My analysis was based on the S&P 500 and found that, if financial services companies are excluded (due to the very different natures of their balance sheets), then the proportion of market value accounted for by tangible assets was only 26%. Note that this number is an average of all industries – the individual industry numbers varied between 60% for utilities and close to 10% for technology companies.

As recently as 1982 (this is as far back as I have taken my analysis), the proportion of market value that was accounted for by tangible assets was 80%.

It is clear that something dramatic has happened in terms of the drivers of business success, and that intangibles have become the dominant source of value creation (by the way, this phenomenon is a global one).

One challenge is that there has been no common classification of intangibles – at least until recently. Surprisingly it is the accountants that have been the most clear minded on the topic. They think of intangibles purely in terms of forms of intellectual property that can be proven to legally belong to the company and which, if the company so chose, could be sold or licensed outside the company. The guidance notes to the new International Accounting Standards for dealing with goodwill arising from acquisitions (i.e. how to explain the price premium paid over the value of the tangible assets) suggest five classes of intangible asset:
- technology-related
- contracts
- artistic content
- customer knowledge
- marketing-related

Brand (or, more precisely, trademarks, trade dress and associated goodwill) fall into the category of marketing-related intangible assets. In aggregate, my analysis suggests that this class of intangibles represents 14% of the value of the S&P 500 (ranging form essentially 0% in basic materials to around 30% in consumer goods) – or a cool $1.5 trillion in market value.

So while it is only true to say that “brand is a company’s most valuable asset” for a minority of companies (there are only 7 companies in Interbrand’s most recent list of global brands for whom brand value was more than 50% of market value), it is clear that – for the majority of companies – brand represents a serious asset.

Of course, it is one thing to measure the value of an asset but quite another to understand what causes that value to go up or down. That is why I am looking forward to Vic’s insights into what drives increases or decreases in intangible value

When I put together the narrated power point presentation for Chapter 1, I went looking for high resolution images to dramatize the concept of the cobbler’s children. I couldn’t find any good ones in the usual places. By accident I found Getty Images (http://creative.gettyimages.com/source/home/home.aspx
). Two things were immediately clear to me. First, this site wasn’t designed for someone accustomed to paying ten bucks for stock images on the Internet. Prices stared at $55 and went up quickly from there. Second, the selection and quality of images, both still and moving, was extraordinary. I ended up buying four of the $55 images for that presentation.

Then, while running the numbers on the value/revenue ratio and the importance of intangible value I noticed that Getty Oil was an outlier in the early 1950s with a value/revenue (v/r) ratio of 17.2 in 1956. That was more than twelve standard deviation away from the average. The 782 companies reported in Standard & Poor’s COMPUSTAT files in 1956 had a combined market value of $207 million and combined revenues of $206 million, putting the v/r ratio at 0.99.

So I ran the numbers on Getty oil. In every year between 1950 and 1983 the company reported the value of intangibles (item 33 in the annual COMPUSTAT data) was $0.00. In all but six of those thirty-four years, the depreciated value of its tangible assets was greater than its market value. This I thought was a company ripe for takeover. Sure enough the following story appeared in the New York Times on January 8, 1984.

“Texaco Inc. and the Getty Oil Company are tentatively prepared to close the largest merger in American history, but a judge is delaying the estimated $10 billion agreement so that heirs of the oilman J. Paul Getty can study it.”

Then I wondered, is there any connection between Getty Oil (ticker symbol GET.1) and Getty Images? So I went to Yahoo Finance and looked up the company (ticker symbol GYI). Sure enough Getty Images was founded in 1993 by Getty’s grandson Mark. It went public in 1995 and complete financial data became available in 1996.

At the close of business on December 31, 2005 Getty Images had a market value of $5,558 million. The intangible market value of the company was $4,750 million, or 85% of total value. Its value/revenue ratio was 7.6. Or the company created $7.60 in shareholder value for every $1.00 in sales.

To me the comparison of an oil company with an image company in the same family captures beautifully the choices managers and investors must make in placing a value on tangible vs. intangible assets … oil vs. images. This in turn goes to the heart of the reasons I think drives these choices.

Now, I’m going to speculate about these reasons. I think they boil down to three forces: brands, technology, and services. Clearly design plays an important role in all three of these areas.

In order to control for shifting market forces, I ran the numbers on the fifty companies with the highest intangible value in 1966 and 2003. Twelve of these reported the data in both years. And all of them had an intangible market value greater than 50%.

The intangible market value of five companies appears to me to be brand driven: Coca-Cola (1966 v2 = 76%; 2003 v2 = 81%); Gillette (80%, 77%); Procter & Gamble (57%, 77%*); Johnson & Johnson (68%, 76%); PepsiCo (52%, 75%*). The intangible value of seven companies appears to me to be technology driven: Pfizer (59%, 78%*); 3M (77%, 78%); Eli Lilly (77%; 73%); Texas Instruments (65%, 71%); Merck (85%, 62%*); Bristol-Meyers Squibb (85%, 62%*); IBM (77%, 38%*). The standard deviation in this small sample was 11%, so changes in the percent of intangible value are significant at a two sigma level for those companies marked with an asterisk. Please review the methods I used to calculate intangible market value (v2) on pages 2 and 3 of my book.

Fifteen companies of the top fifty companies weren’t even on the radar screen in 1966. These companies were (along with an estimate of their 2003 intangible market value): eBay (91%); Amazon (90%); Genentech (86%); Yahoo (86%); SAP (86%); Amgen (85%); Cisco Systems (81%); Qualcomm (80%); Sysco Corp (76%); Microsoft (74%); Clear Channel Communications (72%); Nokia (63%); Wal-Mart (58%); Home Depot (58%); and Nextel Communications (57%). I’ll leave it to you to decide whether the intangible market value of these companies is driven by brands, technology, or service … or some combination of all three.

Meanwhile, what do these results mean to managers and investors? In my view the market value of leading companies across a broad spectrum of industries is driven by the intangible forces of brands, technology, and services. Just as clouds in the sky drive the weather. And accountants can’t agree on how to (or even if) these can be reported in the balance sheet. So, we’ve got to figure out what inputs drive intangible value and how they affect total market value. I hope my book will provide you with some useful clues by pointing to enterprise marketing (a.k.a. selling, general and administrative) expenses as a critical measure of the inputs that drive intangible market value.

p.s. I’m still working on the trends from 1950 through 2005. More about my findings later.

the shift towards intangible assets clearly indicates a shift in the perception of where to locate this potential within a corporation. is it in the production units, in the brand, in the ability to reinvent, entertain and innovate? … hard to say, even harder to nail down with numeric tools i guess.

to my opinion this change of perspective is a fact. and i am really curious to see which parts of the contemporary corporation metrics are able to illuminate and which not.

These are powerful questions that require thoughtful answers. In Chapter 1 I said that “Total shareholder value in this sample of 479 companies in 2003 was $4.412 trillion. The total value of intangibles was $2.950 trillion, or 67% (page 6).” This result is consistent with many other estimates of the importance of intangibles in determining shareholder value. See for example Jonathon Knowles report on “Brand Equity and Shareholder Value” in Marketing Performance Metrics Forum, published by the CMO Council in 2005. My results differ from his only because the sample percentage reported in my book was based on all the companies in the COMPUSTAT database screened for those that reported “Intangibles” on their balance sheet.

Your questions prompted me to recognize that my results have a built in (and subtle) selection bias. Companies that report “intangibles” in their balance sheet very different from those that don’t. The 479 companies were selected out of nearly 6,000 companies in the data base in 2003. How much does this selection bias affect the results?

There’s a fascinating clue in Chapter 4 on “Enterprise Marketing Expenses (page 94, Table 4-6). These results are based on a sample of 5,359 companies that reported these data in their 2002 annual reports. Obviously, most of these companies didn’t report intangibles (annual data item 33 in COMPUSTAT).

There is a surprising number in this table I haven’t paid much attention to till you asked these questions. Here’s that number: the ratio of the combined market value of all these companies ($10.281 trillion USD) to their combined revenues ($8.7 trillion USD) was 1.18. Or, in this much larger sample (drawn just a year earlier) total revenue and total value were nearly equal!

Today I’m running some new numbers from COMPUSTAT. I have two objectives in mind. First, over the long run how does this value/revenue ratio behave? Second, is there some way to out the effects of selection bias in how markets historically have evaluated tangible and intangible value over the long haul?

I began working on these questions at dawn (after your questions gave me a restless night). I hope to have some results to report by the end of the day. In the meantime, I’d sure like to hear what others have to say in answer to your questions.