Technology, Media, and Telecom 2009 Outlook - A Fundamental and Policy Perspective
Summary and Conclusion
In this report, Stanford Group’s technology, media and telecom team of fundamental and policy
analysts discuss the trends, opportunities and potential risks in 2009.
Enterprise Software: Enterprise Software demand is positioned to deteriorate heading into 2009,
although an 11% decline in software-company forward four quarter earnings expectations since
August of 2008 and 14x P/E might finally adequately reflect the weakened demand environment.
Nevertheless, with a second-half economic recovery still tenuous, our bias remains defensive. BMC
Software is our top pick.
Identity Solutions: U.S. Identity Solutions projects should survive intact through the Presidential
transition and the industry should continue to do well in the Obama Administration. Still, the
distractions of the transition – magnified by the economic crisis – will slow some projects and delay
the creation of new ones. We forecast flat government spending for 2009 outside of several key
programs, as a new Administration takes a year to review and reshape existing initiatives.
Communication Towers: Towers will grow throughout the economic recession, but deleveraging
will be the primary use of free cash flow. Credit market relief is likely required before a stock price
recovery can be sustained.
Internet Advertising: The Internet will make further market share gains. But, since the advertising
industry will likely contract, this does not create a compelling investment opportunity. As the leader,
concentrated in the most resilient subsegment, Google is our only Buy-rated stock.
Media, Internet & Communications: US advertising expenditure growth has deteriorated due to the
economic recession, credit crunch and the housing slump. Consumer spending may be further
hindered following the failures of some of Wall Street's most established institutions and further
tightening of bank lending standards. An additional drop in advertising demand from financials, real
estate and automotives seems likely while hotel/motels and other categories of advertisers may also
scale back budgets. We forecast a 6% decline in total US ad spend in 2009. Ancillary revenues could
also be adversely impacted by tightening consumer wallets and shrinking discretionary spending.
Although we anticipate that both revenue and cash flow growth may moderate as a result of these
conditions, we expect that the large-capitalization media companies will weather the storm better
than most.
Telecom Services: We remain cautious in the U.S. wireless industry and expect decelerating
wireless subscriber growth. RLECs remain an attractive defensive investment vehicle, owing to
relatively stable free cash flow and favorable dividend yield. CLECs face strong economic
headwinds, which may result in a lengthening of sales cycles, an increase in customer churn, and a
soft pricing environment.

Internet Software & Services: In spite of the global recession, growing Internet use and denser
content will keep fundamental performance of Internet Infrastructure companies ahead of the
broader economy, but valuations likely will remain at historically low levels on a relative basis due
to overriding market sentiment. Investors should look to cash-rich providers for the greatest
likelihood of superior returns when market momentum turns positive.
Media and Telecom Policy: The election of President Obama and the newly increased Democratic
majorities in Congress are likely to shift the regulatory momentum away from the largest carriers –
Verizon and AT&T – and toward competitors and other users (e.g., applications companies) of
AT&T and Verizon’s networks. We also anticipate government activity that could create new
challenges for certain ad-supported media, including cable content owners and Internet advertisers.
Long Ideas: Akamai (AKAM; Buy), American Tower (AMT; Buy), BMC Software (BMC; Buy),
Cbeyond (CBEY; Buy), CenturyTel (CTL; Buy), Consolidated (CNSL; Buy), Crown Castle (CCI;
Buy), Embarq (EQ; Buy), Equinix (EQIX; Buy), Frontier (FTR; Buy), Google (GOOG; Buy),
Guidance Software (GUID; Buy), L-1 Identity Solutions (ID; Buy), Leap Wireless (LEAP; Buy),
McAfee (MFE; Buy), MetroPCS (PCS; Buy), Microsoft (MSFT; Buy), NII Holding (NIHD; Buy),
Priceline (PCLN; Buy), SBA Communications (SBAC; Buy), Sourcefire (FIRE; Buy), SourceForge
(LNUX; Buy), Time Warner Inc (TWX; Buy), and Windstream (WIN; Buy).
Short Ideas: Amazon (AMZN; Sell), Clearwire (CLWR; Sell), Iowa Telecom (IWA; Sell), Lamar
Advertising (LAMR; Sell), Level 3 Communications (LVLT; Sell) and Marchex (MCHX; Sell).

Table of Contents
TECHNOLOGY, MEDIA, AND TELECOM 2009 OUTLOOK - A FUNDAMENTAL AND POLICY PERSPECTIVE................... 1
ENTERPRISE SOFTWARE – KEVIN BUTTIGIEG............................................................................................................ 5
IDENTITY SOLUTIONS– JEREMY GRANT .................................................................................................................. 14
Update on Key Identity Solutions Programs ..................................................................................................... 19
DoD Biometrics..............................................................................................................................................................19
US-VISIT .......................................................................................................................................................................21
FBI Next Generation Identification (NGI) ......................................................................................................................23
Real ID ...........................................................................................................................................................................23
HSPD-12 ........................................................................................................................................................................24
ePassport.........................................................................................................................................................................25
Passport Card..................................................................................................................................................................26
Western Hemisphere Travel Initiative (WHTI) ...............................................................................................................26
TWIC/HAZPRINT.........................................................................................................................................................27
Registered Traveler.........................................................................................................................................................27
Cyber Security................................................................................................................................................................28
RFID...............................................................................................................................................................................29
Identity Across the Pond…............................................................................................................................... 30
M&A Review and Outlook................................................................................................................................ 32
INTERNET ADVERTISING – CLAYTON F. MORAN..................................................................................................... 35
COMMUNICATION TOWERS – CLAYTON F. MORAN................................................................................................. 43
Summary ........................................................................................................................................................... 43
Operating Trends.............................................................................................................................................. 44
Credit Update ................................................................................................................................................... 45
Risks.................................................................................................................................................................. 46
Conclusion........................................................................................................................................................ 47
MEDIA, INTERNET & COMMUNICATIONS – FREDERICK W. MORAN........................................................................ 48
Broadcasting and Outdoor Advertising Slump in 2009..................................................................................... 48
Radio ..............................................................................................................................................................................48
Outdoor Advertising.......................................................................................................................................................48
Large Media May Grow Through the Downturn............................................................................................... 53
Ecommerce Growth Rate Deceleration in 2009 ................................................................................................ 56
Domestic B2C Ecommerce.............................................................................................................................................56
International B2C Ecommerce........................................................................................................................................57
Travel Ecommerce..........................................................................................................................................................57
TELECOM SERVICES – MICHAEL NELSON ............................................................................................................... 61
Wireless Telecom Services................................................................................................................................ 61
Subscriber Growth Likely to Significantly Slow.............................................................................................................61
Data Services May Help Balance ARPU Pressure ..........................................................................................................65
Capital Spending May Dilute Free Cash Flow ................................................................................................................68
Wireline Telecom Services................................................................................................................................ 70
RLECs Offer a Defensive Investment Opportunity.........................................................................................................70
CLECs ............................................................................................................................................................................71
INTERNET SOFTWARE & SERVICES– RODNEY RATLIFF, CFA ................................................................................. 73
Overview and Outlook ...................................................................................................................................... 74
Primary Drivers Remain In Place ...................................................................................................................................74
Content Delivery ............................................................................................................................................................75
Colocation and Hosting ..................................................................................................................................................76
Conclusion......................................................................................................................................................................77
Summary Comment ........................................................................................................................................................79
MEDIA AND TELECOM POLICY – PAUL GALLANT AND PAUL GLENCHUR................................................................ 80
Democrats Complete D.C. Takeover ................................................................................................................. 80
Increased Scrutiny of Largest Carriers Could Boost Smaller Players .............................................................. 80
Rural Broadband Deployment ........................................................................................................................... 81
Risks for Ad-Supported Content – Both Traditional and Internet-Based .......................................................... 81
Remote DVR Court Case .................................................................................................................................. 81
Government Scrutiny of Internet Advertising .................................................................................................... 82
Competition Policy ........................................................................................................................................... 82

Table of Exhibits
Exhibit 1: Software Demand ............................................................................................................................................ 8
Exhibit 2: Software Demand - Table ............................................................................................................................... 8
Exhibit 3: ISM Implied Decline in Software Demand..................................................................................................... 9
Exhibit 4: ISM By Month and Rolling Three Months .................................................................................................. 10
Exhibit 5: Software Industry Forward Four Quarter P/E, 2002-Present ................................................................... 11
Exhibit 6: Software Industry Forward Four Quarter P/E, 1989-Present ................................................................... 12
Exhibit 7: Software Industry Forward Four Quarter EPS Expectations, 2002-Present ........................................... 12
Exhibit 8: Software Industry Forward Four Quarter EPS Expectations, 1989-Present ........................................... 13
Exhibit 9: Past Recessions and Software Earnings Expectations Declines ................................................................. 13
Exhibit 10: Forecast Spending and Growth in Major U.S. ID Solution Programs .................................................... 16
Exhibit 11: DoD Passive RFID (pRFID) Contract Details............................................................................................ 29
Exhibit 12: Relative Valuation, Identity Solutions Sector ............................................................................................ 34
Exhibit 13: U.S. Internet Advertising Revenue ............................................................................................................. 36
Exhibit 14: Share of Global Ad Spend by Medium, 2007-2011E................................................................................. 36
Exhibit 15: First Half 2008 Internet Advertising Break Down.................................................................................... 37
Exhibit 16: U.S. Internet Advertising Reach, October 2008......................................................................................... 38
Exhibit 17: Internet Ad Revenue by Category .............................................................................................................. 39
Exhibit 18: Internet Advertising .................................................................................................................................... 42
Exhibit 19: Estimated New Sites .................................................................................................................................... 44
Exhibit 20: Nearest Tower Debt Refinancings .............................................................................................................. 45
Exhibit 21: SBA Communications 2008 Debt Reduction.............................................................................................. 46
Exhibit 22: Radio Industry Monthly Revenue Growth ................................................................................................ 51
Exhibit 23: Broadcasting and Outdoor Advertising ..................................................................................................... 52
Exhibit 24: 2008 Movie Distribution Overall Gross Reached $9.63 Billion Compared to $9.66 Billion in 2007 ..... 53
Exhibit 25: Media & Internet......................................................................................................................................... 55
Exhibit 26: Travel Ecommerce ...................................................................................................................................... 59
Exhibit 27: Internet & Ecommerce ............................................................................................................................... 60
Exhibit 28: We Expect Wireless Penetration to Reach 98% By 2011.......................................................................... 62
Exhibit 29: We Project Net Additions to Remain Weak............................................................................................... 63
Exhibit 30: We Forecast 13.5 Million Net Adds During 2009 ...................................................................................... 64
Exhibit 31: U.S. Wireless Industry Prepaid Versus Postpaid Growth ........................................................................ 65
Exhibit 32: Data ARPU Should Help Stabilize Pricing Pressure................................................................................. 66
Exhibit 33: Mobile Data Application Companies .......................................................................................................... 67
Exhibit 34: We Forecast $22.5 billion in Wireless Capital Expenditures During 2009.............................................. 68
Exhibit 35: Share of Ending Subscribers ....................................................................................................................... 69
Exhibit 36: Wireless Stock Recommendations .............................................................................................................. 69
Exhibit 37: RLEC Relative Valuation Metrics .............................................................................................................. 70
Exhibit 38: Access Line Losses Remain Robust ............................................................................................................ 71
Exhibit 39: RLEC Relative Valuation Metrics .............................................................................................................. 72
Exhibit 40: Estimated Growth Of Internet Traffic, Exabytes, 2005-2010 .................................................................. 75
Exhibit 41: Forecast for North American CDN market, 2006-2012 ............................................................................ 76
Exhibit 42: Estimated Web Hosting Revenue, 2007-2012............................................................................................. 77

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