PIVOTAL. U.S. Equity Research Internet / Advertising. Pivotal Research Group

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1 PIVOTAL Pivotal Research Group U.S. Equity Research Internet / Advertising Nielsen Data: TV Dominates Time, Other Media Grows March 5, 2014 BOTTOM LINE: Nielsen published its "Cross-Platform" report for 4Q13 today. TV remains the broadest reaching medium with the greatest amount of inventory tonnage. New data included in this report related to consumption of the web and apps on smartphones and tablets as well as on multimedia devices (such as Apple TV, Roku and Chromecast) helps paint a more detailed picture than we had previously, given the rigor with which Nielsen measures media vs. alternatives. On this basis we can better characterize that media consumption on computers, smartphones and tablets amounts to ~40% of total TV consumption. Arguments around consumer time and advertising money have always been fallacious given varying advertiser goals and consequentially divergent media spending allocations, although we note this figure contrasts with spending on digital media amounting to ~67% of TV s total during 2013 by our estimates. Nielsen's Cross-Platform reports best assess media consumption trends, as their processes reflect input from many of the industry's best researchers and decades of experience of stratifying their samples. The Cross-Platform report data is also more meaningful than ratings data much of the industry focuses on because much of the data in this report is based upon more forms of TV consumption, including local and national viewing. By contrast, the NTR sample which provides regular updates on ratings and which most observers look at weekly or monthly is part of an incomplete sample for those looking to assess broader viewing trends. It is limited by small sample sizes which mean that smaller audience groups may have large standard errors, leaving some room for interpretation of many of the figures produced in these reports. Historical comparisons may also be challenged by processing errors or other methodological changes. Nonetheless, key points from our analysis includes the following: Brian Wieser, CFA brian@pvtl.com Total time with live-only TV was down by an immaterial amount during 4Q13 vs. 4Q12. Kids' 2-11 TV viewing was down by 1.3% per person during 4Q13, although down by only 2.0% cumulatively s full year results were still above 2008 and 2009 levels, if below levels in subsequent years on a viewing per kid basis. Online video viewing reported by Nielsen equated to 2.6% of total TV viewing among the population, although unmeasured tablet viewing should add to this amount. Traditional TV remains broadly popular, while online video general remains concentrated among smaller groups of the population: 33% of TV consumers account for 63% of TV consumption, but 18% of online video consumers account for 94% of online video consumption. Multimedia devices such as Apple TV, Roku or Google Chromecast were noted as used by 16.9mm people for an average of an hour per person per month during the quarter. New data on tablet-based web/app consumption and smartphone web/app consumption allows us to estimate that tablets amount to more than 10% of internet time and that smartphones account for almost one third of this total. Between tablets, smartphones and conventional internet access, a simple division of internet time against TV time equates to almost 40%. 25% of the population accounts for 91% of total home-based internet consumption measured on the basis of aggregated person-hours. While we do not have comparable data for tablets or smartphone web/app consumption, our guess is that figures would be similar. While we have long-quibbled with the notion that time with media should equate to spending on media (as different advertisers find different kinds of media differently appropriate for their advertising goals), it is worth noting that by our estimates, total spending on TV advertising amounted to $63bn in 2013 while total spending on internet-related advertising amounted to $42bn 67% of TV s total during the same time. If time equated to money which, again, we argue is a fallacious notion to begin with either too much money is being spent on internet advertising or too little is being spent on TV. It remains more accurate to consider that ad spending is always a function of least-bad alternatives, whereby a small business or an e-commerce marketer will probably consider that the web is where the bulk of their spending will be allocated when considering perceptions (or the reality) of effectiveness, the relative ease with which campaigns might be managed or the personal preferences of these advertisers. For large brands digital advertising remains an environment primarily focused on engagement-based goals, which are unlikely to ever surpass the spending that is allocated to television, both because of the medium s perceived effectiveness, but also because of the relatively broader use of the medium and ease with which reach and frequency based goals may be accomplished. Additional data, analysis and commentary related to the new Cross-Platform report follows in this note. 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2 BOTTOM LINE: Nielsen published its "Cross-Platform" report for 4Q13 today. TV holds up well among virtually all audience groups, as it remains the broadest reaching medium with the greatest amount of inventory tonnage. This reason remains a paramount factor why traditional TV is the primary beneficiary of ad budget allocations for large brands. Importantly, new data included in this report related to consumption of the web and apps on smartphones and tablets as well as on multimedia devices (such as Apple TV, Roku and Chromecast) helps to paint a more detailed picture than we have had previously, given the rigor with which Nielsen measures media at a macro-level vs. alternatives. On this basis we can now better characterize with that internet- related consumption on computers, smartphones and tablets amounts to approximately 40% of total TV consumption. While arguments around consumer time and advertising money have always been somewhat fallacious given varying advertiser goals and consequentially divergent media spending allocations, we note this figure contrasts with spending on digital media which amounted to approximately 67% during 2013 by our estimates. Nielsen's Cross-Platform reports best assess media consumption trends, as their processes reflect input from many of the industry's best researchers and decades of experience of stratifying their samples. The Cross-Platform report data is also more meaningful than ratings data much of the industry focuses on because much of the data in this report is based upon more forms of TV consumption, including local and national viewing. By contrast, the NTR sample which provides regular updates on ratings and which most observers look at weekly or monthly is part of an incomplete sample for those looking to assess broader viewing trends. The Cross-Platform data does have flaws, such as the exclusion of consumption on connected TVs, and tablet data is still limited. It is also limited by small sample sizes which mean that smaller audience groups may have large standard errors, leaving some room for interpretation of many of the figures produced in these reports. Historical comparisons may also be challenged by processing errors or other methodological changes. Nonetheless, key points from our analysis includes the following: Total time with "traditional" (i.e. live-only) TV was down slightly, if not materially, per person during 4Q13 vs. 4Q12. We calculate 134 billion person-hours or total TV viewing (which we define here as live TV plus time-shifted TV viewing), up by 0.4% vs. 4Q12 and 121 billion person-hours of live TV viewing during 4Q13, down by 1.1% vs. 4Q12. Time per person was recorded as falling by 0.6% year over year vs. slight gains in each of the four prior periods, although we do not consider any of these changes to be at all significant (we think the only way to assess time spent metrics is over a multi-year period given the ongoing sample changes that occur with Nielsen s panels. We note that for the full year 2013 cumulative live and time-shifted TV viewing is up by 4% vs levels; live-only viewing is down by a grand total of -0.7% - a CAGR of -0.1% - over that same period of time Kids' 2-11 TV viewing was down by 1.3% per person during 4Q13, although down by only 2.0% cumulatively. Again, this data is not indicative of a material change in viewing behaviors: 2013 s full year results were still above 2008 and 2009 levels, if below levels in subsequent years on a viewing per kid basis. Annual declines of per-person consumption such as those indicated here are not unusual. Our view is that even if kids do incorporate more viewing of content on tablets or other devices, the widening availability of screens in homes (and ongoing use of TVs for ambience and baby-sitting) means that recorded consumption levels are unlikely to change much for kids, no differently than they do for adults. It is also important to note that changes in viewing levels in any given period can reflect ebbs and flows in Nielsen's panel; these changes are more pronounced with smaller segments of the population. Online video viewing reported by Nielsen equated to 2.6% of total TV viewing among the population, although tablet viewing should add to this amount. Among the population who watch online video content, the equivalent of 4.9% of viewing was reported to have occurred via online video. Among kids 2-11 only, 2.0% of total viewing occurred via online video, with 3.3% of viewing occurring via online video among the sub-set that actually watched online video during the quarter. These figures are likely understated given the absence of inclusion of tablets (our guess is that a fuller online video viewing measure might be double the stated figure). Traditional TV remains relatively broadly popular, while online video general remains concentrated among smaller groups of the population. Nielsen's data indicates concentration Brian Wieser Pivotal Research Group

3 among TV viewers: the 16% of the population not on the internet paired with the 17% heaviest consumers of TV - one third of the population, in total - account for 63% of TV viewing personhours. However, virtually the entire population continues to watch significant volumes of traditional TV as even the lightest 17% of TV viewers continue to watch almost 8x more traditional TV than they watch online video. By contrast, the 9% of the population which are the heaviest users of online video account for 84% of total online video viewing. 18% of the population accounts for 94% of online video consumption. Similarly, 9% of smartphone video consumers account for 85% of smartphone video consumption. Multimedia devices such as Apple TV, Roku or Google Chromecast were noted as used by 16.9mm people for an average of an hour per person per month during the quarter. While the number is relatively small, it does demonstrate a real market for these products. Interestingly, according to the Nielsen data, which provides some ethnic data breakdowns for consumption on these devices, Asian American audiences who comprise ~5% of the population account for almost 50% of aggregated time spent with multi-media devices, highlighting that many new forms of media consumption will realize find significant appeal within highly concentrated consumer segments. New data on tablet-based web/app consumption (based upon its panel of ipad users older than 18 years of age) and smartphone web/app consumption allows us to estimate that tablets amount to more than 10% of internet time and that smartphones account for almost one third of this total. Between tablets, smartphones and conventional internet access, a simple division of internet time against TV time equates to almost 40%. As we indicate above in context of TV measurement, this data is similarly helpful given the rigor with which Nielsen tends to measure its markets vs. alternatives, as Nielsen s data is usually superior at a macro-level, even if it is sometimes challenged at more granular levels. While ipad consumers will undoubtedly have different consumption habits than will other tablet owners (and kids will have different habits as well) the data provided indicates that adults spend approximately 1 hour per day / 30 hours per month on their tablets. We know that 33.5mm households now have tablets, although no data was provided to indicate how many adults within those households use tablets. If we make a crude assumption of 1.5, we could estimate that tablets accounted for 4.6bn person hours in the quarter. Separately, new data was included related to numbers of individuals using and time spent with apps / the web on smartphones. Half the population spent slightly more than one hour per day accessing content in this manner, equating to 15bn person hours during the quarter. As conventional internet access among adults 18+ equated to 24bn person hours, in total, we can calculate that total internet use amounted to 43bn person hours during the quarter among adults 18+, which compares with approximately 113bn person hours on traditional TV among the same population. While we do not have a cohort analysis for tablet consumption, we note that 25% of the population accounts for 91% of total home-based internet consumption measured on the basis of aggregated person-hours. While 85% of the population uses the web at home in a month (effectively meaning that by now it is only the very old and very poor who do not connect at some point), usage remains heavily concentrated. While we have long-quibbled with the notion that time with media should equate to spending on media (as different advertisers find different kinds of media differently appropriate for their advertising goals), it is worth noting that by our estimates, total spending on TV advertising amounted to $63bn in 2013 while total spending on internet-related advertising amounted to $42bn during the same time. If time equated to money which, again, we argue is a fallacious notion to begin with either too much money is being spent on internet advertising or too little is being spent on TV. It remains more accurate to consider that ad spending is always a function of least-bad alternatives, whereby a small business or an e-commerce marketer will probably consider that the web is where the bulk of their spending will be allocated when considering perceptions (or the reality) of effectiveness, the relative ease with which campaigns might be managed or the personal preferences of these advertisers. For large brands digital advertising remains an environment primarily focused on engagement-based goals, which are unlikely to ever surpass the spending that is allocated to television, both because of the medium s perceived effectiveness, but also because of the relatively broader use of the medium and ease with which reach and frequency based goals may be accomplished Brian Wieser Pivotal Research Group

4 Appendix: Important Disclosures Analyst Certification I, Brian W. Wieser, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject company and their securities. I further certify that I have not received and will not receive direct or indirect compensation related to specific recommendations or views contained in this research report. Legal Disclaimers Pivotal Research Group LLC is an independent equity research company and is neither a broker dealer nor offers investment banking services. Pivotal Research Group LLC is not a market maker for any securities, does not hold any securities positions, and does not seek compensation for investment banking services. The analyst preparing this report does not own any securities of the subject company and does not receive any compensation directly or indirectly from investment banking services. Stock Ratings Pivotal Research Group LLC assigns one of three ratings based on an expectation of absolute total return (price change plus dividends) over a twelve month time frame. The ratings are based on the following criteria: BUY: The security is expected to have an absolute return in excess of 15%. HOLD: The security is expected to have an absolute return of between plus and minus 15%. SELL: The security is expected to have an absolute return less than minus 15%. Ratings Distribution Pivotal Research LLC currently provides research coverage of 25 companies, of which 56% are rated BUY, 40% are rated HOLD and 4% are rated SELL. Our company does not offer investment banking services. This data is accurate as-of March 5, Price Chart and Target Price History Brian Wieser Pivotal Research Group

5 - 5 - Brian Wieser Pivotal Research Group

6 Other Disclaimers Information contained in this report has been prepared from sources that are believed to be reliable and accurate but are not guaranteed by us and do not represent a complete summary or statement of all available data. Additional information is available upon request. Furthermore, information and opinions expressed are subject to change without notice and we are under no obligation to inform you of such change. This report is has been prepared solely for our institutional clients. Ratings and target prices do not take into account the particular investment objectives, financial and/or tax situation, or needs of individual investors. Investment decisions should take into account all available information, not just that which is contained in this report. Furthermore, nothing contained in this report should be considered an offer or solicitation by Pivotal Research Group LLC to buy or sell any securities or other financial instruments. Past performance is not indicative of future performance and estimates of future performance contained in this report are based on assumptions that may not be realized. Material in this report, except that which is supplied by third parties, is Copyright 2014, by Pivotal Research LLC. All rights reserved. No portion may be reproduced, sold, or redistributed in any form without express written consent of Pivotal Research Group LLC. Commission Sharing Arrangements Pivotal Research Group LLC has commission sharing arrangements (CSA) with numerous brokerdealers. Please contact Jeff Shelton at for further information. Additional Information Available Upon Request Brian Wieser Pivotal Research Group