J.P. Morgan Internet Investment Guide – Read It

I came across something today that many of you might find interesting. J.P. Morgan has released their 2009 Internet Investment Guide. This is a 340 page document filled with tons of interesting and useful information about the Internet and popular online companies. I just got my hands on it so I haven’t had a chance to read much of it but it is packed with useful statistics.

Here are some interesting quotes from the document:

Search Advertising Likely to Be Winner in Macroeconomic AftermathAlthough we acknowledge that all types of advertising, including search, will likely be hit by advertising budget reductions in 2009, we think search advertising will be the long-term winner in the reshuffling of budget allocations. We believe the weak macroeconomic environment has forced advertisers to test performance-based search advertising at an accelerated pace. Even after economic strength returns, we think advertisers will stick with their new allocations based on better metrics and higher measurable returns. Specifically, we see newspaper and radio advertisements suffering the most from these budget shifts.

Social Networking Needs a New Monetization Approach
We do not believe social networks can drive sufficient revenue from an ad-based model to grow profits. We do not expect broad adoption of advertising on social networking sites by large advertisers, and we think that, to the extent advertising takes hold on social networking sites, it will more frequently be in the form of performance-driven ads than display. We believe the near to medium term presents several significant challenges to the adbased revenue model for social networks that will prevent these sites from reaching their valuation expectations:

Ad spending forecast looks weak. In a weak ad market, with allocations declining to a variety of existing media, we think adding another experimental ad channel could prove difficult.

Large advertisers may be put off by environment. We continue to believe adoption could be particularly slow among traditional advertisers, which may not want to advertise their brand alongside content they can’t fully control.

Advertising on social networks can be complicated. Successful advertising on these sites involves more than just an incremental extension of existing campaigns. Some advertisers end up pulling back after an initial lack of success, while others are reluctant to add yet another wrinkle to their marketing approach.

Given the above challenges, we think revenue at social networks will need to come from sources other than display advertising. We see several possibilities, not all of which can apply to each network:

More performance-based advertising models, such as CPA ads or lead generation;

Sales of virtual goods, which can further the depth of the user experience on a social site;

A model that exposes a site to the classifieds or eCommerce markets, both of which are gaining market share from their offline counterparts; and

Paid premium memberships or selling a la carte paid features (such as the ability to post more or higher-quality photos).

Several sites are already pursuing a variety of these approaches (both LinkedIn and Classmates, e.g., sell premium memberships). We expect much more experimentation as the market continues to mature.

The Internet Is More and More a Performance-driven Model
Over the last five years, performance-based advertising has gained market share over the CPM-based model. This trend is most clearly seen in the U.K., where the online ad market is more mature (~15% of ad dollars are spent online compared to only ~8% in the U.S.). In the U.K. market, we think roughly 85% of total online ad dollars are spent on the performance-based model.

Mobile Is Long-term Interesting, but Near-term Challenging
With 84% of Americans using mobile phones (CTIA), we firmly believe the mobile market is a promising opportunity. Given this level of reach and better mobile Internet technologies and hardware, we think this medium is becoming attractive to advertisers. As a result, Google, Yahoo!, and MSN are strategically focusing on establishing market share in this industry.

However, although mobile phone penetration is high, the mobile search market is in the early adoption stage. In 1Q’08, only 15.6% of wireless subscribers were using mobile Internet services, according to Nielsen Mobile data. Even within this small subset of mobile Internet users, usage drastically trails that on PCs. Nielsen Online reports that the PC Internet user visits more than 100 domains per month, whereas mobile Internet users visit 6.4 individual websites per month, on average.

We think mobile Internet adoption will not accelerate until the introduction of better phones and technologies. 3G networks perform up to 6x faster than prior mobile Internet networks (Nielsen), which we think will greatly improve the user experience and make it more comparable to that on a PC. Additionally, new phones such as the iPhone have improved the size and resolution of the screens. However, we note that smart phone technology has not yet become the norm and uptake of mobile Internet likely has a ways to go. Additionally, we find it unlikely that advertisers will quickly be adopting mobile advertising. In addition to not having the scale and reach of the Internet, mobile advertising is difficult, as it involves dealing with multiple ad networks and mobile service providers and creating ads that can be viewed on small screens. Furthermore, we think advertisers will cut back on experimental models of ad spend in the face of this economic recession.

I tend to agree with many of the points made. This document is packed with a ton of good research and insight into the online market. Obviously, the opinion of J.P. Morgan analysts isn’t necessarily fact. This document is packed with real facts and figures that are accurate and some good insight based on these vales. If you want to download it and check it out click here: Click to Download the J.P. Morgan Internet Investment Guide

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