September 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:

Metrics Showing Strength at Facebook and Twitter, While Google+ Stagnates Facebook Rolls Out Key Product Launches, Bolsters Board, Readies For f8 Highlights From Wedbush Social Media Events Wedbushs Inaugural Second Internet Conference (September 7th) Social Commerce Dinner with OpenSky and chloe + isabel (September 13th) GameStop Tops List of 200 Retailers Leveraging Facebook : Guest Post by Wade Gerten, Founder/CEO of 8thBridge The End of the Banner Ad?: Guest Post by Chris Cunningham, Co-Founder/CEO of appssavvy Deals or No Deals: Groupon Gains Share in August per Yipit; Facebook Terminates Its Deals Effort While Yelp Decreases Emphasis on Daily Deals The Release and Rapid Growth of The Sims Social Highlights Our August Social Gaming Review Kabam Study Shows Social Gamers Decreasing Their Console Game Play

PUBLISHED BY: Lou Kerner @loukerner (212) 668-9874 lou.kerner@wedbush.com

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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 25 of this report for analyst certification and important disclosure information.

Usage Stats: Facebook Dominates, Twitter Surges, Google+ Stagnates

Nielsen released their Q3 2011 Social Media Report, which quantified just how dominant the Facebook platform has become in terms of time spent per month (data from May 2011). Facebook captures more than 40% of all time spent across the top 10 Internet brands.

Figure 1: Facebook Dominates Time Spent, Capturing More Than 40% of All Time Spent Across Top 10 Internet Brand

Source: The Nielsen Company Social media (defined as social networks and blogging sites) has become the most popular activity online, with Nielsen reporting that Social Media accounts for 22.5% of Internet usage, more than double the second most popular type of sites, online games.

Figure 2: Social Networks & Blogs Sites Usage Increasing

Source: The Nielsen Company

Its not only Facebook that is powering this trend; in a recent blog post, Twitter stated that they now attract 400 million monthly visitors, up from 250 million in January 2011. More importantly, Twitter now has over 100 million active users, with more than half logging in to the service every day. Twitter notes that 40% of the active users essentially never Tweet, instead they use the service to consume information from around the world. With over 200 million tweets a day now (up from 65 million Tweets a day one year ago), Twitter stated they have 60 million active tweeters, thus the average active tweeter tweets almost four times a day.

Figure 3: With 60% of Active Users Tweeting, Twitter Broadcasts Over 200 MM Tweets Per Day

Source: Company data, Wedbush Securities, Inc. Buoyed by this rapid growth in user activity, Twitter is becoming more aggressive in its monetization efforts, as they have ramped up the pace of hiring on the advertising sales front and will be rolling out a suite of new ad products including a promoted tweet ad unit that will appear atop a users stream of tweets to ensure that it is seen, as well as promoted tweets from companies that are similar to companies a member already follows. Finally, Google+, which registered tens of millions of users in its first month after launch, appears to be struggling to convert registered members in to active/engaged users (Click here to access our Google+ Industry Expert call: http://bit.ly/r5IlL5). Data released last week in a blog post by web app provider 89n, showed a dramatic 41% drop in the average number of Google+ posts per day by users of their ManageFilter app that integrates a Google+ users account with their Twitter account. During the period from August 19-September 14, users of ManageFilter posted 0.40 public posts per day, down from 0.68 posts per day during the period from July 19-August 19. With over 7,000 users of their ManageFilter app, the data appears to be statistically significant.

Figure 4: Google+ Usage Appears To Be Slowing, Based on Posts Created

Source: ManageFilter

The decrease in Google+ usage reported by 89n is consistent with other data sets we follow. SocialStatistics.com is a site that tracks over 68,000 active Google+ accounts and publishes statistical findings from those accounts, including stats on the most followed accounts. Over the first 17 days of September, the growth in the number of new followers of Google+s five most followed accounts totaled 56,000, down 62% from the 150,000 new followers added by the top five accounts in the first 17 days of August.

Figure 5: Google+ Usage Appears To Be Slowing, Based on Followers Added

Person Mark Zuckerberg Larry Page Sergey Brin Pete Cashmore Vic Gundotra Total Total Followers 505,000 304,000 210,000 180,000 140,000 1,339,000 Followers Added August 1-17 54,269 36,594 23,138 24,113 11,961 150,075 Followers Added September 1-17 % Change 16,037 10,862 11,851 8,985 8,363 56,098 -70.4% -70.3% -48.8% -62.7% -30.1% -62.6%

Source: 89n While these Google+ stats must be disappointing for Google, we note that the service is only a few months old, and its battle for relevancy is just beginning. With Googles +1 button now available across more than one million websites, and viewed more than four billion times a day, certain aspects of Googles social strategy are scaling rapidly.

Figure 6: Google+ 100 Most Followed Accounts Are Adding Followers Less Quickly

Source: Company data 4

Facebook Launches Key Product Features, Readies for Music & Adds to Board
Facebook released a few important product enhancements that provide the platform with features similar to Google+ and Twitter. At the core of Google+s user experience is Circles, which allows members to easily segment their entire social network into smaller subsets, thereby making sharing and consuming content more targeted. While Facebook had a similar feature, it was more complex and seldom used. Last week, Facebook responded by introducing Smart Lists. Smart Lists:

. The Friends List feature on Facebook allows users to group friends in order to easily manage who receives certain status updates and reduces Newsfeed clutter by allowing prioritizing notifications for particular lists. Facebook launched a new sub-feature; automatically creating Smart Lists which are pre-populated with a users friends which Facebook believes belong in a particular category. This functionality eliminates the hassle of having to go through each friend to compile a list (or drop and drag them into a Circle, which is the experience on Google+). Users will also be able to create their own lists; additionally, Facebook has pre-populating lists which include: Family Work (colleagues) Education (attended the same school) Location (live within 50 miles)

Figure 7: Facebook Smart Lists Facilitate A Similar Outcome to Google+s Circles

Source: Facebook Other lists that are not pre-populated but have specific properties: Restricted: Added users are treated as public viewers, allowing them to see pictures they are tagged in and public posts Close Friends: Allows users to set alerts when a friend posts an update

Subscribers: Facebook also unveiled the Subscribers feature which allows members follow the public updates of others, regardless whether they are friends on Facebook or not. Mimicking the core follow experience of Twitter, Facebook users who subscribe to an individual will receive updates in their Newsfeed. For the time being users cannot exclusively share updates with those who are subscribed, which forces public posts to be more social then tweets or blog posts. Unlike many of Facebooks previous updates where the company has defaulted to a more public setting, members must opt-in to allowing subscribers to their account. But once a member opts-ins, anyone can subscribe to their updates, and other members who request to be friends, are automatically added as subscribers. In order to control the noise passing through the Newsfeed, Facebook has allowed users to adjust the settings of their subscriptions so that they are in control of the type of updates they receive from each particular subscription. Options available include: All updates Most updates Important updates only Granular Features (Photos, Games, Status Updates)

Figure 8: Facebook Subscription Feature Is Similar to Following Users on Twitter

Source: Facebook Subscriptions have begun replacing Facebook Pages as a form of communication for some people (e.g. some artists and celebrities) who had previously used Pages to communicate to fans. Because of the integration with a users personal profile, subscribers feel more socially connected despite the similarities of the content shared. Pages still provide significant utility to brands (which cant have profiles) and users, who use the analytics and multi-admin feature which only pages provide. Interestingly, Facebook released a guide to the Subscriptions product with a FAQ that indicates Facebook will soon be allowing users to share content from their Facebook updates directly on Twitter.

Figure 9: Facebook FAQ Indicates Impending Integration with Twitter

Source: Facebook 6

Users of Pages have been able to do this for some time; however Facebook has hesitated to allow this for individual users. The rolling out of subscriptions provides the perfect opportunity for this type of product; reducing the need for users to leave the Facebook platform for widespread distribution. The new feature can significantly add to the traffic coming to Facebook because pictures shared on Twitter will be hosted on Facebook; forcing users to come back to Facebook when they want to view those pictures. It certainly makes sense for Facebook to distribute updates as broadly as possible. Interestingly, sophisticated users will continue to post from Facebook, as opposed to posting from third party apps that share with Facebook, because Facebook gives preferential treatment to posts from its platform that lead to dramatically higher engagement. A recent study conducted by EdgerankChecker.com showed that posts from Facebook have dramatically higher engagement rates (3X-10X) then posts from third party apps.

Figure 10: Posts Directly On Facebook Dramatically Outperform Those Made Via Third Party Apps

Source: EdgeRankChecker.com

Anticipation Is Running High for f8, Facebooks Developer Conference on September 22, 2011
On Thursday, September 22, 2011 Facebook will host its f8 Developer Conference in San Francisco. The major buzz leading up to Thursday is the impending launch of Facebooks music platform called Vibes. Among the details that have been leaked over the last few weeks is that rather than offering their own content, Facebook will be integrating with various providers, reportedly including Spotify, MOG, Rdio, SoundCloud, Deezer, VEVO and Rhapsody. According to Facebook, when Spotify integrated Facebook Connect, they saw a 400% increase in traffic from Facebook. Not only does Facebook have potential as a traffic driver to services it integrates with, it also can serve as a giant source of information. Being able to see how users progress from songs-to-song on multiple platforms can allow Facebook to tailor continuous play-lists to users with an infinite amount of data to pull from. Significant features for Vibes will include: Track Unification: Users who subscribe to any one of the integrated music services will be able to listen to a song shared by a friend; even if they do not have the same service. Scrobbling (a term coined by Last.fm): Songs that are listened to will automatically appear in the Newsfeeds of your friends, adding a social element to music. Music Dashboard: Appearing on the left side of a users home page will be functions such as: o Recommended Songs. o Recent Listens o Top Songs o Top Albums o Music Notifications (Notifies when a friend has listened to a song you recommended) Happening Now Ticker: Songs that are being played now throughout a users social network Snapshot: A page showing all the songs you have played with a particular service While the new music integration has been the most widely discussed, other anticipated news include enhancements to photos, new mobile apps, and maybe even an official Facebook iPad app (a glaring deficiency given the global popularity of the iPad).

Facebook Adds Erskine Bowles to Board, Further Bolstering Washington Ties

On September 7th Facebook announced that Erskine Bowles will be joining the companys board. Bowles is currently the President of University of North Carolina House Chief of Staff, but is most famous for having previously been the Whitehouse Chief of Staff under Bill Clinton from 1996-1998. More recently, Bowles was Co-Chairman of Pres. Obamas National Commission of Fiscal Responsibility and Reform, a member of the National Security Council, the National Economic Council, and a board member of Morgan Stanley. The move further adds another major name to the list of Washington insiders now part of the Facebook team. This year alone, Facebook has hired: Joe Lockhart: Former Clinton Era White House Spokesman Marne Levine: The National Economic Councils Chief of Staff Joel Kaplan: Deputy Chief of Staff under Pres. Bush

Facebooks COO Sheryl Sandberg also has considerable clout in Washington, having served as Chief of Staff for the Treasury Department under Pres. Clinton. Prior to Bowles joining, the most recent addition to the Facebook Board was Netflix CEO, Reed Hastings, added to board in June.

Facebooks Current Board: Mark Zuckerberg, Founder Marc Andreessen, Andreessen Horowitz Jim Breyer, Accel Partners Donald Graham, The Washington Post Peter Thiel, Clarium Capital Reed Hastings, Netflix Erskine Bowles, President Emeritus of UNC

Facebooks early and continuing focus on Washington is another indication of how strategically forward thinking Facebook is. It took Google years to build a meaningful presence in D.C., and Google continues to pay a heavy price for that mistake. We believe government regulation is the biggest risk to Facebook, and the best way to address that risk is with a powerful team of Washington insiders. 8

INAUGURAL SECOND INTERNET CONFERENCE * SANTA MONICA, CA * SEPTEMBER 7, 2011

The Wedbush Private Shares Groups mission is to connect institutional investors with rapidly scaling private companies being born out of the transformational social media and mobile revolutions. On September 7th, Wedbushs Private Shares Group hosted our Inaugural Second Internet Conference at The Loews Hotel in Santa Monica California, reflecting another step in this effort. The conference provided a platform for the CEOs of ten dynamic Second Internet companies to articulate the factors fueling the tremendous growth of the businesses they lead. To provide additional context on the macro investing and sector trends, we included one of Silicon Beachs leading venture investors (Mark Suster from GRP) and a strategy consultant (Matthew LeMerle from Booz Allen) with over twenty years of experience helping Fortune 500 companies adapt to the changing technology landscape. The fireside chat format employed created an intimate environment enabling our audience to really get to know the CEOs and the companies they lead. Click below to view presentations from the conference: Introduction:http://bit.ly/qpvfeI Appia:http://bit.ly/no1x4G Badgeville:http://bit.ly/ojY5hP GRPPartners:http://bit.ly/pqUiDT Betterworks:http://bit.ly/mQidgF Kabam:http://bit.ly/qijyEo Klout:http://bit.ly/qb6N7x MyLife:http://bit.ly/o24VuI Machinima:http://bit.ly/p6t68b Booz&Co.:http://bit.ly/r2jexr BAT:http://bit.ly/pl7Ghu

ShoeDazzle:http://bit.ly/pR80qo QuePasa:http://bit.ly/oVSZ3m

For more information on the Second Internet Conference and the presenting companies, click here: http://bit.ly/nK6A53 We look forward to seeing you all at the Second Second Internet Conference!

SOCIAL COMMERCE DINNER * NEW YORK CITY * SEPTEMBER 13, 2011

On September 13th, Wedbush hosted a dinner for clients featuring the CEOs from two of New Yorks hottest startups in the Social Commerce space, OpenSky and chloe + isabel. This event was part of our monthly dinner series, organized to introduce our clients to the Second Internets most important topics from the perspective of CEOs of leading Second Internet companies. Following our typical format, each CEO spoke for 6-8 minutes to introduce themselves and their company, followed by 90 minutes of questions from our clients and discussion. Below is a recap of the event: John Caplan, CEO of OpenSky kicked off the discussion. Prior to founding OpenSky, Caplan was the CEO of Ford Models, after serving as President of About.com. OpenSky is a curated shopping experience that helps shoppers discover, buy and share the perfect finds tailored to their interests. Users choose and connect to their own team of personal shoppers from OpenSkys network of expert chefs, stylists, designers and celebrities to discover handpicked productsjust for them.

Figure 11: OpenSky Provides A Curated Shopping Experience

Source: OpenSky 10

Caplan described OpenSky as a Twitter for social commerce, with many of the most popular curators on the platform actually cross promoting their offerings with other social platforms like Twitter, Facebook and Tumblr. As an example, Chef Bobby Flay, with over 350,000 on Twitter was well positioned to monetize his social influence through the OpenSky platform; and he has been able to amass over 120,000 followers on OpenSky in less than 12 weeks.

Figure 12: Celebrity Chef Bobby Flay Has Amassed Over 120K OpenSky Followers Within 3 Months

Source: OpenSky Curators are compensated with 12.5% of all profits from individuals which they have brought on to the platform, as well as an addition 37.5% of profits from sales from items theyve personally curated. In addition to benefitting from revenue generated both directly and indirectly, part of the value proposition to curators is OpenSkys ability to negotiate with the manufacturer so that celebrities have the flexibility to offer great deals to their followers. OpenSkys merchandising strategy includes offering an item at an initial discount, and then alerting followers of the discount, which drives users to the site. Because followers are socially attached to those they follow, they are far more likely to open emails sent via OpenSky (Click Thru Rates are five times normal), in addition to significantly lower subscriber acquisition cost relative to Groupon or deal sites. In addition, because the curators add a social element to the purchase, items are far less likely to be returned then when purchased through traditional internet retail channels. (OpenSky has a 1% return rate vs. Amazons 9%). Explained Caplan, Since uploaded recommendations are not scripted, but rather are the genuine point-of-view of the curators, customers know what theyre getting and have a strong connection to both the items and the talent. Some other interesting stats which were shared at the dinner: Over two million connections have been made on the OpenSky platform Over 500,000 shoppers have joined the service nd The companys revenue run rate exceeds $10 million (in the 22 week) 50% of shoppers who made a first purchase have made a follow-on purchase 80% of members are women with average income between $70,000-$100,000

OpenSky closed a $6 million Series B in April, 2010, led by Highland Capital and Canaan Partners. A year earlier, the same two funds together with Ron Conway had invested $5 million in a Series A round when OpenSky was a platform for bloggers to drive commerce. The second speaker at our dinner was Chantel Waterbury, CEO of chloe + isabel, a social-selling site for fashion jewelry that is tapping into a new generation of entrepreneurial women. Before starting chloe + isabel, Waterbury had been in corporate buying for large retailers (including GAP, LVMH and Macys) as well as lead design and product development for famous designer brands. After 15 years of jewelry merchandising, Waterbury recognized the tremendous opportunities for disruption in the $115B direct selling industry. And along the way, she planned to empower a new generation of savvy young women. chloe + isabel wanted to differentiate itself from the brick-and-mortar jewelry sales model where most sales people, as one of our guests pointed out, are there to keep you from stealing, rather than to personalize the experience. The company designs every piece in their New York office and produces the jewelry overseas. Users can sign up to become chloe + isabel merchandisers to build their own customized online boutique, keeping 30% as commission from all sales. Merchandisers can curate the collection, and receive real-time trends, marketing tools and virtual leadership training to support their success.

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Figure 13: chloe + isabel Is Disrupting Traditional Jewelry Retailing

Source: chloe + isabel The companys software allows for easy integration with social sites turning merchandisers into personal buyers and curators for their entire social network. Within the first few months of its Beta rollout (chloe + isabel just emerged from Beta this month), a pool of 30+ merchandisers generated six figures in sales, demonstrating how powerful social commerce can be. In November 2010, the company closed their Series A raising $3.25M from investors including First Round Capital, Floodgate, SV Angel Ron Conway, Founder Collectives Caterina Fake, Felicis Ventures Aydin Senkut, Ashton Kutcher, The Consiglieres Mike Duda and Forerunner Ventures Kirsten Green.

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Social Commerce IQ Index: Top 3 Takeaways for Retailers

Guest post by Wade Gerten, Founder & CEO of 8thBridge

With over 750 million users worldwide, Facebook is fast becoming the most important website for retailers. A new study released by 8thBridge analyzes the top 200 retailers on Facebook and ranks them based on their Social Commerce IQ. The report examines what strategies are the most critical for success and how Facebook users engage with brands.

Demystifying The Social Commerce IQ Score When analyzing a brands Social Commerce IQ our analysis took into account three important factors that brands should optimize for: reach, engagement, and shopping. Each of these factors is explained below: 1. 2. 3. Reach - How many fans the brand has on Facebook, how often the brand publishes status updates. Engagement - Weighted fan engagement with all fan page status updates, customized landing tab for non-fans, gaming applications for Facebook fans, percent of traffic that comes directly from Facebook. Shopping - How often the brand publishes shopping updates on Facebook (coupon, sale, and product posts), weighted fan engagement with shopping fan page status updates, store offered to fans on fan page, store finder application offered to fan on fan page, customer service offered to all fans on fan page, Facebook integration on website (Facebook Login, Facebook Like button on product pages, FB Share, Send, and Like Box plugins).

The top 5 retailers by Social Commerce IQ are as follows: 92 - GameStop 89 - Victorias Secret 84 - Walmart 79 - Sephora 78 Clinique Key Takeaways from the study:

1. Sale status updates have 30% higher engagement rate

Facebook status updates serve as one of the main communication channels for a retailer. The type of status update a retailer shares will affect how fans perceive the retailer and feel motivated to engage. 8thBridge analyzed 7,354 status updates for nearly 200 retailers during the month of July on Facebook and found Sales status updates had the highest engagement rate.

Figure 14: Sales Communicated In Status Updates Greatly Increase Engagement

Source: 8th Bridge

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Engagement rate by type of status update is listed below: Sale Status Updates 2.37% All Status Updates 1.81% Fan Status Updates 1.71% Product Status Updates 1.55% Coupon Status Updates 1.08%

2. Most Likes on product pages come from product owners

In a survey of over 1,200 U.S. based Facebook users, 57% of respondents said they clicked the Facebook Like button on product page because they already owned the product.

Figure 15: Product Owners Are Driving Likes

th Source: 8 Bridge

3. Facebook Influences Purchases

In the survey we wanted to determine to what extent Facebook influenced purchases. First, we asked users whether they were more likely to buy a product if it had more Facebook Likes on the page. Approximately 35% of respondents said they were more likely to buy the product. This means that adding the Like button to product pages for retailers is a low-risk initiative.

Figure 16: Social Recommendations Influencing Purchase Decisions

th Source: 8 Bridge

Additionally, we asked: Have you been driven to make a purchase based on a Facebook recommendation? to which 16% of respondents answered yes. Taking this percent and applying to the U.S. Facebook population of 138 million equates to roughly 22 million people who have been driven to make a purchase based on a Facebook recommendation. To download the entire report for free click here.

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Figure 17:

th Source: 8 Bridge

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Moving Away from Traditional Banners

Guest Post by Chris Cunningham, Co-Founder & CEO of appssavvy

It is no secret that banners fail to engage consumers. appssavvy, a social activity company has unlocked a new opportunity in display advertising that reaches and resonates with consumers by delivering ads in the stream of a social activity, such as sharing content, checking-in, taking polls and entering contests, and collecting, sending and earning virtual goods, to name a few, are performed. This month, appssavvy launched a new platform, adtivity, focusing solely on new, activity-based media. The technology enables publishers to unlock new, high-impact, center-of-the-page display advertising opportunities in environments where social activities take place, like apps or games. This rapidly growing shift in Internet behavior to activities has led the company to no longer sell traditional banner advertising as its been our experience that advertising around the experience doesnt work the future of advertising is focused on what people are doing, not where theyre doing it.

Figure 18: Activity Based Media Outperforms Traditional Banners

Source: appssavvy In turn, advertisers can now buy audiences across the web, social media and mobile through appssavvys adtivity platform as they perform social activities and exactly how they do traditional display advertising. In addition to appssavvys technology platform generating activity-based advertising opportunities for both publishers and advertisers at scale, the company says adtivity ads delivered in the stream of a social activity, right in the middle of the page, reach people when theyre most engaged. Campaigns to date are converting on average of two percent, significantly better than traditional banner ads, and often much higher. Earlier this year, the company released research demonstrating activity-based advertising outperformed standard display ads by a multiple of 11 and more than doubled rich media ads. At launch, adtivity can reach 127 million people performing 1.4 billion social activities each month and growing. Among the publishers that have integrated the adtivity technology into their social activities include 6waves, 50 Cubes, Friend.ly, iWin, GameDuell, OMGPOP and Social Graph Studios Status Shuffle, to name a few. Colin Sutton, U.S. director of OMD Word, the social unit of OMD, part of Omnicom Group said, Ive seen the success of social activity at the campaign level and its a space that we are following with great interest as we leverage social data and the opportunities that are developing to support authenticate connections for our brands with their customers. 16

DEAL COMMERCE Yipit Data Shows Groupon Gains Market Share, Total Competitors Surpass 400
Data from Daily Deals aggregator Yipit estimates North American Daily Deals revenue of $228 MM for August, up 9% from July, and implying a $2.74B annual revenue run rate for the industry. Groupons revenue rose 13% in August, to $121 MM, growing its industry leading market share by 3% (to 53%). The industrys second largest player, LivingSocial, saw a 3% drop in revenue in August to $45 million, as its market share fell to 20% from 22% in July.

Figure 19: Daily Deals Data August 2011

Source: Yipit The industry continues to experience rapid turnover; with 29 Deal Commerce sites shuttering operations in August, while 53 new Deal Commerce companies launched, bringing the total Deal Commerce universe tracked by Yipit to over 400 companies. Of the universe that Yipit has tracked this year, nearly one-third of all daily deals sites 170 of 530 have shut down or been sold. Among newer entrants expected to make an impact, Google Offers saw a 23% drop in revenue to $254K in the three cities it currently operates (Portland, New York and San Francisco). However, no one doubts Googles commitment to local, with recent moves including their acquisition of Zagats, Dealmap (a start-up that aggregates deals from hundreds of sites), and DailyDeal, a Germanbased deal company. Regarding the acquisitions, Google commented, As more and more people go online to find the latest, most relevant deals, were exploring new ways to help consumers get the best local deals out there. Another potential major player is Amazon with its Amazon Local offering, powered by LivingSocial. While available in just three major markets (Los Angeles, Chicago and Seattle), Amazon Local revenue topped $1.4 million in August, placing it in the Top 10 of all North American sites. The recent launch of an ad subsidized Kindle (priced at $114 vs. $139 for the unsubsidized Kindle) will give Amazon another platform to promote deals, enabling users to redeem coupons with the click of a button.

Figure 20: Advertising Subsidized Kindles Could Provide An Additional Distribution Platform For Amazons Deals

Source: Amazon 17

Among those recently leaving the fray is Facebook, as they ended their efforts after releasing a product four months ago in five cities, with Facebook stating: After testing Deals for four months, weve decided to end our Deals product in the coming weeks. We think there is a lot of power in a social approach to driving people into local businesses. We remain committed to building products to help local businesses connect with people, like Ads, Pages, Sponsored Stories, and Check-in Deals. Weve learned a lot from our test and well continue to evaluate how to best serve local businesses. Yelp also curtailed their presence in the deals space, although they are continuing to offer a smaller number of deals. Yelp is cutting its sales force in half (from 30 to 15), and shifting the focus of its deals efforts to emphasize deals on the Yelp pages of local businesses. While there were numerous factors driving Yelps decision, we find it interesting that a recent study found that companies running deals see a significant increase in reviews of their business, but that reviews that have the words Groupon or Coupon had ratings that were on average 10% lower, and posts with both were rated 20% lower.

Figure 21: Yelp Ratings From Customers Mentioning Groupons or Coupons Were Lower Than Average

Source: Byers-Zervas-Mitzenmacher Study

We offer several possible explanations as to why Yelp ratings could be negatively impacted by deals: 1. 2. Overwhelmed Merchants: A large influx of customers may overwhelm merchants causing comprises in customer experience Adapting to margin squeezes: Merchants at significantly lowered margins because of discounted pricing may cut corners to control costs Cognitive Dissonance: During normal transactions, patrons may add a positive skew to an experience to justify their decision to transact. Buying a Groupon eliminates that need to skew because the justification is a significantly cheaper price. Underlying Positive Skew: Prior to a Groupon a business often has only a couple reviews which are often by loyal patrons and management or family, all of whom are positively biased

3.

4.

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SOCIAL GAMING August Shows Gains, Driven By Smashing Debut of The Sims Social
In total the top 10 games rose 8% in August from 255 million Monthly Active Users (MAUs) to 278 million, benefitting from the hugely popular launch of The Sims Social game.
Figure 22: August Gaming Data For Top 10 Games by MAUs

Rank8/4/2011 Rank9/8/2011 AppName Developer 8/4/2011 1 1 CityVille Zynga 78,413,520 2 2 Empires&Allies Zynga 44,526,082 4 3 TexasHoldEmPoker Zynga 34,138,108 3 4 FarmVille Zynga 34,342,312 N/A 5 TheSimsSocial EA N/A 5 6 GardensofTime Playdom 16,082,300 10 7 DiamondDash wooga 9,801,886 7 8 CafWorldbyZynga Zynga 10,930,000 8 9 BejeweledBlitz PopcapGames 10,481,316 11 10 BubbleIsland wooga 9,330,899 248,046,423
Source: Appdata, Wedbush Securities Inc.

9/8/2011 75,661,529 40,887,353 36,686,089 35,566,567 30,841,042 17,279,943 11,250,312 10,300,289 9,938,823 9,912,576 278,324,523

Change 3.51% 8.17% 7.46% 3.56% 7.45% 14.78% 5.76% 5.18% 6.23% 12.21%

Outside of The Sims Social, the other nine top games were flat at 248 million MAUS. Its also interesting to note that the total number of MAUs from the top 10 games is down about 8% from January, when the ecosystem was benefiting from the smash debut of Cityville, the fastest growing game in the history of Facebook gaming.

Figure 23: MAUs For Top 10 Games Over Time

Source: AppData, Wedbush Securities, Inc.

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The Sims Social

On August 8th Electronic Arts officially launched their blockbuster Sims franchise on Facebook, titling the game (which was in beta at the time) The Sims Social. Sims was the first highest quality AAA game to be brought onto Facebook. Usage rocketed, scaling to over 48.5 MM monthly uniques; propelling Sims to the second most popular game on Facebook after CityVille, and EA the second most popular developer with over 90M monthly uniques.

Figure 24: The Sims Social MAUs Since Launch

Source: Appdata, Wedbush Securities, Inc. The rapid growth of The Sims Social highlights the ability of properties with strong brands and large gamer user bases off of Facebook to rapidly gain momentum on the Facebook platform

Adventure World Highlights The Evolving World Of Increasingly Costly Social Gaming

Zyngas latest game for Facebook titled Adventure World is indicative of the evolution of social gaming from low budget, casual games in to graphic intensive games that take longer and cost more to develop. Adventure World was created out of Zyngas Boston office, where the development team spent a year building a flash-based game engine to optimize the game play. With enhanced rendering technology, the game can support 3D like graphics which are superior to current social games. By far Zyngas most ambitious game to date, Adventure World raises the stakes for all developers in the space.

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To highlight the complexity of Adventure World, Zynga released the following statistics: 20,000+ different objects within the game 5 worlds, 30 environments and 200 quests to explore Over 40x the size of past Zynga games 1,000+ different art assets 10,000+ avatar variations to choose from Available in 8 different languages Level 40 is currently as high as a player can go 150 Adventure World Neighbors is the max

Players are represented by 3D avatars; stockpiling coins and completing objectives in order to reach El Dorado (City of Gold). The game is the first puzzle based game from Zynga, where actions individuals take while playing will significantly impact the outcome of the game. The games most obvious social integration is the concept of players needing to invite friends (maximum of twelve) to participate in certain adventures in order to be able to proceed. While its too early to declare Adventure World a hit, the game surpassed one million MAUs in its 10th day of release.

Figure 25: Adventure World MAUs Since Launch

Source: Appdata, Wedbush Securities, Inc.

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Kabam Study Shows Social Gaming Cannibalizing Console Gaming

The games industry is evolving rapidly, and no category is evolving more rapidly than social games. Non-existent four years ago, this new category of free-to-play digital games has grown into a disruptive force in the overall $50 billion dollar games industry. An industry that is growing so rapidly goes through changes and requires on-going study to understand the changes in consumer behaviors, attitudes, habits and practices. To better understand this rapidly evolving market, Kabam partnered with Information Solutions Group and surveyed 2,522 respondents, with 1,412 respondents falling into the desired audience of social game players in the U.S. In addition, over 6,000 Kabam players were surveyed. The outcome: a nationally projectable research study of U.S. social gamers that goes further in segmenting and identifying the gameplay habits of social gamers than previous studies weve seen. We got an early peek at the results that Kabam and ISG will be releasing later this week, and a couple of key findings jumped out at us. Social gamers are not all middle-aged women playing casual games The research study revealed that social gamers are NOT all the same (as suggested by previous research), but vary greatly by segment and brand. Two broad segments with different demographics and behaviors emerged: Casual Social Gamers This is the group who play casual social games like Bejeweled Blitz, Diner Dash, CityVille, FarmVille, Texas Hold Em, etc. They skew 61% female, with 62% at least 40 years old. Hardcore Social Gamers There is a large segment of gamers who are playing social games more akin to the hardcore games found on consoles and retail PC games -strategy, RPG, FPS style games. Their profile is more in line with the traditional demographic skews of what we consider core gamers mostly male, 57% under age 40, and an average age of 37.

Gamer behavior patterns are already shifting The growth of social games is precipitating a discernible shift in gamer behavior, namely a reduction in time and money spent on other gaming platforms. As the chart below demonstrates, roughly 27% of social game players who played games on other platforms report a decline in the amount of time they are playing on those other platforms. Equally important, this decline in core platform play is also negatively impacting console game purchases, as roughly one quarter of social game players who play console games report decreasing their purchases of console products by an average of 50%. When comparing Kabam players on these same metrics, the research reports those numbers grow even greater 55% reported a decline in their gameplay on other platforms, with those reporting a decline in play averaging a reduction in console purchases of 65%.

Figure 26: Gamers Are Shifting To Social Gaming From Console Gaming

Source: Company data, Wedbush Securities, Inc. We look forward to the seeing the complete report when it is released this Thursday September 22nd. 22

SIGN THAT THE SECOND INTERNET IS UPON US

Figure 27: View From The Stage At Wedbushs Inaugural Second Internet Conference

Source: Wedbush Securities, Inc.

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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 Streets 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.

About Michael Silverstein

Prior to forming Wedbushs Private Shares Group, Michael and Lou first teamed up at Bolt Media. Michaels previous experience was as an equity analyst at Goldman Sachs where he covered the leisure sector. Michael left Bolt to pursue his MBA at UCLA Anderson. While at UCLA, Michael expanded his understanding of digital media investing as an intern at Redpoint Ventures and Media Rights Capital. Michael has a BA in History from Duke University .

Contact Wedbush Securities Private Shares Group:

Lou Kerner Managing Director, Private Shares Group (212) 668-9874 Lou.kerner@wedbush.com @loukerner Michael Silverstein (213) 688-6663 michael.silverstein@wedbush.com Kevin Cohen Director of Trading, Private Shares Group (213) 688-8089 kevin.cohen@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 Barrons. 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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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 September 20, 2011 Company Facebook (private) Klout (private) Google eBay Electronic Arts Disclosure 12 12 1 1 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 analysts 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 investors 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. 25

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 EQUITY TRADING Los Angeles (213) 688-4470 / (800) 421-0178 * EQUITY SALES Los Angeles (800) 444-8076 CORPORATE HEADQUARTERS (213) 688-8000

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