This document provides a summary of recent developments in social media. It discusses how Facebook continues to grow and innovate, such as with new photo tagging features, and projects like Spartan that aim to enable browser-based apps. It also discusses how brands like Procter & Gamble and Pepsico are increasing their presence on Facebook through new store openings. Data from sources like comScore, InsideFacebook, and Vitrue show increasing engagement and usage of social media platforms like Facebook and Twitter.

1. June 20, 2011
The Second Internet
Social Media is changing the world to a far larger degree than Wall Street currently appreciates.
We refer to the emerging Social Internet as The Second Internet.
We believe that for the foreseeable future, the news flow on the Second Internet will be highly positive.
IN THIS ISSUE:
 The Week In Facebook
 Reports of Facebook Member Loss in U.S. Don’t Tell the Full Story
 Photo Tool Innovated… Privacy Concerns Raised
 Facebook’s Project Spartan Reportedly Looks To Bypass iPhone App Store
 P&G Opens Six More Brand Stores on Facebook
 Guest Post by Reggie Bradford, CEO Vitrue:
How Brands Are Successfully Increasing Engagement on Facebook & Twitter
 The Week In Twitter
 Twitter Poised To Get Massive Boost From iOS 5 Integration
 The Week In Social Media Data
 comScore Report Shows Social Media Is Fastest Growing Mobile Category
 Traffic Surges Worldwide Across Second Internet Including Tumblr & HuffPo
 Merchant Circle Survey Highlights Effectiveness of Social Media and Daily Deals
 The Week In Social Gaming
 Zynga’s “Empires & Allies” Is Its 2nd Fastest Grower Ever
 The Week in Private Shares ─ Facebook up 4% to 33.75 ($84B) as IPO Talk Swirls
 The Second Internet Image of the Week
PUBLISHED BY:
Lou Kerner
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http://eepurl.com/dZfH5 (212) 668-9874
lou.kerner@wedbush.com
Wedbush Securities • 1000 Wilshire Blvd., Los Angeles, CA 90017 • (213) 688-8000 • Member NYSE/FINRA/SIPC • www.wedbush.com
The information herein is only for Accredited Investors as defined in Rule 501 of Regulation D
under the Securities Act of 1933 or institutional investors.
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, 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 decision. Please see page 24 of this report
for analyst certification and important disclosure information.

2. THE WEEK IN FACEBOOK
Reports of Facebook “Jumping the Shark” Are Premature
A recent article in InsideFacebook, a well-regarded industry blog, stated that Facebook lost almost six million U.S. users in May. That
story was picked up by multiple media sources including The Wall Street Journal and BusinessInsider, which asked ‘Has Facebook
Jumped the Shark?’ We believe this narrative to be misleading.
Since Facebook doesn’t release monthly user figures, companies like InsideFacebook utilize data provided by Facebook’s imprecise
advertising tools. Among other anomalies, the tool doesn’t include mobile usage, which is soaring for Facebook. Facing questions
about its initial story, InsideFacebook looked at alternative measurement sources, all of which revealed growth in monthly unique users:
Figure 1: Four of Five Traffic Sources Showed Facebook Users Increasing in May
Source: InsideFacebook
We’ve taken a closer look at data compiled by the advertising tool as well, dissecting the data in several different time periods.
While the advertising data does indicate that Facebook lost U.S. users in May, we note that other factors─particularly seasonality─can
also impact month-to-month figures (social networking slows down April/May as it gets warm outside and students focus on finals and
school ends). We further note that the same advertising data showed a gain of close to one million users for the first two weeks of
June, so looking at all various sources of data, the widely reported story appears to be the much-ado-about thing. If we go out six
months, Canada remains the only Top 20 country with negative user growth (according to the numbers from the advertising app):
2

3. Figure 2: Facebook Users, Top 20 Countries Last 6 Months
Source: Socialbakers
We also point out that user engagement for Facebook continues to grow at a very healthy clip around the world. According to Alexa,
global page views per user per day are up almost 40% in just the last three months. The rising engagement is positive, as engaged
users are becoming more immersed in the platform:
Figure 3: Facebook Daily Pageviews per User Are Increasing Significantly
Source: Alexa
3

4. Facebook’s high engagement was further confirmed in a recently released PewResearch study which showed that over 50% of
Facebook users visited the site at least once a day (versus 6% for LinkedIn users):
Figure 4: Facebook Used Much More Frequently Than Alternative Networks
Source: PewResearch
We believe that Facebook will continue to add new functionality (e.g. Deals), introduce significant enhancements to existing features
(e.g. photo tagging, as chronicled below), and will increasingly optimize the mobile experience, all of which should improve
engagement, usage and monetization.
As such, we remain steadfast in our belief that Facebook is increasingly a utility, like the water company, no longer sexy, but of
increasing value to the majority of people on the planet.
The following recently updated chart highlights how Facebook is the dominant social network in most of the world:
Figure 5: World Map of Social Networks, June 2011
Source: Vincenzo Cosenza
4

5. Facebook Photo Innovations Drive Engagement….and Privacy Concerns
Facebook Photos remain one of the most popular and rapidly growing features on Facebook, with more than six billion new photos
being added each month, Facebook is closing in on surpassing 100 billion photos uploaded:
Figure 6: Facebook Users Are Uploading Over 6 Billion Photos per Month
Source: Company data, Wedbush Securities, Inc.
Facebook has worked continuously to upgrade the Photos application. A notable upgrade occurred last December, when Facebook
rolled out face recognition technology for tagging photos to North American users. Although more than 100 million tags a day were
already being added to photos, Facebook wanted to facilitate an improved tagging experience, in order to increase tagging, which is a
great driver of user engagement. Following the enhancement, when a member uploaded a photo, tags were suggested to the member
based on facial recognition of the member’s roster of friends. Members could accept (or decline) the suggested tags. Facebook hoped
to alleviate privacy concerns by enabling members to opt out of the program.
Figure 7: Facebook’s Photo Recognition Tool Suggests Tags
Source: Facebook
5

6. Facebook recently announced that they had rolled out the facial recognition service to “most countries” around the world, using the
same “opt-out” feature, which meant members were automatically opted in. While most users have embraced the feature (Facebook
has indicated it has received almost no user complaints), the press and governments around the world have raised privacy concerns.
High profile actions, include a complaint being filed with the FTC, European Union privacy watchdogs launching a probe, and the
Connecticut Attorney General requesting a meeting with the company.
Like the firestorm that brewed when Facebook first introduced the News Feed in 2006, and then died down as users recognized the
enormous value of the newsfeed, we believe that Facebook’s facial recognition feature will weather the storm.
The tagging tool is just one aspect of Facebook advancing photo functionality. TechCrunch reported that Facebook is in the process of
creating its own photo sharing app to compete with popular photo sharing apps, such as Instagram (which has exceeded over 5 million
users in just 8 months ago and added another 100,000 users this weekend alone).
Figure 8: Mock-Ups of Facebook’s Upcoming Photo App
Source: Facebook via TechCrunch
Facebook’s Project Spartan Reportedly Looks To Enable Browser Based iPhone App
Last week, TechCrunch also broke news of Facebook’s “Project Spartan,” potentially Facebook’s biggest endeavor into mobile to date.
With Project Spartan, Facebook appears to be attempting to bypass Apple’s App Store by enabling smartphone users the ability to use
Facebook applications directly from within their mobile browsers.
To facilitate this experience, Facebook is utilizing HTML5, a programming language that displays rich content within browsers
regardless of which platform they are using. By leveraging HTML5, Facebook will enable members to simply point their browser to the
Facebook website, at which point they could access a drop down window with various apps that can then be launched within a
Facebook “wrapper,” thus enabling Facebook functionality.
6

7. The report claims that 80 developers are already programming for the platform, including Zynga and the Huffington Post. A key
component to Project Spartan will be integrating Facebook Credits into the platform. Once operational, Facebook would be able to sell
popular apps such as Zynga’s Farmville directly without passing users through Apple’s App Store (and their 30 percent revenue share
which contributes to Apple expecting nearly $3 billion in revenue this year). Additionally, if successful, this project could provide a
major boost for smaller mobile-app developers as well who have long struggled to meet the differing standards of platforms such as iOS
and Android.
While it is uncertain if Facebook users would widely adopt a mobile browser experience that is a departure from the ingrained behavior
of navigating native apps, even if Facebook can make a small dent in Apple’s app revenues, the payoff could be significant given the
global mobile app store revenue is expected to reach $40 billion in 2014.
Figure 9: App Spending ($, millions)
Source: Gartner
P&G To Open Six New Facebook Stores
Proctor & Gamble has been an early mover on Facebook, opening its Pampers store on Facebook in March 2010. P&G followed that
up in July 2010, opening up an Amazon-powered store on a UK Fan Page for MaxFactor. In September 2010, P&G partnered with
Amazon again to open another store on Facebook which sold 29 different brands (from Always to Zest).
Last week, P&G continued its Facebook Commerce foray by announcing it was opening Facebook stores for Tide, Gillette, Olay, Gain,
CoverGirl, Luvs and Febreze. In this go-round, the stores will not be powered by Amazon, but instead by PFSWeb, an e-commerce
outsourcing specialist. P&G also said other retailers might sell P&G products on Facebook pages as well (there is speculation that
Walmart is interested). Explaining the motivation for the latest rollout, P&G referenced multiple benefits unique to the Facebook
platform, including customer insight gained from analyzing how customers are interacting with their brands, and improved convenience
as P&G CEO noted, “We want to maximize our sales through retailers but we also want to be where the consumer wants to shop.”
Figure 10: Proctor & Gamble Bringing Brands to Facebook
Source: Facebook
7

8. Vitrue, a SaaS-based social marketing platform, is handling the Facebook management for many of the P&G brands amongst hundreds
of other brands and agencies across 47 countries and over 4,000 Facebook and Twitter accounts.
Below, Virtrue’s CEO, Reggie Bradford discusses the data his company sees that shows improving engagement. Impressions per post
are rising significantly as brands are successfully acquiring and retaining fans. Not only are brand posts being seen, as brands improve
the quality of the content they are posting, fans are increasingly commenting on to interacting with and liking to redistribute the
advertisers messaging:
How Brands Are Successfully Increasing Engagement on Facebook and Twitter
By Reggie Bradford, CEO & Founder of Vitrue
Social media is having a profound and lasting effect on modern communications. Everything ─ including all media ─ is now social. We
are social beings by nature, so today’s rise of social networks is natural. Social platforms like Facebook and Twitter have completely
upended the traditional marketing-communications paradigm. Brands have recognized the importance of social and responded by
creating vibrant and engaging social communities.
Between January 2010 and May 2011, the Fans (our clients’ collective fan base) managed by the Vitrue SRM platform has grown by an
average of 23% per month and an impressive 3,494% overall. We are now managing more than 720 million fans across over 4,000
streams.on Facebook and Twitter. The Vitrue Publisher (component of the Vitrue SRM platform) published 744 posts in January 2010
to this network, and today we publish more than 30,000 per month.
Analyzing data across this base shows significantly increasing engagement and activity:
Facebook post impressions have grown from 15,171,509 in April 2010 to 14,488,576,168 in May 2011, representing a 64% average
monthly growth and a 100,872% overall increase. This data indicates that what brands are posting is increasingly being viewed by
Facebook users:
Figure 11: Posts Impressions Per Page Are Up Over 6X
Source: Vitrue
8

9. Comments on advertisers’ posts have also grown significantly, going from 11,783 in January 2010 to 717,598 in May 2011,
representing a 27% average per month growth and an overall 6,090% increase. On a per page basis, commenting has increased two
and half times from Q2 2010 to Q1 2011:
Figure 12: Comments per Page Are Up Over 2.5X
Source: Company data, Wedbush Securities, Inc.
Facebook post “Likes” have grown from 16,904 in January 2010 to 3,144,186 in May 2011, representing a 36% average monthly
growth or a 18,600% overall increase. On a per-page basis, likes have increased over five times from Q2 2010 to Q1 2011:
Figure 13: Likes Per Page Are Up Over 5.5X
Source: Company data, Wedbush Securities, Inc.
For brand marketers, the potential for social to build brand awareness, brand loyalty, drive product and create new consumers is
limitless. But smart marketers have approached the medium with a solid strategy and measureable goals, carefully weaving social into
their overall marketing plan.
Overall, there are a few key similarities we believe form the base for successful social marketing:
 Create true “communities” where your brand can feed your fans’ passions;
 Publish rich and engaging content that is truly relevant, localized and valuable;
 Apply “ask, listen and learn” principles;
 Think creatively and with customer-centric principles in mind; and
 Understand the differences between Facebook, Twitter and other platforms and how to approach each differently for success.
9

10. Here are five brands that we think are doing it right. (We’ve limited the brands to five and noted only a few key tactics for brevity
purposes. But there are many more strong examples):
1. Apple: Apple’s iTunes Facebook Page now reaches 15 million fans and is growing daily. The Page gives Apple’s passionate
fans a community with which to discuss music, preview new tunes and featured artists, enjoy fans-only promotions, and
receive exclusive content. Apple’s publishing frequency and quality content like videos, polls, exclusives, and promotions,
drives sampling, sharing and purchasing. Apple, like many other brands, also has different Twitter handles for its products—
@AppStore, @iTunesMovies, @iTunesMusic and @iTunesTV—so they can hyper-target content based on fans’ preferences.
Apple’s iTunesMusic account now has more than a million followers.
2. American Express: American Express is utilizing both Facebook and Twitter in very smart, strategic and consumer-focused
ways. Most recently, American Express updated its long-running Membership Awards for American Express to serve as
“social currency.” A great brand phrase to own and a great way to let consumers redeem digital and social rewards—a
practice in which they are increasingly participating. The newly created “Points” Tab on its Facebook page also promotes
further community sharing around deals, specials, using your points and social currency. Additionally, the Tab incorporates its
popular Twitter feed. The brand has also been running a national advertising campaign, focusing on real-life Tweets from
consumers enjoying the “social currency” awards.
Its groundbreaking “Small Business Saturday” program created the first-ever holiday dedicated to the support of small
businesses by encouraging consumers to frequent local businesses. The program offered companies an ad credit and
consumers a $25 gift card. At the time, it was one of the fastest growing Pages on Facebook and helped drive small business
revenue by 27%. Today the Page is averaging more than 2,200 likes and 400 comments per post!
Its also does a great job of using its small business forum blog to create compelling content that is not solely focused on the
American Express brand. Additionally, the brand utilizes Twitter effectively to communicate, respond and monitor its follower’s
questions, statements and feedback.
3. MTV: MTV has done many things right when it comes to social, and the network’s Facebook strategy for its shows is brilliant.
MTV creates Pages for each of its individual shows, creating hyper-targeted communities for each, based on show
demographics and interests. MTV does pre-promotional Facebook buzz to create awareness, interest and fans even before a
show’s debut. By creating hyper-targeted communities, MTV can really drill down and offer relevant content based on what
each community/fan wants. MTV has a myriad of offerings and audiences and these Facebook communities cut through
clutter and speak directly to their audiences. Fans of “Jersey Shore” don’t necessarily want information on “MADE.” So MTV
delivers what each fan wants. And it is delivering content across MTV’s diverse “cultural” interests, providing rich and
engaging content on everything from fashion to shows to gossip. These passionate communities translate into ratings and a
strong consumer following on and off social. And that is essential for a network.
4. McDonald’s: The Golden Arches truly gets “social segmentation” and applies it to the fullest on Facebook. Social
segmentation allows a brand to examine its entire consumer base and communicate differently to specific “silo” audiences
within the base. After all, not all of McDonald’s 8 million plus fans want the same thing, right? The fast food giant consistently
delivers rich and engaging content, including “Wall Apps” that receive 3x the engagement as Tab content. And McDonald’s
can also localize its content to more than 6,000 different zip codes delivering geo-targeted information. So a McDonald’s fan
in Atlanta could receive locally relevant and different content than a Boston resident, from specific menu items to individual
store events and promotions. McDonald’s plans to step it up with “Like” buttons and open graph functionality across the web.
McDonald’s also utilizes Twitter effectively to message followers with special promotions, health/nutritional information,
celebrity Tweets and much more.
5. NBA: The NBA has led sports leagues in social popularity from the beginning, currently boasting 9.6 million Facebook fans
and 2.6 million followers. (Incidentally, the NBA has been the perennial sports league in our Vitrue 100 rankings year after
year.) Not only does the league boast impressive social figures but so do its teams and players: the Lakers have 9.1 million
fans; Shaq has almost 4 million Twitter followers. But amassing fans and delivering engaging, rich and valuable content are
two different things. The NBA seems to have mastered both. The league has done a tremendous job of connecting in real-
time with its fans and allowing for that connection to happen not only through the league but through the teams and players.
The NBA has a more open social policy in regards to its teams and players participating on social. The league understands
the fans desire to connect directly with players and leverages that for the brand’s overall success. Shaq recently announced
his retirement on Twitter. It gave it WOM that no ESPN SportsCenter story could have provided. And the league leverages
that for its fans and brand every day. The NBA strives to make the hard-court action and news occur in real-time with their
fans across the social realm. In addition to rich video content and insider news, they also frequently poll their fans asking what
they’d like to receive. The NBA understood early on that sports can and does thrive socially…especially around the digital
water cooler.
10

11. iOS 5 Integration Should Drive Significant Additional Users and Usage for Twitter
Apple announced the integration of Twitter into iOS 5 at its Worldwide Developer Conference (WWDC.) last week. This means that all
new Apple devices with iOS 5 (iPhone, iPad, iPod Touch) will now allow a single Twitter sign-in and enable tweeting from any Apple
app (e.g. camera, photos, contacts, YouTube, etc) as well as from the any application that leverages the single sign-in capability. The
added ability to add location from any Tweet is also a cool feature.
Just as Facebook Connect encourages many more registrations and log-ins at websites off Facebook as it expedites those activities,
having a Twitter sign-in for iOS apps will have a similar impact and undoubtedly will encourage many iOS 5 users who are not already
Twitter members to join the service. Given the increased number of Twitter members, and the increased ease of tweeting, Twitter
activity from the iOS platform will grow dramatically.
The Apple-Twitter partnership is also great news for iOS app developers who will benefit from the increased number of registrations,
log-ins, and improved user data. For example, knowing an app users’ Twitter friends, apps will better enable their users to connect with
their friends, giving the apps more utility and make them stickier.
An obvious question is why Apple chose Twitter over the far more ubiquitous Facebook for the sign on capability. In addition to more
users, Facebook has significantly more information on the users, meaning a tie up with Facebook would have yielded more utility for the
iPhone ecosystem. First, it’s possible that Facebook Connect will be integrated at some point down the road. But more likely is that
both Apple and Facebook wanted to retain control in any partnership, making a deal impossible. That appears to be the reason why
the Apple Ping/Facebook Connect relationship never materialized. In addition, Facebook’s close relationship with Microsoft/Windows
Phone 7/Bing does not improve the odds for any Facebook/Apple tie-up.
Finally, given the significant benefit to app developers, we expect Google’s Android will need to respond with its own single sign-in
solution for apps. It’s hard to imagine they’ll choose Facebook, given how fiercely the two companies are competing with each other at
the moment. While Google could choose Twitter, it’s also possible Apple asked for exclusivity, at least for a period of time.
Figure 14: Twitter iOS Integration
Source: Apple
11

12. comScore Report Highlights Growing Use of Social Media Via Mobile
comScore’s latest report showed that social media usage on mobile devices grew by 46% year over year, with over 60 million users
now accessing social media via their phone at least once a month:
Figure 15: Social Networking Mobile Usage Surging
Source: comScore
In addition, as the data above reveals, the number of people accessing social media almost every day increased by more than 50% and
now represents more than half of users who do access social media via their cell phone. As one would expect, Facebook drives 86%
of the category minutes. An average Facebook user spends 269 minutes on Facebook mobile. As the graph below reveals, while
social networking was the third largest usage category tracked by comScore, it was the fastest growing of the top 10 categories.
Figure 16: Social Networking Mobile Usage Surging
Source: comScore
12

13. Traffic Surges Worldwide Across Second Internet Outlets
As we have previously discussed, the Second Internet (the Social Internet) includes companies in a variety of genres that are scaling
rapidly, and we believe will come to dominate their respective verticals.
Figure 17: Subset of Second Internet Companies
Genre Offline 1st Internet 2nd Internet
News NBC News CNN.com Huffington Post
Q&A Encyclopedia Britannica Yahoo Answers Quora
Gaming (Casual) Electronic Arts MiniClip Zynga
Gaming (Hard Core) Dungeons & Dragons Blizzard (World of Warcraft) Kabam
Shoes & Accessories DSW Zappos ShoeDazzle
Work Productivity Microsoft Office Google Docs Jive Software
Sports News Sports Illustrated ESPN.com SB Nation
Writing Journal WordPress Tumblr
Source: Wedbush Securities, Inc.
Our thesis is that Second Internet companies are well positioned to grow dramatically. We point out that recent data illustrates the on-
going traction of Second Internet companies beyond Facebook. The HuffingtonPost remains a great poster child of our thesis as it
recently passed The NY Times to become the most trafficked news site:
13

14. Figure 18: Huffington Post Has Surpassed NY Times To Become the Most Trafficked News Website
Source: comScore
We also call attention to Tumblr.
Tumblr’s mission as a blogging site is both simple and broad:
“Tumblr lets you effortlessly share anything. Post text, photos, quotes, links, music, and videos, from your browser, phone, desktop,
email, or wherever you happen to be. You can customize everything, from colors, to your theme's HTML.”
It turns out that there are tens of millions of people who want a simple yet broad and customizable blogging template. While Tumblr
started the year with just seven million blog, stats on its site indicate it has tripled that number in six months.
Figure 19: Tumblr User Stats
Source: Tumblr
With this growth, Tumblr has eclipsed WordPress in terms of total blogs hosted, which is a real milestone for Tumblr given WordPress’s
broad reach and four year head start. Users are not only starting blogs, but they are utilizing the platform to generate content, and the
content is driving significant page views, which are growing at almost the same pace as the growth of blogs:
14

15. Figure 20: Tumblr Page View Growth
Source: Quantcast
It’s also important to note that more than half of the blogs that utilize the open sourced WordPress technology host the site themselves,
so the total number of “WordPress Sites” is over 47 million, and growing rapidly as well. Google’s Blogger also remains a massive
blogging platform, generating about four times the total number of global page views as both Tumblr or Wordpress (Google does not
release statistics on the number of blogs hosted on Blogger).
Merchant Circle Survey Finds Social Networks & Daily Deals Are Both Effective Marketing Channels
MerchantCircle is an online business directory that leverages social networking and customizable web listings to enable its 1.6 million
local merchants to attract new customers efficiently. We found several interesting insights from the company’s recently released survey
of 4,942 local business owners. Marketing budgets are tiny for most businesses, with over 75% reporting budgets of $5,000 or less:
Figure 21: Three Quarters of Local Merchants Report Marketing Budgets of $5,000 or Less
Source: MerchantCircle
15

16. Given the modest budgets of most small businesses, it’s very positive for Facebook that it’s the most utilized web site used by local
merchants to promote their business:
Figure 22: Over 65% of Local Merchants Utilizing Facebook for Promotion
Source: MerchantCircle
While only 22% of the local merchants surveyed had run Facebook ads, of that group, an impressive 65% indicated they would use
Facebook ads again:
Figure 23: Over 65% of Local Businesses That Have Bought Facebook Ads Would Do So Again
Source: MerchantCircle
16

17. Facebook scored well in terms of ease of use of the system, with the difference between merchants that would use the service again
and merchants that wouldn’t, largely being based on the success, or lack thereof, in acquiring new customers.
Figure 24: Ease of Facebook Ad Use Scored Highest
Source: MerchantCircle
The survey results were also very positive for Daily Deal Sites, as merchants who tried Daily Deals indicated they were even more likely
to repeat usage than were merchants who used Facebook ads (77% vs. 65%):
Figure 25: 77% of Local Merchants That Offered a Daily Deal Indicated They Would Do So Again
Source: MerchantCircle
17

18. Satisfaction, or dissatisfaction, with Daily Deals stemmed from the success of the programs to effectively attract customers.
Figure 26: Merchant Satisfaction with Daily Deals
Source: MerchantCircle
The survey confirmed our belief that after many years of being mystified at how to leverage the Internet, increasingly large numbers of
local merchants are beginning to figure it out. As a result, dollars spent on daily deals for local merchants are poised to grow
dramatically. The results above are further supported by a recent Rice University study.
18

19. Figure 27: Breakdown of Merchants Profitability With Various Daily Deal Sites
Source: Uptal Dholakia, Rice University
Zynga Forays Into Strategic Gaming, “Empires & Allies” Off to a Fast Start
Zynga released its most ambitious project to date on June 1st, with the launch of Empires & Allies. The game was developed in Zynga’s
Marina Del Rey studio and is a departure from Zynga’s previous games because of its strategic framework. The game is still designed
to appeal to mainstream audiences with its happy, toy-like feeling created by Matt Briton former General Manager of Jim Henson’s
Creature Shop. According to Amer Ajami, the game’s Executive Producer, it’s “Cityville meets Risk”.
The game borrows heavily from Cityville, including an identical city building mechanism. In Empires & Allies, troops can perish and
thus players can actually “lose”. The game itself is billed as Zynga’s “most social” game to date because of the way in which friends are
enlisted and designated as either friends or enemies. To develop resources, friends can trade virtual items to enhance the chances of
success.
Leveraging Zynga’s vast base of 250 million Facebook gamers (although that double and triple counts some members who play
multiple Zynga games every month), usage for Empires & Allies has surged to over 30 million MAUs (Monthly Active Users) in the first
seventeen days following its release. This makes it the second fastest growing Facebook game of all time, after Zynga’s Cityville.
19

20. Figure 28: Empires & Allies’ Rapid MAU Ramp
Source: Wedbush Securities, Inc, Appdata
Zynga hopes to broaden its gamers beyond the middle-aged women typically drawn in by the casual and social nature of Zynga’s
games, and “Empires & Allies” is built to attract more hard core gamers than Zynga’s usual fare. In addition to playing the games
longer, hard core gamers generally spend more on games, so the profitability can be significant. The challenge for Zynga will be to
create a game that attracts traditional gamers, yet does not alienate its core. By branching in to strategic gaming, Zynga hopes
“Empires & Allies” players will engage with the game for a longer period of time, as is usually the case with hit strategic games.
While Zynga is working to expand the breadth of its gaming reach and profitability on Facebook, it is also trying to drive growth via
mobile, where it currently has 3 games (Hanging with Friends, Zynga Poker, and Words with Friends) in the top 15 grossing apps in the
Apple store:
Figure 29: Top Grossing iOS Apps as of June 16, 2011
Source: iTunes
20

21. Zynga’s latest iOS games include a version of Cityville called CityVille Hometown and Hanging with Friends, a cross between Hangman
and Words with Friends. With its growing pool of developers and capital, we expect Zynga to attempt the same viral game marketing it
has implemented effectively on Facebook. Zynga is also likely to continue its acquisitive ways with mobile games. According to Screen
Digest, there were 26 mobile gaming-related acquisitions last year, and that number is only set to grow this year, and Zynga will
probably help.
Figure 30: Hanging With Friends
Top Paid iOS Apps by Downloads
Rank Name Developer
1 Angry Birds Clickgamer Technologies
2 Hanging With Friends Zynga
3 Pocket God: Journey To Uranus Bolt Creative
4 Tiny Wings Andreas Illiger
5 Angry Birds Rio Clickgamer Technologies
6 Fruit Ninja Halfbrick
7 TETRIS® EA
8 Cut the Rope Chillingo
9 Camera+ taptaptap
10 Feed Me Oil Chillingo
Source: Zynga.com, Appdata.com
Facebook Shares Trade at All-Time High of $84 B as Speculation Swirls of an IPO at $100 B+
Despite the pullback in public equities over the last month, Facebook continues to reach new highs, trading up 4% last week to reach
$33.75, which values the company just over $84 billion.
Figure 31: Facebook Up 4%, Reaches $33.75 Implying $84 Billion Value
Source: Company data, Wedbush Securities, Inc.
21

22. Last week’s price jump was likely fueled in part by a CNBC report that Facebook is “likely to go public by the first quarter of 2012… at a
valuation pegged at north of $100 billion”. As Facebook has stated that it will release financials starting in April of 2012, as required by
current regulations, we believe it’s likely that Facebook will go public prior to that time. We also believe the “north of $100 billion”
conjecture, given our current Facebook model, conservatively values Facebook at north of $200 billion based on 2015E projections:
Figure 32: WEDBUSH’S FACEBOOK MODEL
ESTIMATED FACEBOOK
FINANCIAL DATA 2009E 2010E 2011E 2012E 2013E 2014E 2015E
Global Advertising Revenue $ 50,400 $ 61,000 $ 71,000 $ 80,000 $ 88,000 $ 95,000 $ 101,000
Facebook % Share 1.0% 2.4% 4.0% 5.9% 8.3% 11.4% 15.4%
Facebook Ad Revenue $ 525 $ 1,464 $ 2,840 $ 4,720 $ 7,304 $ 10,830 $ 15,554
Other Facebook Revenue $ 225 $ 525 $ 1,050 $ 1,890 $ 3,024 $ 4,536 $ 6,532
Total Facebook Revenue $ 750 $ 1,989 $ 3,890 $ 6,610 $ 10,328 $ 15,366 $ 22,086
Facebook EBITDA Margin 33.3% 50.0% 51.5% 50.0% 50.0% 50.0% 50.0%
Facebook EBITDA $ 250 $ 995 $ 2,003 $ 3,305 $ 5,164 $ 7,683 $ 11,043
Public Market Multiple 20X
Estimated Value $ 220,860
Cash $ 1,500 $ 2,278 $ 3,600 $ 5,666 $ 8,739 $ 13,156
Value $ 95,853 $ 119,816 $ 149,770 $ 187,213 $ 234,016
Private Market Discount $ 71,890 $ 89,862
Source: Wedbush Securities, Inc.
Figure 33: Facebook’s Funding Over Time
Source: Namesake
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23. THE SECOND INTERNET IMAGE OF THE WEEK
Figure 34: Victory Cigar 2.0
Source: Twitpic via @MCuban
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24. About Wedbush Securities Private Shares Group
The Private Shares Group of Wedbush Securities covers the growing base of privately traded securities, with an
emphasis on those in the social media space. The mandate of the group is to build our trading network in all private
shares, source deal flow in the space (including “initial private offerings”), and to build funds and create other alternative
investment opportunities across private shares for our institutional and accredited retail clients.
About Lou Kerner
Lou Kerner is Managing Director of the Private Shares Group within Wedbush Securities’ Equities
Division. Prior to this, Lou was Wedbush and Wall Street’s first recognized Social Media equity research
analyst.
Before becoming an internet executive in 2000, Lou was an equity analyst following media and internet
related companies for Goldman Sachs and Merrill Lynch. Lou started his internet career as CEO of The
.tv Corporation, which licensed the top level domain .tv from the tiny island nation of Tuvalu. .tv was
acquired by Verisign in 2001. Subsequently, Lou acquired one of the early leaders in social networking,
Bolt Media, which grew to over 20 million monthly uniques under his three years of leadership. Lou has a BA in
Economics from UCLA and an MBA from Stanford University.
Contact Wedbush Securities Private Shares Group:
Lou Kerner
Managing Director, Private Shares Group
(212) 668-9874
Lou.kerner@wedbush.com
@loukerner
Kevin Cohen
Director of Trading, Private Shares Group
(213) 688-8089
kevin.cohen@wedbush.com
Michael Silverstein
Researcher, Private Shares Group
(213) 688-6663
michael.silverstein@wedbush.com
Craig Muhlrad
Researcher, Private Shares Group
(213) 688-8084
craig.muhlrad@wedbush.com
About Wedbush Securities
Founded in 1955, Wedbush Securities is a leading investment firm that provides brokerage, clearing, investment banking,
equities research, public finance, fixed income sales and trading, and asset management to individual, institutional and
issuing clients. Wedbush currently ranks the #1 liquidity provider for NASDAQ, and was ranked #1 stock picker for 2010
by Barron’s. Headquartered in Los Angeles, with over 100 offices nationwide, Wedbush focuses on relentless service,
client financial safety, continuity, and advanced technology. (www.wedbush.com)
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25. IMPORTANT DISCLOSURES
The information contained herein is intended for accredited investors as defined in Rule 501 of
Regulation D under the Securities Act of 1933 or institutional investors.
WEDBUSH SECURITIES
Wedbush does and seeks to do business with companies covered in its research reports. Thus, 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 decision.
The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity.
The analysts receive compensation that is based upon various factors including WS’ total revenues, a portion of which are generated
by WS’ investment banking activities.
ANALYST CERTIFICATION
I, Lou Kerner, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not,
directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in
this report.
Capital Markets Disclosures as of June 20, 2011
Company Disclosure
Facebook (private) 12
Klout (private) 12
Apple 1
Research Disclosure Legend
1. WS makes a market in the securities of the subject company.
2. WS managed a public offering of securities within the last 12 months.
3. WS co-managed a public offering of securities within the last 12 months.
4. WS has received compensation for investment banking services within the last 12 months.
5. WS provided investment banking services within the last 12 months.
6. WS is acting as financial advisor.
7. WS expects to receive compensation for investment banking services within the next 3 months.
8. WS provided non-investment banking securities-related services within the past 12 months.
9. WS has received compensation for products and services other than investment banking services within the past 12 months.
10. The research analyst, a member of the research analyst’s household, any associate of the research analyst, or any individual
directly involved in the preparation of this report has a long position in the common stocks.
11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.
12. Lou Kerner maintains a position in shares of Facebook (private) and Klout (private).
Private securities may involve a high degree of risk and are intended for sophisticated investors who are capable of understanding and
assuming the risks involved.
Private securities may have a high level of volatility. High volatility investments may experience sudden and large drop in their value
causing losses that may equal your original investment.
Private securities are illiquid and may not be readily realizable and it may be difficult to sell or realize those investments, similarly it may
prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.
Investors should obtain advice from their own financial advisor and only make investment decisions on the basis of the investor’s own
objectives, experience, risk tolerance, and resources.
The information herein is based on sources that we consider reliable, but its accuracy is not guaranteed. The information contained
herein is not a representation by this corporation, nor is any recommendation made herein based on any privileged information.
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26. This information is not intended to be or should it be relied upon as a complete record or analysis; neither is it an offer nor a solicitation
of an offer to sell or buy any security mentioned herein.
This firm, Wedbush Securities, its affiliates, officers, employees, members of their families, or any one or more of them, and its
discretionary and advisory accounts, may have a position in any security discussed herein or in related securities and may make, from
time to time, purchases or sales thereof in the open market or otherwise.
The information and expressions of opinion contained herein are subject to change without further notice.
The herein mentioned securities may be sold to or bought from customers on a principal basis by this firm.
Any reference to past performance is not a guarantee of future results.
Supporting documentation will be furnished upon request for any claims, comparisons, recommendation, statistics or other technical
data. Additional information with respect to the information contained herein may be obtained upon request.
Applicable disclosure information is also available upon request by contacting the Business Conduct Department at (213) 688-8090.
You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.
RESEARCH DEPT. • (213) 688-4505 • www.wedbush.com
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