosting the radio service. Recent trends. Two key trends have become evident in the Internet radio market over the past few years. First, consumers are increasingly listening to Internet radio on mobile devices, drawn by the on-the-go convenience and supported by smartphones and 3G/4G data speeds. Second, consumers are increasingly choosing customized radio over genrespecic radio. Outlook and evolution. We believe two main themes will potentially play out in the Internet radio market. First, we expect additional competition will continue to enter the marketboth terrestrial stations migrating to dual Internet/terrestrial offerings and new companies. Second, we believe direct-serving of Internet radio into automobiles may occur as automobiles become IP-ready, making listening to Internet radio in an automobile as easy as listening to an AM/FM station.
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Internet radio is a rapidly growing market with substantial growth opportunities for both advertising and subscription dollars. In the United States, about 4 billion hours of radio are listened to every week, and in 2010, between 90% and 92% of listening hours were of traditional terrestrial radio. Of the remaining 8% to 10%, we estimate that Internet radio and satellite radio each constitute roughly half. In other words, Internet radio accounts for only about 4% to 5% of radio listenership in the United States, providing substantial room for growth through market share gains.
Table 27 January 2011 Internet Radio Average Active Sessions 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Pandora Corporate CBS Radio Inc. Clear Channel Radio Citadel Broadcasting Company Slacker, Inc. ESPN Radio Corporate Entercom Communications Corp. Cox Radio Inc. Cumulus Media, Inc. Digitally Imported Inc. EMF Corporate Radio One Emmis Communications Bonneville Corporate AccuRadio Salem Communications Greater Media Corporate 977Music.com Corporate Univision Townsquare Media 522,330 103,228 82,992 31,601 26,338 17,000 16,678 13,305 12,225 11,639 11,004 6,810 6,142 5,794 5,360 5,148 5,132 4,985 4,805 3,503 Average Time Spent Listening 0.83 0.85 1.15 1.47 0.71 1.10 1.32 1.48 1.44 1.40 1.64 1.60 1.05 3.43 2.68 3.26 1.97 1.41 0.83 1.60
Session Starts 344,150,856 66,689,856 39,271,024 11,648,727 20,180,397 8,404,084 6,870,164 4,878,879 4,621,798 4,501,252 3,230,511 2,304,464 3,173,657 913,342 1,088,049 851,770 1,415,899 1,912,959 3,172,073 1,162,701
Source: Ando Media Ranker, January 2011
To subsegment the market further, the Radio Advertising Bureau estimates that 19% of radio listening is done in the ofce, 37% is done at home, and 44% is done in an automobile. We believe the home and ofce (collectively 56% of the market) are the sweet spot for Internet radio, with automobile listening a longer-term opportunity. In dollar terms, the U.S. radio advertising market generated $17.3 billion in 2010, an increase of 6% year-over-year (and the rst year of growth since 2006). Over time, we believe Internet radio has the opportunity to substantially take ad dollars away from terrestrial radio because: Internet radio is stickier than terrestrial, with lower advertising loads, channel personalization and customization opportunities, song-skipping capability, and potentially song-selection capability (only offered by some providers); Internet radio has incremental advertising opportunities (banner, video, and audio) and requires user engagement (i.e., it is a lean in to listen experience versus passive listening); most Internet radio providers are serving signicantly fewer ads per hour than terrestrial radio and could increase the ad load over time (although this would likely have a negative impact on CPM rates); and Internet radio can target users on additional metrics relative to terrestrial radio (e.g., age, gender).
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Figure 50 U.S. Radio Advertising Revenue (in $ billions)
$25.0 $20.0 $15.0 $10.0 $5.0 $0.0 2005
Source: Radio Advertising Bureau
2006
2007
2008
2009
2010

As detailed in table 28, we estimate that the domestic market for Internet radio in 2011 will total $363 million, and it will scale to $1.9 billion in 2015, a CAGR of 52%. We estimate that the vast majority of advertising revenue will be derived from PC and mobile devices; audio advertising on CE devices and automobiles will scale over time, but will not be a material contributor in the near term, in our opinion. In 2011, we believe there will be an average of 8.5 ads delivered to PC users per hour (combination of display, video, and audio ads), and this will scale to 10.5 ads per hour in 2015. Similarly, in 2011 we believe there will be an average of 5.5 ads delivered to mobile users per hour (also a combination of display, video, and audio ads), and this will scale to 7 ads per hour in 2015. Estimated CPM rates on PCs are substantially higher than mobile, but mobile advertising is a nascent market with signicant long-term potential, and we believe our mobile CPM rates could prove conservative.
Table 28 Internet Radio Market Size Forecast Total annual U.S. radio listener hours (in billions) Estimated percent Internet radio Internet radio hours (in billions) Percent listened to on PC Percent listened to on CE/mobile devices Percent subscription (not advertised to) PC Internet radio hours (in millions) Sold opportunities per hour Mixed CPM rate (display, video and audio, direct sold, and remnant) PC radio revenue (in $millions) Mobile/CE Internet radio hours (in millions) Sold opportunities per hour Mixed CPM rate (display, video and audio, direct sold, and remnant) Mobile & CE devices radio revenue (in $millions) Total Internet radio advertising revenue (in $millions) Year-over-year growth rate CAGR vs. 2011
2011 187.2 7.0% 13.1 30.0% 62.5% 7.5% 3,931 8.5 $7.50 $251 8,190 5.5 $2.50 $113 $363 NA
2012 187.2 11.0% 20.6 25.0% 67.5% 7.5% 5,148 9.0 $9.00 $417 13,900 5.8 $2.75 $220 $637 75.3% 75.3%
2013 187.2 15.0% 28.1 23.5% 69.0% 7.5% 6,599 9.5 $10.00 $627 19,375 6.0 $3.25 $378 $1,005 57.8% 66.3%
2014 187.2 18.5% 34.6 22.5% 70.0% 7.5% 7,792 10.0 $11.00 $857 24,242 6.5 $3.75 $591 $1,448 44.1% 58.6%
2015 187.2 22.0% 41.2 21.5% 71.0% 7.5% 8,855 10.5 $12.00 $1,116 29,241 7.0 $4.00 $819 $1,934 33.6% 51.9%
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Advertising Methods
Unlike terrestrial radio, Internet radio is typically accessed through devices with screen displays, enabling multiple advertising products to be served. At a high level, Internet radio supports three different types of advertisements (display, audio, and video), delivered across three primary access devices (PCs, mobile phones, CE devices). Each advertisement type/access device combination garners its own CPM, which we estimate can range from as low as $0.75 to as high as $14.00. As with many other emerging advertising platforms, Internet radio companies are experimenting with different advertisement types and bundles/combinations to maximize the revenue from their inventory. Among the basic three groups (display, video, audio), multiple variations and combinations exist, as detailed below. Further, some Internet radio providers are also experimenting with new forms of advertising and promotion; for example, at least one Internet radio company is offering users branded radio stationswherein the brand (e.g., Oreo) has created a multihour song list (i.e., a radio station) synonymous with its brand that users can select to listen to. PC Display PC: Traditional display/banner, home page banner/skin Mobile: Traditional display/banner, welcome screen display, tall/expandable banners
Video PC: Pre-roll, user-initiated, auto-play (as a temporary pause in music) Mobile: Traditional display/banner, welcome screen display, tall/expandable banners
Audio PC: Traditional audio ad Mobile: Traditional audio ad
Bundles/Combinations PC: Home page+video, home page+audio, user-initiated video+home page, audio+home page, audio+banner Mobile: Audio+banner, video+banner, audio+banner+screen take-over
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Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 97 - 97 -
Figure 51 Internet Radio Advertising Methods Preroll Video (Yahoo! Launchcast) Rollover Video Ad (Pandora Radio) Multiple/Mixed Ads (Slacker Radio)
Rollover Video Ad
Banner Ads
Source: www.launchcast.com Source: www.pandora.com Source: www.slackerradio.com
Video Ad
Audio Ad With Companion Banner (Pandora Radio)
Banner Ad (Clear Channel iheartradio)
Homepage Banner/Skin (Pandora Radio)
Audio Ad (plays in music stream) Companion Banner Ads

Source: www.pandora.com Source: www.launchcast.com
Banner Ad
Source: www.pandora.com

Consumers Are Shifting to Mobile Consumption of Internet Radio Smartphones continue to sell rapidly in the United States and worldwide; according to IDC, 73.6 million smartphones will be sold in North America in 2011, scaling to an estimated 150.4 million in 2015. For Internet radio, smartphones are important, because they both enable on-the-go consumption and act as the connection device that powers in-auto listening. These two benets have resulted in mobile listening taking considerable share of Internet radio marketing; in 2011, we forecast that mobile will account for about 63% of all Internet radio listening, and that this will scale to 71% by 2015. We estimate that the leading smartphone radio app, Pandora, has been downloaded more than 70 million times, and according to Nielsen, Pandora is a top-ve most used app on iPhone, Android-powered, and BlackBerry devices. Last, we believe the rollout of 4G cellular services, which offer signicantly quicker download speeds (up to 10 times as fast) and an extended reception range relative to 3G, will accelerate mobile consumption; latency delays and buffering are among the more common user complaints for Internet radio on mobile devices. Custom Stations Favored Over Genre Stations There are typically two main types of Internet radio models: custom stations and traditional genre stations (e.g., R&B). Some consumers prefer the traditional genre-based approach, but the majority of Internet radio listeners have ocked to customized radiodrawn by the capability to rene the radio experience more closely to their musical interest. The leading customized radio sites are Last.fm, Pandora, and Slacker, followed by a handful of smaller companies. According to Ando Media, a market research rm specializing in Internet radio, customized radio accounted for more than 61% of Internet radio listening hours in January 2011, with the market leader, Pandora, accounting for more than 58% of the hours. We believe customized radio will continue to gain market share in the Internet radio market.

Potential for Direct-Serving Into Automobiles Internet radio playback in automobiles is still in early stages, but has potential for signicant growth over the longer term. The existing method of enabling Internet radio playback in automobiles involves linking a users smartphone to an automobiles media technology (e.g., Ford Sync technology), effectively leveraging the smartphones Internet connectivity, but enabling control of the playback through the automobile (e.g., buttons on the steering wheel) and the automobiles speaker system. We believe this is only the rst step of integration, however, and we see phase II a couple years down the road where a car can sense a smartphone and automatically pair with the device on entry. A couple of years after that, we believe phase III will occur, where Internet connectivity is built directly into automobiles and Internet radio will be as accessible and easy-to-use as AM/FM radio is today. More Competitors Will Enter the MarketEspecially If a Favorable Shift in the Fee Structure Takes Place Internet radio has grown rapidly over the past few years, and as expected, more competitors have entered the market as a result. Further, as Internet radio continues to take share from traditional terrestrial radio, terrestrial companies have increasingly moved to offer online listening in addition to traditional AM/FM listening. A gating factor to entry, however, has been the Soundexchange royalty terms applied to Internet radio; Internet radio companies must pay the greater of 25% of gross U.S. revenue or about $0.001 per song played (increasing about 5% per year through 2015). This works out to a cost of about $0.0175 per hour of music in 2011, making the economics on mobile/CE devices difcult for new competitors because of lower CPM and ll rates as well as a barrier for established market leaders. We believe this has served as a deterrent for many radio companies seeking to enter the Ralph Schackart 312.364.8753 - 98 -

Internet radio market (mobile is a signicant growth driver). There is potential, however, for the Soundexchange license rate to be reduced before its expiration in 2015. If this were to occur, we believe additional Internet radio companies would emerge.
Table 29 Internet Radio Soundexchange Costs 2011 Estimated percent of hours from platform that are ad-supported PC Mobile/CE Implied revenue per hour PC Mobile/CE Average of PC and mobile/CE Soundexchange cost Songs per hour Cost per song (predetermined) Estimated Soundexchange cost per hour Implied margin per hour ONLY factoring in Soundexchange costs PC Mobile/CE Average of PC and mobile/CE
Sources: Soundexchange, William Blair & Company, L.L.C.
2012 25.0% 67.5% $0.081 $0.016 $0.031 17 $0.00110 $0.01870
2013 23.5% 69.0% $0.095 $0.020 $0.036 17 $0.00120 $0.02040
2014 22.5% 70.0% $0.110 $0.024 $0.042 17 $0.00130 $0.02210
2015 21.5% 71.0% $0.126 $0.028 $0.047 17 $0.00140 $0.02380
30.0% 62.5% $0.064 $0.014 $0.028 17 $0.00102 $0.01734
73% -26% 37%
77% -18% 40%
79% -5% 43%
80% 9% 47%
81% 15% 49%
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Stand-Alone Models: Paid Blogging

Paid Blogging: The 21st Century Tupperware Party?
Market size and opportunity. Blogging is one of the most popular activities on the Web. Both Blogger and WordPress, the two largest blog hosting sites, are in the top 20 most visited sites, according to Alexa.com; Twitter, a microblogging site, is also included in the top 20. Although these sites do not generate the billions of dollars that other sites on this list do, they still generate signicant amounts of revenue. For 2011, we estimate that paid blogging generated $525 million; we expect this will grow to about $1 billion by 2015. Industry statistics and nancial metrics. There are only a few key metrics in the paid blogging market: RPM, page views, and page rank are the most important. RPM (revenue per mille, with mille being Latin for thousand) measures how much revenue the blog generates, from all sources, from every thousand page views. Page views are how many times a page on the blog is viewed by a unique user. The revenue generated from paid blogging is simply RPM page views. We estimate paid blogging sites generate $5-$15 per thousand page views. The page rank of a blog is important in sponsored posting. Advertisers care about how a blog is perceived, or ranked, in the Web. Authors of sponsored posts are frequently paid based on their Google PageRank. Advertising methods. Paid blogs offer two methods of advertising: display/contextual advertising and sponsored posts. Display and contextual advertising for paid blogging is very similar to that of other forms of content. Blog authors (or site owners) create ad space (inventory), which is sold to advertisers. Advertisers insert display or text advertisements relevant to the blog. Recent trends. Because the content quality from content farms (sites that employ many authors to ll perceived gaps in online content) can be poor, it is frowned on by search engines. In early 2011, Google changed its search algorithm to reduce the appearance of material from content farms. The result was a decline in trafc of up to 50% for some publishers. Moreover, paid blogging can sometimes carry a conict of interest, as readers can perceive the authors material as an unbiased opinion when, in fact, the author is receiving compensation from advertisers. Because of this, in 2009 the FTC implemented rules requiring blog authors to disclose when a review is sponsored. Since this is a new advertising medium, it is likely that there will be continuing government regulation or oversight. Outlook and evolution. Paid blogging ts an advertising niche that was previously unmet; however, it remains to be seen if the paid blogging market can grow faster than the overall Internet advertising industry. Although we estimate the paid blogging market to grow 15% through 2015, to $1 billion, it remains to be seen if the growth rate can be maintained past 2015. The paid blogging market faces regulatory risks as well as a dependence on search engine algorithms. Both risks have been exposed recently, with new restrictions and changes to algorithms lowering the revenue of paid blogs.
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Blogging is one of the most popular activities on the Web, in terms of both time spent creating and consuming content and page views. Both Blogger and WordPress, the two largest blog hosting sites, are in the top 20 most visited sites, according to Alexa.com; Twitter, a microblogging site, is also included in the top 20. Although these sites do not generate the billions of dollars that other sites on this list do, they still generate signicant amounts of revenue. For 2011, we estimate that paid blogging generated $525 million; we expect this will grow to $1 billion in 2015.
Table 30 Top 20 U.S. Websites, by Page Views Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Site Google Facebook Yahoo! YouTube Amazon Wikipedia Twitter Blogger.com eBay Craiglist Windows Live LinkedIn MSN Bing Go CNN AOL ESPN WordPress Netflix Category Search Social networking Portal Web video E-commerce Information Microblogging Blogging E-commerce Classifieds Search Social networking Portal Search Portal News Portal News Blogging Web video
Sources: Alexa.com and William Blair & Company, L.L.C.
Table 31 Paid Blogging Market Size 2010 Blog page views per year (millions) 150,000 Paid-blogging as a percent of all blogs 50.0% RPM $7.00 Estimated market size (millions) $525 Year-over-year growth rate
2011 157,500 51.0% $7.50 $602 14.8%
2012 165,000 52.0% $8.50 $729 21.1%
2013 172,500 53.0% $9.00 $823 12.8%
2014 180,000 54.0% $9.50 $923 12.2%
2015 187,500 55.0% $10.00 $1,031 11.7%
CAGR 4.6%
14.5%
Revenue for paid blogging is generated in two ways: display/contextual advertising and sponsored posts. Display and contextual advertising for blogging is no different from display and contextual advertising for most other websites. Relevant display and text-based ads are placed near the content of the blog. Because blogs are text heavy, it is easy for search engines to place relevant, effective contextual-based ads in the blogs ad inventory. The second advertising method, sponsored posts, is unique to the paid blogging industry. Sponsored posts involve advertisers paying bloggers (blog authors) to write about the advertisers product, service, or brand. This advertising method creates an avenue for freelance writers to increase their earning potential, but it also can create an ethical dilemma.
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There are only a few key metrics in the paid blogging market: RPM, page views, and page rank are the most important. RPM measures how much revenue the blog generates, from all sources, from every thousand page views. Page views are how many times a page on the blog is viewed by a unique user. The revenue generated from paid blogging is simply a product of the RPM and the page views. Paid blogging sites appear to generate $5-$15 per thousand page views, in our estimation. Although this RPM is greater than other website types, they typically get fewer views (according to Google, Facebook had about 150 times as many views as Blogger in 2010 and YouTube almost 20 times as many views). Demand Media, a company that pays authors to write about relevant topics and then sells advertising related to the topic, reported 15.3 billion page views from its websites and those in its network in the rst nine months of 2010, with a weighted average RPM of $6.91. The page rank of a blog is important in sponsored posting. Advertisers care about how a blog is perceived, or ranked, on the Web. Googles PageRank is a metric that values a website based on multiple metrics, specically the quantity and quality of outside hyperlinks linking to the blog. For instance, a blog that is referenced several hundred times in outside websites will rank higher than a blog with few outside references, according to Googles PageRank algorithm. Authors of sponsored posts are frequently paid based on their Google PageRank.
Advertising Methods
There are two methods of advertising in paid blogs: display/contextual advertising and sponsored posts. Display and contextual advertising for paid blogging is very similar to that for other forms of content. Blog authors (or site owners) create ad space (inventory), which is sold to advertisers. Advertisers insert display or text advertisements that are relevant to the blog. As seen in gure 52, a personal blog post discussing Chicago snow patterns on Christian holidays contains ads for Chicago snow removal and online ministry degrees that t within the context of the blogs content (contextual advertisements). The display advertisement on the right is a more generic advertisement that appears in a wide swath of Web pages. In this example, the sites author uses Blogger (powered by Google) to create a personal blog. The owner has the option of inserting ad space in his blog. Google, through its AdSense product, matches available advertisements with the inventory created. When a reader clicks on an ad, Google charges the advertiser the relevant cost-per-click and pays the author a percentage of the ad revenue. The display ad is placed in the Web page through Googles display advertising product, DoubleClick, with similar mechanics.
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Figure 52 Blog Display and Contextual Advertisement Example
Display Advertisement
Contextual Advertisements
Sponsored posts are much different from traditional advertising and are unique to blogging. Sponsored blogging involves an advertiser compensating a blogger in some fashion to write about the product, service, or brand. This method is unique to blogging, and successful, because blogging involves an author discussing her thoughts and the readers typically empathizing or agreeing with the author. In the example shown in gure 53, on the following page, a beauty and fashion blogger received a bag of cosmetics in exchange for writing about the goods. Because of the inherent conict of interest this creates (readers reading reviews and not knowing there is a bias), the FTC has mandated that blog authors must disclose if the review is sponsored. Authors can go directly to the advertisers for material or they can use third parties that match bloggers with advertisers. The most popular service is PayPerPost by Izea. PayPerPost offers bloggers cash to write about the products of the advertisers. PayPerPost, and others like it, pay authors on a per-post basis, between $5 and $500 depending on the situation, but typically $10 or less. Authors are given guidelines such as including links and pictures and, to an extent, what to write. Sponsored-post authors can also be paid to include hyperlinks to other websites in their blogs or distribute press releases or other announcements.
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Figure 53 Sponsored Post Example
Sources: WordPress and William Blair & Company, L.L.C.
There are many hybrids of these two advertising models; the most common hybrid advertising model is one in which content is created to match a perceived advertising need. The leading company in this space is Demand Media. Demand Media uses search engine optimization technologies to determine where there is a lack of content in the Web and it pays writers to write about the subject. The material is placed on Demand Medias websites and advertising is sold on the website. Because the content is created by amateurs and has little editorial oversight, the quality is typically much lower than that from a professional source. For this reason, Demand Media and its competitors are known as content farms. Figure 54 is an example of a Demand Media website (eHow). Demand Media determined there was a need to provide information on tween birthday party ideas. The company listed the writing job on its job board, had one of its many (13,000) freelance writers write the article and upload it, and then the company added display and contextual advertising in the article. Like sponsored posts, authors of these articles are paid on a per-article basis, typically about $10. This type of advertising is quite effective, as Demand Media reported 6 billion page views in the rst nine months of 2010 with an average RPM of $12.60, equal to $80 million.
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Figure 54 Created Content Example
Display Advertisements
Contextual Advertisements
Sources: Demand Media, Inc and William Blair & Company, L.L.C.
Participants Technorati, a widely read tech blog, commissioned a survey of bloggers for its 2010 State of the Blogosphere report. The report found that 11% of bloggers used their blog as their primary source of income; however, the average income for this group was only $15,000. The report surmises, with anecdotal evidence to support it, that a large group of the blogging population is stay-at-home moms who blog to supplement their household income. Brand advertisers have picked up on this phenomenon, as the report noted that 54% of blogging moms have been approached by a brand to write about it or make a product review, compared with 33% for the overall blogging public. This evidence lends to the perception that paid bloggers are the new Tupperware party hosts.

Because the content from content farms can be poor qualitythese companies seem to place more emphasis on quantitysearch engines can view it as diluting the value of their search results. In early 2011, Google changed its search algorithm to decrease the appearance of material from content farms. The result was a decline in trafc of up to 50% for some publishers. Paid blogging can sometimes carry a conict of interest, as the author may not have a strongly favorable opinion of the product she is being paid to review or would not otherwise use the product, but readers can perceive the authors material as an unbiased opinion. Because of this, in 2009 the FTC implemented rules requiring blog authors to disclose when a review is sponsored. Since this is a new advertising medium, it is likely that there will be continuing government regulation or oversight.
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Paid blogging ts an advertising niche that was previously unmet; however, it remains to be seen if the paid blogging market can grow faster than the overall Internet advertising industry. Although we estimate the paid blogging market will almost double by 2015 to $1 billion, this growth rate may not be sustainable. The paid blogging market faces regulatory risks as well as a dependence on search engine algorithms. Both risks have been exposed recently, with new restrictions and changes to algorithms lowering the revenue generated by paid blogs. Additional information is available upon request. This report is available in electronic form to registered users via R*Docs at www.rdocs. com or www.williamblair.com. Please contact us at (800) 621-0687 or consult http://www.williamblair.com/pages/eqresearch_ coverage.asp for all disclosures. DJIA: S&P 500: NASDAQ: 12,595.75 1,337.78 2,828.47
The prices of the common stock of other public companies mentioned in this report follow: Apple Inc. (Outperform) Cinemark Holdings Inc. The Coca-Cola Company comScore, Inc. (Outperform) Ford Motor Co. Google Inc. (Outperform) Kraft Foods Inc. Microsoft Corporation (Outperform) National CineMedia, Inc. Netix, Inc. (Market Perform) Nielsen Holdings N.V. (Outperform) Regal Entertainment Group Rovi Corporation (Outperform) Toyota Motor Corp. Walgreen Co. (Outperform) Verizon Communications Inc. (Market Perform) Yahoo! Inc. (Market Perform) $340.50 $20.71 $68.13 $28.09 $15.08 $529.55 $34.89 $25.03 $16.53 $246.52 $30.60 $13.68 $58.23 $83.38 $44.97 $37.26 $16.55
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Appendix A: Venture Capital Financing Process

We use subscription services and frequently track a number of industry websites to keep abreast of new and emerging trends. Through this process, we gather venture capital nancing information from numerous sources. For each nancing deal of $5 million or more, we determine if the deal falls within our denition of digital advertising or a related platform end-market; if it does, we subjectively categorize the funded company into one of the nine digital advertising or platform subverticals we have dened (detailed in the tables and charts on pages 8-9). Our data will not exactly match traditional subscription service reporting metrics (details provided below). Still, we believe our data are nearly complete and are therefore quite useful to analyze, evaluate, and interpret new and emerging industry themes. Further, our industry trends analysis is a mosaic approach, incorporating our industry knowledge, news ow, channel checks, company reports, and other information; our nearly complete funding data are a complement to, rather than a driver of, our analysis. As noted above, our funding data will differ from traditional service providers funding data for the following items: We gather funding data primarily from industry websites (i.e., our data may not incorporate every nancing that occurred). We believe our denition of digital advertising closely mirrors the general consensus denition; however, our subjective determination of whether a funded company is a digital advertising company may result in inclusion or exclusion from our list. We subjectively categorize funded companies into what we believe is the most appropriate vertical among the nine we have dened. Many funded companies could be categorized in two or more verticals, so the funding values for each subvertical could be more (or less) than the value detailed in our analysis.
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Appendix B: Proles of Public and Private Digital Advertising Companies and Properties
33Across Inc. www.33across.com New York Citybased 33Across Inc. develops technology to identify inuential online users for online marketing. It offers the SocialDNA platform, which improves brand and direct response programs. The company serves advertisers and publishers. The company was founded in 2007. Activision Blizzard, Inc. www.activisionblizzard.com Ticker: ATVI Price: $11.51 William Blair & Company Rating: Company Prole: Outperform Aggressive Growth
Activision Blizzard is the largest third-party videogame publisher in the global videogame industry. Its well-known franchises include World of Warcraft, and Call of Duty, as well as motion-picture-related games, such as Bond and Transformers. For videogame publishing, the company focuses on a lean and deep approach, favoring fewer but higher-quality games over numerous but lower-quality games. Acxiom Corporation www.acxiom.com Ticker: ACXM Price: $14.29 Acxiom provides marketing technology and services that enable marketers to manage audiences, personalize consumer experiences, and create customer relationships. It operates in two segments: information services and information products. The information services segment offers customer data integration, multichannel marketing services, infrastructure management services, and consulting services. This segment also develops, sells, and delivers industry-tailored solutions, including the design and creation of marketing databases and data warehouses; data integration and customer-recognition systems; marketing applications; list processing; and information technology services. The information products segment develops and sells various data products, including segmentation products and domestic fraud and risk mitigation products, as well as online advertising products. This segment provides InfoBase-Xa, a customer-centric foundation for various marketing needs with a collection of U.S. consumer information available in one source; PersonicXa, a household segmentation and visualization system; and Acxiom Relevance-Xa, an online advertising network that lets marketers reach the consumers interested in their particular product or service. The company was founded in 1969 and is based in Little Rock, Arkansas. Adap.tv, Inc. www.adap.tv Adap.tv builds technology to make buying and selling video advertising easy and seamless. The companys productsAdap.tv for Advertisers, Adap.tv for Publishers, and the Adap.tv Marketplacework in harmony to connect video advertising buyers directly to sellers on a single platform. The Adap.tv Marketplace is the industrys largest video marketplace for premium publishers and brand name advertisers, with over 4,200 sites selling inventory and hundreds of campaigns running daily. Based in San Mateo, California, and with sales ofces in New York, Los Angeles, Chicago, Seattle, and London, Adap.tv is privately held and backed by Bessemer Venture Partners, Gemini Israel Funds, Redpoint Ventures, and Spark Capital. Ralph Schackart 312.364.8753 - 108 -

AdBrite, Inc. www.adbrite.com AdBrite operates an Internet advertising exchange platform for companies, advertising agencies, demand-side platforms, real time bidders, advertising networks, and publishers. Its platform offers direct access to campaign data and analytics, as well as enables users to use its third-party data to target their online advertising campaigns. The company accepts and serves advertising units, including in-page video, media, banner, and text; third-party advertising tags; and pre-roll videos. It also provides yield management solutions. AdBrite was formerly known as MarketBanker and changed its name to AdBrite, Inc. in 2004. Adchemy, Inc. www.adchemy.com Adchemy operates as a digital marketing technology company. It offers Adchemy Audience Data Cloud, a data management platform that enables clients to develop deep insight into online audiences, develop targeted segments, and deliver relevant advertising that improves engagement and conversion; and the Adchemy WordMap application, a SaaS software solution to extract underlying intentions from keyword search terms. It serves online advertisers. Adchemy was founded in 2004 and is based in Foster City, California. Adconion Media Group Limited www.adconion.com Adconion is an independent global audience network providing compelling interactive media solutions for advertisers, agencies and publishers. In the United States, it operates as Joost, which offers a wide breadth of current, premium, and exclusive online video content. Adknowledge, Inc. www.adknowledge.com Adknowledge operates one of the largest digital ad marketplaces. It specializes in performance-based marketing solutions across multiple channels. The company has over 60 terabytes of anonymous consumer data which it utilizes to support more than 10,000 advertisers who use the Adknowledge ad network, AdMob (part of Google Inc.) www.admob.com Ticker: GOOG Price: $529.55 William Blair & Company Rating: Company Prole: Outperform Aggressive Growth
AdMob Google Inc., a mobile advertising network, provides solutions for discovery, branding, and monetization on the mobile Web. Its mobile advertising and monetization solutions include mobile sites; Mobile Analytics solution, which helps mobile site owners to gain insight into their trafc and site usage to make data-driven decisions about their mobile business; and Mobile Metrics Report, which offers insight into trends in the mobile ecosystem. The company serves advertisers, agencies, application developers, and mobile Web publishers in the United States and internationally. AdMob Google Inc. was formerly known as AdMob, Inc.
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Adometry, Inc. www.adometry.com Adometry, formerly Click Forensics, Inc., is the leading provider of ad analytics and trafc quality solutions for the online advertising community. For over half a decade, Adometry has led the industry in online ad verication and trafc quality management, delivering actionable insight to improve the performance of online advertising. Online advertisers, agencies, publishers, and ad networks rely on Adometry for audience verication, click quality scoring, and attribution metrics to optimize online advertising results.
Admeld Inc. www.admeld.com Admeld Inc. provides advertising network optimization technology for online publishers in the United States and internationally. Its technology monitors customers sites, as well as selects a mix of advertisements in a portfolio of advertising networks, exchanges, and demand-side platforms. The company also manages customers demand relationships and consolidates various data into a single reporting interface, enforces business rules on various demand sources, and provides tools and services to eliminate problems, such as channel conicts, inappropriate advertisements, and blanks.
AdReady Inc. www.adready.com AdReady offers software solutions for digital display advertising in a platform for midsize to large advertisers and agencies. The companys platform helps advertisers and agencies in campaign creation and management and assists publishers in managing advertisement operations, trafcking, and billing. AdReady Inc. was founded in 2006 and is based in Seattle.
Adroit Interactive LLC www.adroitinteractive.com Adroit is a leader in dynamically generated advertising. The company enables advertisers and agencies to use dynamic ads across their entire campaign to modify, deploy, test, and optimize ad content in real time.
AdSafe Media, Inc. www.adsafemedia.com AdSafe Media provides online advertising brand protection and risk management solutions. The company offers a suite of products and services for brands, such as brand equity risk management and control solutions for brands online; for agencies to manage and protect their clients brands; for ad networks, including certifying and endorsing network inventory and allowing networks to moderate and classify their inventory; and products for publishers, including third-party certication of site content and safety. Its rating system provides a third-party content rating and certication platform to help standardize and control the online advertising ecosystem.
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Adteractive, Inc. www.adteractive.com Adteractive, Inc. provides performance-based online customer acquisition and lead generation services to consumer direct marketers and advertisers. It builds a customer acquisition network that enables it to acquire qualied leads and customers across various online distribution channels for advertising clients in a diverse set of vertical markets. The company was founded in 2000 and is based in San Francisco.
AdXpose, Inc. www.adxpose.com AdXpose provides digital advertising analytics solutions. Its SaaS technology helps advertisers and publishers deliver digital advertising campaigns. AdXpose was formerly known as Mpire Corporation and changed its name to AdXpose on April 4, 2011. The company was founded in 2005 and is based in Seattle with an additional ofce in New York.
Aggregate Knowledge, Inc. www.aggregateknowledge.com Aggregate Knowledge provides solutions that enable customers to leverage real-time consumer interest in their advertising and marketing campaigns. It offers Pique Discovery Network, which connects consumers to products, content, and items from various retailers and media companies. The companys AK Discovery Platform provides the foundational audience management infrastructure to collect data, congure audiences, and track campaigns in various connected digital channels. It serves retailers and media companies. The company was founded in 2005 and is based in San Mateo, California.
AlmondNet, Inc. www.almondnet.com AlmondNet, a behavioral targeting advertising company, provides targeted, privacy-sensitive, and relevant paid search advertisements to people based on the recent searches they made. The company offers post-search advertisements for consumers; post-search solutions for data owners, collecting user search data from the site and using it to enable the delivery of behaviorally targeted advertisements outside the site; and post-search data for advertisers and media owners that are in purchasing mode for the products and services that the advertisers are seeking to offer to their target customers. It has a strategic alliance with National Ad Force.
Amobee, Inc. www.amobee.com Amobee delivers telco-grade systems for funding mobile content and communications through advertising revenues. The company inserts interactive advertisements into various mobile entertainment and communication channels, including videos, music, messaging, games, and WAP using telco-grade ad-serving infrastructure. It serves mobile operators, publishers and developers, and agencies and advertisers targeting mobile consumers. The company, formerly known as Upsteed, was founded in 2005 and is based in Redwood City, California, with an additional ofce in London, as well as a research and development center in Herzliya, Israel.
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Angies List www.angieslist.com Angies List is a word-of-mouth network for consumers with a growing list of real-life experiences with local service companies. Users of Angies List connect to nd trustworthy companies that perform high-quality work. Angies List is supported by monthly subscriptions from users to access ratings on the list.
Apple Inc. www.apple.com Ticker: AAPL Price: $340.50 William Blair & Company Rating: Company Prole: Outperform Core Growth
Apple designs, manufactures, and sells personal computers, portable digital music players, and mobile communication devices, as well as related software, services, peripherals, and networking solutions worldwide. Some of the companys most popular products are its MacBooks, iPod music players, iPhone mobile phone, iPad tablets, and iTunes music playing and purchasing platform. The company was founded in 1976 and is based in Cupertino, California.
AppNexus, Inc. www.appnexus.com AppNexus develops and manages an online advertisement exchange in the United States and the United Kingdom. It provides an on-demand production infrastructure for direct marketers, advertisement networks, and demand-side platforms to build, manage, and optimize their display advertising businesses. It also offers AppNexus cloud, an ecosystem in which enterprises collaborate and share industry-specic information without the latency, bandwidth, and security issues of the public Internet. The company was founded in 2007 and is based in New York. It has a data center in Amsterdam.
Associated Content (part of Yahoo, Inc.) www.associatedcontent.com Ticker: YHOO Price: $16.55 William Blair & Company Rating: Company Prole: Market Perform Core Growth
Associated Content is an open content platform that enables anyone to publish content on any topic, in any format (text, video, audio, and images) and connect that content to consumers, partners, and advertisers. Associated Content is part of the Yahoo! Contributor Network and the worlds largest sources of community-created content.
AudienceScience Inc. www.audiencescience.com AudienceScience offers a behavioral targeting platform and marketplace for the digital media industry. The companys solutions include Targeting Marketplace, a platform that enables advertisers to nd audiences for their messages on the Web; Discovery, a target audience search tool; Behavioral Segments, a consumer behavioral data warehouse; and Brand Enhance, a solution that is designed to deliver brand recognition and lift while ensuring a safe
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environment for marketers campaigns. It also collects, measures, and segments peoples interests and intent through their Web behaviors. AudienceScience Inc. was formerly known as Revenue Science, Inc.
Automattic Inc. (WordPress) http://automattic.com Automattic is a startup best known for its WordPress product, although it has a portfolio of products and many other interesting products and services in the pipeline as well. The company is a strong believer in open source and the vast majority of its work is available under licenses like the GPL.
Big Fish Games, Inc. www.bigshgames.com Big Fish Games is a global leader and innovator in the casual games industry, producing and delivering engaging gaming experiences. Big Fish Games portal distributes more games worldwide than any other online site and offers visitors a rapidly expanding selection of content, typically launching a new game every day.
Bizo, Inc. www.bizo.com Bizo provides an advertising network and a bizographic (anonymous business demographic data) targeting platform to collect information from company databases, business registrations, and online proles to provide mechanisms for business trafc measurement and targeting. It offers B2B marketers with access to targetable audiences of businesspeople through its platform and network of publisher sites across the Web. The companys platform understands bizographics of its audience, such as industry, functional area, seniority, education, and location. Bizo, Inc. was incorporated in 2008 and is based in San Francisco.
BlackArrow, Inc. www.blackarrow.tv BlackArrow is a leading worldwide provider of advanced advertising technology for New Television platforms (VOD, DVR, broadband, and mobile). The companys multiplatform advertising system is designed specically for video content distributed over any on-demand platform, enabling networks and content distributors to maximize advertising revenues. BlackArrow is privately held, and backed by Cisco, Comcast Interactive Capital, and Intel Capital, among others.
Bling Nation www.blingnation.com Bling Nation helps business turn their best customers into Facebook Fans and their friends into new customers. Bling Nations mobile platform enables unique tap-and-connect capabilities with rich social media connectivity. Businesses can supercharge their loyalty programs with actionable analytics and programs to boost customer conversion.
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Blogger (part of Google) www.blogger.com Blogger is Googles free blog hosting product. The product allows users to easily create and monetize blogs. Blogger was known as Pyra Labs before its acquisition by Google.
Blue Kai, Inc. www.bluekai.com Blue Kai, Inc. operates an online platform for intent-focused data exchange. Its platform enables marketers to customize and own data to boost advertisement targeting and discover new prospects; publishers to provide intent data and earn revenue; and consumers to manage what marketers know about them. The company was incorporated in 2007 and is based in Bellevue, Washington.
BooRah (part of Intuit) http://business.intuit.com/boorah-restaurants/ Ticker: INTU Price: $55.35 William Blair & Company Rating: Company Prole: Outperform Core Growth
BooRah is a personalized restaurant review guide for consumers. BooRah uses a patentpending natural language processing technology to automatically summarize a collection of online reviews from bloggers, professional critics, and consumers.
Booyah Inc. www.booyah.com Booyah is dedicated to creating new forms of entertainment for the masses by bringing together elements of the real world and the digital world. The development team hails from many backgrounds, including top-notch videogame studios, semiconductors, and consumer Web services. The company is based in Palo Alto, California, and nanced by Kleiner Perkins Caueld & Byers iFund.
Boxee, Inc. www.boxee.tv Boxee is a free, open-source, downloadable social media center. On a computer or connected to an HDTV, Boxee gives people a truly connected digital entertainment experience to enjoy movies, TV shows, music, and photos, as well as streaming content from websites like Netix, MLB.TV, Comedy Central, Pandora, Last.fm, and Flickr. Users can also share information about what they are watching with friends so they can nd it legally and enjoy it too.
Brand.net, Inc. www.brand.net Brand.net, Inc. operates as an online advertising network for brand advertisers. It helps build brands online for brand advertisers and their agencies. The company offers precampaign creative testing and troubleshooting; ongoing campaign monitoring and proactive communication and support; frequent campaign optimization; and customized campaign insights. Ralph Schackart 312.364.8753 - 114 -

It serves automotive, CPG, entertainment, nance, retail, telecommunications, and travel brand advertisers. The company was founded in 2007 and is based in San Mateo, California, with additional ofces in New York, Chicago, Atlanta, and Silicon Valley.
Break Media www.break.com Break Media provides entertainment content to men online. It develops, publishes, and distributes digital entertainment content, including videos, editorial, and games. It serves videos and photos to 18- to 34-year-old guys on a monthly basis. The company also enables advertisers to market directly to young males. Break Media was founded in 1998 and is based in Beverly Hills, California, with satellite ofces in New York City, Chicago, San Francisco, Dallas, Toronto, London, and Shanghai.
Brightcove Inc. www.brightcove.com Brightcove is one of the largest and most respected online video platforms. It allows organizations to publish and monetize their videos across PCs, tablets, smartphones, and TVs.
BrightRoll Inc. www.brightroll.com BrightRoll is one of the largest and fastest-growing video advertising networks. The company enables agencies and brand advertisers to execute effective video ad campaigns across the industrys leading publishers, including over 175 of the top 250 websites in the United States.
Brilig www.brilig.com Brilig provides a structured environment that is open and transparent, for the listing, combination, analysis, and buying or selling of audience information for online advertising targeting.
Buddy Media, Inc. www.buddymedia.com Buddy Media specializes in social media engagement tools for brands. Brand marketers and agencies use Buddy Medias comprehensive social media management platform to create, manage, and track social campaigns on social media sites such as Facebook and Twitter. Buddy Media appeals to marketers because users can create and manage aesthetically pleasing Facebook pages and Twitter proles with minimal technical knowledge. Based in New York City, the company has raised just over $10 million in venture funding from investors such as Softbank Capital, Greycroft Partners, and Bay Partners.
Burst Media Corporation www.burstmedia.com Burst Media Corporation provides Internet advertising solutions to online advertisers, publishers, and ad networks. The company has three independently operated advertising networks, including Burst Network, Burst Direct, and Giant Realm; and technology and business process infrastructure Burst adConductor. Its Burst adConductor is an end-to-end Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 115 -

ad management solution, which manages advertising inventory; targets audiences; serves advertisements; and provides reporting, billing, and other services. As of December 2009, the company delivered advertising campaigns for its customers through a network of approximately 5,900 specialty content websites. It has advertising servers in Massachusetts, Virginia, and Colorado in the United States; and Amsterdam in Europe. The company was founded in 1995 and is based in Burlington, Massachusetts.
BuyWithMe, Inc. www.buywithme.com BuyWithMe is a group buying services website that allows consumers to leverage the power of group buying to receive large discounts with local merchants. Deals become activated when a preset minimum number of consumers buy into the deal. Its services are available in four cities in the United States. The company received $5.5 million in series A venture funding in 2010 from Matrix Partners.
Buysight, Inc. www.buysight.com Buysight, Inc. provides online acquisition, remarketing, and brand advertising services. It builds BuyerIndex, an index of consumer purchase intent, history, and activity data. The company, through its BuyerIndex, predicts what individual shoppers want to buy and connects them to companies that meet their needs. Buysight also gathers and analyzes retail shopping activity for various shoppers and delivers brand messages to people looking to buy in a brand category. The company was formerly known as Permuto, Inc. and changed its name to Buysight, Inc. on September 27, 2010. Buysight was founded in 2008 and is based in Palo Alto, California.
Centro, LLC www.centro.net Centro, LLC operates as an online media services provider. It enhances the success of advertising agencies by helping them develop and execute local digital solutions. The company, through its media planning and buying platform, streamlines the process of buying and selling online advertising among national, regional, and local agencies, and local online publishers in the United States and Canada. Centro handles the local online buying process that includes research, strategic planning, negotiating, buying, trafcking, optimizing, and billing. It gives clients access to local content in various markets, including local online properties and digital media companies.
ChoiceStream, Inc. www.choicestream.com ChoiceStream, Inc. provides personalization services to e-retail, entertainment services, and TV and mobile providers. The companys RealRelevance Anywhere personalized recommendation service is an automated software-as-a-service solution that helps companies in recommending the relevant content and products to each consumer. Its fully hosted service helps shoppers in product discovery. The company serves media and entertainment, retail, consumer services, and consumer electronics markets. ChoiceStream, Inc. was founded in 2000 and is based in Cambridge, Massachusetts, with an additional ofce in Palo Alto, California.
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Cinedigm Digital Cinema Corp. www.cinedigm.com Ticker: CIDM Price: $2.16 Cinedigm is a leader in providing technology and content services critical to transforming movie theaters into digital and networked entertainment centers. The company works with Hollywood movie studios, independent movie distributors, and exhibitors to bring movies in digital cinema format to audiences across the country.
Clearspring Technologies, Inc. www.clearspring.com Clearspring Technologies, Inc. provides creation, distribution, management, tracking, and monetization services. The company provides platforms that are used for creating, conguring, and editing widgets from management consoles; for distributing widgets to social networks, bookmarking sites, blogs, start pages, widget galleries, and desktop and mobile phone platforms; and for monitoring views, grabs, and viral spreads, as well as tracking custom events to analyze the usage of widgets.
Club Texting www.clubtexting.com Club Texting allows businesses to easily send group text messages to their customers. Club Textings Web-based system allows users to send thousands of text ads instantly and at favorable prices.
Collective www.collective.com Collective is a leading media and technology solutions provider for display advertising. Founded in 2005, the company delivers targeted audiences to advertising agencies, brand advertisers, and publishers. Collectives industry expertise provides a strategic advantage to its clients by leveraging insights to reach audiences. Its media solutions include Collective Display and Collective Video. Collectives technology solutions include AMP, the leading ad network administration, audience targeting, and reach extension platform. The company is based in New York with ofces in Atlanta, Boston, Chicago, Dallas, Detroit, Los Angeles, San Francisco, and London.
CONTEXTWEB, Inc. www.contextweb.com ContextWeb, Inc. provides contextual advertising solutions in the United States. The company offers ContextAd, a contextual advertising solution that uses context to identify keywords and derive a relevant match for the Web page and advertiser. It also operates ADSDAQ, an exchange that acts as an online platform for advertisers and publishers. It serves advertisers, including marketing organizations and publishers. ContextWeb was founded in 2000 and is based in New York.
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Convertro, Inc. www.convertro.com Convertro, Inc. provides online conversion solutions for companies. It offers visitor tracking, media attribution, and phone tracking solutions. The company also provides Convertro Dashboard, which enables clients to see real-time conversion data by referral source at macro and micro levels; Convertro Data Export, which allows marketers to share conversion data with various bidding tools; and Convertro Pixel Management Tool, which provides control over third-party pixels that re, and how much credit they receive based upon multi-attribution contribution.
CPX Interactive, LLC www.cpxinteractive.com CPX Interactive, LLC operates an online advertisement network. It engages in the development, execution, and delivery of online strategies; and provision of reach, content, and premium networks for advertisers and publishers in the United States and internationally. The company also provides campaign conversions and placement services. CPX Interactive, LLC was formerly known as B.U.D.S., Inc. and it changed its name to CPX Interactive, LLC in 2006. The company was founded in 2000 and is based in Westbury, New York, with additional ofces in Milan, Istanbul, Madrid, New York City, and Los Angeles.
Crisp Media www.crispmedia.com Crisp Media, a media advertising company, provides an advertising platform for building, serving, and measuring interactive campaigns across desktop and mobile Web platforms, mobile applications, tablets, and connected TVs. The company offers advertising formats and Adhesion, a xed placement technology for publishers and developers to engage with consumers and drive interaction across various channels. It provides multiplatform rich media advertising formats for smartphones, tablets, and the desktop and rich media advertising components, rich media reporting, and creative services for agencies.
CrowdStar International, Limited www.crowdstar.com CrowdStar offers numerous popular social games on social networking sites, particularly Facebook. In addition, CrowdStar International is a publishing company, handling business operations for CrowdStar games and other independent providers.
Cumulus Media Inc. www.cumulus.com Ticker: CMLS Price: $4.37 Cumulus Media is the second largest operator of radio stations in America and covers 68 metropolitan areas. It offers multiple advertising solutions to its community of 14 million listeners.
DataLogix, Inc. www.datalogix.com DataLogix provides data and technology-driven solutions to direct marketers and brand advertisers to increase the effectiveness of customer acquisition, retention, and branding programs on traditional and online marketing channels. It offers NextAction Direct, a database Ralph Schackart 312.364.8753 - 118 -

of SKU-level consumer purchasing behavior; and Afniti Digital, an online advertising platform for real-world data that enables media companies and agencies to nd Internet users based on ofine behaviors and attributes. DataLogix was formerly known as NextAction Corporation and changed its name to DataLogix, Inc. in November 2009. The company was founded in 2002 and is based in Westminster, Colorado.
DataXu, Inc. www.dataxu.com DataXu provides an advertisement optimization and bidding platform for online display advertisers. The companys platform engages in valuing, bid managing, and buying advertisements on an impression-by-impression basis across the advertisement exchanges operated by Google, Yahoo, and others. It also offers advertisers consumer and brand insights, including nanosegment reports that identify the key context, and consumer and creative attributes; performance reporting and analysis services; and real-time bidding services.
Demand Media, Inc. www.demandmedia.com Ticker: DMD Price: $15.96 Demand Media is a leader in distributed social media, powering 3 billion conversations every month. The company has a comScore top 50 global network of premium online brands, a breakthrough Internet content studio, and an enterprise social media platform deployed on the worlds leading digital destinations. Demand Media makes it possible for more than 100 million people each month to engage in conversations and form passionate communities around relevant content.
DeNA Global, Inc. www.denaglobal.com DeNA Global owns and operates MobaMingle, a mobile social-networking community for Web-enabled mobile phone users. The company also owns mobile game developer ngmoco, which it purchased in 2010. DeNA enables mobile citizens to create and share digital media content with their friends, and also helps in nding friends, blogging, social networking, and sharing life stories.
Digital Chocolate, Inc. www.digitalchocolate.com Digital Chocolate is a leading publisher of original, high-quality games that reach massmarket consumers across all platforms and are driven by social value, convenience, and instant gratication. The company was founded in 2003 by Trip Hawkins, who was also the founder and CEO of Electronic Arts.
Dotomi, Inc. www.dotomi.com Dotomi offers Internet advertising and media management services. The company provides media marketing, remarketing, data management, campaign management, creative designing, and performance analysis services. It also offers media buying, technical integration, and online reporting services. In addition, the company provides Message Sequencing Solution,
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which allows advertisers to change their display advertisements based on number of days or number of impressions, as well as offers advertisers a solution to manage and respond to the ongoing performance of their display advertising campaigns.
DoubleClick, Inc. (part of Google) www.google.com/doubleclick DoubleClick provides digital marketing technology and services. Companies come to DoubleClick for expertise in ad serving, media, video, search, and afliate marketing to help them make the most of the digital medium.
DoubleVerify, Inc. www.doubleverify.com DoubleVerify Inc. provides online media verication solutions for agencies, marketers, publishers, and advertisement networks. It offers audit and verication of online advertising transactions. DoubleVerify Inc. was founded in 2008 and is based in New York with an additional ofce in Tel Aviv, Israel.
Efcient Frontier, Inc. www.efrontier.com Efcient Frontier operates a DSP platform that offers an auction-based inventory spanning search, display, and social media.
Electronic Arts Inc. www.ea.com Ticker: ERTS Price: $23.70 William Blair & Company Rating: Company Prole: Outperform Core Growth
Electronic Arts is the worlds second-largest third-party publisher of videogames for consoles, handheld devices, and mobile phones. The companys market-leading brands include FIFA, Madden NFL Football, Need for Speed, The Sims, and many others. In addition, Electronic Arts purchased Playsh, a leading social gaming company.
Emuse Technologies.com www.emuse-tech.com Emuse works with media operators and content owners around the world to enable crossplatform advertising and interactive content to TV platforms, IPTV, online, and mobile devices.
Ensequence, Inc. www.ensequence.com Ensequence is an interactive television company that provides solutions enabling programmers, advertisers, and distributors to create and deploy interactive TV experiences that increase programming ratings, advertising response, and audience reach. The company mitigates the technical complexities of interactive TV implementation and enables its customers to quickly and affordably deliver a high volume of robust interactive TV experiences across cable, satellite, and IPTV. Ralph Schackart 312.364.8753 - 120 -

Entercom Communications Corp. www.entercom.com Ticker: ETM Price: $9.20 Entercom is one of the ve largest radio broadcasting companies in the United States. The company has a portfolio of over 100 stations in 23 markets. Entercom incorporates its audio, digital, and experiential assets to provide effective integrated marketing solutions for its customers.
eXelate Media LTD www.exelate.com Israel-based eXelate Media provides online advertising solutions. The company focuses on the marketplace for behavioral targeting data. It offers Targeting Cookies that provide nonpersonally-identiable preference information, which helps advertisers specify an ad or a group of ads that are meant to be displayed to a user in the future. The company was founded in 2006 and is based in Petach Tikvah, Israel, with additional ofces in New York and Tel Aviv.
EyeWonder, Inc. www.eyewonder.com EyeWonder, Inc. provides interactive digital advertising products and services in the United States. The company also provides online video and rich media advertising solutions. Its ad formats include in-page interactive digital ad formats, which comprise video ad formats, including video banner ads, video expandable ads, and video oating ads; and rich media ads, such as interactive banner ads, expandable ads, and oating ads. The companys ad formats also include in-stream ad formats that comprise in-stream 2.0 ads, such as linear-full interactive player, nonlinear-interactive bug and ticker, Yahoo act 3, and Adobe media player; and pre-roll ads. In addition, its ad formats include custom ad formats, which comprise instant messenger formats, such as InstantWonder, which offers richest media and video ad units; in-game ad formats; and synchronized roadblock ads. The companys services include consulting, production, campaign management, and custom ad development. It enables advertisers, creative/production and advertising agencies, media agencies, partners, and content publishers to create, deliver, manage, and optimize their interactive digital ad campaigns. The company was formerly known as XstreamNet. EyeWonder, Inc. was founded in 1999 and is based in Atlanta.
Explore Your City LLC (d.b.a. YouSwoop) www.youswoop.com YouSwoop is a Chicago-based group buying services website that allows consumers to leverage the power of group buying to receive large discounts with local merchants. Deals become activated when a preset minimum number of consumers buy into the deal. Members receive reward points for every purchase that can go toward future purchases. YouSwoop is currently available only in Chicago.
Facebook, Inc. www.facebook.com Facebook is the largest and most popular social networking website. The company enables users to connect, interact, and engage each other in an increasing number of ways, such as playing games, sharing status updates, sharing photos, chatting via instant message, joining user groups, commenting on friends proles, and more. Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 121 -

FatTail, Inc. www.fattail.com FatTail provides integrated workow, inventory management, and revenue enhancement solutions for the digital media industry. The company offers software solutions, including AdBook for proposal/IO management, workow management, inventory management, billing management, and reporting to online publishers; Results Management System, a data aggregation and reporting solution for advertisers and agencies; and Creative Library, a collaboration solution for agencies and publishers. It serves the online advertising industry. The company was founded in 2001 and is based in Woodland Hills, California.
Federated Media Publishing, Inc. www.federatedmedia.net Federated Media Publishing provides online marketing services to creators, audiences, and marketers. The company was founded in 2005 and is based in Sausalito, California.
Fliqz, Inc. www.iqz.com Fliqz provides plug-and-play video solutions. It offers online video solutions, as well as operates an Internet video platform that allows companies, real estate brokers, social networking sites, and entertainment companies to post their clips online. The company also provides monetization solutions, including advertising units, pre-roll advertisements, and advertising server integration solutions for online video publishers, as well as offers solutions for websites and blogs to post their videos online. It serves communities, enthusiasts, listings, and travel and publishing customers. The company was founded in 2005 and is based in Emeryville, California.
Flurry, Inc. www.urry.com Flurry is a venture-backed company that provides smartphone application analytics and a monetization platform used by more than 30,000 applications.
FourthWall Media www.biap.com FourthWall Media (formerly known as Biap, Inc.) provides interactive television and advanced advertising solutions. The company helps advertisers break through the fourth wallthe invisible barrier standing between the TV audience and programmers and advertisers. FourthWall Media has partnered with Time Warner Cable, DISH Network, and several other operators to deliver rich interactive services to nearly 25 million set-top boxes.
Foursquare Labs, Inc. www.foursquare.com Foursquare is a location-based mobile platform that makes the real world more fun by adding check-ins and location sharing. Users can share their location with friends while collecting points and virtual badges. Companies can use Foursquare to obtain, engage, and retain customers and audiences.
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Gigya, Inc. www.gigya.com Gigya provides widget distribution, content sharing, and advertising platform for the social Web. It offers Wildre, which provides tools to content publishers for boosting and tracking widget distribution; social widgets; and Socialize, a service that allows site publishers to add social features to their websites. The company was incorporated in 2006 and is based in Palo Alto, California.
Glam Media, Inc. www.glammedia.com Glam Media, Inc., an online media company, owns and operates lifestyle websites and blogs for women. Its websites enable the users to express opinions on a range of lifestyle topics, including style, fashion, shopping, wellness, and food. Glam Media was founded in 2003 and is based in Brisbane, California, with an additional ofce in New York. The company has operations in the United States, the United Kingdom, Canada, Australia, and South Korea.
Glu Mobile Inc. www.glu.com Ticker: GLUU Price: $3.71 Glu Mobile designs, markets, and sells mobile games worldwide. The companys games based on licensed intellectual property include Call of Duty, Deer Hunter, Diner Dash, Transformers, Wedding Dash, World Series of Poker, and Zuma; games based on its own intellectual property include Beat It!, Bonsai Blast, Brain Genius, Glyder, Stranded, and Super K.O. Boxing. It designs a portfolio of games for the wireless subscriber population as well as for users of smartphones. The company also develops games for social networking websites. It markets and sells its games primarily through wireless carriers. The company was formerly known as Sorrent, Inc. and changed its name to Glu Mobile Inc. in May 2005.
Gowalla Inc. www.gowalla.com Gowalla creates games and game-like experiences for the social Web. The company is best known for its location-based game/service, which inspires people to share their favorite places and events with friends while discovering the world around them. The service is available on the iPhone, Android, and BlackBerry. Gowalla is also the creator of the Facebook game PackRat. The company is privately held and based in Austin, Texas.
Grooveshark (part of Escape Media Group, Inc.) www.grooveshark.com Grooveshark is a Web-based application designed for anyone to listen to music on the Internet for free. Grooveshark has a 7 million song catalog from which users can listen free of charge. Artists and record labels can upload songs and pay to have their songs advertised or played to users.
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Groupon, Inc. www.groupon.com Chicago-based Groupon is the largest and most well-known provider of group buying services. Groupon recently expanded its footprint to Europe with the purchase of group buying site CityDeal. The company features a daily deal in each of its markets at signicant discounts that become activated when a preset minimum number of consumers buy into the deal. Groupon recently unveiled a member rewards program (currently in beta) that rewards members for viewing and buying deals. Reward points can be used toward Daily Deals or in the newly launched Local Rewards marketplace.
GroupTexting www.grouptexting.com GroupTexting offers an affordable bulk text messaging system. Users can send SMS ads to between 100 and 100,000 customers from GroupTextings website.
hi5 Networks, Inc. www.hi5.com Hi5 is one of the largest social entertainment sites in the world. Available in more than 50 languages, hi5 combines ad-supported social networking features with payment-based premium content to deliver a user experience focused on self-expression and interactivity that appeals to the sites young demographic (67% of users are between 18 and 34). Social games, virtual goods, and other premium content on the site are monetized through hi5 coins, a virtual currency supporting more than 60 payment methods and 30 currencies worldwide. The site also supports third-party games and other applications through its OpenSocial platform.
HipLogic Inc. www.hiplogic.com HipLogic was founded to redene the mobile user experiencemaking it easy for users to access and use mobile apps and services. The HipLogic application platform features a lightweight, always-on JavaScript virtual machine connected to intelligent cloud services, aggregating information from network operators and the Web to create unique mash-ups on the mobile device.
Hulu www.hulu.com Helping people nd and enjoy premium content when, where, and how they want it is Hulus mission. The company offers an online video service including hit shows, clips, movies, and more on Hulu.com. Hulus service is accessible through a growing number of connected devices including TVs, Blu-ray players, PCs, and tablets. Hulu offers free and premium services, with the subscription premium service including more content.
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HomeRun.com www.homerun.com HomeRun is a popular daily deals service. The company helps introduce new customers and their friends and family to local businesses by way of offering users a purchasable deal to a local business at a signicant discount.
iAd Network (part of Apple) http://advertising.apple.com Formerly Quattro Wireless, iAd is a rich-media ad network run by Apple for iOS devices. The network reaches millions of devices everyday with dynamic, interactive advertisements.
identi.ca www.identi.ca Identi.ca provides a microblogging service based on the Free Software StatusNet tool. Registered users can send short text messages about themselves and their status. Members can also subscribe to friends status updates through the Web or RSS feed.
IDG TechNetwork, Inc. www.idgtechnetwork.com IDG TechNetwork, Inc., a technology media, events, and research company, operates an online advertising network for technology marketers and agencies that create branding, product launch, and lead generation programs. The company connects advertisers and sponsors with an audience of enterprise, consumer, small and medium-size businesses, and gaming technology buyers, as well as enabling marketers to address specic technology markets with targeted communication. Its network features websites and print titles related to business technology, consumer technology, digital entertainment, and videogames. The company also produces various technology-related events and offers marketing services.
Iheartradio (part of Clear Channel Communications, Inc) www.iheartradio.com Ticker: CCO Price: $14.84 Iheartradio aggregates local radio stations, brands, personalities and on-demand content. The group (part of Clear Channel Communications) has very popular iOS, BlackBerry, and Android applications for mobile and portable devices. Over 750 local radio stations are part of its network.
infoGROUP, Inc. www.infogroup.com InfoGROUP Inc. and its subsidiaries provide business and consumer databases for sales leads, mailing lists, direct marketing, database marketing, e-mail marketing, and marketing research solutions. Its Data Group segment maintains proprietary databases of information relating to businesses and consumers in the United States and internationally. It provides access to its databases over the Internet through various websites, such as infoUSA.com, Salesgenie.com, onesource.com, and others. Its Marketing Research Group segment provides customer satisfaction surveys, employee surveys, opinion polling, and other market
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research services for businesses and government. The company was formerly known as infoUSA Inc. and changed its name to infoGROUP Inc. in June 2008. The company was founded in 1972 and is based in Omaha, Nebraska.
InMobi www.inmobi.com InMobi provides mobile advertising services in Asia and Africa. It develops an ad serving algorithm that helps in optimizing the ranking of the ads served on mobile phones. The company offers campaign management services, such as strategy, designing, executing, managing, and optimizing campaigns; and ad creation, format, and targeting services for advertisers. It also provides monetization strategies to monetize site trafc, by using a combination of performance and branding ads; and an ad serving algorithm to rank the ads available based on user targeting and past performance for publishers.
interCLICK, inc. www.interclick.com Ticker: ICLK Price: $6.92 InterCLICK, inc., a technology company, provides solutions for data-driven advertising in the United States. It combines scalable media execution capabilities with analytical expertise to deliver results for digital marketers and is involved in transactions of online advertising, such as display, video, and media formats between agency clients and third-party website publishers. The companys Open Segment Manager platform organizes and values various data points to construct responsive digital audiences for digital marketers. InterCLICK, inc. was founded in 2002 and is based in New York.
Intergi L.L.C. www.intergi.com Intergi L.L.C. operates as an online gaming and entertainment advertising network and representation company. Intergi L.L.C. was formerly known as eGameLogic and changed its name in September 2007. The company was founded in 2007 and is based in Deereld Beach, Florida.
IZEA www.izea.com Since 2006, IZEA has been a world leader in social media sponsorships. IZEA offers sponsored blog posts, sponsored updates (tweets), and sponsored actions to clients. The company was an early adaptor of cash sponsorships and continually creates new platforms and campaigns.
JovianDATA www.joviandata.com JovianDATA is a leading marketing business intelligence and data analytics technology rm. The company has developed patent-pending technologies that run complex queries on massive data sets in seconds. This enables marketers to make in-ight campaign adjustments to optimize their return on investment and campaign results. At the heart of the JovianDATA solution is a cloud-based analytics platform, JovianInsights, which manages huge data volumes from multiple advertising data sources (e.g., display, search, video, TV). Ralph Schackart 312.364.8753 - 126 -

JovianInsights for Campaign Effectiveness and Media-Mix Optimization are the rst two applications that provide the analytics and insights needed for in-ight, cross-media campaign adjustments. The applications provide attribution correlation, audience segmentation, and other marketing capabilities to help digital marketers optimize campaign performance.
Justin.tv Inc. www.justin.tv Justin.tv is a platform that allows users to easily create live video streams and share the experience with friends around the world. One new live video stream starts every second.
Jumpstart Automotive Group www.jumpstartautomotive.com Jumpstart Automotive Group operates as an automotive media and marketing company in the United States. It represents in-market car shoppers and inuencers across various automotive websites. The company offers integrated programs and campaigns for advertisers. Its services also include Web advertisements and packages, mobile applications and advertising, e-mail blasts, social media, video on demand, print, experiential, integrated proposal development, sales support, strategy and ideation consulting, and agency. The company was founded in 2000 and is based in San Francisco.
JumpTap, Inc. www.jumptap.com JumpTap provides mobile search and mobile advertising solutions for the Apple tablet in North America and Europe. It offers search engine, ad network, advertisers, operators, content publishers, paid search, and display ads solutions. The company serves advertising agencies and content providers. JumpTap was formerly known as SpringRight, Inc. and changed its name in November 2005. The company was founded in 2004 and is based in Cambridge, Massachusetts.
Kabam, Inc. www.kabam.com Kabam develops and publishes real games for social gamers. The companys studios focus on combining the best elements of traditional and social gaming to appeal to a growing audience of players looking for deeper, more engaging social games. Before expanding into gaming, Kabam established itself as a leading social applications developer with entertainment and sports communities totaling more than 60 million users. Kabam was known as Watercooler before 2010.
Kaltura Inc. www.kaltura.com Kaltura provides an open source online video platform. The companys product enables publishers to enhance their websites with video and interactive rich-media functionalities, including video management, searching, uploading, importing, editing, annotating, remixing, sharing, and advertising. The company also provides maintenance, support, integration, professional development, streaming and hosting, ad serving, content syndication, and aggregation of related third-party services. It serves media companies, social networks, UGC sites, video sharing sites, major brands, nonprots, bloggers, and enterprises. The company was founded in 2006 and is based in Brooklyn, New York. Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 127 -

Kontagent www.kontagent.com Kontagent is a leading analytics platform for social application developers. Kontagents platform provides deep social behavior analysis and visualization to provide actionable insight. The platform works with many of the worlds largest developers and brands, tracking hundreds of applications and more than 70 million monthly active users.
Last.fm Limited (a CBS Corp. subsidiary) www.last.fm Ticker: CBS Price: $25.94 Last.fm is a social networking company built around a proprietary music recommendation engine. Recommendations are made by comparing user data to the rest of the Last.fm user community, rather than matching similar musical attributes.
Lijit Networks, Inc. www.lijit.com Lijit helps publishers engage and understand their readership by providing innovative content discovery and search tools that enhance reader engagement, lengthen time on the site, and increase page views. By tracking reader intent, behavior, content, and demographics, Lijit also offers premium online advertising campaigns that are highly targeted and contextually relevant to the publishers audience and readership. Using Lijits Ad Services, advertisers and brands leverage the companys robust publisher networkincluding 12,000 publishers, 700 million page views per month, and 53 million unique visitors per dayto build campaigns that increase brand awareness, provide better brand recall, deliver more intent to purchase, and result in better ad performance. Lijit Networks, Inc. was incorporated in June 2006 and is based in Boulder, Colorado.
LivingSocial Inc. www.livingsocial.com LivingSocial is a leading social discovery and group buying website. It offers deals up to 90% at local restaurants, bars, spas, theaters and more. LivingSocial offers a unique twist; customers who get three other users to purchase the deal receive their deal for free. LivingSocial is available in more than 250 geographies across North America, Australia and Europe.
Lolapps, Inc. www.lolapps.com Lolapps offers custom applications spanning pop culture, entertainment, and various special interests for Facebook and other social networking platforms.
Loopt, Inc. www.loopt.com Loopt helps its 5 million users nd friends and places around them using their mobile phone. Loopt pulls in location data from Facebook and other users on Loopt to show users where their friends are to create wonderful moments of serendipity.
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Lotame Solutions, Inc. www.lotame.com Lotame Solutions provides social media solutions. It offers targeted digital advertising services for advertisers, agencies, and publishers. The company provides Crowd Control as a self-serve audience data management platform that enables Web publishers to create custom audiences, license audience data for use in interest-based advertising, and to protect the privacy of their site visitors. Lotame Solutions also provides in-market support services to various agencies and brands. In addition, it aggregates data created through social Web-based activities enabling brands to locate, target, and message inuencers through its platform.
LucidMedia Networks, Inc. www.lucidmedia.com LucidMedia is a comprehensive and transparent digital media platform offering consolidated buying with a universal cap, preemptive brand-safe ltering, and massive scale.
Magnetic Media Online, Inc. www.magnetic.is Magnetic Media Online develops an online search data marketplace that enables advertisers and publishers to use the search data for online advertising. It compiles data from various search engines and website partners that serve sponsored search ads. The companys data marketplace allows advertisers and publishers to use search data as the key indicator of intent and re-target their campaigns to relevant audiences online. It serves agencies, advertising networks, and demand-side platforms. Magnetic Media Online was formerly known as Domdex, Inc. and changed its name in 2010. The company was founded in 2008 and is based in New York.
MarketShare Partners, L.L.C. www.marketshare.com MarketShare develops software that evaluates the key parts of a companys business, such as macroeconomic factors, product innovation, industry and client-specic data, and brand buzz to help it make better decisions regarding where to spend its marketing, sales and promotional dollars.
MediaBank, LLC www.mbxg.com MediaBank is an operating system for the advertising industry. The company provides workow systems, analytics platforms, and agency nancial tools for media planners, buyers, and vendors. It offers MediaBank O|X, an order management and workow solution that allows users to manage the media buying life cycle for print, digital/Web/emerging media, out of home, spot/cable, network, direct response, and production; MediaBank A|X, a solution for tracking, reporting, and optimizing in-ight and historical campaigns; and MediaBank V|P, an integrated exchange portal for optimal buying and selling activities across multiple media types.
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MediaMath, LLC www.mediamath.com MediaMath provides cross-exchange advertising management services and technology. It offers Singularity, a media buying platform for advertising agencies that provides technology, strategy, services, and insight to trades in display advertising supply sources and exchanges on behalf of advertisers; software-as-a-service access for agency clients; and an independent managed services option for agencies. The company also provides the MathSelect suite of targeting tools, which allow agencies to target participating publishers and contextual channels in top-tier sites and portals, as well as demographically and behaviorally dened audience segments in various impressions daily.
Media6Degrees, LLC www.media6degrees.com Media6Degrees provides Internet advertising solutions. It provides brand marketers with targeted audiences using social graph data. The company is based in New York.
MediaMind Technologies Inc. www.mediamind.com MediaMind is a global provider of digital advertising solutions that optimize the use of media, creative, and data for enhanced campaign performance. MediaMinds unique platform incorporates display ad serving, search, rich media, video, dynamic ads, mobile, and emerging media, providing marketers with a cross-channel view of ad campaigns.
Metromix L.L.C. www.metromix.com Metromix is a network of local entertainment websites that offer deals and information on entertainment in local markets. Originally launched by the Chicago Tribune, Metromix has grown to 60 markets. Users are typically 21 to 34 years old, with active social lives and signicant disposable income. Metromix is backed by a joint venture between Gannett and the Tribune Co.
Millennial Media, Inc. www.millennialmedia.com Millennial Media offers mobile advertising services. It offers MBrand, a mobile advertising network, and Decktrade, a performance-based mobile advertising network. The company also designs and develops Millennial Motion, a platform that delivers media mobile campaigns. Millennial Media was founded in 2006 and is based in Baltimore with additional ofces in New York, Los Angeles, San Francisco, Chicago, and London.
Mind Candy Ltd. www.mindcandy.com Mind Candy specializes in the development of new types of multiplayer online gaming experiences. The company offers many types of games, but most combine social networking, virtual worlds, and casual or social gamestypically interacted with on a daily or multipletimes-a-day basis. The company is based in the United Kingdom.
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MindJolt www.mindjolt.com MindJolt gives social game developers a way to distribute their games, through MindJolts popular platform. MindJolt also offers monetization and analytic tools for developers.
Mojiva, Inc. www.mojiva.com Mojiva provides mobile marketing solutions for content publishers, advertisers, ad sellers, afliates, and developers. It offers self-serve mobile advertising and mobile ad publishing solutions. The company also provides private label mobile advertising platform, a mobile advertising workow management tool; and publisher white label, which provides control for the trafcking and management of advertising campaigns on various mobile content sites and advertising networks. Mojiva, Inc. was founded in 2008 and is based in New York.
MySpace Inc. (a subsidiary of News Corporation) www.myspace.com Ticker: NWSA Price: $17.45 MySpace is a leading social networking sitea lifestyle portal for connecting with friends and discovering popular culture. By integrating Web proles, blogs, instant messaging, e-mail, music streaming, music videos, photo galleries, classied listings, events, groups, college communities, and member forums, MySpace has created a connected community.
National CineMedia, Inc. www.ncm.com Ticker: NCMI Price: $16.53 Through its subsidiary, NCM Media Networks, National CineMedia offers one of the largest in-theater advertising networks in the country, with more than 17,000 screens at more than 1,400 locations.
NDS Group Ltd www.nds.com NDS Group creates technologies that allow pay-TV operators to deliver and monetize digital content to TVs, set-top-boxes, digital video recorders, PCs, portable media players and other devices. NDS is based in the U.K. with a global workforce and strong emphasis on R&D.
NetShelter Technology Media www.netshelter.net NetShelter Technology Media provides digital marketing services focusing on the technology sector. The company offers vertical media network assembling and online technology publishing services. In addition, it provides technology media distribution, management, and monetization services. The company also offers media kits to information technology, consumer electronic, mobile, game, and developer groups. NetShelter provides its products under neowin.net, WindowSecurity.com, MacRumors.com, geek.com, LetsGoMobile, Computing.net, gamershell.com, and neoseeker.com brand names. The companys clientele include Carat Fusion, World Media, Crucial Technology Europe, and Deep Focus.
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Neverblue Media, Inc. www.neverblue.com Neverblue Media operates as an online marketing company that focuses on lead generation and client acquisition for advertising clients in Canada, France, Germany, and the United Kingdom. It offers search engine marketing, e-mail marketing, contextual advertising, and incentive marketing and banner advertisements. The company was founded in 2004 and is based in Victoria, Canada. As of February 1, 2007, Neverblue Media is a subsidiary of Vertrue, Inc.
OMGPOP Inc. www.omgpop.com OMGPOP is a free online multiplayer game site that specializes in social games. The company started in 2006 as iminlikewithyou, a place for people to play games to meet each other, and in 2009 changed its name to the shorter OMGPOP, where people meet each other to play games.
On The Wall!, Inc. www.adsonthewall.com On The Wall is a theater advertising company dedicated to helping local small and midsize companies nd a source in which to market themselves in a focused and efcient way.
Ooyala, Inc. www.ooyala.com Ooyala provides video solutions to video content providers, advertisers, publishers, and consumers. It offers Backlot, a video platform with analytics, content syndication controls, and monetization solutions; Analytics Engine, a real-time analytics engine to process video data, such as plays, displays, and rewinds, as well as video watched and video abandonment points; Ooyala Backlot Video Platform, which includes the analytics module; and Adaptive Bitrate Delivery, which allows customers to initiate, manage, and monetize live streams. The company also provides a video sharing platform, which allows publishers and consumers to create and share their own dynamic clips.
OpenTable, Inc. www.opentable.com Ticker: OPEN Price: $93.05 OpenTable provides a restaurant management software system that allows users to easily nd and reserve their favorite restaurant and restaurant owners to manage their reservation and booking systems. The website initially launched in San Francisco in 1999 and has since spread to all 50 states and multiple countries.
OpenX Technologies, Inc. www.openx.org OpenX Technologies provides solutions and tools for Web publishers, advertisers, and technology providers in the United States and internationally. Its products include OpenX Enterprise ad server, which delivers advertisement serving functionalities; OpenX Community Hosted, a solution for users to service advertisements; OpenX Community Download, a solution for users to host their own advertisement server; and OpenX Market, a structured marketplace for publishers to sell their advertisement inventory to competing advertisers. Ralph Schackart 312.364.8753 - 132 -

Operative Media, Inc. www.operative.com Operative Media provides advertising business management solutions for the media industry. It offers Operative.One Digital, an advertising business management solution; Operative. One Ad Trafcking, a digital execution solution; and Operative.One Campaign Management, a solution to monitor campaigns and identify risks to meeting campaign goals. The company also provides Operative.One Network, an advertising business management solution that manages partner relationships, payments, and performance; and Operative. One Ad Serving, a solution that provides technical support, training, and project assistance for technology investments.
Pandora Media, Inc. www.pandora.com Pandora is a personalized Internet radio and music discovery service available anytime and anywhere on the PC, in the home, and on mobile devices. Pandora is based on the Music Genome Project begun in 2000 and is one of the most thorough analyses of popular music ever undertaken. Each song is analyzed by one of more than 35 trained musicians and assessed against up to 400 distinct musical attributes such as melody, harmony, and rhythm to capture its unique musical identity. Pandora is the largest online music site based on monthly unique visitors, boasting registered users exceeding 90 million.
PopCap Games, Inc. www.popcap.com PopCap Games designs, develops, and publishes casual and puzzle games. Its games are played on the Web, desktop computers, cell phones, smartphones, PDAs, pocket PCs, iPods, iPhones, game consoles, and in-ight entertainment systems. The company offers its products to Web portals, retail stores, mobile operators and developers, and game device manufacturers, as well as online shops.
PubMatic, Inc. www.pubmatic.com PubMatic provides ad optimization solutions to online publishers. It offers a meta ad server platform to publishers that provides ad optimization solutions and its Audience Data on Demand product, which allows publishers to leverage third-party audience data from multiple companies and make that data actionable for direct sales packaging. The company was founded in 2006 and is based in Palo Alto, California, with additional ofces in London; Paris; Hamburg, Germany; and Amsterdam, as well as in the United States and Asia-Pacic. It has operations in the Bay Area, California; and Pune and Mumbai, India.
Quantcast Corporation www.quantcast.com Quantcast provides open Internet ratings services. It offers media measurement services that enable advertisers to view audience reports on various websites and services. The company also ranks various Web properties based on the ability to deliver the target audience. It serves marketers, publishers, and agencies. Quantcast was founded in 2005 and is based in San Francisco.
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Rapleaf, Inc. www.rapleaf.com Rapleaf provides automated search solutions for people information on the social Web. It provides social media data and analysis services that include marketing services, such as social media report, data append, lead scoring API, and salesforce integration; fraud and credit services comprising fraud data API, research dashboard, and social graph scoring; and recruiting services, such as salesforce integration and social network search. The company serves retailers, airlines, hotel chains, social networks, lead generation rms, telcos, political campaigns, and other consumer-facing companies. Rapleaf was incorporated in 2005 and is based in San Francisco.
Related Content Database, Inc. (RCDb) www.rcdb.net The Related Content Database (RCDb) provides communication software solutions and data services to content owners, service providers, and consumer electronics manufacturers. RCDbs software and metadata enables fast and efcient development of next-generation TV, tablet, and Blu-ray user experiences. RCDbs Time Data service enables content owners to monetize digital video and metadata assets across multiple distribution platforms. The company provides support and professional services including development, integration, and training. RCDb was founded in 2006 and has ofces in San Francisco and Los Angeles.
ReachLocal, Inc. www.reachlocal.com ReachLocal offers search engine marketing and display advertising services to small and medium-size businesses and online marketing technology for advertising agencies.
Red Aril, Inc. www.redaril.com Red Aril operates a data management and audience optimization platform (DMP) for advertisers to effectively market to their target audiences.
Right Media, Inc. (part of Yahoo!) www.rightmedia.com Right Media operates Right Media Exchange, a digital advertising exchange platform. Right Media Exchange is an auction marketplace for buying and selling online inventory. The company also offers solutions architecture, implementation and technical integration, consulting, and advertisement operation and business process management services. It serves publishers, advertisers/agencies, advertising networks, and technology providers. The company was founded in 2003 and is based in New York with additional ofces in London, Moscow, Hong Kong, Hamburg, Eugene, San Francisco, and Tallahassee. As of July 12, 2007, Right Media, Inc. operates as a subsidiary of Yahoo!, Inc.
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Rocket Fuel Inc. www.rocketfuel.com Rocket Fuel provides an ad serving technology platform for agencies and advertisers to manage, run, and evaluate online campaigns. Its automated technology identies the performing segments for each individual campaign and directs impressions, as well as provides audience targeting technologies that combine social, behavioral, contextual, geographical, search, and other data sources to understand consumer interest and intent.
RockYou, Inc. www.rockyou.com RockYou develops social games and advertising solutions for social media. It reaches and monetizes social gamers across the most popular social media destinations online and is consistently in the top 15 social game developer list published by AppData.
Roku, Inc. www.roku.com Privately held Roku supplies innovative and easy-to-use digital media products. It is best known for its Roku digital video player and the stylish SoundBridge Internet radio line.
Rubicon Project, Inc. www.rubiconproject.com Rubicon Project, an advertising technology company, provides online advertising solutions to Web publishers and ad networks. It also offers ad network optimization services, as well as ad quality protection programs. In addition, the company provides solutions to stop unwanted ads in tracks by protecting Web publishers. Further, it offers REVV for publishers, a technology platform that empowers Web publishers by giving them complete control and visibility to manage their direct and indirect inventory to match every impression with the highest paying demand source.
Scoutmob, Inc. www.scoutmob.com Scoutmob provides location-aware coupons, offering rapidly expiring deals on local food, coffee, and shops, tailored to users location and city.
SapientNitro (part of Sapient Corporation) http://www.sapient.com/en-us/sapientnitro.html Ticker: SAPE Price: $14.52 William Blair & Company Rating: Company Prole: Outperform Aggressive Growth
Sapient Nitro is a multichannel marketing rm that specializes in providing social and digital marketing solutions to its clients. Sapient Nitro is part of the larger advertising agency Sapient Corporation.
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SAY Media www.saymedia.com SAY Media is a modern media company designed for a social age. The company enables advertisers to engage todays social consumer through rich content experiences while helping creators monetize their work and grow their audience. Through a collection of inuential creators, passion-based communities, and engaging sites, SAY Media delivers brand messages to an online audience of 400 million across both display and mobile.
Screenvision www.screenvision.com Screenvision is a leader in cinema advertising, providing premium marketing and media solutions for advertisers and comprehensive representation in cinema advertising for exhibitor partners. The Screenvision network comprises more than 15,000 screens in 2,400 theater locations across the United States.
SCVNGR, Inc. www.scvngr.com SCVNGR is a location-based online game. Users earn points and unlock rewards by checking in to SCVNGR using their mobile phones. Businesses can use SCVNGR to create games and tasks and reward users with virtual and real rewards.
ShareThis, Inc. www.sharethis.com ShareThis provides an online sharing platform that enables individuals to share online content to their proles, blogs, friends, and contacts. The company allows its users to share videos, text, pictures, music, documents, and photos through e-mail, IM, Facebook, Digg, and mobile SMS. It was formerly known as Nextumi, Inc. and changed its name to ShareThis, Inc. in March 2008. ShareThis was founded in 2004 and is based in Mountain View, California.
Shopkick, Inc. www.shopkick.com Shopkick bridges the worlds of mobile and physical retail. In August 2010, shopkick launched the rst mobile application that hands consumers rewards and exclusive deals at shopkicks national retail partners simply for walking into thousands of stores and malls. Shopkick created a new location technology that allows the app to verify the user is actually present inside a store (GPS is too inaccurate for that). Like advertisers pay Google for click trafc in the online world, they can pay shopkick for foot trafc in the real world. Shopkicks growing partner alliance includes Best Buy, Target, Macys, American Eagle, Crate & Barrel, Sports Authority, West Elm, Wet Seal, Simon Malls (largest U.S. mall operator), Procter & Gamble, Kraft Foods, Unilever, Intel, HP, Covergirl, Revlon, and Levis. Shopkick is the only 100% performance-based marketing platform in the physical retail world, with measurable foot trafc and transactions at stores. The app grew to 1,000,000 users in its rst six months.
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ShortTail Media, Inc. www.shorttailmedia.com ShortTail Media develops a game-changing ad platform that migrates online brand advertising. It offers video ads on nonvideo pages at entry, exit, and between sites. The companys platform also enables customers to target users from social media sites, search engines, and aggregators. ShortTail Media, Inc. was founded in 2008 and is based in Atlanta.
Slacker, Inc. www.slacker.com Slacker operates as a personal radio company in the United States and Canada. It offers a unique radio experience that enables consumers to play personalized music via creating a personalized Internet radio station.
Smaato, Inc. www.smaato.com Smaato offers mobile advertising solutions. The company owns and operates SOMA (Smaato Open Mobile Advertising), a mobile advertising optimization platform. Its advertisement platform delivers targeted advertising to mobile phones on mobile websites/widgets within applications and in mobile games. The company partners with publishers, application developers, advertisement networks, and mobile operators. Smaato Inc. was founded in 2005 and is based in Redwood Shores, California, with an additional ofce in Hamburg, Germany.
SNAP Interactive, Inc. www.snap-interactive.com SNAP Interactive provides online dating applications for social networking websites. SNAP Interactives Are You Interested? application is consistently listed in the top 15 social application list.
SocialCode www.socialcode.com SocialCode is a full-service Facebook agency. The agency initially developed an expertise in running effective internal Facebook performance ad campaigns and has since expanded its expertise to include engagement and fan monetization strategies.
Sorrento Square Media, LLC (d.b.a. Yipit) www.yipit.com Yipit aggregates deals from group buying services websites and suggests deals that its subscribers may be interested in based on interests indicated in the subscribers prole. Yipit is available in six U.S. cities and aggregates from all major group buying sites serving those cities. Yipit has received about $250,000 in venturing funding. The company is based in New York City.
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Specic Media, Inc. www.specicmedia.com Specic Media is a technology and online media company that enables advertisers to target audiences through demographic, behavioral, contextual, geographic, and retargeting technologies.
Spotify Ltd. www.spotify.com Spotify is an innovative digital music service offering music fans instant access to a world of music. Spotify enables on-demand streaming of audio content and aims to be a better alternative to music piracy by offering a superior user experience, while monetizing licensed content with an ad-supported, free-to-the-user model and a premium, paid model.
SpotXchange Video Ad Network www.spotxchange.com Based in Colorado and launched in November 2006, the SpotXchange online video advertising network allows advertisers and publishers to buy and sell online video advertising in an auction marketplace.
Sprout Inc. www.sproutinc.com Sprout helps creative professionals build rich media HTML5 ads simply. Its AdVine platform is integrated with leading mobile ad networks and publishers, allowing customers to build rich HTML5 mobile ads that can run anywhere consumers spend time online. Sprout customers include Disney, Warner Bros., HBO, Federated Media, Intel, Technorati, Toyota, and MTV. Funded by Polaris Venture Partners, Sprout is based in Honolulu and San Francisco.
TagMan Limited www.tagman.com TagMan Limited designs and supplies tag management solutions for online advertisers, marketers, and analytics companies to manage online marketing tags/pixels in the United Kingdom and internationally. It offers TagMan, a universal real-time attribution and tag management system for enterprise e-commerce. The TagMan allows the digital advertising industry to track the performance of online campaigns and the data they provide.
TARGUS Information Corporation www.targusinfo.com TARGUS Information Corporation provides on-demand information services. Its services help retailers, call-center operators, Web-based marketers, and communication service providers to identify and verify, as well as to know the qualication and location of their customers. The company was founded in 1993 and is based in Vienna, Virginia.
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Tatto Media, Inc. www.tattomedia.com Tatto Media offers design and brand-building services. The companys services include brand audits and assessments, Web and interactive graphic design, ash animation, motion graphics, animation, sound design, streaming media, video design, e-commerce, content creation, site architecture, and database design services. It also develops B2C and B2B applications, including multitiered applications, e-commerce sites, automated integration to fulllment houses, customer extranets, and time tracking systems, as well as content management and publishing systems.
The Trade Desk, Inc. www.thetradedesk.com The Trade Desk operates a bidding platform and service for buying digital media and data. The company offers various tools and options for media buyers and data owners. The company was incorporated in 2009 and is based in Ventura, California.
Theorem, Inc. www.theoreminc.net Theorem, an online media operations company, provides ad and search operations, and technology and analytical services to digital marketers and online marketing agencies primarily in the United States. The company offers data and data analysis services, which allow enterprises to perform various tasks; and Theorem Analytics, a product for online and traditional campaign analysis that allows marketers to take actionable information from marketing data. It also provides outsourcing services to marketers ranging from routine back-ofce tasks, such as ad trafcking, campaign, and rich media testing, to data mining and customer support.
Tippr LLC (a Kashless Inc. subsidiary) www.tippr.com Tippr is a group buying services website that allows consumers to leverage the power of group buying to receive large discounts with local merchants. Tippr features patented accelerating deals, in which deal discounts increase as more buyers opt in. Tippr is available in ve U.S. cities. Parent company Kashless Inc. has raised $5 million of venture funding from RRE Ventures. Tippr is based in Seattle.
Tradimax www.tradimax.com Tradimax is a Facebook marketing service provider. The company offers a customized strategy and service offerings including overall Facebook campaign strategy development, Facebook page design, strategic input, targeted campaign creation, and analytics.
TripAdvisor LLC (Part of Expedia) www.tripadvisor.com Ticker: EXPE Price: $25.17 TripAdvisor is a free travel guide and research website, offering reviews and information. In addition to hotel reviews, TripAdvisor lets users post vacation videos, and travel marketers can showcase their properties. Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx - 139 -

Trumpia (a DBA of DoCircle, Inc.) www.trumpia.com Trumpia offers multichannel marketing services, including e-mail, mobile text, instant messaging, and voice broadcast through its Web-based software. Trumpia helps marketers increase response rates, brand awareness, and return on investment.
Twitter Inc. www.twitter.com Twitter is a microblogging platform that allows users to instantly communicate with the world, 140 characters at a time. Twitter users can send messages (tweets) using a PC, smartphone, mobile phone, or tablet device and can follow any other user on Twitter or a variety of different applications.
Tumblr, Inc. www.tumblr.com Tumblr is a microblogging platform that allows users to easily and quickly share anything to their Tumblr account or connected blog. Users can quickly post messages, photos, links, music, and videos from their browsers, desktop, e-mail or smartphone. Over 17 million blogs use Tumblr.
TidalTV, Inc. www.tidaltv.com TidalTV provides video advertising, optimization, and yield management solutions. TidalTV uses proprietary technology and data to guarantee delivery of a brands message to a very targeted demographic.
TrafcMarketplace.com Inc. www.trafcmarketplace.com TrafcMarketplace.com Inc. provides business-to-audience online advertising network solutions for advertisers and publishers. The company delivers display advertising, in-path, e-mail, and custom marketing solutions. It also provides lead generation and co-registration, search engine, and hosted solutions; Eyengage, which turns advertisements into vivid displays; and Livemarkets Click-to-Chat that integrates live chat functionalities into banner advertisements. The company was founded in 2000 and is based in El Segundo, California. It has locations in El Segundo and Mountain View, California; New York; and Chicago.
TRAFFIQ, Inc. www.trafq.com Trafq, a display advertising marketplace, provides a Web-based media management platform that connects buyers and sellers of online media. Its platform provides a suite of enterprise tools that enable negotiations for various deal points and centralized ad operations, including trafcking, inventory management, tracking and optimization, and billing.
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Tremor Media, Inc. www.tremormedia.com Tremor Media is an advertising network for online video. The companys SE2 technology offers advertisers massive reach while still being 100% brand safe. The Acudeo income engine helps publishers monetize their video inventory.
Tribal Fusion, Inc. www.tribalfusion.com Tribal Fusion, a site representation company, provides advertising solutions to brand and direct marketers and publishers. The company focuses on representing publishers and delivering online marketing solutions to advertisers. It offers site-specic, channel-wide, and run-of-network advertisements, as well as behavioral and contextual placements; and video overlays ad units in display, interstitial, and mobile formats for advertisers.
Triggit, Inc. www.triggit.com Triggit develops technology solutions to website publishers and bloggers. Its solutions allow customers to source and optimize ads from various networks, and integrate various ad units with a drag-and-drop interface. The company was founded in 2006 and is based in San Francisco.
Tumri, Inc. www.tumri.com Tumri provides online display advertising solutions. The companys solutions include Dynamic Media, which integrates and optimizes media selection and acquisition within user marketing campaigns; Dynamic Messaging, which transforms display media into real-time marketing channels to personalize and optimize marketing performance; Dynamic Response, a post-click response solution for landing page optimization; Dynamic Insight, a real-time marketing analytics solution that simplies campaign launch and reduces time-to-value for common types of dynamic creative marketing campaigns; and Tumri Ensemble, a self-serve platform for dynamic creative and offer optimization.
Turn www.turn.com Turn operates the Turn Platform, which allows agencies to scale, optimize performance, and globally manage campaigns across inventory sources.
Twistage, Inc. www.twistage.com Twistage is the leader in carrier-grade digital media management, delivering Web, mobile, and connected TV solutions including Online Video Platform (OVP), audio and image management, cloud-based transcoding, workow automation, and more. Already the platform of choice for many leading enterprises and digital publishers, Twistage enables organizations to drive return on existing investment and accelerate their time to market.
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UberMedia, Inc. www.ubermedia.com UberMedia develops applications that make it easier for users to nd, follow, and communicate with others on Twitter and other social media platforms. UberMedia also provides marketers with new ways to engage and communicate with consumers via Twitter.
Undertone Networks, Inc. www.undertone-inc.com Undertone Networks provides display and video advertising solutions for advertisers, publishers, and global audiences. It executes and manages digital advertising campaigns and online advertising for advertising agencies and marketers. Undertone Networks offers banners, in-stream video, half-page ads, full-page ads, synced ads, and home page takeovers. The company was founded in 2001 and is based in New York. It has ofce locations in Chicago; Detroit, Michigan; San Francisco; Paris; Ultimo, Australia; Wiesbaden, Germany; and London. Undertone Networks operates as a subsidiary of Intercept Interactive Inc.
Urbanspoon (part of IAC) www.urbanspoon.com Ticker: IACI Price: $34.62 Urbanspoon is a leading online local restaurant guide. The company aggregates restaurant reviews from across the Web, including professional food critics, newspapers, bloggers, and diners. Urbanspoon also allows diners to make reservations through its online booking service. Urbanspoon offers restaurants a reservation and table management system built to run on the iPad.
Ustream, Inc. www.ustream.tv Ustream is a leading live interactive broadcast platform. Originally created to allow U.S. servicemembers to interact with loved ones at home, the platform has gained popularity for streaming popular live events, such as movie premieres and celebrity talk shows.
ValueClick, Inc. www.valueclick.com ValueClick is one of the worlds largest integrated online marketing companies. It delivers scalable solutions for advertisers to cost-effectively acquire customers and for publishers to maximize their revenue.
Vantage Media, LLC www.vantagemedia.com Vantage Media operates as an integrated media and marketing company in the United States. The company provides marketing leads, integrated search campaigns, online marketing services, search engine marketing, brand and trade name protection services, e-mail marketing, media buying and afliate management services, and direct connect leads. It serves education, home services, nance and insurance, and consumer services categories. Vantage Media was founded in 2002 and is based in El Segundo, California.
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Velocity Cinema Advertising Company www.movieadvertising.com Velocity Cinema Advertising is a full-service media buying rm that specializes in placing multivendor cinema campaigns for agencies and advertisers nationwide. Hollywood movies had more than 1.3 billion attendees last year; Velocity Cinema Advertising has the expertise to market to them.
Vibrant Media, Inc. www.vibrantmedia.com Vibrant Media, Inc. provides in-text advertising solutions to marketers to deliver user-initiated online advertisements within the text of relevant Web content. It offers contextual video advertising; Flash, image, and text advertising; video and interactive ads formats; and media planning services. It offers its services in various content categories, including computing, consumer electronics, information technology, videogaming, music, health, mens and womens interests, home and garden, business, nance, travel, sports, automotive, entertainment, food and drink, news, social networking, and real estate. The company serves advertisers, agencies, and Web publishers.
Visible World www.visibleworld.com Visible World provides targeted TV advertising solutions. The companys suite of services enables advertisers, agencies, and media companies to deliver interactive, measurable ads. Visible World helps over 200 advertisers target consumers in over 100 million TV households and across 1,500 major websites.
VMIX Media, Inc. www.vmix.com VMIX provides carrier-class online video publishing and communication solutions. Designed with high-volume producers, device manufacturers, and network providers in mind, the companys cloud-based products make it easy to ingest, manage, and deliver video anywhere. With 25 million unique videos stored, and processing over one million new videos every month, VMIX offers comprehensive, scalable online video solutions for media organizations, device manufacturers, agencies and marketers, educators, and nonprots. The company was founded in 2005 and is based in San Diego.
WebTrends Corporation www.webtrends.com WebTrends provides audience analytics to websites, blogs, online campaigns, and enterprise systems. The company also provides social media measurement and paid-search optimization.
WebVisible, Inc. www.webvisible.com WebVisible makes the Internet an advertising and customer acquisition medium for small and midsize businesses around the world. The company uses a SaaS platform to power its customer offerings.
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WildTangent, Inc. www.wildtangent.com WildTangent is a games media company delivering a premium entertainment experience to consumers around the globe. The company operates a fast-growing online games service, offering downloadable, online, and social games. WildTangents BrandBoost advertising network is one of the largest gaming-based ad networks in the world, reaching more than 100 million monthly active users and used by some of the largest social gaming developers.
World Avenue Holdings, LLC www.worldavenue.com World Avenue Holdings, LLC operates as an interactive marketing services company that assists companies in achieving their lead-generation and customer-acquisition goals. It provides a suite of advertising technologies to help clients connect with the right consumer at the right time with the right offer. The company was founded in 2002 and is based in Sunrise, Florida, with additional ofces in the United States, Canada, and the Caribbean.
[X + 1], Inc. www.xplusone.com [X + 1] created the Predictive Optimization Engine, which lets brands, agencies, and media companies connect to the most desired audiences.
Yammer www.yammer.com Yammer is a social network tool for enterprises. It provides a secure way for employees to communicate, collaborate, and share information. Employees on Yammer can discuss ideas, post news, ask questions, and share links and other information.
Yelp, Inc. www.yelp.com Yelp connects people with great local businesses. Yelp communities have taken root in major metros across the United States, Canada, United Kingdom, and Ireland; Yelp drew an audience of more than 31 million unique visitors in March 2010.
Yodle, Inc. www.yodle.com New Yorkbased startup Yodle is a local advertising company. The companys goal is to connect local businesses with consumers so simply and cost-effectively that business owners cannot imagine any other way to advertise.
YouTube (part of Google Inc.) www.youtube.com YouTube is the largest online video site in the world. It allows users to share video and interact, inform, and inspire with others around the world. In November 2010, YouTube announced that it was receiving 35 hours of uploaded video every minute. YouTube is owned by Google Inc. Ralph Schackart 312.364.8753 - 144 -

YuMe, Inc. www.yume.com YuMe, Inc. operates as a video advertising network on the Web. It offers an advertisement management system that enables advertisers and publishers to identify, classify, and track content through digital media platforms, such as Web, downloads, mobile, and IPTV. The company also enables publishers to organize videos on their sites into content channels, which include automotive, nancial services, lifestyle, news, music, sports, entertainment, and family friendly, as well as operates DataConnect with Land Rover, which allows advertisers to pull and display XML data feed in real time.
Zagat www.zagat.com Zagat provides trusted and accurate restaurant ratings and reviews for thousands of top restaurants worldwide. Zagat.coms robust restaurant search and rich features help diners easily nd the best restaurant for every occasion.
ZEDO, Inc. www.zedo.com ZEDO, Inc. operates as an Internet advertisement serving company. Its platform allows advertisers, Web publishers, and advertisement networks to manage and create online advertising campaigns. The company was founded in 1999 and is based in San Francisco with additional ofces in Mumbai, St. Petersburg, and London.
Zoove Corp. www.zoove.com Zoove lets brands easily connect with customers using StarStar Numbers it operates. The ease of use of the StarStar Number system allows consumers to quickly connect to a brands mobile app, Web page, coupon, videos, and more, directly from their mobile phones.
Zozi www.zozi.com Zozi enables users to easily nd and book things to do locally and around the world at up to 70% off. Zozi differentiates itself from other group buying services by donating the proceeds from each sale to the local community in which it operates.
Zynga, Inc. www.zynga.com Zynga is the most popular online social gaming company to date. It offers casino games, word games, board games, role-playing games, and party games, as well as casual online games. The company developed and offers many of the most popular online social games, including FarmVille, the clear leader in the industry.
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Current Ratings Distribution (as of 4/30/11) Coverage Universe Outperform (Buy) Market Perform (Hold) Underperform (Sell) Percent 58% 31% 1% Inv. Banking Relationships* Outperform (Buy) Market Perform (Hold) Underperform (Sell) Percent 8% 2% 0%
* Percentage of companies in each rating category that are investment banking clients, dened as companies for which William Blair has received compensation for investment banking services within the past 12 months. Ralph Schackart attests that 1) all of the views expressed in this research report accurately reect his personal views about any and all of the securities and companies covered by this report, and 2) no part of his compensation was, is, or will be related, directly or indirectly, to the specic recommendations or views expressed by him in this report. We seek to update our research as appropriate, but various regulations may prohibit us from doing so. Other than certain periodical industry reports, the majority of reports are published at irregular intervals as deemed appropriate by the analyst. Stock Rating: William Blair & Company, L.L.C. uses a three-point system to rate stocks. Individual ratings reect the expected performance of the stock relative to the broader market over the next 12 months. The assessment of expected performance is a function of near-term company fundamentals, industry outlook, condence in earnings estimates, valuation, and other factors. Outperform (O) stock expected to outperform the broader market over the next 12 months; Market Perform (M) stock expected to perform approximately in line with the broader market over the next 12 months; Underperform (U) stock expected to underperform the broader market over the next 12 months; Not Rated (NR) the stock is currently not rated. Company Prole: The William Blair research philosophy is focused on quality growth companies. Growth companies by their nature tend to be more volatile than the overall stock market. Company prole is a fundamental assessment, over a longer-term horizon, of the business risk of the company relative to the broader William Blair universe. Factors assessed include: 1) durability and strength of franchise (management strength and track record, market leadership, distinctive capabilities); 2) nancial prole (earnings growth rate/consistency, cash ow generation, return on investment, balance sheet, accounting); 3) other factors such as sector or industry conditions, economic environment, condence in long-term growth prospects, etc. Established Growth (E) Fundamental risk is lower relative to the broader William Blair universe; Core Growth (C) Fundamental risk is approximately in line with the broader William Blair universe; Aggressive Growth (A) Fundamental risk is higher relative to the broader William Blair universe. The ratings and company prole assessments reect the opinion of the individual analyst and are subject to change at any time. The compensation of the research analyst is based on a variety of factors, including performance of his or her stock recommendations; contributions to all of the rms departments, including asset management, corporate nance, institutional sales, and retail brokerage; rm protability; and competitive factors. Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategiesto our clients and our trading desksthat are contrary to opinions expressed in this research. Our asset management and trading desks may make investment decisions that are inconsistent with recommendations or views expressed in this report. We will from time to time have long or short positions in, act as principal in, and buy or sell the securities referred to in this report. Our research is disseminated primarily electronically, and in some instances in printed form. Electronic research is simultaneously available to all clients. This research is for our clients only. No part of this material may be copied or duplicated in any form by any means or redistributed without the prior written consent of William Blair & Company, L.L.C. THIS IS NOT IN ANY SENSE A SOLICITATION OR OFFER OF THE PURCHASE OR SALE OF SECURITIES. THE FACTUAL STATEMENTS HEREIN HAVE BEEN TAKEN FROM SOURCES WE BELIEVE TO BE RELIABLE, BUT SUCH STATEMENTS ARE MADE WITHOUT ANY REPRESENTATION AS TO ACCURACY OR COMPLETENESS OR OTHERWISE. OPINIONS EXPRESSED ARE OUR OWN UNLESS OTHERWISE STATED. PRICES SHOWN ARE APPROXIMATE.
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THIS MATERIAL HAS BEEN APPROVED FOR DISTRIBUTION IN THE UNITED KINGDOM BY WILLIAM BLAIR INTERNATIONAL, LIMITED, REGULATED BY THE FINANCIAL SERVICES AUTHORITY (FSA), AND IS DIRECTED ONLY AT, AND IS ONLY MADE AVAILABLE TO, PERSONS FALLING WITHIN COB 3.5 AND 3.6 OF THE FSA HANDBOOK (BEING ELIGIBLE COUNTERPARTIES AND PROFESSIONAL CLIENTS). THIS DOCUMENT IS NOT TO BE DISTRIBUTED OR PASSED ON TO ANY RETAIL CLIENTS. NO PERSONS OTHER THAN PERSONS TO WHOM THIS DOCUMENT IS DIRECTED SHOULD RELY ON IT OR ITS CONTENTS OR USE IT AS THE BASIS TO MAKE AN INVESTMENT DECISION. WILLIAM BLAIR & COMPANY AND WILLIAM BLAIR & COMPANY (SCRIPT) ARE REGISTERED TRADEMARKS OF WILLIAM BLAIR & COMPANY, L.L.C. Copyright 2011, William Blair & Company, L.L.C.
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Equity Research Directory

Bob Newman, CFA, Principal Manager and Director of Research 312.364.8783 Kyle Harris, CFA, Principal Operations Manager 312.364.8230 CONSUMER Sharon Zacka, CFA, Principal Group HeadConsumer Apparel, Leisure, Restaurants Jon Andersen, CFA, Principal Consumer Products Meggan Friedman Marketing Services 312.364.5386 HEALTHCARE Ben Andrew, Principal 312.364.8828 Group HeadHealthcare Medical Devices Ryan Daniels, CFA, Principal 312.364.8418 Healthcare Information Technology, Healthcare Services John Kreger, Principal 312.364.8597 Distribution, Outsourcing, Pharmacy Benet Management Tim Lugo 312.364.8415 Therapeutics Amanda Murphy, CFA 312.364.8951 Diagnostic Services, Life Sciences, Pharmacy Benet Management Matthew OBrien Medical Devices 312.364.8582 312.364.8224 312.364.8170 212.237.2758
312.364.8697
312.364.8664
Daniel Hofkin 312.364.8965 Broad Assortment and Hardlines, Health, Beauty, and Convenience Mark Miller, CFA, Principal 312.364.8498 Broad Assortment and Hardlines, E-commerce, Health, Beauty, and Convenience GLOBAL INDUSTRIAL INFRASTRUCTURE Nick Heymann 212.237.2740 Co-Group HeadGlobal Industrial Infrastructure Multi-industry Larry De Maria, CFA 212.237.2753 Co-Group HeadGlobal Industrial Infrastructure Agriculture, Construction, Mining, Capital Goods Nate Brochmann, CFA 312.364.5385 Commercial Services, Logistics/Transportation Mike Coleman, CFA 212.237.2751 Electrical Equipment: Grid and Building Energy Efciency, Wire and Cable/Power Transmission Brian Drab, CFA 312.364.8280 Filtration and Water Management, Industrial Technology Sam Eisner 212.237.2752 Industrial Components Chase Jacobson 212.237.2748 Engineering and Construction Ryan Merkel, CFA 312.364.8603 Commercial Services, Industrial Distribution GLOBAL SERVICES Brandon Dobell, Principal 312.364.8773 Group HeadGlobal Services Educational Services, Real Estate Services Timothy McHugh, CFA 312.364.8229 Consulting, Employer Services, Stafng Robert Riggs, CFA 312.364.8610 Business Process Outsourcing, Information Services Christopher Shutler, CFA 312.364.8197 FinTech and Payment Services FINANCIAL Adam Klauber, CFA 312.364.8232 Group HeadFinancial Insurance Brokers, Property & Casualty Insurance
John Sonnier, Principal Biotechnology Brian Weinstein, CFA Diagnostic Products Y. Katherine Xu, Ph.D. Biotechnology TECHNOLOGY
Jason Ader, CFA, Principal 617.235.7519 Co-Group HeadTechnology Data Networking and Storage Laura Lederman, CFA, Principal 312.364.8223 Co-Group HeadTechnology Business Software & Services, IT Services, Software as a Service Jim Breen, CFA 617.235.7513 Communication Services Anil Doradla 312.364.8016 Electronic Components, Semiconductors, Wireless Communications Jonathan Ho 312.364.8276 Cybersecurity, Security Technology Ralph Schackart III, CFA, Principal Digital Media and Internet 312.364.8753
Bhavan Suri 312.364.5341 Business Software & Services, IT Services CHINA Liping Cai, CFA +86 21 2327 2260 China-Based Companies EDITORIAL Steve Goldsmith, Head Editor 312.364.8540 Maria Erdmann 312.364.8925 Beth Pekol +44 20 7868 4516 Lisa Zurcher 312.364.8437
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The Future in Digital Media

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Equity Research

Technology Digital Media and Internet

The Future in Digital Media

Ralph Schackart, CFA 312.364.8753 rschackart@williamblair.com

Kristopher Barney, CFA 415.248.2862 kbarney@williamblair.com

Tim Compton, CPA 312.364.8414 tcompton@williamblair.com

William Blair & Company, L.L.C.

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Emerging Digital Advertising Technologies Overview

Interactive Program Guides Pr

Online Video & Guidance

Emerging Digital Advertising Universe

Source: William Blair & Company, L.L.C.

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

William Blair & Company, L.L.C.

Mobile Display and Rich Media Location Based Text/SMS

Socially Focused Facebook Microblogging Social and Casual Videogaming

Stand-Alone Models Digital Cinema Internet Radio Paid Blogging

Ralph Schackart 312.364.8753

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

William Blair & Company, L.L.C.

William Blair & Company, L.L.C.

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Global Advertising Industry

William Blair & Company, L.L.C.

Emerging Digital Advertising Is a Large Venture-Capital-Funded Vertical

Ralph Schackart 312.364.8753

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx -9-9-

William Blair & Company, L.L.C.

Figure 5 2010 Digital Advertising VC Funding by Industry Vertical (dollars in millions)

William Blair & Company, L.L.C.

Local Markets: Group Buying Services

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Market Size and Opportunity

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

William Blair & Company, L.L.C.

Industry Statistics and Financial Metrics

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Months After Launch Chicago

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

William Blair & Company, L.L.C.

Recent Industry Trends

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Figure 10 Group Buying Sample Deals

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

Sources: www.groupon.com, www.livingsocial.com

William Blair & Company, L.L.C.

Outlook and Evolution

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

Local Markets: Recommendation Services

Analyst Name 312.364.8753 Ralph Schackart312.364.xxxx

William Blair & Company, L.L.C.

Market Size and Opportunity

Industry Statistics and Financial Metrics

Ralph Schackart 312.364.8753

William Blair & Company, L.L.C.

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