The Value of Intangibles

Issue 132, October 26, 2023

We continue to be fascinated by the value proposition of intangibles. This isn’t some weird magical idea. We’re talking about assets that have no physical form but are nonetheless valuable. Considering that we are living in a digital marketplace, intangibility has a profound relevance despite our inherent and deeply programmed need to see, feel, and touch something tangible. If it can be seen, felt, and touched we believe it is real.

An intangible asset is non-monetary and not physical, and therefore cannot be manipulated physically. We cannot touch it, we cannot feel it and other than viewing it on a computer screen represented by the joining of millions of pixels, we actually cannot see it in three dimensions. Common types of intangible assets include brands, goodwill, patents, copyrights, trade names, trademarks, and intellectual property. Other types include social media feeds, digital images, bitcoin, blockchain, NFTs, and data created and managed in the digital realm. Businesses have several ways to value these assets, which can be challenging because of generally accepted accounting principles (GAAP). Individual value determination can only come from “viewing” the intangible via computer or mobile interface. Therefore, can we be sure it really exists and has value?

We rely upon accountants and financial professionals to dive deeply into financial data and report to others with reports and summaries. One often hears, “Tell me only what I need to know.” We expect data analysts and scientists to take on the heavy lifting to assess, interpret, and manipulate data and then report in a summary form. These experts are necessary because those asking questions and wanting information are uncomfortable with a medium that seems untouchable … intangible.

We wrote about the economics of intangibles in our book, The Truth About Transformation, and we’re going to do a quick recap here as an update on how important it is to think differently about how you value your assets.

The Intangible Nature of Data

Data has become today’s currency and we personally and professionally have grown more and more dependent upon it. The deeper, more authoritative, and descriptive the data, the more valuable it is and the more ways it can be used. In terms of context, younger generations don’t know a world without data access, digital interaction, and mobility. And all of us are navigating the world dominated by technology and more recently, generative AI. Many of the outcomes of language-based AI are intangible; these systems synthesize data into information and then into language-based output whose form is principally in the written word. And written words are generally considered intangible assets.

But let’s think about the data itself.  Data of course has always existed in the form of physical written words, tables, or logs.  The historical forms were tangible as they were written on paper, something that we could see, touch and feel. Therefore, we equated the content on paper as real and valuable. But digital technology has provided the ability for data to be collected, curated, and managed across systems — almost invisibly. Intangible. Despite the promise of digital, many organizations still struggle with how to value something that remains intangible.

Data touches almost everything in life. But it is intangible to most of us. It becomes real (although still intangible) when Alexa tells us we are out of detergent or Siri tells us we have lost our way. The organizational and societal benefits of amassing quality data and leveraging that data for research, analysis, generation of insights, measurement of performance, and even monetization via productization cannot be underestimated.

The way we work, interact, purchase, and behave has also changed because of technology and digital, but we remain anchored in the physical world. A world that is now tracked across nearly every point. But don’t start feeling too confident; the metaverse is quickly approaching which will dramatically change how we view ourselves as intangible avatars in an intangible digital environment. Have you been in a virtual meeting lately where some of the participants turned their avatars on and shut their video feeds off? Are the participants tangibly present? Were you interacting with the intangible avatar or the real person?

Businesses and consumers alike have the challenge of aligning value to something that can be interacted with visually and digitally but cannot be touched. The rapid adoption of mobile, utility-oriented apps and social media reflects how each relates to meeting a specific need, want, or way to communicate. Tech can clearly fulfill basic needs. However it is limited by all generations who still desire the physical construct of meeting and communicating with other humans physically.

Intangible Asset Measurement and Value

As data’s manifestation remains in the digital and virtual realm, humans struggle with understanding and determining its value. What measures do we use to calculate the value of data in how it is used to enhance human activity and intelligence? Information derived from data can be viewed by digital manipulation into categories, alerts, and calculations, but the data itself remains untouchable.

When we look at the traditional performance measures for businesses, IPOs are based on EBITA valuations that remain multiples based on promises and guesses of customer purchase and brand loyalty. The rapid pace of technological evolution adds complexity as young upstart companies can quickly gain market share without making any profit. With all the dynamics at play across rapidly changing consumer preferences and adoption, exacerbated by short attention spans and diminishing brand loyalty, financial performance is even harder to predict in tangible terms without contextual analysis along with the intangibility of technology, digital, and data.

Valuing data remains a struggle for many organizations given our desires for high-level summary data and visualization. We want major points communicated to us, see results in the short-term, and generally do not want to expend mental energy to derive our meanings and conclusions.

We will continue to be dependent and rely on data. Given the influence of technology and data, we will need to expand what we are capable of, enhanced by both. Our critical thinking skills will need to expand to accept how our lives will manifest in the digital realm.

Economist Erik Brynjolfsson, Director of the MIT Initiative on the Digital Economy “examines the effects of technologies on business strategy, productivity and performance, digital commerce, and intangible assets. He was among the first researchers to measure the productivity contributions of IT and the complementary role of organizational capital and other intangibles. His research provided the first quantification of online product variety value, often known as the long tail, and developed pricing and bundling models for information goods (Brynjolfsson, E. (Nd.).”

Any organization that produces data uses, analyzes, and sells data must come to grips with the economics of intangibility to determine the value of invisible assets without physical form. The valuation of a transformed business model must operate without hype or built on numbers pulled out of the air. Our default behaviors and perceptions are gut correlated to institutional knowledge and easily divert us from the true task at hand: Defining and valuing intangibles must be done concretely. This is the classic dilemma of determining value from vapor.

Technology and Intangibles

The implementation of technologies and the focus on data is critical for change and transformation for any organization in today’s digital world and runs counter to normal human desires and behaviors. Yes, some technologies can be implemented quickly to address a specific issue within an organizational silo or operational process. But most technological implementations take considerable planning starting with the understanding and detail surrounding current operational processes. How humans interact and complete work manually or technology-enabled directs how new technology will complement, address, or alter how work is accomplished. Digital is often not tangible; when it is, it is represented by lines of code, system diagrams, or front-end interfaces that serve the purpose of creating tangibility.

AI, like digital, manifests in intangible outputs. Yet, machine learning can produce touchable results. For example, how many sales resulted? How many customers interacted based on how AI communicated with them? AI and machine learning can lead to major learning, insights, and intelligence that can lead a human or a system to make decisions. Those decisions can be valued and correlated to sales, production improvements, customer engagement or conversion, market penetration, and more. Remember that humans first and foremost educate and inform the AI and machines and humans create the algorithms. Working with AI compels us to continuously exercise our critical thinking and assessment skills to evaluate the outputs. That human need will always be required regardless of how smart we believe we have made the technology and artificial intelligence.

The struggle in the age of digital and AI has been how to directly value what is represented, curated by, or produced by technology. The inability to effectively and realistically value the intangible continues to challenge organizations and investors alike. Put simply, with technology it is important to assess what data you need, how to collect it, and how to analyze it – all of which are intangible.

Intangibles and the Human Factor

One of the seminal debates in the current digital economy is how to establish the tangible or perceived value of data and technology when results may only come in the longer term. The human desire to see short-term tangible results is compromised.

Human behaviors geared towards immediate goal attainment and reward often are one of the causes of derailment from long-term value-producing efforts and commitments in an organization. Our desire for rewards, and the dopamine boost that comes from such, transcends to nearly all humans across an organizational enterprise via team and individual performance plan bonus and reward systems, sales staff compensation plans, and even SMART goals that denote how “success” is defined.

Although short-term satisfaction is generally tangible, it may work against longer-term goals that are intangible. Most short-term thinking is based on the feel-good principle and a sense of accomplishment to “feel” good and to “feel” satisfied. The consequences become apparent in the long term, whether you consider the future to be a month, a year, or five years from now. The omissions, faults, or gaps created by the short-term decision-making and desire for tangibility become apparent. What happens then? We tend to assign blame.

Consider the anxiety about intangibles in context of interacting with stakeholders, whether they be external or internal—particularly the board.  Making progress in the short term, often regardless of its long-term impact, addresses an immediate item or issue, is usually applauded, and confirmed as a movement in a positive direction. Again, it results in tangibility for the action taker or task completer who gains the satisfaction of accomplishment and receives accolades. Across the spectrum, all participants receive the dopamine burst and relish a job well done. Mission accomplished.

Even if human behavioral defaults and desires are recognized and accommodated, the attained goal in the long term may remain intangible. It is a persistent fact of life that must be recognized in the digital age. Organizations will remain challenged to visualize tangible elements in sets of data, technological systems, outputs, products, and services. As we become more adept at integrating technology into our lives, we will become more comfortable with intangibles and learn to place real value on financial systems, data, and digital assets.

One true thing: humans will always continue to evolve and as a result create evolved systems to serve their needs and desires. Placing value on intangibles, becoming comfortable with the intangibility of what is around us, doing business with cryptocurrencies, and using blockchain will become the art of doing business in an evolving digital marketplace.

As we evolve will we ever resolve our inherent need to see, touch, and feel?