TWST: Jason, what has the severe economic downturn meant to Internet business at this point?

Mr. Helfstein: There are multiple facets of the Internet. We mostly focus on advertising content. There is e-commerce as well. All of that is economically sensitive, because a lot of that has to do with consumer consumption, whether it's advertising, which is basically driven by a company's desire to sell products, or e-commerce, which is driven by consumers actually buying the products or even content. A lot of the content on the Internet is free, but you also have purchased content. So effectively, we look at it and we say, "The Internet is cyclical." The good news is, in some cases, it's less cyclical than other areas of advertising. Search advertising and e-commerce are both taking share, so they're not seeing the type of negative trends that we're seeing in more traditional advertising, but display advertising, for example, probably will decline in 2009 just as much as cable advertising.

TWST: So they're big enough now that they feel some of the pain.

Mr. Helfstein: The issue with Internet display advertising is twofold. Number one, there is unlimited inventory. When you have a lot of players and you don't get pricing discipline, players will price for share and that's a dangerous trend relative to other sectors and media where there is really limited inventory. If you think about traditional television advertising, there are only a certain number of commercials on the top four networks, Sunday night to Thursday night and everybody wants it. So there is kind of a limitation to it. Number two, the Internet, for all its metrics that we haven't searched which are very positive display advertising is really unproven. Effectively, they're like glorified billboards. People see them but most people don't click. The click-through rate I believe is less than 0.1% and getting worse. So the question is a matter of what the impact is. Somebody saw your banner ad. Did they do anything? It's the same argument with a billboard outdoors. So you're really seeing a bifurcation. You have search advertising, which is very measurable. An advertiser only pays if somebody clicks. That is measurable so you can make an argument, it's kind of the least waste in media. Then you go to the other end of the spectrum where it's really unmeasurable and you're guessing as to what that impact is. In an ad recession, advertisers want to spend less time guessing.

TWST: There's not much price discipline at this point?

Mr. Helfstein: Correct. There is a certain amount of premium inventory, whether it's Yahoo! (YHOO) or someone else's. The home pages are the major portals or the major verticals within the portals, so it's a Yahoo! Finance or premier sites like ESPN and FOXSports, and certain areas where you know people are going. They can say, Look, we've got a lot of whatever and we sell that ourselves. Meanwhile, you've got a lot of sites that give their inventory to ad networks. There are a lot of ad networks that have sprung up in the last several years and, to be honest, everybody wants the premium inventory. So number one, the starting point is that there is very limited ad discipline among the networks. But number two, if Yahoo! can lower price to gain a bit of share, I think they're going to do it and we think they are doing it. For example, you'll see display advertising, we believe, probably down 5% to 10% this year and Yahoo! will be better than that.

TWST: Within the context of the Internet, if they're better than the average, who is losing share? Is it the smaller players?

Mr. Helfstein: Yes. It's the non-premium Websites and then the ad networks that serve those Websites. If you're a smaller Website, you probably don't sell your own advertising, while the big sites do sell their own, but they also offload some of that to ad networks. So, for example, EPSN, I don't know the exact percentages, but they will sell their home page in probably the initial landing pages on the football, hockey, etc., but depending on how deep you go into it, they may give what's typically called run-of-site inventory, the banners, the ads on the bottom or the ads on the pages that don't get as many hits, they may give those to an ad network and that ad network acts as a reseller and is likely not to have the pricing discipline, because they're selling tonnage. They have to be able to walk in and say, "Advertiser, we've got a great deal for you," and they say, "But if premium stuff is on sale, you'd better really be on sale."

TWST: So it falls down the food chain?

Mr. Helfstein: Right, it's a trickle down. Then on the search side, you've got Google (GOOG) with roughly 70% market share and they don't really set the price. It's an auction model, so the advertisers choose what they want to pay. They may decide what the minimum bid is, but ultimately the model speaks for itself. So depending on the demand and supply every day, that price is moving around. So is there weakness? Are there weaker key words? Right now, absolutely, because the majority of Google's clients are still medium and small businesses and you would imagine they're being impacted by the economy. That being said, there are advertisers we believe who are then saying, "Okay, we just saved X% on a keyword," and they're then reinvesting that in volume growth or buying more keywords, basically to try to take share. Then the question in search is going to be, at what point are you pushing on a string? As long as there are customers who aren't shopping in bricks and mortar and are buying online, you can justify search to try to drive e-commerce. Secondly, if you think you can take share again, you can justify it. The question is, do things get bad enough in the economy that people just aren't shopping you have a significant deceleration in people shopping online. I think Amazon.com (AMZN) gave first quarter guidance of 9% to 19% revenue growth. It's a pretty wide range.

TWST: But it is still growth, which is different from other advertising spaces.

Mr. Helfstein: Correct. Remember, Amazon is not advertising, it's e-commerce, but the point is, Google should be some derivative of that, one would imagine. Hypothetically, Amazon is some kind of proxy for e-commerce and you have a lot of smaller players using Google to drive their traffic, while a lot of Amazon's traffic is organic. People go right to Amazon.

TWST: Are there any big changes taking place in this space other than price? Are we beginning to see some clear directions?

Mr. Helfstein: Not really. I mean, some of the issues that we had, maybe they are thought out more deeply or are addressed. For example, you have Time Warner (TWX) owning AOL. Time Warner isn't split off the cable business, so AOL was more of a rounding error when it was part of that conglomerate. Now that Time Warner is a smaller entity, ex the cable business, AOL matters. Given the recession, there is pressure on AOL's business, more pressure than there otherwise would be, so it probably increases the pressure for them to decide what to do with that business keep it, sell it, merge it, who knows? Same thing with Yahoo!. Their display business is under pressure. Again, I think they'll outperform, but their display business is under pressure. And while the majority of the press attention for Yahoo! has to do with what's going to happen in Microsoft (MSFT) is there going to be a search deal, etc.? the bigger issue facing Yahoo! is, how do they turn display into more than glorified billboards? I think the way you do that is by expanding your ad network so you can do more behavioral advertising legitimately, using cookies, which is, for now at least, an accepted practice, and effectively it makes the ads more targeted to the users. But by doing that, I believe they've got to expand the ad network, expand their reach, and that justifies perhaps fitting together with AOL or trying to do a display deal with Microsoft where they get the MSN ad network traffic. Those are the types of decisions that the Boards are probably spending more time thinking about, just because the business is under pressure. For example, Google has never managed costs before. We've all read about some of the things that go on at their headquarters that make it the fun place to work and all the perks. Well, now they are rethinking what they really need. They've always encouraged their employees to spend a decent amount of their time on pet projects, and then they also go after projects of the future that they can't tell you what the revenue opportunity is. And because of the pressure on the top line, they are rethinking those things. There's plenty of innovation I'm sure still going on, but if something can't generate revenue in five to seven years, based on some plan, do you really need it? I think those are the types of decisions that they are making. So you're seeing them reducing headcount and reining in expenses, and I think that the recession is forcing Google to focus on its margins when it's never really done that. Margins were an output of whatever revenue was, and costs were, and now I believe they're managing that more closely.

TWST: Is that going on throughout the industry, where companies are becoming much more directed in terms of R&D?

Mr. Helfstein: The smaller companies have always been somewhat margin focused. If I take two of the small companies we cover, Move (MOVE) and The Knot (KNOT), part of what a lot of these companies needed to do was kind of revamp their back end and when they were done, then say, "Okay, how can we now get this to scale and get our margins up?" Move has identified $20 million of cost savings, and relative to their profits last year, that's very significant. As a result, that's a company, regardless of what the top line does, whose EBITDA should grow in 2009 just because of the cost savings. It's more dramatic because it's a smaller company. But you want to be able to say, "Look, we grew earnings during the recession." There are not a lot of companies that are going to be able to say they did that. The Internet companies are probably just as well poised to do that as any other industry. I haven't done the analysis yet, but I'm curious as to how many companies with a market cap of over $50 billion will grow earnings in the first quarter. I think S&P earnings consensus is down 13%, and last year earnings were impaired by financial write-offs. If you adjust that out, does that mean S&P earnings are going to be down roughly 20%? If Google can grow at all against that, that's pretty impressive, and there are probably only a handful of companies that can cite that statistic.

TWST: This is a period where cash is king. Is this space in pretty good shape from a cash perspective?

Mr. Helfstein: Yes. Most of these companies have net cash. If I just look down at my coverage list, none of the Internet companies have debt. They're all in a net cash position.

TWST: That's a sharp change from a couple of years ago where everybody was scrounging for cash.

Mr. Helfstein: Technology companies have always wanted to have cash for their investments, but when we went through the 2002 correction or recession or whatever you want to call it, display advertising got hit much worse than anybody thought at the time. As a result of that, you've had companies that have just been much more conservative about their balance sheets, even through the bull market. They really never levered up to buy back stock or do anything like that. They always maintained their strong cash positions. Not that the cash is helping them, because, again, most of these guys don't issue dividends, they're not buying back stock in most cases, but they're not worried about their liquidity or having to raise capital in a difficult market.

TWST: So this leaves them in pretty good shape?

Mr. Helfstein: Yes. If I look at their counterparts in the traditional media sector, there are companies where people are questioning their viability because of their debt and depending on how long the recession lasts, the banks could end up owning the assets. That's really not an issue for the Internet industry in most cases.

TWST: As we look out over the next couple of years and as we get through this downturn, are there any apparent new trends or directions that are going to drive this space, or is it going to just be refinements of what we already have?

Mr. Helfstein: I think search on the desktop will kind of stay what it is. Google is likely to remain the market leader. I think you'll continue to see them innovate. The question will be, can they take their leadership on the desktop and transfer that to the mobile? I think so far they've got a pretty good head start. Now part of that's going to be, as the 3G networks, the advanced networks are built out around the country and smart phones become more widely used, they can only move as fast as the platforms available. But the next big opportunity for Google is on to the mobile. And like I said, for companies that are very display focused, like Yahoo!, the question is going to be, can they make display advertising more relevant? I believe the way to do that is through some kind of opt-in behavioral targeting. They've already tried contextual advertising and it hasn't proven to be any kind of secret sauce to make advertisers think it's more effective. And networking we cover News Corp. (NWS), which owns MySpace, and you've got Facebook that's still private. I think nobody disputes that social networking is here to stay; however, no one has really found the way to monetize it. It doesn't really scale from an advertising standpoint. The only guys who have been successful is where somebody has created, like Coke, a personality on Facebook and then people make it their friend. But that doesn't cost much. In fact, it's potentially free. So the question is going to be, can somebody come up with a way to make social networking have a viable revenue model? It makes you wonder, does social networking over time start to display things like e-mail and instant messaging and so forth? And then when we look at some of the smaller niche companies, the question is, does somebody try to roll up the verticals, whether it's finance, real estate, home, insurance, weddings, health, I mean, even local? Do you see these companies rolled up? Because the truth is, there is a lot of commonality in the back end and on a national basis, you can leverage that from the sales force. Now, one could argue some of the local sales forces going into specific verticals, but I think that's something that we've always thought. Also, the last piece is analytics. comScore (SCOR) is what we cover in the analytics space. The truth is, what makes the Internet great is all the data you can get from it and how you use it, and we really think that while that stock has been punished during the bear market, there is scarcity value to what they do, and we think people will really appreciate that as we come out of the downturn, as they second-guess how they're spending their money in advertising. The majority of money is still in traditional advertising and they're trying to cut back their overall spending, yet they're trying to improve their effectiveness. The way you do that is by analyzing and finding more effective ways to advertise. We think the analytics companies are a big part of that.

TWST: Are we going to see significant consolidation in this space as we get through this period?

Mr. Helfstein: I think you'll see consolidation with the private companies. With the public companies, the only consolidation I could really see is if somebody wants to roll up some of the smaller vertical players, but so far nobody seems to have an interest to do that. Maybe you'll have some of the media companies realize, "Okay, we need more online presence, and it's easier to buy than to build." But I think you've got a lot of private companies that will probably have trouble. The IPO prospects won't be what they thought they were, and while they might be able to continue to get private capital, their exit strategy is probably less of an IPO and probably more to sell to a larger company. So you'll see consolidation, probably among companies that most people haven't heard of, smaller private companies that are coming up with new technologies and so forth.

TWST: Are the big guys looking for some of these smaller players or are they sitting on the sidelines and guarding their cash?

Mr. Helfstein: We think Google by the end of 2009 will have roughly $25 billion of cash. So they could spend a few hundred million, no big deal. But a lot of these companies have been focusing inward. They've tried to run their businesses as best they can in a recession and really haven't been focused on acquisitions. Probably not in 2009 but in 2010, once there is bit greater visibility in the economy, you probably will see some of these smaller private companies taken out by the larger companies.

TWST: But it's further down the road?

Mr. Helfstein: Yes. Part of it, like with Yahoo! for example, is that they have to address their display business. So if they have an opportunity to do something with AOL, you can imagine that that will happen before they go and buy some smaller company. I think it's manage your business, do some of the larger things that you think you need to do, and then as you get out of this, start to build your target list and see what's available at what price. Part of it too is the longer we're in a bear market, the lower the purchase price is. If you're an acquirer, from an acquisition standpoint, the bear market is helping you, because it's lowering the seller's expectations.

TWST: As you talk with investors, what's the interest level in the space? What's the concern?

Mr. Helfstein: I think there is always interest in Google. You have a large cap growth company there just aren't a lot of them out there anymore. So there is always interest in Google and Yahoo!. I think people just want more clarity on what the new CEO's outlook for the business is and her strategy. So I would say whenever you hear talk about Microsoft or there was chatter about changes over there, you get focus. Again, I think there is good interest in the analytics space. Right now, where there is limited interest is in the kind of smaller cap display advertising; investors acknowledge that that's going to be the most cyclical within online. Right now, investors have a bias more to the bigger cap companies right now, where there is more liquidity and they can get in and get out.

TWST: So it really reflects the market rather than what's going on in the industry?

Mr. Helfstein: Exactly.

TWST: What are you telling investors to do at this juncture?

Mr. Helfstein: Our overall view has been trying to basically pick the companies that you think will be more resistant and will come out stronger. We've been recommending Google. The longer the economy stays weak, the more downward pressure is put on earnings estimates. That being said, we still see Google growing this year from a top-line standpoint, and we think they've got low- hanging fruit as far as the margin. There is a very small group of large cap companies that will grow earnings this year. So we like Google from that perspective, we like the analytics sector, again with comScore growing. It's hard to find technology companies growing this year. We do still have a positive recommendation on MOVE just because it's exceptionally cheap at about 1 times EBITDA, but we acknowledge that that's probably not right now where people are focused on because of the liquidity concerns we've talked about. We also cover traditional media, and we try to focus people more toward the services side of the business where it's less advertising driven and the margins, the costs are more variable, so they can cut cost out as things remain weak. We've just tried to kind of limit where we think people should invest, until you get better visibility on the cycle. The truth is that valuations fell well below where people expected, less in media but just overall. Investors rightly so have been hesitant to buy stocks on valuation alone. They want to see stability to earnings, so not cutting earnings each quarter, and they also want to see what type of path they have for coming out.

TWST: As you look at Google longer term, where are their growth opportunities?

Mr. Helfstein: First of all, roughly half of Google's revenues are international, so that's still a significant opportunity. Meanwhile, one could argue that the US desktop search may be maturing; everybody you know uses Google basically. Internationally, you are still under-penetrated from a computer standpoint, and some people speculate in some companies, you may just skip PCs and go right to the mobile, but that's still an opportunity for them. At the end of the day, Google's expertise is organizing information for you to find it, basically helping you find information, whether it's desktop or mobile. So that's still a significant opportunity. I think they continue to provide tools to advertisers to fine-tune how they use search, so there's probably further opportunity there. There are newspapers that are going to go out of business or will stop delivering newspapers Monday to Thursday and there may only be weekend newspapers. Those advertisers, the local advertisers, will have to find another way to advertise. They're already spending on Google, but it probably gives them the opportunity to spend more on Google. Then, Google going with Android, their mobile software platform who knows what will happen there? Does Google go anywhere with cloud computing? That's effectively giving smaller businesses access to supercomputing power and so it sounds like you rent the space but the question is still, what's the revenue model for that? But I think the core business for Google is still healthy and there are growth opportunities and that's why we continue to recommend the stock.

TWST: In the analytics space, is comScore the name of choice at this point? What sets them at the top of the list?

Mr. Helfstein: There are not that many in the space. I mean, there is Omniture (OMTR), which we used to cover. But really with comScore, in addition to their providing information about how many people go to what Websites, and they also have e-commerce data as far as how people are using the Web, they're more and more getting into effectiveness tools. So they can actually help their clients figure out whether or not what they're doing works. I think that's pretty invaluable. If they have a 50%, 55%, 60% market share in the core business, their market share in the ad effectiveness space is very small right now. So that's an opportunity. Plus, 85% of comScore's revenues are in the US, so only 15% is international. So if I looked at Google, if Google is 50/50, not that I'm predicting comScore is going to go to 50/50, but it would seem like comScore definitely has further to go internationally, given that most of the world's Internet users are not in the United States. And they do do that tracking internationally. It's just a question of scaling that business, when they open up international offices.

TWST: So they're well positioned for the longer term?

Mr. Helfstein: Correct.

TWST: And the other one you touched on was Move? What's the appeal there?

Mr. Helfstein: Move owns Realtor.com. They're the leading real estate Website by a significant factor. They've made a number of changes over the last two years to position the company much more aggressively from a content Website standpoint and they have an exclusive relationship with the National Association of Realtors (NAR), which basically gets them the best data. So really if you're a consumer and you're looking to buy a house, that's the place you go. They've got very strong relationships with agents and brokers around the country, and while all the listings are free, they then try to convince those agents and brokers to kind of upsell. They also have the leading CRM or client relationship management software for real estate brokers and agents, and I think there is an opportunity for them to tie that into the Website. So just like Google, you only pay, as in advertising, if somebody clicks, you can track the effectiveness, and I really believe there is an opportunity for that to happen over the longer term in the real estate sector with Move's Website. In the short term, are they feeling pain because of the real estate cycle? Of course, but in the most recent quarter, the core part of their business was down just a few percent, and that's pretty impressive, given what's going on.

TWST: Is there anybody else in that space or are they really the dominant players?

Mr. Helfstein: Publicly traded consumer focused, they're the only one. There is ZipRealty (ZIPR), which we don't cover, but that's more of a real estate broker as opposed to a listings content business. And then the competitors Zillow and Trulia are private.

TWST: So it's about the only game in town?

Mr. Helfstein: Yes, it's the only game in town from that perspective. Like I said earlier, they've identified a significant cost savings moving into 2009. So no matter what happens, we see significant growth for them from a cash flow and an earnings standpoint, and we also expect to see some interesting creative things from them on the content side.

TWST: Is there anybody in this space that won't make it through this downturn, Jason?

Mr. Helfstein: Nobody that we cover. I can't talk about companies that I used to cover, but all the companies we cover are all net cash, generate free cash and, in most cases, whatever issues they're facing are really more cyclical and not secular.

TWST: Thank you. (TJM)

Note: Opinions and recommendations are as of 3/27/09.

JASON HELFSTEIN Oppenheimer & Co. Inc. 125 Broad Street 14th Floor New York, NY 10004 (212) 667-6433