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Tim Crawford Sean Eyde 1 INDUSTRY ANALYSIS Within the technology sector are various industries dealing with very specific products and/or services. One major industry in the tech sector is internet information providers. Examples of major companies within that industry are Yahoo, Inc. and Google, Inc. In addition to those maj..

Tim Crawford

Sean Eyde

INDUSTRY ANALYSIS

    Within the technology sector are various industries dealing with very specific products and/or services. One major industry in the tech sector is internet information providers. Examples of major companies within that industry are Yahoo, Inc. and Google, Inc. In addition to those major players are smaller companies with high growth potential.

“In our opinion the dot-com shakeout that began in the spring of 2000 ended in mid

    2003,” stated Standard & Poors’ stock research analyst, Scott Kessler, in both Yahoo and

    , Google’s January 282006 stock reports. He also noted that many internet companies

    were able to cut costs and prioritize their profits through selling low or zero-coupon convertible debt and acquiring weaker competitors.

    There is a great amount of competition existing in this industry, yet there are some key diversifying factors between its companies. Their management of costs and technological innovations are at the heart of these differences. Smaller companies in this industry face possibilities of being acquired, but also have opportunities to find their own niche in this broad classification.

    It is expected that e-commerce spending will rise from $295.4 billion in 2004 to $1.1 trillion in 2009, amounting to average annual increases of about 30%. This is according to research from International Data Corp. But some companies in the internet-retail sub-industry, such as Expedia, are expected to face dwindling profit margins as shipping costs rise and competition gets tougher.

ENTRY BARRIERS

Brand Identity

    Yahoo has a strong reputation as being a quality internet information provider. People have Yahoo.com set on default as their homepage and advertisers continue to fill in large spaces on the site. Google has a newer name, but has already generated a strong recognizable presence in the industry. It is common now for people to use the expression

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“I Googled that online!” For other new and smaller firms like Knot, inc.’s theknot.com,

    it may take large advertising costs and a long time period to achieve such brand identity, thus creating a significant barrier to entry.

Governmental Policy

    As these sites expand, they look abroad for possibilities. However, certain governments like China have very restrictive free speech laws that make operating such an information provider subject to government scrutiny and regulation. Recently as Google reported fewer earnings in 2005’s fourth quarter than analysts had expected, the reason given was in part due to high than anticipated costs internationally.

    Also recently in the news is the court battle between Google and the U.S. government which is dealing with the handing over of user information to the government. Google is currently refusing to compromise the privacy of its users, while the U.S. government contends that it needs such information to make anti-child pornography laws effective. It could affect Google’s share price if they lose this case or if they win this case.

Economies of Scale & Start-up Costs

    As small, successful sites like Mooter.com are able to demonstrate the fact of their being relatively small start up costs, larger information providers are enjoying their popularity with increased services such as email and larger advertising revenue (Google’s minimum fee per click is $.05 according to its 2004 annual report). However, as a site becomes more popular, the company faces higher costs in making it accessible to a high volume of users simultaneously.

RIVALRY DETERMINANTS

Industry Growth/Trends

    With a current P/E ratio hovering around 40 in this industry, there are serious expectations of growth from its companies. However, Google admits that it does not expect to sustain its remarkable growth rate it has had in recent years. In 2004’s Annual Report, the MD&A cited increasing competition and “inevitable” decline in their growth

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    rates. Surprisingly, the internet information provider industry is seasonal. Internet usage generally slows during the summer months, and commercial queries generally increase in the fourth calendar quarter of each year (2004 Google Annual Report).

Diversity of Competitors

Within this industry are various sub-industries. To illustrate this industry’s diversity,

    Expedia, Inc., which is a leader in travel planning services, is also included in this industry. MIVA, Inc., a performance marketing network that is responsible for private brand toolbars as well as other professional services to small businesses, is classified as an internet information provider as well. Retail sites like Expedia.com are compared to informational sites like Edgar.com. Domestic search engines like Google and Yahoo are also compared to foreign search engines like Baidu.com in China and the increasingly popular rediff.com, which caters to people of Indian decent.

Buyer Propensity to Substitute

    There is a high propensity for users to substitute between search engines. However, currently there are not many “good” choices besides MSN, Yahoo, and Google. Also, each of these sites offers different services. Yahoo, for example, offers Yahoo Finance that cannot be found on Google or MSN.

    The possibility for new information providers is a reality that these companies are tying to fight as they each differentiate themselves with unique products and services that keep them one step above the competition. Evidence of this is how Google now focuses its energy not on its easily substitutable search engine, but rather is acquiring companies with a unique knowledge of different services such as academic library collections and cell phone compatibility, as well as Gmail and Blogger features.

DIFFERENTIATION

    Services differ immensely within this industry. Mapquest.com varies significantly from Knot.com (a new, extremely popular site for wedding planning). There are many sites that offer specific services that have proven to be solid investments. Others have

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achieved success by offering multiple services. Craigslist.com, an online community

    bulletin board that started in 1995, now is a popular forum for metropolitan locals for job

    posting, dating, events, and furniture & used items. In 2004, E-bay purchased a 25%

    stake in the company.

Target users vary by site as well. Briefing.com has investors, eHarmony.com has singles,

    BET.com has African Americans, gfn.com has gay financial professionals, and

    yahoo.com has just about everybody. Each of these sites has its own core competencies

    that add value and make for solid investments.

Google and Yahoo, the two biggest movers and shakers in the industry, have managed to

    differentiate themselves. Google, with 3,021 employees, has a cost differentiation

    compared to Yahoo’s 7,600 employees. Google has the new Google Earth offers maps and satellite images for complex or pinpointed regional searches, while Yahoo has Maps

    Beta that gives detailed driving directions as well as offers in depth information about a

    particular area including traffic reports that can be sent to mobile phones.

CHART OF KEY INDUSTRY RATIOS (3/14/06 Yahoo.com)

    Net 1 Day Long-Price Price to Profit Div. Price Term to Free Cash Market MarginYield P/E ROE % Description Change Debt to Book Flow Cap % % %EquityValue(mrq) (mrq)

    Sector: Technology 0.45 4973.8B 37.71 12.66 1.86 0.77 6.24 9.78 -18.16

    Industry: Internet Information Providers -0.37 164.1B 66.80 17.60 1.60 0.05 20.64 21.30 -209.00

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COMPANY OVERVIEW: The Knot, Inc.

    The Knot, Inc. is a wedding media and services company that provide products and

    services to couples planning their weddings and future lives together. It operates in two

    divisions, Online and Offline. The online division manages websites that provide future

    brides and grooms with a searchable database focusing on wedding planning and

    interactive wedding planning tools. Visitors can browse online shopping areas that

    feature large items like household appliances and electronics to smaller items such as ring

    pillows and table center pieces. For the bride and groom looking to make their wedding

    truly unique the website offers the ability to personalize bits and pieces like toasting

    glasses, cake servers, napkins, and wedding attendant gifts. The Knot, Inc. has also

    launched several brands that target before and beyond the wedding day which include the

    teen-oriented PromSpot.com, the newlywed site TheNest.com and the online personals

    site, GreatBoyfriends.com.

     The Offline division has a diverse collection of print publications. It publishes The Knot

    Weddings Magazine semiannually, which is a searchable shopping guide providing

    directories of wedding gowns, fine jewelry, china, home products, invitations, wedding

    supplies, honeymoon packages, and local wedding vendors. It also authors a series of

    books that provide the information to bride and groom needed to plan their wedding.

    (Company profile information adapted from Yahoo Finance.)

MOST RECENT MEDIA COVERAGE OF KNOT,INC.

World's Leading Travel Magazine and Leading Wedding Media Company

    Introduce Luxury Travel Resource (BUSINESS WIRE)

    Feb. 14, 2006--Travel + Leisure, the world's leading travel magazine, and The

    Knot, Inc. (www.TheKnot.com; NASDAQ: KNOT), a life stage media company

    and premiere wedding resource, today announced a new joint venture: Travel +

    Romance. Debuting in April 2006, Travel + Romance magazine will showcase

    the best in luxury honeymoons, destination weddings, and trips for two. The

    publication's companion web site, www.Travel-Romance.com, also launching in

    April, will be the first and only site to focus on luxury romantic travel.

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AMERICAN EXPRESS AND THE KNOT, INC. LAUNCH UNIQUE CREDIT

    CARDS DESIGNED SPECIFICALLY FOR ENGAGED COUPLES AND

    NEWLYWEDS

    NEW YORK, December 01, 2005 -- American Express and The Knot, Inc., today

    announced a strategic partnership with the launch of two new co-brand, fee-free

    consumer credit cards, The Knot Credit Card from American Express, developed

    for couples planning their wedding, and The Nest Credit Card from American

    Express, designed specifically for newlyweds.

    “Given that engaged and newlywed couples are spending over $70 billion a year

    in this life stage, it's about time there's a credit card with core benefits that cater to

    their needs and specific interests for this time in their lives,” said Beth Lacey,

    senior vice president and general manager, American Express Strategic Alliances

    and Cobrands. “We are thrilled to be partnering with American Express to launch

    this innovative service for our engaged couples and newlyweds,” said David Liu,

    CEO of The Knot.

    .

    Timeline of Significant Events:

    September 1996 The Knot launches on America Online (AOL keyword: knot).

    July 1997

    The Knot launches on the Web at www.theknot.com.

    November 1998 The Knot launches a full-service online gift registry, the first of its kind.

    July 1999

    The Knot Gift Registry expands its wide-ranging selection of gift items to more than 10,000

    products.

    December 1999 The Knot raises $35 million in an initial public offering.

    February 2000 The Knot acquires Weddingpages, Inc.

    September 2000 The Knot announces strategic marketing and retailing partnerships with Linens 'n Things and

    Fortunoff.

    October 2001

    The Knot announces content distribution deal with Yahoo!

    February 2002 The Knot receives $5 million strategic investment from The May Department Stores Company

    and announces marketing alliance to promote the online gift registries of The May Department

    Stores.

    January 2003

    The Knot brings Real Weddings from The Knot to the television screen on The Oxygen Network.

    September 2003 The Knot's "Bridal Fashion Preview" televised special airs on The Oxygen Network

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COMPETITION

iVillage, Inc. operates various online and offline media-based properties for women. Its

    properties include the iVillage.com, Women.com, gURL.com, Astrology.com,

    Substance.com, Promotions.com, Healthology.com, and GardenWeb.com Web sites. The

    company also provides Web site creation and development services to healthcare related

    organizations; digital commerce platforms creation and development services; consumer

    products offerings, consisting of an iVillage-branded book series; and informational and

    instructional magazines, custom publications, television programming, videos, and online

    properties of interest to expectant and new parents. The company also offers research

    services measuring brand awareness and the attributes related to purchase decisions to its

    sponsors, advertisers, and other customers.

THIS JUST IN….

    NBC Universal to Acquire iVillage Inc.; Top Women's Online Community to Be

    Centerpiece of NBCU's Digital Strategy

NEW YORK--(BUSINESS WIRE)--March 6, 2006--NBC Universal and iVillage Inc.

    (NASDAQ:IVIL) have signed a definitive agreement for NBC to acquire iVillage, one of

    the nation's most successful online destinations for women.

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INDUSTRY & KNOT: S.W.O.T. ANALYSIS

Strengths

    ? Low entry barriers as there are relatively small startup costs. “The cost of starting

    a Web-based company is plummeting,” says Keven Maney in his June 7, 2005

    article in USAToday Online. “Some in the industry estimate starting an Internet

    company today costs one-tenth or even one-fifteenth what it did just five years

    ago.”

    ? Diversification between companies.

    ? Constant innovation

    ? Over one million subscribers to theKnot, and growing.

    ? Market niche in wedding related services.

Weaknesses

    ? High volatility. Volatility implies risk and internet stocks do typically have

    higher betas.

    ? Reliance on advertising revenue. 99% of Google’s 2004 revenue was from

    advertising.

    ? Decreasing inventory turnover.

    ? Knot appeals mainly to women needs to diversify its target audience.

Opportunities

    ? Foreign investment.

    ? Advancements in cell phone technology. Some companies have made web

    content formatted to smaller screens available to subscribers.

    ? Web lobs (Blogs). According to Yahoo’s industry profile, “The 2004 presidential

    election brought blogging into the mainstream parlance as both partisan and

    independent commentators managed to scoop many traditional news outlets.

    Blogs operated by active military personnel are providing a unique and unfiltered

    view of the war in Iraq.

    ? Strategic Alliances with retail businesses.

Threats

    ? Government regulation. The Digital Millennium Copyright Act, Children’s

    Online Protection Act, Children’s Online Privacy Protection Act, and other

    similar laws are always subject to violation if the company is not careful.

    ? Competition with iVillage.com, or other companies like weddingchannel.com

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FCFE ASSUMPTIONS

    Sustainable Free Cash Flow from Equity (FCFE) growth in the accompanying FCFE analysis is assumed to be 12.5%. This is because of the following reasons: This year,

    “Analyst Estimates “on Yahoo Finance predict that the growth in S&P will be 12%. This

    year, KNOT’s growth is predicted to be a whopping 125%; next year is forecasted at 64%

    and the rate for the next five years is 43%. When determining this assumption, it was

    decided to err on the side of conservative predictions weighing the S&P’s predicted return most heavily.

KNOT experienced Sales Growth of 24.5% in 2003, 12.81% in 2004, and 24.18% in

    2005. The average of these three years’ growth is 20.5%. As the company gains more

    exposure, it is predicted that sales will grow even further. Yahoo predicts a 22.5%

    growth for 2006. The accompanying FCFE analysis starts off with a slightly more

    aggressive growth rate of 25% for 2006 and 2007, but recognizes that the company will

    mature quickly as its market is only so big. Therefore, the growth rates are assumed to

    still be increasing, at a decreasing rate, by 20%, 18%, and 15% for 2008, 2009, and 2010,

    respectively.

Cost of Goods Sold (COGS) is represented as a percentage of sales. Looking at the

    previous four years of data, COGS have been 35%, 32%, 27%, and 22% most recently.

    When analyzing this, along with many other expense items on the Income Statement, it

    was determined that a four-year weighted average of these percentages, with the most

    recent year being weighed heaviest and the oldest year weighed least, would be a better

    estimate to use for the assumption for the pro-forma financials and subsequently the

    FCFE analysis. The weights are the following: 40% for 2005, 30% for 2004, 20% for

    2003, and 10% for 2002. Using this technique, the assumption for COGS as a percentage

    of sales is a consistent 26%.

    The assumptions for Research and Development (R&D), Selling General and Administrative (SG&A), and Depreciation/Amortization followed the same method as

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