EQUITY RESEARCH

Jordan Rohan,

Managing Director, Equity Research

Internet and Digital Media

jrohan@stifel.com

212-271-3765; @jordanrohan

Social Media, the Economy, and Shifts in Consumer BehaviorKeynote Address at Social Media Insider SummitAugust 18, 2011

Stifel Nicolaus does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 

All relevant disclosures and certifications appear on pages 25-27 of this report.

EQUITY RESEARCH

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Has Facebook Peaked?

EQUITY RESEARCH

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Source: Apple’s “Get a Mac” campaign from 2006-2010

What Does It Mean To Peak?

Microsoft has peaked, despite continued record profits.

Apple continues upward with Innovative products, consumer imagination…(and record profits)

Now is Facebook’s Moment in the Sun…

… but moments in the sun can be so fleeting.

EQUITY RESEARCH

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Internet Companies Have Cycles of Popularity

Nasdaq Peak in 2000

Source: FactSet, Stifel Nicolaus estimates

EQUITY RESEARCH

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Is This a Peak?

December2010

Source: TIME Magazine

EQUITY RESEARCH

TIME Magazine Has a Strong Record of Calling Peaks

6

Netscape

MarcAndreessen

February1996

Microsoft (peak?)

Apple (trough?)

Investment in Apple

August1997

Intel

Andy Grove

Man of the Year

December1997

AOL

Time Warner

“The Merger”

January2000

Source: TIME Magazine

EQUITY RESEARCH

Magazine Covers Do Not Always Mark Peaks in a Company

7

Apple

iPod

October2005

Apple

iPhone

November2007

Apple

iPad

April2010

Amazon’s

Jeff Bezos

Person of the Year

December1999

Apple Continues to Innovate Amazon Executes

Source: TIME Magazine

EQUITY RESEARCH

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What Could Change? What Could Make Facebook Become“Establishment” Instead of “Insurgent”?

• Shift in Economy

• Shift in Consumer Preferences - Competition

• Shift in Technology

EQUITY RESEARCH

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Markets Digesting a Slower Growth Scenario, Globally

• Right now, investors are de-risking as the economy moves through a period of de-leveraging. De-leveraging could continue to take years. It is a slow, painful process.

• In the U.S., the Fed is running out of stimulative actions: Low GDP growth despite three years of zero interest rates, which are now pegged at zero through 2013. Stubbornly high unemployment.

• Europe cleaning up (or holding together) the mess in Italy, Spain, Portugal, Ireland, Greece. Potential reorganization of the Euro Zone would be a destabilizing force.

EQUITY RESEARCH

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More on the Economy – Leverage Remains High

10%

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Q1

Nominal Home Mortgage Debtas a % of Nominal GDP

Growing mortgage debt at half nominal GDP, or about 2.5% versus 5% nominal GDP,

for almost 10 years would lower mortgagedebt to its pre-bubble 1997 level.

4Q 1997 = 44.0%

1Q 2009 = 75.5%

1Q 2011 = 67.1%

Nominal Home Mortgage Debt as a % of Nominal GDP

Peak 1Q 2009 at 75.5%

‘91 – ‘97

Source: FactSet, Federal Reserve, Stifel Nicolaus.

EQUITY RESEARCH

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We Have Been in Secular Bear Market Since 2000

10

100

1,000

10,000

100,000 18

96

1899

1902

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1911

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1995

1998

2001

2004

2007

2010

Dow Jones Industrial Average, 1896 to 2011

Secular bear market = ~14 range-bound, flat years

1907-2114 years flat

1929-4213 years down

1966-8216 years flat

2000- ….

1914low

1921end 1932

low

1942end

1974low

1982end

S&P 500 666 (Dow 6,443) in Mar ‘09.

1906start

1929start

1966start

2000start

Source: Dow Jones, U.S. Census, Stifel Nicolaus format.

EQUITY RESEARCH

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Source: FactSet.

After Adjusting for Inflation, the Last 12 Years Has Been Painful

$600

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$2200

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Real S&P500 Prices12/31/00 - 08/10/11

EQUITY RESEARCH

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Source: FactSet

Last Few Weeks Have Seen Extreme Volatility

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul1,000

1,050

1,100

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S&P 500 (Right) CBOE VIX (CBF) (Left)

VIX (Fear) IndexSpikes Up

S&P rallies on QE2

EQUITY RESEARCH

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Macro Backdrop Uncertain…Does it Matter for Social Media?

Cyclical Influences are more negative than positive:

• "Rates will remain unchanged, as will credit standards," says Nicholas Stanutz, head of the auto finance and dealer services group for Huntington National Bank. "What most probably will change is consumer confidence.“

• “The biggest impact is emotional," David Cosper CFO of Sonic Automotive Inc. "The more people are afraid, the less likely they are to buy something, especially a big-ticket item like a car.“

Secular shift towards digital and social media is positive:

• "Auto dealers not on Facebook are missing the boat because that's where their customers are," he says. "And that's where their customers expect them to be.“ – Matthew Funk writer for TK Carsites

• Chuck Capps, Nissan dealership owner, used to spend $25,000 monthly on weekly newspaper, radio and TV advertising. Now he's only spending money online, with $8,000 monthly to TK Carsites.

Source: Automotive News, USA Today, August 2011

EQUITY RESEARCH

Facebook: Key Metrics

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EQUITY RESEARCH

Facebook – Usage Metrics Show High Engagement, Frequency

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Source: Wall Street Journal, comScore, Stifel Nicolaus Estimates

• FB accounts for 37% of all Internet visits and 16% of page views• FB visitors averaged more than one visit per day in July.• Facebook now working with Comscore and Nielsen to measure Internet GRPs.

Total Unique Visitors

(000)

Average Daily

Visitors (000)

Total Minutes

(MM)

Average Minutes

per Usage Day

Total Pages Viewed

(MM)

Total Visits (000)

Average Minutes per Visit

Average Visits per

Visitor Total Internet : Total Audience 215,054 175,713 448,632 82.4 651,309 16,767,086 26.8 78.0

FACEBOOK.COM 162,078 70,284 70,413 32.3 123,667 6,266,376 11.2 38.7Facebook % of Total Internet 75% 40% 16% 39% 19% 37% 42% 50%

July 2011, US

EQUITY RESEARCH

Facebook’s Opportunity: Improve Gross Profit per User

Key Takeaways• Google/Amazon show best GP/User/Year at $63-$72 in the U.S.• Facebook has made progress in GP/User/Year, now up to nearly $18• U.S. Monetization 3-6x higher than International, on average

Note: Estimates for LinkedIn and AOL are approximate and based on Consensus. AOL 2001 US Unique Visitors estimate represents 70% of Worldwide, we estimate international revenue was 20% in 2001 and 5% in 2011E. AOL Revenues based on Consensus figures. Facebook revenue estimates based on gigaom.com tied to WSJ and NYT. Yahoo assume 70% US revenue based on historical breakout as are gross margin assumptions. Facebook we assume 65% of $5bn total revenue derived from US and we estimate 85% gross margins. Google revenue estimates based on Gross Revenue percentage splits. Amazon US are representative of North America reported data.

Source: Company Reports, ComScore, gigaom.com, FactSet, ThompsonONE, Stifel Nicolaus Estimates

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Unique Visitor

(June, mn)Revenues

($MN, 2011E)

Gross Margin (2011E)

Gross Profit ($MN, 2011E)

Gross Profit ($) /Unique

VisitorUnique Visitor

(June mn)Revenues

($MN, 2011E)

Gross Margin (2011E)

Gross Profit ($MN,

2011E)Gross Profit ($) /Unique Visitor

Precedents:AOL - 2001 17.6 6,892 65% 4,480 254.53 7.6 1,723 65% 1,120 147.36 AOL 110.4 2,071 55% 1,139 10.31 121.1 109 55% 60 0.49 Yahoo 178.4 3,144 77% 2,421 13.57 493.2 1,348 82% 1,105 2.24

Current/Future:Facebook 160.9 3,250 85% 2,763 17.17 573.4 1,750 85% 1,488 2.59 LinkedIn 33.9 354 82% 291 8.58 50.5 159 82% 131 2.59 Google 182.5 13,513 85% 11,522 63.12 841.1 15,238 85% 12,992 15.45 Amazon 95.8 27,097 25% 6,894 71.99 186.5 21,486 18% 3,866 20.73

InternationalUnited States

EQUITY RESEARCH

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Source: comScore, Stifel Nicolaus Estimates

All Things Considered, Facebook Remains Dominant Platform

…Visitor data shows no peak-like characteristics

EQUITY RESEARCH

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Despite Facebook’s Popularity, Consumer Sentiment is Mixed

Source: American Customer Satisfaction Index (ACSI) July 2011

Facebook is the only Internet

brand to rank among “Most-Hated”

Ranking Brand Index1 Pepco Holdings 542 Delta Air Lines 563 Time Warner Cable 594 Comcast 595 Charter Communications 596 United Airlines 617 US Airways 628 American Airlines 639 Continental 6410 United Health 6511 Long Island Power Authority 6512 LA Dept. of Water & Power 6613 Facebook.com 6614 AT&T Mobility 6615 PG&E 6716 JP Morgan Chase 6717 DISH Network 6718 Cox Communications 6719 Bank of America 6820 AT&T Universe 68

Why?

EQUITY RESEARCH

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Source: comScore, Stifel Nicolaus Estimates

Successful Launch of Google+

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

Worldwide

U.S.

Google+ Cumulative Worldwide & U.S. Unique Visitor TrendSource: comScore, Worldwide and U.S., Home & Work Computers (excl. Mobile)

Toward the end of July G+ is close to 30mn Unique Visitors…

EQUITY RESEARCH

Is Facebook Vulnerable to a Change in Consumer Preferences?

• Once “invincible” Internet franchises face increased competition• Historically, consumer loyalty to Internet content properties shifts ~5 years• There is some “fashion risk” in social media, some vulnerability

• Switching Costs Matter • Facebook’s implementation of the social graph creates real switching costs• Now that consumers have their social network on Facebook, there is no way they

will set up somewhere else. Or will they?

• That is why the entry of Google + mattered so much • Google appeared to focus on privacy (circles) in ways that Facebook doesn’t• But Google + alone doesn’t appear to be making a dent in Facebook’s traffic

metrics

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EQUITY RESEARCH

Twitter is the Top “Free Agent” in Social Media

• In our view, Twitter needs a partner• Twitter’s business model has lagged its overall level of influence (significantly)• Google reported to have offered as much as $10 billion to acquire Twitter in the

last year*• “Google +” plus Twitter equals social relevancy and real competition to Facebook

• Twitter has become the most popular “open” sharing platform • Sharing is part of Facebook’s core, but Facebook network is closed• Mainstream media tells consumers to follow them on “Facebook or Twitter,”

interchangeably

• Apple and Microsoft would likely also see strategic value in Twitter• Facebook may prefer to have Twitter as an independent competitor

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Source: *Google offer for Twitter reported by Fortune Magazine April 14, 2011

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Source: SecondShares, FactSet, Financial Times, Stifel Nicolaus Estimates

Can Facebook’s Valuation Withstand Market Turmoil?

• Facebook’s value is currently estimated at $86 billion ($35/shr) on SecondShares• But there were reports of a sale by Interpublic this week at implied $66 billion (-23%)

Did Facebook’s “real” valuation tick down with overall equity markets?

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Conclusions

No, we do not believe Facebook has peaked. The metrics still reflect a dominant platform with high user frequency and activity levels. But some signs exist that hype related to Facebook is peaking.

Facebook will peak some day. Consumers prefer choice and open platforms. Facebook has some shortcomings, including a declining signal-to-noise ratio in its stream. It also needs to improve monetization without alienating its core user base.

Technology and the shaky macro economy / stock markets could disrupt Facebook’s party as well, even if there is very little direct impact on social media’s fundamentals. The potential sale of Twitter could alter the competitive landscape.

We continue to monitor the economy and the social media metrics closely, and welcome feedback and perspectives.

jrohan@stifel.com

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Important Disclosures and Certifications I, Jordan Rohan, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Jordan Rohan, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at www.stifel.com. Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors) Stifel Nicolaus' overall investment banking revenues. Our investment rating system is three tiered, defined as follows:

BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non-U.S. securities as compared to the MSCI World Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value.

Of the securities we rate, 50% are rated Buy, 48% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 34%, 20% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively.

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