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To: MoonBrother who wrote (52379)	4/23/1999 7:49:00 AM
From: Glenn D. Rudolph	Respond to of 164684

Highlights: * Based on early quarterly results from Yahoo!, Excite, and Infoseek, we believe that Q1 might be the first quarter in Internet history that U.S. online advertising revenues decline sequentially (albeit modestly). If this proves to be the case (and it is too early to know for certain), it is nothing to be alarmed about—Q1 is a weak quarter across all media and the Internet advertising market is still growing nearly 100% per year. It could be an indication, however, that the growth of the domestic online advertising market is entering a new phase, one in which market-share gains will become as important as solid year-over-year growth. * There are three main growth drivers in the consumer online market: 1) the number of people online, 2) advertising spending, and 3) commerce spending. Although the growth of each of these value-drivers is healthy, we believe that each respective growth-curve is at a different stage of maturity. Specifically, we believe that the growth curve of new U.S. users is the most mature (there is plenty of absolute growth left, of course, but the law of large numbers will slow the year-over-year gains), the growth of advertising spending is settling into a steady-growth phase, and the growth of commerce spending is still accelerating. * In a more mature, market-share driven environment, we would recommend concentrating investment dollars in the stocks of companies that are 1) steadily gaining share and already have the scale and critical mass necessary to achieve profitability, and 2) have significant international exposure, because the international market should grow faster than that in the U.S. over the next several years. In the advertising market, such stocks would include Yahoo! (YHOO, $190, D-2-1-9) and America Online (AOL, $137, D-1-1-9). * We might also consider favoring the leading consumer online companies that benefit more directly from the growth of the third and least-mature value driver—commerce revenue—such as Amazon.com (AMZN, $167, D-2- 1-9) and Telebank (TBFC, $90, D-2-1-9). * Based on their behavior over the last week or so, it does not appear that the Internet stocks will serve as a “safe haven” for beleaguered technology investors moving money out of other sectors (except, perhaps, on a relative basis). We believe the next wave of companies to report—which will include AOL, Amazon.com, eBay, and other industry leaders—could act as a positive stimulus, but we do not expect to see any major industry-wide catalysts until Q3 and Q4 (when excitement about the advertising and commerce associated with the next holiday season should kick in). Bulletin United States Internet Software & Svcs 19 April 1999 Henry Blodget First Vice President Internet / e-Commerce NET STOCK UPDATE: Change in Growth Phase of U.S. Online Advertising? Reason for Report: Industry Update Merrill Lynch & Co. Global Securities Research & Economics Group Global Fundamental Equity Research Department RC#10210907 Industry