2000-03-24 An Overview of Internet Valuation - Is The Internet A Bubble Waiting To Burst?

EIMG Property - Confidential Do Not Distribute Without Authorization
An Overview of Internet
Valuation—Is the Internet a
Bubble Waiting to Burst?
Mark Hsu
Envision Internet Media Group
Mark@eimg.com.tw
National Cheng Kung University—March 24, 2000

Agenda
 Introduction & Opening Remarks

 Background—A Look at the U.S. Capital Markets
 Internet Business Models
 Opportunities vs. Risks
 Asian Internet Characteristics
 Valuation Strategies
 Valuation Methods
 Conclusion/Reflections

Overview
 Profits still Matter!

 Valuation is more of an art than a science
 In Asia, There‟s still a Huge Opportunity
 Investors invest in Ideas & People, not in physical
assets.

Background
A Look at the U.S. Capital Markets

& Internet Sector
 Why Look at the U.S. when we are in Asia?

 A generation of Wealth in 5 years
 The Land of the US $100 Billion Companies

Up…up…and away
The Performance of the NASDAQ,
Market Cap—Old Economy vs. New
1995-2000 (for 2000, as of 3/10/00) Economy
Company Approx. Market Cap

Year Return (%)
2000* 24%
Microsoft $525 Billion
1999 85.59% Cisco $466 Billion
1998 39.63% GE $432 Billion
1997 21.64%
1996 22.71%
Intel $401 Billion
1995 39.92% AOL $134 Billion
Coca-Cola $110 Billion

US Internet Market Cap 1994-99
Market Cap growth driven by both

503.4
500 RISING VALUATION and
467.5
RECORD NUMBER OF INTERNET ISSUES
424.4
400
(US$Billions)
300
224.7
200
95.0
100
1.2 5.0
9/10/99
Q1:94
Q2:94
Q3:94
Q4:94
Q1:95
Q2:95
Q3:95
Q4:95
Q1:96
Q2:96
Q3:96
Q4:96
Q1:97
Q2:97
Q3:97
Q4:97
Q1:98
Q2:98
Q3:98
Q4:98
Q1:99
Q2:99
Source: Goldman Sachs.
Record IPOs in 1999
By Year Amt Raised

No of IPOs (US$m)
1992 1 23
1993 1 30
1994 4 74
1995 12 590
1996 33 1,753
1997 18 742
1998 30 1,574
1999YTD 197 16,988
And the IPO flow shows no signs of slowing down...
Number of Internet-related companies in registration: 96
Estimated amount to be raised: US$7.9B
Source: Edgar’s IPO Express, SEC Filings, Goldman Sachs.

Internet IPOs
Record number of IPOs in 2Q99 6,984

(73 IPOs which raised nearly $7 billion)
and in 3Q99
(76 IPOs which raised $5.7 billion) 5,748
help drive market cap of
Internet sector
2,294
1,962
904
293 316
23
Q1:94
Q2:94
Q3:94
Q4:94
Q1:95
Q2:95
Q3:95
Q4:95
Q1:96
Q2:96
Q3:96
Q4:96
Q1:97
Q2:97
Q3:97
Q4:97
Q1:98
Q2:98
Q3:98
Q4:98
Q1:99
Q2:99
Q3:99
Q4:99 to date
1992
1993

US Evolution in the Internet Space
32X
eBay 54X
2000 Rev
3X 2000 Rev
2000 Rev Geocities
18X NetZero 36X
2000 Rev 2000 Rev
Mindspring
Lycos Infoseek eToys

eTrade
Earthlink
Excite
CDNow
21X 60X 10X

2000 Rev 2000 Rev 2000 Rev
AOL Yahoo! Amazon.com
Time
Access Advertising E-Commerce
US$7B-44B by 2002 US$1.3T by 2003

The Opportunity
Yahoo vs. Amazon
Yahoo! and Amazon.com - stock performance since IPO (US$)

250 120
200
80
150
100
40
50
0 0
1996 1997 1998 1999
Yahoo! (LHS) Amazon (RHS)

Total Online Market Opportunity
Brokerage Insurance Mortgage Banking Retail Travel
Online 120 70
50
Market
8 12
(US$B) 5
1 1 20 5 2
8
% of Total 7% 22% 0% 3% 7% 22% 1% 2% 0% 2% 2% 7%
3,400
1,000 3,000 3,300
2,600
Total 300 800 165
Market 24 290
125
16
(US$B)
1998 2002 1998 2002 1998 2002 1998 2002 1998 2002 1998 2002
Source: Jupiter Communications, IDC, Forrester Research, Killen and Associates, FDIC, GS Economic Research, Goldman Sachs.

Stock Multiples
1996 1997 1998
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
AOL
Market value (US$mn) 5,037 4,052 3,330 3,160 4,142 5,573 7,707 9,431 14,675 23,090 23,406 70,614
LQA revenue (US$mn) 1,248 1,336 1,400 1,636 1,800 1,904 2,088 2,368 2,776 3,172 3,432 3,840
Sequential quarterly growth (%) 7 5 17 10 6 10 13 17 14 8 12
Revenue multiple 4.0x 3.0x 2.4x 1.9x 2.3x 2.9x 3.7x 4.0x 5.3x 7.3x 7.4x 18.4x
Number of members (mn) 5.5 6.2 6.9 6.6 7.8 8.6 9.2 10.8 12.0 12.5 13.5 15.1
Value/member (US$) 916 654 483 479 531 648 838 873 1,223 1,847 1,182 4,676
LQA revenue/member 227 215 203 248 231 221 227 219 231 254 254 254
Yahoo!
Market value (US$mn) NA 552 564 452 781 1,008 2,160 3,117 4,279 7,378 12,780 23,384
LQA revenue (US$mn) 7 13 22 34 38 54 69 106 121 165 214 307
Sequential quarterly growth (%) 86 162 12 42 28 54 14 36 30 30 43
Revenue multiple NA 46.0x 23.5x 12.6x 19.5x 18.0x 30.0x 31.2x 35.7x 45.0x 59.2x 76.9x
Page Views per day (mn) 6 9 15 20 30 38 50 65 95 115 144 167
Value/Page View (US$) NA 61 38 23 26 27 43 48 45 64 89 140
Amazon.com
Market Value (US$mn) NA NA NA NA NA 441 1,242 1,442 2,067 4,955 5,886 17,055
LQA Revenue (US$mn) 4 8 20 32 64 112 152 264 348 464 616 740
Sequential Quarterly Growth (%) 100 150 60 100 75 36 74 32 33 33 64 64
Revenue Multiple NA NA NA NA NA 3.9x 8.2x 5.4x 6.0x 10.7x 9.6x 23.0x
Number of members (mn) NA NA NA NA NA 0.6 0.9 1.5 2.3 3.1 4.5 6.2
Value/customer A/C (US$) NA NA NA NA NA 723 1,321 955 915 1,578 1,308 2,751
LQA revenue/customer A/C NA NA NA NA NA 187 169 176 151 150 137 119

Business Models/Revenue Models
 The Internet is divided into 5 primary spaces

 Generally speaking, there are 3 primary revenue
streams for “pure-play” Internet companies.

Internet Business Models
Currently, the Internet is divided into 5 sub-areas in terms of commercial activities:
Business Activity US Comparables Taiwan Comparables

Content CBS Marketwatch, Haa.com, Shesay.com,
The Street.com
Community Yahoo Yam, Kimo, Sina,
Dreamer
Enabling technology Miramba, Commerce Tornado, Openfind,
One, Broadvision Shinning Tech, Hi-Trust
E-commerce Amazon, Ebay Coolbid.com (Inforian),
Access Mindspring, AOL, Narrowband: Hinet,
Excite@Home Seednet
Broadband:
Gigamedia, Eastern
Multimedia, Hinet

Business Models
CONTEXT
Search/Directory/
Navigation
Sohu, Kimo
Successful
Asian Internet Revenue Model 2
Business
Model Horizontal or Vertical
COMMUNITY
Home Page/
Reviews/
Discussions
RenRen
Primary Internet Revenue Streams
THREE REVENUE LEGS
SUBSCRIPTIONS ADV./DIR. MKTG. COMMERCE

(No touch vs . High touch)
America Online Yahoo! eBay vs . Amazon.com
44% Gross Margins 85 % + Gross Margins G. M.: 85% vs . 22%:
15% Operating Margins 30 % + O.M. O.M.: 28% vs . (14%)
Adding Advertising, Direct Adding Commerce Adding Adv . Sponsors,

Mktg & Commerce and Subscriptions Direct Mktg
80 Million Monthly Visitors Customers: 3.8m vs. 10.0m +

19 Million Subscribers
incl . CompuServe 65 Million Registered Users Gross Rev: $2.1B vs. $1.2b *
* Gross Merchandise Revenue Run Rate as of Q1:99

Dynamic Pricing
Business Model US Comparables Comments

Auction Ebay, Onsale Started with B2C, C2C, but quickly
spreading to B2B. Ebay model superior
because low-touch & high gross margins,
in excess of 85%
Reverse Auction Priceline Priceline pioneered concept of consumer
setting the price. Model started with
tickets & hotels, but quickly spreading to
all industries. Low-touch.
Demand Aggregation Mercata, Newest twist to the dynamic pricing
Acompany model—price drops with incremental
addition of buyer. Verdict still out as to
whether this will catch on like Ebay or
Priceline. Scaleable? Hi-touch or
low-touch?

The Opportunities & the Risks
Are we really in a New Economy?
 Metcalfe‟s Law: (The value of a network

increases with the number of nodes of the
network) Bob Metcalfe, founder of 3Coms, and
father of the Ethernet.
 Growth & Pervasiveness: From 0 to 500+
Million in a decade.
 “New Business Model”: Amazon, Dell, Cisco

The Opportunity
The Internet represents a medium that facilitates almost every type of human
interaction including communication and commerce.
 Many-to-Many Communication Tool: For the first time in human history, we are now able to
post knowledge on „real-time bulletin boards‟ for everyone to see as well as interact with. A
networked economy. Ex: 10+1=>10%, but (10+1)^2=>21%
 Growth and Pervasiveness : By the year 2003, IDC projects there to be 500+ million
Internet users, globally. All from a virtually non-existent user base from the mid-80s.
 New Economy: True Internet companies (New Economy), such as Amazon.com and
Yahoo!, have superior cashflow business models versus traditional brick & mortar (Old
Economy) companies.
 Competitive Advantages: Furthermore, corporations such as Dell that have embraced the
Internet as a tool have decidedly distanced themselves from their competitors who have not
have not. (I.e. Compaq)

New Economy - „Look Beyond the P&L‟
From Michael J. Maubousssin report, Rational Exuberance?

The Risks
We believe that out of every 100 startups or ideas, only 2 to 3 will become successful.
 Examples of the Hype

 Functions versus Businesses: Is a widget a business and how do
you differentiate?
 Market Capitalization versus Revenues:
Of the 1,200-plus technology IPOs since the debut of the personal
computer in 1980, a mere 5 percent have created 86 percent of
the wealth (source: Red Herring).
Of 133 Internet stocks who have a combined value of $410 billion,
these stocks have combined sales of $15.2 billion and losses of
more than $3 billion. (source: Red Herring)
Source: CSFB

The Asian Internet Opportunity
How Should We View the Internet

Opportunity in Asia?

The Opportunities in Asia
 Huge Market
 From a Demographics Standpoint, it‟s just the
beginning.
 Hindsight/Leapfrog: We know what models work
and won‟t wont based on U.S. experience.

Asian Internet Users
95% of Asia‟s Internet Users

(m) 1997 1998 1999E 2000E 2001E 2002E 2003E 5-Year CAGR
Australia 2.5 3.8 4.9 5.8 6.7 7.4 8.4 14%

China 1.4 2.4 7.5 16.6 32.1 57.0 80.5 80%
Hong Kong 0.5 0.7 1.0 1.3 1.7 2.4 3.0 27%
India 0.3 0.5 2.3 8.6 19.4 36.2 70.0 130%
Singapore 0.4 0.6 0.7 0.8 1.0 1.2 1.5 17%
South Korea 1.1 3.3 6.2 9.1 12.1 14.9 17.7 32%
Taiwan 0.7 1.0 3.4 5.0 6.6 8.0 13.1 53%
Indonesia 0.3 0.3 0.4 0.4 0.8 1.1 1.5 29%
Malaysia 0.4 0.4 0.7 0.7 1.0 1.3 1.9 27%
New Zealand 0.5 0.6 1.0 1.1 1.3 1.5 1.7 17%
Philippines 0.2 0.3 0.4 0.5 0.7 0.8 1.1 28%
Thailand 0.3 0.3 0.5 0.6 0.8 1.2 1.5 28%
Vietnam 0.0 0.0 0.1 0.1 0.2 0.3 0.4 45%
Total 8.4 14.3 28.8 50.6 84.4 133.3 202.1 55%

Asian, US, and Europe Online Ad Markets
(US$m) 1996 1997 1998 1999 2000 2001 3-Year CAGR

US
Total advertising 101,220 106,997 112,708 117,010 121,857 127,330 4%
On-line advertising 314 1,026 2,063 3,340 4,984 6,701 48%
% online ? 1 2 3 4 5
UK
On-line advertising ? 8 25 104 238 382 148%
% online ? ? <1 1 1 2
ASIA
On-line advertising ? ? 10 237 788 1,455 426%
% online ? ? 0.05 1 3 5 375%
Note: For Asia, we have assumed transition numbers from total advertising spending, to online advertising spending.
Source: Zenith Media, Jupiter Communications, Goldman Sachs.

Total Internet Commerce in Asia by Country
(US$mn) (US$mn)
18,000 35,000
Personal (151% CAGR)
16,000
Business (139% CAGR) 30,000
14,000
Supply chain (140% CAGR) 25,000
12,000
10,000 Total internet commerce (right scale) (145% CAGR) 20,000
8,000 15,000
6,000
10,000
4,000
5,000
2,000
0 0
1997 1998 1999E 2000E 2001E 2002E 2003E
Note: Personal commerce includes Software, Subscriptions, Books, CD’s, Brokerage, Travel/Leisure
CAGR (%)
1998-2003
Australia 85 433 1,083 1,866 3,027 5,248 9,180 84

China 2 8 42 182 583 1,531 3,837 243
HK 15 58 142 316 685 1,313 2,379 110
India 1 4 16 55 182 594 1,747 246
Singapore 9 35 84 180 380 783 1,580 114
South Korea 16 57 161 417 876 2,414 4,939 145
Taiwan 10 45 114 263 555 1,179 2,836 129
Total 137 640 1,642 3,279 6,288 13,061 26,499 111
Source: IDC.
The Risks in Asia
 Not enough innovation. Too many “me-toos.”

 Learning Curve for Asian Investors: How do you
evaluate early-stage companies.
 Lack of Venture Capital in the Silicon Valley sense.
 Heterogeneous Markets: Small in population, e.g.
Singapore, Hong Kong, Taiwan, etc.
 Underdeveloped Infrastructure: No Logistics

Valuation Strategies—What Investors are
Looking For?
 Market Size & Growth Potential
 Differentiable Business Models
 Strategies Specific to Asia

Valuation Strategies—What to Look For
 Market Size and Growth Potential: Will the market opportunity continue to grow and
flourish over an extended period of time?
 Differentiable Business Models:
 Self-Perpetuating: The Gillette razor model with multiple razors.
 Business that are first to scale (the creation of virtual monopolies): The leaders
benefit from increasing return economics, first mover advantages and the „Network
Effect‟.
 Businesses with better information: The Internet allows for instant positive feedback
loops. If the customer is king, then the ability to listen and act is paramount.
 Businesses dependent upon multiple, high-quality revenue streams: It‟s early for
everybody, so hedge your bets...
 Businesses with a deep and talented management team: The knowledge based
economy is based upon a management team‟s ability to take an idea, execute and
adapt.

Asia Specific Strategies
 Asia Key Factors
 Relatively higher value on a deep and talented management team: Because Asia
has historically been mostly a manufacturing centre, IT skills and creativity are
relatively scarce compared to the US and should be valued at a premium.
 „Path to Monetization‟: Because it is the early days, many players today are busy
building partnerships, traffic and/or content at the expense of revenues. All good,
however, what is then key is how management expects to „monetize‟ those assets,
whether they be through ecommerce, advertising, subscription fees or through
acquisition. It‟s still a business…
 Marketing Sizing: Does the valuation size to the potential of the total market, much
less a piece of the pie?

Exit Strategies
 Cash Flow (DCF Analysis)

 Acquisition
 IPO—Lots of options now. GEM, JASDAQ,
KOSDAQ, NASDAQ & TIGER?

Valuation Tool Kit
Challenge: Valuing Companies with no profits and

with little or no revenue.

Investment Considerations:
Seven Golden Rules for Internet Business Models
1. First-mover and shaker

Online penetration still in infancy
Mega -Dollars moving online
2. Large operational and financial scale
3. Extreme user-centricity
4. Organic growth
Viral characteristics
User-generated content
5. Open-ended opportunities
Applicable markets globally
Multiple revenue streams
6. High long-term earnings and ROIC leverage
7. Scalable management teams
Focus on Execution
Source: Goldman Sachs

Conclusion/Reflections
 Are we really creating value? Stimulating

Demand or Taking Market Share?
 Horizontal vs. Vertical
 Empire Building vs. Getting Rich

Thank You For Coming
Mark@eimg.com.tw

Appendix 1
Companies Service Acquired By Valuation

Hotmail, Free Email, web Microsoft $400 million in
based. MSFT stock for 10
million usersx
Mirabillis ICQ AOL $300 million for its
12 million users.
Junglee Shopping Engine Amazon $100 million+
Classifieds 2000 Classified Excite $100 million+ in
Excite stock.
Raging Bull Financial Message Alta Vista
Board
Source: EIMG

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EIMG Property - Confidential Do Not Distribute Without Authorization

National Cheng Kung University—March 24, 2000

EIMG Property - Confidential Do Not Distribute Without Authorization

 Introduction & Opening Remarks

EIMG Property - Confidential Do Not Distribute Without Authorization

 Profits still Matter!

EIMG Property - Confidential Do Not Distribute Without Authorization

A Look at the U.S. Capital Markets

 Why Look at the U.S. when we are in Asia?

EIMG Property - Confidential Do Not Distribute Without Authorization

Company Approx. Market Cap

EIMG Property - Confidential Do Not Distribute Without Authorization

Market Cap growth driven by both

By Year Amt Raised

Source: Edgar’s IPO Express, SEC Filings, Goldman Sachs.

Record number of IPOs in 2Q99 6,984

Source: Goldman Sachs.

Lycos Infoseek eToys

21X 60X 10X

Access Advertising E-Commerce

US$7B-44B by 2002 US$1.3T by 2003

Yahoo! and Amazon.com - stock performance since IPO (US$)

EIMG Property - Confidential Do Not Distribute Without Authorization

% of Total 7% 22% 0% 3% 7% 22% 1% 2% 0% 2% 2% 7%

EIMG Property - Confidential Do Not Distribute Without Authorization

Source: Goldman Sachs.

EIMG Property - Confidential Do Not Distribute Without Authorization

 The Internet is divided into 5 primary spaces

EIMG Property - Confidential Do Not Distribute Without Authorization

Business Activity US Comparables Taiwan Comparables

EIMG Property - Confidential Do Not Distribute Without Authorization

THREE REVENUE LEGS

SUBSCRIPTIONS ADV./DIR. MKTG. COMMERCE

Adding Advertising, Direct Adding Commerce Adding Adv . Sponsors,

80 Million Monthly Visitors Customers: 3.8m vs. 10.0m +

* Gross Merchandise Revenue Run Rate as of Q1:99

Source: Goldman Sachs.

Business Model US Comparables Comments

EIMG Property - Confidential Do Not Distribute Without Authorization

Are we really in a New Economy?

 Metcalfe‟s Law: (The value of a network

EIMG Property - Confidential Do Not Distribute Without Authorization

EIMG Property - Confidential Do Not Distribute Without Authorization

From Michael J. Maubousssin report, Rational Exuberance?

EIMG Property - Confidential Do Not Distribute Without Authorization

 Examples of the Hype

EIMG Property - Confidential Do Not Distribute Without Authorization

How Should We View the Internet

EIMG Property - Confidential Do Not Distribute Without Authorization

EIMG Property - Confidential Do Not Distribute Without Authorization

95% of Asia‟s Internet Users

Australia 2.5 3.8 4.9 5.8 6.7 7.4 8.4 14%

Source: Goldman Sachs.

(US$m) 1996 1997 1998 1999 2000 2001 3-Year CAGR

EIMG Property - Confidential Do Not Distribute Without Authorization

Australia 85 433 1,083 1,866 3,027 5,248 9,180 84

 Not enough innovation. Too many “me-toos.”

EIMG Property - Confidential Do Not Distribute Without Authorization

EIMG Property - Confidential Do Not Distribute Without Authorization

EIMG Property - Confidential Do Not Distribute Without Authorization

EIMG Property - Confidential Do Not Distribute Without Authorization

 Cash Flow (DCF Analysis)

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