1. I N D U S T R Y N O T E
J a n u a r y 2 1 , 2 0 1 5
Internet
Decoding The Top Five Priorities For AMZN, GOOG, AAPL, FB
Gene Munster
Sr Research Analyst, Piper Jaffray & Co.
612 303-6452, gene.a.munster@pjc.com
Douglas J. Clinton
Research Analyst, Piper Jaffray & Co.
212 284-9488, douglas.j.clinton@pjc.com
Samuel J. Kemp
Research Analyst, Piper Jaffray & Co.
612 303-6179, samuel.j.kemp@pjc.com
Related Companies: Share Price:
AAPL 108.72
AMZN 289.44
FB 76.24
GOOG 506.90
RISKS
Risks include changes in consumer
spending, competition from start-ups
in space, and government regulation.
CONCLUSION
The following report analyzes what we believe to be the top five priorities of AMZN,
GOOG, AAPL and FB. The reason we chose to look at these four companies is that
given their breadth of projects, there are legitimate questions about the core focus areas
for each company. Most companies smaller than these in scale have fewer questions
about focus. We feel that narrowing down each company's focus areas helps to explain
where to expect continued or more aggressive investment and what areas are future
opportunities for growth. The bottom line is that our thoughts on each company's five
priorities reinforce our confidence in AMZN as our top large cap pick for 2015 and
Google as the best name to own with a long-term view (5+ years). Note that we have
12-month Overweight ratings on both names.
• Why Five Priorities? We note multiple authorities on management and successful
managers seem to suggest that five points of focus is about the maximum that a
company can handle. First, Steve Jobs was quoted in his autobiography that he
thought that Apple could only focus on 2-3 things at one time and do them well.
Management specialist Jim Collins suggests that people only focus on up to 10 things
at one time. Finally, another management specialist, Stephen Covey, is known for his
“Big Rocks First” story, which is generally accepted to mean focus on five priorities
before everything else. Whether a company can focus on two things at a time or ten,
we believe there is a natural limit to how much one company can do and the number
of opportunities one company can handle may vary company to company. The point
of our five priorities analysis is to demonstrate what really matters for our large cap
coverage in terms of near and long-term growth, while also showing whether they are
true threats to some of our smaller cap coverage.
• Five Priorities Addresses The True Dangers Of Goliath To David. We believe that every
company, even the largest and best staffed, faces the reality of limited resources. The
companies that we focus on in this piece have some of the best resources in terms of
talent and technology in the world. However, even these companies must focus on core
priorities as management must allocate its best resources to its highest priorities. Thus
while many of these companies have hundreds of active projects, all but the top focus
projects are likely allocated the company’s lesser resources overall. This belief leads
us to the conclusion that smaller competitors that may have overlap with the giants
in the Internet and consumer hardware space, but focus on projects that are not core
focus areas for the larger companies are likely in little danger of being disintermediated
by the larger company in any foreseeable timeline. We use this logic to answer the
question, why won’t company X just kill company y by doing it better? Because if
the business opportunity is company X’s 20th area of focus and has the 20th best
resources, its unlikely to do meaningful damage in direct competition to company y
with the opportunity as its first focus and best resources allocated to it.
Page 1 of 21
Piper Jaffray 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 decisions. This report should be read in conjunction with important disclosure
information, including an attestation under Regulation Analyst certification, found on pages 19 - 21 of this report or at the
following site: http://www.piperjaffray.com/researchdisclosures

2. INDUSTRY NOTE
January 21, 2015
AMAZON
Fundamentally, Amazon’s top priority is to best serve its customers and merchants. We
believe that if Amazon were to list its top five priorities they would be
1. Accelerating fulfillment speed
2. Expanding into new geographic markets
3. Amazon Web Services (AWS)
4. Expanding content offering
5. Expanding into new buyer/product verticals
We believe Amazon’s top priority is to serve its customers best, which includes building the
infrastructure and expectation of same-day and immediate delivery for many items.
Amazon currently offers same-day shipping to regions that cover ~20% of the U.S.
population and has aggressively expanded its fulfillment and sortation center network to
offer increasingly fast shipping times. This past holiday season saw the dawn of PrimeNow
– the same-hour delivery service. We believe that same-day and same-hour delivery is the
next competitive front in eCommerce and that investors misunderstand its importance.
First, we see same-day and same-hour as a large defensive moat that will prevent both
retailers and eCommerce companies from encroaching on Amazon’s territory. We believe
that Amazon’s fulfillment network and extremely fine-tuned system allow it to offer these
services at a far lower cost than retailers, eCommerce companies, and any other providers
without fulfillment scale. The majority of Amazon’s competitors will employ third parties
to compete in this delivery method and will either have to compress margins or pass the
expense to the customer. Either way, we believe that competitors will be at an inherent
disadvantage and that consumers will prefer to purchase on the Amazon platform.
Second, we see same-day and same-hour delivery as a means to expand Amazon’s reach
into a different time-frame market. What we mean by this is that as Amazon makes delivery
more and more immediate that it can increasingly compete with physical retailers offering
immediate gratification. Whereas historically Amazon has competed for market share of
goods sold that can be waited for two days or more, it is now making itself an increasingly
viable option vs going to the store yourself. We believe this unlocks an enormous new TAM
and creates further consumer engagement with Amazon’s brand.
Amazon has been vocal about its plans to expand into new geographies, namely China and
India. We see these markets as attractive for Amazon as they are still young in retail and
eCommerce consumer behavior development. Amazon is actively investing in fulfillment
center and distribution infrastructure in each of these countries, with significant capacity
build-out relative to existing demand (see Exhibit 1 below for int’l fulfillment center build-
out). We believe that Amazon’s strategy is to build out capacity so that demand can be met
with a seamless experience. We note that India’s eCommerce market is being heavily
invested in, and we believe that this will stimulate both internet adoption expansion and
development of an eCommerce market (currently eCommerce represents a nearly
immeasurable portion of retail sales). While China’s eCommerce market is further along in
its development and is more intensely competitive, we believe that there is space for
Amazon to gain share through its customer-focused tactics. Amazon will continue to
expand its efforts in these emerging markets.
Accelerating
Fulfillment Speed
New Geographic
Markets
Page 2 of 21

3. INDUSTRY NOTE
January 21, 2015
AWS has been a highlighted success story of Amazon’s investment-heavy model. It offers
both long-term growth and high-margin revenue, making it attractive to Amazon
management and investors. We believe that AWS continues to be a focus as Amazon
continues to roll out tools to users and offer the ability to expand from basic cloud storage
to a full-scale application and computing service for customers. We believe that Amazon
differentiates itself by having enormous computational power and scalability/flexibility.
Many see the cloud storage business as a commoditized industry, but we believe that the
Amazon’s computation systems, app hosting platform, ease of use, and continued price
cutting creates a high degree of loyalty among CIOs and enterprise systems managers. As
one of the most lucrative business lines and with an expanding need from enterprises of all
sizes, we believe AWS will continue to be a heavy focus for Amazon.
Amazon’s foray into media began with its origins as a book reseller/distributor and it
continued as the company sought to revolutionize how individuals engaged with books.
Amazon’s KindleUnlimited and Kindle Lenders Library are examples of how Amazon is
attempting to continue changing how books are owned, accessed and read. This ambition
has spread from books to music, streaming video and original content. We believe that,
despite heavy investments in Amazon Studios and licensing content, Amazon continues to
lag competitors (i.e. Netflix, HBO) in terms of content. Amazon announced this past
Monday (1/19) that it intends to begin developing movies to be shown in theaters and will
release them via Amazon Prime video streaming far quicker than the industry standard
release cycle. Fundamentally we believe that Amazon has had best success when it is
focusing on changing how content is accessed and expect that as Amazon increasingly
becomes a hub for original content that users will also expand use of non-Amazon original
content on the platform. While our thesis does not rely on Amazon media success, we note
that there is upside potential from further engagement with consumers.
Amazon’s brand is extremely powerful and portable; we believe Amazon sees opportunities
to expand the brand’s reach and importance to consumers through different verticals and in
new buyer-scenarios. We see the local booking, travel and grocery markets as the most
attractive new product categories for Amazon to port its brand into. Amazon Prime offers a
paywall membership structure that local services would find attractive as an advertising
Exhibit 1
INTERNATIONAL FULFILLMENT CENTERS
Source: Piper Jaffray, MWPWL, Geobatch
Amazon Web
Services (AWS)
Expanding Media &
Content
New Buyers, New
Products
Country Sq. Feet
U.S.A. 65,752,120
United Kingdom 5,381,000
France 2,646,600
China 8,607,900
Canada 1,592,060
Germany 2,926,040
Italy 645,600
Spain 301,300
Czech Republic 1,291,200
Poland 3,242,000
Japan 6,195,510
India 500,000
Warehouse Sq. Feet by Country
Page 3 of 21

4. INDUSTRY NOTE
January 21, 2015
target and that could be used to break down the travel industry’s price-parity norms to give
consumers better prices on travel products. We believe that Amazon is also focusing
attention on developing and popularizing its B2B website AmazonSupply.com; the B2B
eCommerce market is a $1 trillion market in the US alone according to Internet Retailer,
three times larger than the B2C market. Amazon will likely continue to look beyond these
opportunities for new customer profiles and product categories to target.
We believe that hardware for Amazon will become less and less of a priority. Amazon
succeeds best when it is able to create a market or revolutionize an existing market. The
Fire phone and tablet are examples of initiatives in which Amazon did not offer a
revolutionary product, which led to a lack of mainstream traction. The original Kindle saw
success because it shifted how consumers interact with content and products like the Echo
have the potential to change consumer behavior, but we believe Amazon will increasingly
rely on third-party hardware and platforms to engage with consumers. We expect that
Amazon will continue to invest in original hardware initiatives, but that its focus on
already-established markets will wane.
Hardware: Not A
Top Tier Priority
Page 4 of 21

5. INDUSTRY NOTE
January 21, 2015
GOOGLE
We believe Google thinks about focus areas slightly differently than Apple. We think
Google thinks thematically where Apple’s focus is more product-centric. As an example,
while search is obviously Google’s most important individual product, we think that
thematically the company thinks about search as a theme of discovery and guidance,
connecting users with the information they want and moving to connect them to it before
they know they want it. Another example is interface, which we think of as a user’s
window to utilize information and includes Chrome and Android. Thus we believe
Google’s five core focus areas are:
1. Discovery/Guidance
2. Entertainment
3. Interface
4. Automation
5. Communication/Productivity
It’s no surprise that search remains Google’s most important product and business. We
estimate that the company’s core search product generated about 60% of the company’s
total gross revenue and about 70% of net revenue. We believe it is unlikely that search
becomes a minority contributor any time in the foreseeable future despite the myriad new
products Google is developing. Over the next year, we expect the core narrative around the
search business to be about the shift from click growth to eventual CPC growth. We
currently expect CPCs to turn positive in Q4 with mid-teens click growth throughout CY15
while the Street expects clicks to grow in the low-20% range while CPCs remain down y/y
in the low single digit range. While we view the optionality in other themes around Google
including Entertainment and Automation are the best reasons to own Google long-term, in
the short-term we believe that as CPCs approach positive y/y rates, it could represent a
psychological hurdle that could help shares go higher in the back half of the year.
Discovery/Guidance
(Search) Core Focus
Exhibit 2
PAID CLICK AND CPC T RENDS, Y/Y
Q113-Q415
Source: Google, Piper Jaffray Estimates
Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414E Q115E Q215E Q315E Q415E
Paid Clicks 20% 23% 26% 31% 26% 25% 17% 16% 16% 15% 15% 14%
CPCs -4% -6% -8% -11% -9% -6% -2% -2% -2% -1% 0% 1%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
Page 5 of 21

6. INDUSTRY NOTE
January 21, 2015
Aside from the shift from paid clicks to CPC growth, we believe the other story that could
weigh on search in the near-term is potentially lower share due to the loss of distribution
deals. We note that Firefox in November 2014 decided to replace Google with Yahoo! as its
default search option. Early desktop U.S. search share data from StatCounter for December
suggests that Google lost about 400 bps of share, while Yahoo! gained about 300 bps. If
Google is replaced in Safari, we believe that Google would gain most of the lost share back,
specifically from savvier web users who will change the option in Firefox or direct
navigate. We point to Yandex in Russia, which lost about 10 percentage points of share to
Google in 2011-2012 when Google removed Yandex as the default in Chrome and
ultimately gained substantially all of that share back. Beyond Firefox, we believe Apple’s
upcoming renewal with Google in Safari will be the bigger question, although we believe
that investors largely are expecting Google to be replaced. If Apple does replace Google, we
believe the stock is likely down on the news, which we would view as a buying opportunity
as we are confident that Google can regain enough share to offset the net revenue impact.
Given the TAC arrangement with Apple, Google would need to replace around 50-70% of
lost share assuming 30-50% TAC. The wild card for both Firefox and Safari (to a lesser
extent) is that users may decide to just replace browsers and utilize Chrome if they are
dissatisfied with Yahoo! as the default search option. Chrome had 46% market share
Worldwide as of December 2014, according to StatCounter; Internet Explorer was second
with 22% share.
YouTube may be the most interesting theme for Google in the near to mid term. Based on
our checks on YouTube ad coverage, we believe that the percentage of YouTube videos
with an ad increased to 74% in the middle of 2014 from the 60% range we saw in 2013.
Additionally, of the videos that had an ad, 34% were pre-rolls in 2014 vs. mid-20% range in
2013. We believe the meaningful increase in pre-roll ad coverage points to significant
revenue growth last year. We estimate YouTube generated $5.4 billion in gross revenue last
year from $3.3 billion in 2013 (~60% y/y growth). Looking to 2015, we expect YouTube to
grow 50% y/y to $8 billion in gross revenue. While not unique thinking, we believe that
Facebook/Instagram and YouTube are beginning to replace traditional TV for younger
generations in both the US and abroad. According to Nielsen data shared on YouTube,
YouTube reaches more US adults 18-34 than any cable network. Additionally, YouTube is
one of a handful of web properties globally that reaches over 1 billion unique users per
month (Google, Facebook) and 80% of total traffic comes from outside the US. We expect
YouTube to remain a transformative digital video property and expect revenue to sustain
30%+ growth rates for the next 3-5 years driven by increased inventory and pre-roll
coverage.
Expect Near-Term
Focus On
Share/Search Deals
YouTube Biggest
Entertainment
Platform In World
Page 6 of 21

7. INDUSTRY NOTE
January 21, 2015
An area in which Google has had obvious, but perhaps underrated, success is in controlling
consumer interfaces to the web. Android is the leading mobile OS in the world with 84.4%
unit share in Q3, according to IDC. We believe this suggests that Android usage share on
mobile is likely near 80% globally. Much like Apple controlling iOS and the related
experience (user data, Apple Pay, apps), we believe Android is a key component to Google’s
future in mobile discovery and advertising. All Android users are required to set up a
Google Account (including Gmail, detailed below), which enables cross platform user
action tracking. We expect Google to meaningfully upgrade Google Wallet at its IO
conference in May/June of this year to better compete with Apple Pay. While the prospect
of actually making money via small transaction fees as a payments platform for Google is
likely not that attractive a business, we believe the potential for Google to tie ads on its
platform to a specific offline conversion would be significantly valuable. Thus we believe
figuring out Google Wallet as a component of Android will be a core piece of the interface
theme for Google over the next couple of years.
The second component to Google’s interface focus is Chrome. As noted, Chrome had 46%
market share Worldwide according to StatCounter as of December 2014, while Internet
Explorer was second with 22% share. We believe Chrome will play an important part of
replacing lost search distribution deals like Firefox (already switched to Yahoo!) and
potentially Safari. If Apple moves away from Safari, we expect Google would spend
marketing dollars to promote Chrome on iOS to regain any potential loss from the Safari
distribution on mobile. We note that Yandex previously used this strategy successfully
against Google when Google removed Yandex from Chrome in Russia. Ultimately it could
be the best move long-term for Google to more aggressively promote Chrome on iOS today
to minimize TAC and maximize control of the user.
Exhibit 3
YOUTUBE GROSS REVENU E
2013-2015E
Source: Piper Jaffray Estimates
Google Dominates
Global Interface
With
Android/Chrome
$0
$2,000
$4,000
$6,000
$8,000
$10,000
2013 2014E 2015E
Page 7 of 21

8. INDUSTRY NOTE
January 21, 2015
We actually believe the theme around discovery and guidance ties significantly with another
important theme on our top 5 priorities for Google: Automation. We believe that
automation will be a key theme over the next 10 years and Google’s established ability to
most efficiently find what consumers are seeking will enable the company to deliver
automation related products better than any other company on the market. One interesting
point in the automation theme is that it seems likely the company monetizes through the
sale of hardware or software, whether it is a physical robot, a thermostat or a self-driving
car platform. However, Google hasn’t been great historically in getting consumers to pay
them directly (Google Checkout, Play lags Apple’s App Store in monetization, YouTube
rentals). We believe that what Google may do is aggressively sell hardware/software to
business users, which it has been historically great at monetizing (AdWords, Apps), but
look to monetize individual consumers through their free to use discovery/guidance
products, which are subsidized with advertising. We believe the consumer monetization
could come from direct monetization like automation products placing orders for
consumers from which Google gets a tariff or less direct in that automation products free
up consumers from menial tasks and could encourage more web usage. We note that
autonomous units like Nest may still focus on selling consumer automation hardware, but
believe it may be less likely that we see Google branded consumer automation hardware. In
terms of eventual contribution to the model, we believe it is unlikely that the automation
theme shows significant contribution in the next 3-5 years. While we expect the segment to
show rapid growth off of a small base (likely under $500 million in automation related
revenue in 2014), it will be difficult for the segment to move the needle given the overall size
of Google in the foreseeable future.
We feel communication and productivity is Google’s fifth priority, but lags significantly
behind the first four. Gmail is the crown priority in the communication and productivity
vertical for Google. Gmail has 425 million users as of June 2012 (last public
announcement); thus, we estimate that Gmail has more than 500 million users today and
Exhibit 4
GLOBAL DESKTOP/TABLE T BROWSER MARKET SHARE
December 2014
Source: StatCounter
Automation Biggest
Long-Term Theme
For Google
Communication/Pro-
ductivity Helps
Extend Advertising
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Chrome Internet
Explorer
Firefox Safari Opera Other
Page 8 of 21

9. INDUSTRY NOTE
January 21, 2015
possibly more than 600 million. We believe this makes Gmail the biggest email platform on
the world. The reason that Gmail is so important in our opinion is that it is the crux of a
user’s Google Account, which we view as an important piece of cross platform tracking for
the company. Users logged into multiple devices on their Google Accounts gives Google a
single user’s actions to track across desktop, mobile and tablet, which we believe will be an
important part of Google ultimately tracking offline conversion, potentially connected to
some type of mobile wallet. Beyond Gmail, we note that for this particular theme Google
offers Apps, Hangouts, Drive and other communication and productivity apps, but view
those as add-ons to Gmail at the core and not core focus areas beyond enhancing
functionality in Gmail. Even with the emergence of WhatsApp, Kik, Snapchat, Facebook
Messenger, etc., which we view as largely the evolution of SMS, we believe email is here to
stay and Gmail is likely to sustain its position of leadership for the foreseeable future
There are a couple of noteworthy products that we do not view as top 5 core focuses for
Google. First: Google Fiber. We have long believed that Fiber is an effort by Google to
force existing telecoms to increase Internet speeds to consumers at a faster rate than the
telecoms intended. We note that over two years Google has entered three small/mid tier
markets (Provo, Kansas City, and Austin) and made an announcement that it is examining
another 34 cities in 9 metro areas, but we have yet to see significant progress in those
additionally announced markets. Based on the company’s own timeline, it hoped to make
announcements around which of the additional cities might get Fiber by the end of 2014;
however, we have not seen any updates as of January 2015. We believe that Google is in no
rush to add additional Google cities and believe Google Fiber’s core purpose is to drive
incumbent telecoms to increase their own Internet speed offerings in all the potential
markets and more. We expect Google to ultimately add a few new markets in 2015, likely 2-
5 markets, but do not expect Fiber to be a significant draw on capex over the foreseeable
future.
We believe Google’s suite of adtech/network type products including AdSense, the
DoubleClick Exchange, Google Display Network, Admeld, Invite Media and AdMob are
driven by the company’s successes in AdWords and YouTube. We believe the suite of
adtech products outside of core AdWords and YouTube serve to round out Google’s
product offering and enable the company to clear some unsold inventory vs showing a true
interest in the “adtech” space. Even more importantly, we believe Google generates
tremendous data that benefits its first-party advertising businesses through its adtech
offering. Given the trajectory of the company’s network segment, which has lagged core
search for most of the last five plus years in terms of total growth as Google has worked to
clean up its network, we do not see an effort to meaningfully jumpstart growth in the
segment. The biggest takeaway here is that when investors wonder why Google won’t just
kill adtech start-up XYZ, we believe the answer is that they are more interested in the data
driven by its adtech offerings vs. the direct revenue.
Don’t View Fiber,
Adtech As Key Focus
Areas
Page 9 of 21

10. INDUSTRY NOTE
January 21, 2015
APPLE
We believe Apple has a much more product-centric view of its priorities than Google by
comparison. While the stock has seemingly played to the product cycle theme with a recent
trough around last year’s iPhone 5S and near-term peaks around the iPhone 6 launch, we
believe looking at the company’s product priorities points to an eventual maturation
beyond the product cycle theme. We believe Apple’s five core priorities are:
1. iPhone
2. iOS
3. Apple Watch
4. Emerging
5. Mac
Unsurprisingly, we believe the iPhone is the top priority for Apple and expect iPhone units
in the near-term and product cycle timing in the long-term to continue to be the biggest
factors in the stock. We expect 61 million iPhones for Dec-14 (20% y/y) and 53.5 million for
Mar-15 (22% y/y, includes 1 week additional channel fill). As we move beyond proof of the
success of the iPhone 6 cycle over the next couple of quarter reports, we expect focus to
shift to the Watch and eventually the iPhone 6S. The earliest reports on the 6S suggest that
we may get a 6S Mini, which would replace the iPhone 5S as the $99 subsidized device with
the 4” screen size and unify the product line. We believe that a 6S Mini would make sense
and expect that to be part of the announcement in the fall. Looking at the past two “S”
model phones, Apple launched Siri as the core feature for the 4S and TouchID as the core
feature to the 5S. Therefore we believe that the 6S will feature some kind of unique
software and/or minor hardware improvement, although it is early to make specific
predictions on what the new feature may be. We note that there were significant rumors
about sapphire screens for iPhone prior to the launch of the iPhone 6, thus we may see
sapphire for the 6S. An interesting note from the key features of the 4S and 5S is that both
were actually driven via acquisition: Siri from a company acquired called Siri, Inc., and
TouchID driven from technology acquired in the acquisition of AuthenTec. We do not
believe there are any obvious acquisitions Apple has made in the last year that point to a
specific new feature on the phones, but could be one lead to watch. As we get beyond the 6
cycle and into the 6S and future releases, we believe that the iPhone franchise can grow in a
more normalized mid to high single digit to low double digit range over the next several
years.
It is arguable that iOS could thematically fit with iPhone as we view the hardware evolution
of the iPhone (LTE, HD camera, TouchID, retina display, design) as synchronized with the
evolution of iOS. However, iOS has given life to additional products including the Apple
Watch and services including Apple Pay and the App Store. As a result, we believe Apple
thinks of iOS as its own individual priority comprised of the core operating system, Apple
Pay, Siri, and third-party enabling software (HomeKit, HealthKit, etc.).
We believe that the core purpose of iOS is to help sell hardware in the form of iPhones,
iPads, Apple Watches and eventually televisions where Android for Google is, in our
opinion, focused on driving forward the interface to the web for users globally while
providing discovery services and collecting as much data as possible. While these differences
may seem irrelevant, we believe it is a core reason for why iOS tends to actually be the
iPhone 6 Sales To
Shed Light On Power
Of Product Cycle
iOS The Future Of
Apple
iOS Sells iPhones
Today…
Page 10 of 21

11. INDUSTRY NOTE
January 21, 2015
leader in driving forward mobile operating system features. Apple may not always be the
first to have a feature, but when they add a feature to iOS, it makes it mainstream in the
market. iOS was the first mobile operating system to incorporate voice search as a core
feature with Siri, the first to add effective biometric security in TouchID, and the first to
implement payments on a widely accepted basis. We believe that the focus on doing
features the best has been a key factor in iOS dominating the high-end phone market and
expect Apple’s focus to remain on best vs. first for the mobile OS.
Looking to the future of iOS, we believe over the next few years that a core theme on iOS
will be the expansion of it to new platforms beyond iPhone and iOS. The Apple Watch will
be the first and most obvious of the extension of iOS to new platforms. We also expect iOS
to be the key feature of an eventual Apple television in the next few years. We believe may
the most important thing to remember with iOS as a core focus area is that the concept of a
mobile operating system will live long beyond just the iPhone and iPad and eventually help
extend Apple into future computing platforms such as augmented reality. We also note that
offerings like HomeKit and HealthKit could work to ensure that Apple participates in
emerging category and collects data as it builds its own offerings beyond phones and
tablets. Given this belief, iOS may actually be the most important long-term priority for
Apple.
The most recent news from 9to5Mac on the potential Apple Watch launch suggests that the
Watch could launch in March this year, which is later than we first thought (February), but
earlier than previous reports that pointed to a CYQ2 launch. Overall the March launch
does not change our thinking on the Watch. We continue to expect a $500 ASP and 10
million units in the first full year of availability (8 million units in CY15). Assuming the
$500 ASP/8 million CY15 unit expectation is correct, it would add $4 billion or 2% to CY15
revenue. By comparison, we believe Street models assume 12-15 million Watches in CY15
with some significantly higher. Thematically, we believe that wearables in some form will
ultimately replace smartphones as we use them today. Today the Watch is an accessory for
the iPhone, but we believe core features like calls, voice control, messaging, etc. could be
controlled via a Watch, implant, light field technology or other evolving technology, leaving
the smartphone as we know it irrelevant. Therefore we believe that Apple’s foray into
wearables via the Apple Watch may be more important in them figuring out how wearables
will change the smartphone market than it is as an individual business line in the next
couple of years.
We believe the 5th and less specific focus area for Apple is on what’s next. A year ago, this
focus area was the Apple Watch. Now that the Watch has been announced, which we
believe demotes the iPad out of the top five, we expect the new emerging focus area is now
on the television. We have been consistently wrong on the timing of the television, but
continue to believe that commentary from Apple points to an eventual television.
Fundamentally, we believe that Apple looks for areas in which they can deliver great
experiences by marrying hardware and software. We believe television is the most obvious
and most significant remaining market opportunity. Additionally, we note that CEO Tim
Cook continues to note TV as an area of interest and views the current experience as
outdated (Charlie Rose interview in September 2014).
In terms of actual timing of a television, we note that there was a 6-year gap between the
iPod and iPhone, a 3-year gap between the iPhone and iPad, and a 4-year gap between the
iPad and Apple Watch. We believe this timeline is congruous with our thinking that
emerging categories are a top 5 focus for Apple, but Apple only attacks one opportunity at
a time. We continue to believe that content may be part of the delay on the TV, but also
believe that if they build it, content providers will come, much like the App Store followed
the iPhone. While we have predicted an Apple television for the last few years, we believe
…But Core To
Apple’s Future
Beyond iPhone
Apple Watch
Important First Step
Into Wearables
Emerging: Television
Up Next
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12. INDUSTRY NOTE
January 21, 2015
that given the company just announced the Watch to launch later this year, it is unlikely we
see a TV in 2015 and quite possibly not until after 2016.
While it may seem unsexy at this point, we still believe the Mac is a top 5 focus for Apple.
The company’s Mac segment generated 15.7% of revenue in Sep-14 vs. the iPad at 12.6%
and has outgrown it in five of the last six quarters. Of all of the Apple’s top 5 focus areas,
we believe Mac is the area in which investors are least interested because it seems to be a
mature product segment. However, we believe that Apple is able to show more design
creativity in the Mac segment than the iPad comparatively given the iPad mirrors iPhone for
a consistent product line. The growth of the Mac segment over the past few years is a
testament to the value that consumers and increasingly businesses put in both the design of
Macs and usability of the software compared to other offerings in the market. Additionally,
we believe the enterprise opportunity for Mac is underrated overall. We believe the iPad
already has majority enterprise tablet share, although only a minority of enterprises utilize
tablets. We believe that the Mac has minority share in enterprise overall, but substantially
all enterprises use computers. Thus the halo effect of enterprises utilizing iPhone may
increase enterprise Mac share and provide a continued tailwind for the Mac business over
the next several years. We expect Macs to grow 4% this year and 3% in CY16.
Perhaps the most controversial opinion we have on Apple’s five core focus areas is that iPad
is not a top five priority. We believe that at this point, the iPad is largely just an offshoot of
iPhone in that the iPad does not have any significantly unique features that iPhone does not
other than a larger screen. While this may seem a negative view on iPad, it is not meant as
such and more of a commentary on the power of the iPhone and iOS that it extends to
create a sub-segment that is ~13% of Apple’s core business. Additionally, while we do not
view iPad is unique to iPhone today, we note that the biggest wildcard on iPad is what will
develop from the IBM relationship. Looking forward, we expect iPad growth to continue to
Mac Still Alive, May
Have Underrated
Enterprise
Opportunity
Exhibit 5
IPAD VS MAC GROWTH
Jun-13 to Dec-14E
Source: Apple, Piper Jaffray Estimates
Believe iPad, Music,
iAd Not Core
Focuses
Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14E
iPad -14% 0% 14% -16% -9% -13% -4%
Mac -7% -7% 19% 5% 18% 21% 10%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
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13. INDUSTRY NOTE
January 21, 2015
lag overall company growth over the next couple of years driven by cannibalization from
the iPhone 6 Plus and general saturation of the high-end tablet market.
Music is in Apple’s DNA, but we don’t believe music, and by extension iTunes, is a top 5
focus any more for Apple and believe the App Store has become meaningfully more
important to product stickiness than music. While we don’t expect Apple to lose share as
the leading music service online for sales, we do expect to see continued competition from
the likes of Spotify and Pandora. The company’s relative lack of a meaningful response to
the growth of both Spotify and Pandora demonstrates that music is no longer a core focus
for Apple, although we note the Beats acquisition as a potential wild card for a new music
related product.
While there have been some announcements over the past few months around iAd
partnering with a number of mobile advertising platforms, we still do not view iAd as a
core focus for Apple and do not expect advertising will be a focus for Apple in at least the
next 10 years. The basic math is even if Apple were to build its mobile ad platform into
something the size of Twitter (a largely mobile offering) in terms of net revenue at $2.3
billion next year based on Street estimates, it would only represent 1% benefit to total
revenue at potentially a similar to lower margin to the overall business. Good platforms
that rely on third-party media, which iAd does, tend to operate at around 30% operating
margins in the best case. We think that the reality of the ad business is that the opportunity
is significantly smaller than improved hardware sales and may come at a lower margin and
thus will likely get a minimum of Apple’s resources.
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14. INDUSTRY NOTE
January 21, 2015
FACEBOOK
We believe Facebook has the clearest set of catalysts for any of our large cap coverage
space. Most obviously, the company has yet to monetize the 700 million and 300 million
strong user bases of WhatsApp and Instagram, respectively. Beyond those companies, the
company is also developing an emerging ad tech suite and also has Oculus as a longer-term
opportunity. We believe Facebook’s five core priorities are as follows:
1. Core News Feed/Timeline
2. Messaging
3. Instagram
4. Oculus
5. Adtech
While messaging may be a more core theme to Facebook’s mission to connecting the world
as we discuss in the next paragraph, we believe that the company’s News Feed product
remains the most important focus today. Facebook’s News Feed has long been its crown
jewel of engagement, enabling users to keep up with what their friends are doing. The
News Feed was introduced in 2006, thus it has been a core piece of the functionality of the
site since close to the beginning. Facebook generates the vast majority all of its ad-based
revenue today from News Feed. At its core, we (like many) believe the Facebook News Feed
is a sort of reality-TV-like look into the lives of a person’s friends and is a form of
entertainment. For this reason, as the News Feed continues to evolve, we believe that
separation and curation between sharing professional content vs user generated (UGC) and
professional/UGC video will be key to continuing to drive engagement.
The most immediate evolution of the News Feed will likely be the continued growth of
video on the platform. According to comScore data, Facebook is generally the second or
third most trafficked video platform in the US, behind only Google/YouTube and
sometimes AOL (Adap.tv). Longer-term we don’t expect Facebook to ever surpass
YouTube as a video entertainment platform, but does appear to be a powerful platform for
sharing other viral videos. Additionally, we continue to believe that video ads are growing
on the platform. In our ad checks, we have noted that video ads tend to be one in every ten
mobile ads and we expect this coverage to continue to grow. We believe that video ads
could be a $300-400 million opportunity in the U.S. alone if Facebook captures 5% of the
video ad market.
Core News Feed
Evolution To
Continue
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15. INDUSTRY NOTE
January 21, 2015
We believe that at its core messaging is the true feature that helps Facebook connect the
world, not the timeline/user profile. Facebook has two core messaging offerings: its
organically created Facebook Messenger, which is a mobile app that utilizes a user’s
Facebook profile and network to communicate, and the recently acquired WhatsApp.
Facebook noted that it had 500 million users of Messenger as of November 2014. Not to be
outdone, WhatsApp reached 700 million users in January this year, up from 600 million in
August 2014. We note that Facebook CEO Mark Zuckerberg has stated that WhatsApp’s
mission will remain to grow the user base to over a billion users before it looks to monetize
significantly. WhatsApp's current offering is free for new users for the first year, then $1 per
year thereafter, and we believe the most logical path to monetization is to continue making
the service a low price paid model. Even with the current user base and $1 per year
subscription fee, there is a roadmap to $700 million in revenue in the next few years. We
also note that some investors have speculated that WhatsApp could move into payments,
specifically into International money transfer given the International focus of WhatsApp.
We believe that while a payments offering is possible, it seems unlikely that such an offering
would roll out in the next 3-5 years and thus we don’t view payments as a key focus area
for Facebook. In terms of Facebook Messenger, we expect the company to continue its pace
of rapid updates to the platform (they had been updating it every two weeks); however, we
view Messenger as an extension of the core Facebook mobile offering and do not see a clear
path to specific monetization of the Messenger app itself.
Based on our periodic social ad checks, Instagram remains largely unmonetized. We have
noted that in recent months, we have been seeing more advertising overall on the platform,
but never more than one ad in 100 posts (vs. the typical 10 in 100 for Facebook). As a result,
we believe that Instagram remains in experimental mode as Facebook gathers data on how
users interact with ads. We believe that Facebook management has made it clear that it will
not force monetization on the platform particularly while users continue to grow quickly.
Exhibit 6
TOP 10 US INTERNET VIDEO PROPERTIES
By Unique Users, November 2014
Source: comScore via eMarketer
Messaging Core To
Connecting The
World
Instagram Destined
To Be Powerful
Advertising Platform
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
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16. INDUSTRY NOTE
January 21, 2015
Instagram officially surpassed 300 million users in December 2014, up 50% from 200
million in March 2014. We believe that if Facebook were to allocate a fuller ad load (more
consistently showing 1 ad for every 100 posts), Instagram could conservatively generate
$200-400 million in revenue in its first year of monetization, which would be about $1
ARPU, although ARPU could ramp quickly as Facebook has seen 81% ARPU growth since
the beginning of 2013. Additionally, we note that Twitter is likely to post 2014 ARPU of
around $5.50 for the full year. We believe that Instagram could quickly become a billion
dollar business when monetization becomes a focus. We believe that some Street models
reflect some Instagram monetization; however, the amount is likely mixed and our model
does not currently reflect Instagram contribution.
Exhibit 7
EARLY INSTAGRAM ADVE RTISING
Source: Instagram
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17. INDUSTRY NOTE
January 21, 2015
Facebook CEO Mark Zuckerberg has mentioned multiple times that he believes virtual
reality and augmented reality are going to be major computing platforms in the future and
views Oculus as a play on those platforms. We have tested two developer versions of
Oculus and noted significant improvements in the most recent version, Gear VR, which is
powered by a Galaxy Note 4 smartphone. We note that interest in Oculus seems to be
increasing rapidly based on 1.5-2 hour wait times at the Oculus booth at CES as well as our
limited 40-person survey in Minneapolis. In our survey of 40 consumers, on average
consumers rated the Oculus an 8.6 out of 10 (10 being best) and noted they would be willing
to pay an average of $342 for the device. We note that the Gear VR currently costs $200;
thus if a consumer has a smartphone compatible with Gear VR, the device is already in a
price range where consumers are willing to consider it. Additionally, Google noted that it
shipped 500k Cardboard devices ($20 cardboard based VR headsets): demand for virtual
reality products appears to be real today. Zuckerberg has previously said that it needs to be
at 50-100 million VR units before it’s a meaningful platform, so it seems we are about 1%
of the way there in demand creation. While the jury is still out as to what the killer
applications will be for Oculus type devices, we believe that augmented reality will be a
significant opportunity for Facebook and other tech companies as technologies like light-
field can be integrated into more consumer friendly and less obtrusive devices. From an
advertising based opportunity, we believe augmented reality as a theme provides more
upside for new types of advertising, while virtual reality is likely to be more of an extension
of television.
Where Google’s adtech businesses have existed longer and are more mature (many in
operation in some form for the last 6-10 years), Facebook’s efforts in adtech are relatively
nascent. Facebook’s ad exchange (FBX) is the oldest of the company’s three core adtech
products and launched in late 2012. Atlas relaunched just this past fall (2014), as did the
company’s mobile ad network. Longer-term, we expect Facebook could be interested in
building a full ad stack to rival that of Google including publisher side ad serving, DSP/SSP,
etc. This could enable Facebook to generate the same level of third-party data as Google,
with which the company could better target its own ads. We view Atlas as the key piece to
Facebook’s overall adtech offering as we believe the platform now gives marketers the
ability to track users in campaigns beyond using just cookies and instead uses Facebook’s
user ID for tracking. We believe this is important because that ID can represent a user
across multiple platforms (iOS, Android, PC, Mac, etc.) as most consumers leverage
multiple devices throughout their day. Cookies can only represent a single browser
instance, which may actually be used by multiple people on the same device. While we
currently do not know if Facebook has a fee schedule in place for the relaunched Atlas or
how they intend to monetize it, we believe that based on industry sources, the traditional ad
serving market is a high hundreds of millions to low double digit billions per year
opportunity. Given Facebook’s unique capabilities in working around cookies, we believe
that in time it is possible they disrupt that legacy industry, but may take 2-3 years or more
to see impact to the model.
Second, Facebook's Audience Network lets third party advertisers show advertisements
from Facebook on their mobile sites, like Google AdSense, but can leverage Facebook’s
unique user data set for theoretically better targeted ads compared to other networks.
While we don’t expect to see meaningful contribution from it in the Q4 report, we believe
that within 1-2 years the product could scale to over nine figures in revenue given that most
relatively mature adtech services are in the $200 million to $1 billion range. We do not
believe there is some consideration for the Audience Network currently in Street models,
although we believe it is unlikely that the Audience Network generates much more than
$100 million in its first year. Given the roll-out of the Audience Network, we actually
Oculus: Facebook’s
Bet On Future Of
Computing
Adtech An Emerging
Focus For Facebook
Page 17 of 21

18. INDUSTRY NOTE
January 21, 2015
believe that Facebook should be a bigger concern in terms of taking share from existing
adtech companies than Google.
In terms of what we do not view as core priorities for Facebook, the most interesting are
search and Facebook at Work. Facebook introduced Graph Search in early 2013, which is a
semantic search tool that users can use to find information within Facebook. Good search
experience is critical to almost every major web property, not just Google, but the most
important factor when thinking about search in a specific product is what users will be
looking for. Facebook admits in a December 2014 post that user feedback suggested that
users wanted to be able to better search posts. We don’t believe most users think of
Facebook’s search bar as a window to find things in the outside world, just a tool to find
people, posts, pictures and information from within Facebook. We don’t view this as a
negative for Facebook, but do believe that it refutes the idea from a few years ago that
search data incorporating a user’s friends could potentially be better than Google. We
believe the reality a year and a half into Graph Search is that Facebook users largely aren’t
conducting commercial searches on Facebook, thus while they may be able to gain “search
share,” it doesn’t appear Graph Search will be a threat to Google’s search dollar share in
the foreseeable future.
In November 2014, a Financial Times report suggested that Facebook is working on a
professional focused offshoot of its service called “Facebook At Work.” The report
suggested that the product would let people connect with colleagues and collaborate on
work. Just this week (January 2015), Facebook launched the official Facebook At Work
App, but we do not believe that attacking the professional market is a top five priority for
Facebook, thus it remains only experimental. Some investors have expressed concerns
about the impact of Facebook At Work on LinkedIn; however, it appears the focus of
Facebook At Work is as a collaboration tool vs. a competing social network; thus, it
appears to be more competitive to Slack or Yammer. In our view, LinkedIn’s top priority is
the professional social networking market and it would be difficult for Facebook to
duplicate the resume-like data that LinkedIn has currently.
AMZN: Overweight rating and $400 price target (17x 2016E EBITDA of $10.7b, assuming
net cash of $8b and 463m shares outstanding). Risks: slowing consumer spending and
eCommerce growth, state internet sales tax collection legislation, gross margin
compression, competition, and FX changes.
AAPL: Overweight rating and $135 price target (18x CY15E EPS of $7.48). Risks: trends in
end-markets, component pricing, and competitive pressures.
GOOG: Overweight rating and $630 price target (21x FY15E PF EPS of $29.98). Risks:
competition, increasing traffic acquisition costs, loss of key partnerships, and slowing
ad/search growth.
FB: Overweight and $82 price target (27x CY15 EBITDA of $8.2 billion plus cash of $9.65
billion (shares out of 2.8 billion). Risks: changes to advertiser spend in social, competing
social platforms, and continued shift to smartphones.
Search/Workplace
Not Core Focus
Areas
Ratings, Price
Targets and Risks
Page 18 of 21

19. I N D U S T R Y N O T E
J a n u a r y 2 1 , 2 0 1 5
IMPORTANT RESEARCH DISCLOSURES
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20. I N D U S T R Y N O T E
J a n u a r y 2 1 , 2 0 1 5
Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each
box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note
written during the past three years.
Legend:
I: Initiating Coverage
R: Resuming Coverage
T: Transferring Coverage
D: Discontinuing Coverage
S: Suspending Coverage
OW: Overweight
N: Neutral
UW: Underweight
NA: Not Available
UR: Under Review
Distribution of Ratings/IB Services
Piper Jaffray
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [OW] 382 60.54 97 25.39
HOLD [N] 235 37.24 21 8.94
SELL [UW] 14 2.22 0 0.00
Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliates
received compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closely
correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead represent
recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. See
Stock Rating definitions below.
Analyst Certification — Gene Munster, Sr Research Analyst
Analyst Certification — Douglas J. Clinton, Research Analyst
Analyst Certification — Samuel J. Kemp, Research Analyst
The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of
my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.
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21. I N D U S T R Y N O T E
J a n u a r y 2 1 , 2 0 1 5
Research Disclosures
Piper Jaffray was making a market in the securities of Apple, Inc. at the time this research report was published. Piper Jaffray will buy and sell Apple,
Inc. securities on a principal basis.
Piper Jaffray was making a market in the securities of Amazon.com, Inc. at the time this research report was published. Piper Jaffray will buy and
sell Amazon.com, Inc. securities on a principal basis.
Piper Jaffray was making a market in the securities of Facebook, Inc. at the time this research report was published. Piper Jaffray will buy and sell
Facebook, Inc. securities on a principal basis.
Piper Jaffray has received compensation for investment banking services from or has had a client relationship with Facebook, Inc. within the past
12 months.
Within the past 3 years Piper Jaffray participated in a public offering of, or acted as a dealer manager for, Facebook, Inc. securities.
Piper Jaffray was making a market in the securities of Google Inc. at the time this research report was published. Piper Jaffray will buy and sell
Google Inc. securities on a principal basis.
Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.
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• Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst.
• Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst.
• Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst.
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