If you have a secret, it’s usually a good idea to keep it to yourself, right? But what about the old saying: “You can’t sell a secret”? Aren’t these two positions juxtaposed?

In some ways, sure. But there’s a world of difference between selling a secret (which involves the art of advertising) and trying to prevent other people from knowing your secret.

Owning a piece of information that no one else can access is a great strategy for business success. Obviously, that information should be superior to anything out there (it’s useless to have a secret no one else wants). But even the best data will have zero value if it isn’t deployed to the right places. It’s a bit like having money that refuses to be spent correctly.

But the idea of “confidential information” sounds very hand-wavey at this point. What does it actually mean? And when does a secret become an intangible asset?

Let’s go through a few of the more prominent examples of confidential information to better understand this important intangible asset class.

Trade secrets

What comes to mind when you think of trade secrets? Probably Coca-Cola, right?

We’ve already written a few times on this site about the legendary story of Coke’s secret recipe supposedly hidden away in a vault in Atlanta. But as we uncovered in those articles, there’s not much substance behind the myth.

Nevertheless, Coca-Cola does have a unique recipe for its beverage that other companies have struggled to mimic. People can recognise the taste (although not consistently in blind tests) as different from the more than 20 competitors. No other beverage rival has access to Coke’s trade secret. They can probably guess the ingredients, but no one knows for sure. And that’s enough of what the cool kids call a “moat” to give Coke a distinct market advantage.

Another example of a trade secret that no one can access, but some can probably guess, is Google’s 25-year-old search algorithm. This complex set of mathematical equations helps Google determine which web pages are displayed for whatever crazy query you type into its search field. Protecting this algorithm is not just a priority; it's necessary for maintaining Google’s competitive edge.

The exact details of the algorithm are a closely guarded trade secret. Just like the rumours about Coca-Cola’s formula, only a select group of engineers at Google can access the complete algorithm at a time, and even these special people may not know all its intricacies. The overall Google system is likely too large and complex for a single person to wrap their heads around anyway.

Another reason no one can steal the algorithm is that Google continually updates it, often multiple times a day, to improve the quality of search results and enhance user experience. Google employs artificial intelligence (AI) so that the algorithm learns over time.

Google's precious algorithm has made its search engine the most widely used globally, capturing over 90% of the search market share in some regions. This dominance translates into enormous advertising revenue and giant pools of user data. People trust Google to deliver accurate and relevant information, which keeps them coming back.

For those reasons, it makes perfect sense why the company would protect its secret algorithm.

Market knowledge

Market data involves a lot of factors. It likely includes customer lists, survey results, market research, customer feedback and many other crucial data points.

A well-organised and comprehensive customer list is a valuable intangible asset. It provides a window into who the customers are, usually including their contact information, purchase history and preferences. A company that maintains an up-to-date customer list can connect the dots to find higher-quality sources or more appropriate retail outlets that make more sense for the whole supply chain.

To see why a company wouldn’t want its customer list (or a supplier list) to be leaked to a rival, it’s helpful to think of this problem as though you are a spy.

The basic task of corporate espionage is to collect information that your rivals hope to keep secret. One of the most valuable pieces of information a spy can steal is the list of things that a rival doesn’t know about you. Their “to-do” list, if you will.  By comparing this list with your current balance sheet of assets, it is possible to hide big things in plain sight.

In this way, a comprehensive customer list immediately becomes a target list for a rival company since it reveals all the connections they would like to make, along with the already existing connections. Should a rival gain access to that customer list, they will be able to create a decent picture of a company’s future strategy. Then the rival can funnel resources in precisely the right areas to outbid, outcompete and outrun the targeted company.

Corporate espionage is a great tool if you can get it right.

Patents and innovation

Who knows what will be in the next iPhone? Aside from a few rumours leading up to every launch, Apple covers its innovations under a wide umbrella of rights protections, patents and other legal barbed wire.

A few years ago, a company called PowerbyProxi developed an intuitive new technology that allowed batteries in pretty much any digital device to be charged without the need for a power cable. The technology was robust and it worked well, so Apple became interested and eventually bought the company for a hefty sum in 2017.

At the time, everyone thought Apple would roll out the PowerbyProxi technology in its next iPhone models. But the next generation iPhone was eventually released without any near-field charging capabilities. Then another generation came out, but still the iPhone required a charging cable.

By the time of the third iPhone release after the purchase of PowerbyProxi, it became clear that Apple wasn’t going to use the technology in its products. After pressure from journalists, Apple eventually confirmed it had permanently shelved the near-field charging system for undisclosed reasons.

For the founders of PowerbyProxi, the sale to Apple was highly lucrative (scuttlebutt suggests the company was sold for about $US270 million). But they were no doubt quietly saddened that the technology would never see the light of day and languish in an Apple R&D office potentially forever.

For Apple, the purchase of the small company made a lot of sense at the time. It’s impossible to know if Apple ever intended to use the technology, but that didn’t really matter for the giant conglomerate. It always had a use for PowerbyProxi, nevertheless.

Apple knew the existence of PowerbyProxi was a risk if it stayed out in the wild. The confidential information of exactly how the start-up’s technology worked would provide a huge boost for any rival smartphone manufacturer, should they get their hands on it first. That was a serious risk for Apple.

Apple’s strategy was to either invent cutting-edge technology or at the very minimum buy and hold onto it so that no one else could use the idea. At the time, Apple was rich enough to buy the company and then mothball the technology (in 2017, Apple had about $US74 billion cash on hand).

This is an important example of the value of confidential information. If your company is building an amazing new technology that could disrupt an entire market, there’s a good chance that one of the major players in that market may be interested in purchasing it. They’ll want to keep the secret just as much as you do, but they’ll have to pay to do so.

Have you heard of the coffee shops Brew Haven and Aroma Oasis?

A few years ago, they were locked in fierce competition. Both shops offered excellent brews, cosy ambience for customers waiting in line and delightful pastries to accompany the warm beverages. Yet, Brew Haven seemed to have an edge that kept customers returning.

One day, the owner of Aroma Oasis decided to uncover the secret behind Brew Haven's consistent success. She talked to customers, suppliers and even friended the baristas on Facebook to strike up a conversation. She discovered that Brew Haven had secured a rare "Sustainable Sip" certification, highlighting its commitment to eco-friendly practices and ethical sourcing. This certification not only resonated with consumers but also granted Brew Haven a key competitive advantage.

Intrigued and determined to level the playing field, Aroma Oasis pursued its own certifications. Its operations were revamped to align more with the requirements for sustainable sourcing, it worked hard to reduce waste and also set up initiatives to promote more community engagement. About 12 months later, Aroma Oasis could proudly display its newly acquired "Sustainable Sip" certification as well.

The effect was remarkable, and customers flocked to the shop. The approval turned out to be an invaluable intangible asset and Aroma Oasis wished it had secured it a lot earlier. That would have saved a lot of money and heartache!

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Where competition is fierce, certifications often provide a unique advantage that sets a company apart. They can attract more customers, build credibility and just like the aroma of a freshly brewed cup of coffee, approvals stamp an unforgettable impression in the minds of the public.

Approvals as Economic Moat

It’s a bit of a jargon term, but an “economic moat” generally refers to a sustainable competitive advantage that lets a company outperform its rivals. Credibility is a protective moat, for example, fending off challenges from competitors that might give off a cowboy vibe. Never a good thing in business…

Approvals or certifications are a decent example of an economic moat because they signify adherence to high standards and bestow a unique advantage to fortify a company's position.

Imagine a company that produces organic foods and secures the coveted "Certified Organic" label from a reputable regulatory body. This certification tells customers about a company's commitment to producing foods that meet stringent standards. When consumers see this certification while browsing in the shopping centre, they are more likely to choose the certified company over alternatives, bolstering its competitive advantage.

It's not easy for a company to produce “Certified Organic” products. It takes time and money to plant and harvest the right kinds of organic fruiting plants. In this sense, approvals and certifications can raise barriers to entry for new competitors, preserving the certified company's market-leading position.

Approvals are also a sign of competence and business maturity since navigating complex regulations is a skill in itself. Companies with key approvals demonstrate mastery over those regulatory frameworks. This understanding becomes a moat when regulatory agencies view these companies as more reliable, leading to smoother approvals when it comes time to introduce new products.

Trust and Confidence

Elon Musk's trailblazing enterprise, Tesla, changed the automotive landscape forever through high-performance electric vehicles. Key to Tesla's extraordinary triumph was its resolute commitment to innovation and sustainability, fortified by indispensable certifications and approvals.

Tesla's electric vehicles boast prestigious certifications, including ISO 9001 (Quality Management), ISO 14001 (Environmental Management) and ISO 26262 (Functional Safety). The role of these certifications in building consumer trust and confidence cannot be overstated. If customers have concerns about safety, quality and environmental impact, Tesla's ISO certifications are a beacon of assurance. These certifications serve as tangible evidence of Tesla's unwavering adherence to rigorous quality control protocols, robust environmental practices and stringent safety measures.

And because Tesla has secured these ISO certifications, the company is also entitled to government incentives, rebates and tax breaks due to their certified eco-friendly attributes. These subsidies not only make the cars more affordable but also foster environmentally conscious decision-making since losing those certifications would result in an appreciative rise in the per-unit cost of the cars.

Certifications wield influence beyond consumer trust; they can also help investors sleep better at night.

Tesla's basket of approvals is irrefutable evidence of the company's dedication to excellence. This commitment is exactly what investors want to see, especially when the business world puts such a high premium on the principles of sustainability and ethical responsibility. As Tesla's reputation for “green” innovation flourishes, more investors who share these values are attracted to supporting the company, fuelling its expansion and amplifying its growth trajectory.

Certifications also serve as a lighthouse for partnerships with suppliers, collaborators and industry peers that echo Tesla’s commitment to excellence represented by these certifications.

The Intangible Power of Approvals

Pharmaceutical companies are a great example of why approvals and certifications can be the bedrock of a business. Without certain approvals for its products, there is simply no way for these companies to release anything no matter how much money they have spent on R&D.

The industry plays a vital role in global healthcare by researching, developing and producing medications that improve and save lives. However, the journey from discovery to delivering a drug involves stringent regulations. Approvals not only ensure patient safety but also boost the value of the companies (since the regulators agree the medicine works).

Approvals by regulatory agencies, such as the US Food and Drug Administration (FDA) or the European Medicines Agency (EMA), are crucial to ensure that the medications reaching patients are safe, effective and of high quality. These rigorous approval processes involve exhaustive preclinical and clinical trials, scrutinising a drug's potential risks and benefits.

Pharmaceutical approvals also verify a drug's efficacy (its ability to deliver the intended therapeutic benefits). Rigorous clinical trials evaluate a drug's performance against specific endpoints, such as symptom reduction, disease progression prevention or even (sometimes) cure.

Without approvals and certifications, the world would be full of snake oil. Of course, having approvals and regulations doesn’t eliminate snake oil products, but imagine how much worse the situation would be without the tick of approval from agencies that (usually) know what they’re doing?

In 1989, a young English computer scientist named Tim Berners-Lee was working at CERN (the European Organisation for Nuclear Research) in Switzerland.

Every time new data was generated, Berners-Lee knew it would take an excruciatingly long time for it to reach its destination - even if that location was just down the hall. He grew frustrated at the inefficient tools for collaborating across different computer systems. Rather than throwing up his hands in despair, he put his thinking cap on.

The thinking cap worked. Berners-Lee came up with a "hypertext" system that would allow documents to be linked together, letting people navigate between related pieces of information seamlessly. On March 12, 1989, he submitted a proposal for the idea titled "Information Management: A Proposal" to his boss at CERN, which outlined the concept of what would later become known as the internet.

By 1990, Berners-Lee developed the first web browser called "WorldWideWeb" (later renamed "Nexus") and the first web server software. The technology was clunky, but it worked. His colleagues were using it often and uncovering bugs which were in turn ironed out. On 6 August, 1991, Berners-Lee shared the World Wide Web with the world, allowing people outside CERN to create websites for the first time.

Within a few years, the number of websites exploded as the internet evolved from a niche tool used by researchers into a global platform. Early adopters like Yahoo, Google, Amazon and eBay seized the opportunity to create entirely new services such as e-commerce, online search and social networking. The internet has since reshaped entire industries and revolutionised how we communicate and live.

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As an idea, the internet wasn’t a guaranteed success. Sure, it seemed obvious in hindsight, but that’s true for any invention. A conference of factors needed to be in place for the internet to succeed. Subtracting just one of those variables could have led to CERN shelving the invention for another day. If that had happened, Berners-Lee’s idea would still have been an intangible asset, but a non-performing one – otherwise known as a liability.

Yet the idea was successful – enormously so. Although it’s a bit hard to quantify, it is possible to put a price tag on Berners-Lee’s invention. Bear in mind that the internet is in the “commons” – free to use – making it difficult to value at all. Nevertheless, people have tried to put a price on the internet.

For example, a handful of economists in 2017 calculated by looking at consumer surplus value (the difference between a person’s willingness to pay for something and the price they actually pay for it) that the internet may be worth $US8 trillion a year to the GDP – and that’s just in the US.

If that figure is correct, it would make the idea of the internet the most valuable invention of all time. Pretty impressive idea for a frustrated guy in the 1980s.

The world’s biggest invention shop

Think about it this way. The idea for the internet at one point existed only in a man’s head. After Berners-Lee made it real, that idea is now worth $US8 trillion.

There’s a lot of value in coming up with good ideas.

Some companies understand that ideas are important, but none more so than IBM (International Business Machines Corp.) IBM has been a trailblazer in technology for over a century. As of September 2021, IBM has filed over 100,000 patents, making it one of the top patent holders globally because it knows new ideas is the only way to survive.

From its earliest days, the company recognised the value of ideas as an intangible asset. IBM’s innovative spirit led to inventions like mainframe computers, magnetic storage, computer processors and others. These breakthroughs were achieved by nurturing a leadership philosophy that embraced open innovation with external partners and encouraging IBM staff to always be thinking of better ways.

IBM's dominance of innovation saw it capture a staggering 60-70% share of the global business computer market. However, it wasn’t all smooth running. While its market control waned over the years, IBM’s commitment to innovation has retained its position as the world’s biggest invention shop.

IBM takes ideas from genesis to commercialisation. In contrast, some companies do nothing but gather other people’s ideas – and then sit on them.

How valuable are your ideas?

I’m talking about patent squatters. No one likes these people. While they are an expected outcome of a patent system, that doesn’t make them any less hateable.

A notorious patent squatter is Intellectual Ventures (IV), based in Bellevue, Washington. Founded in 2000 by former Microsoft chief technology officer Nathan Myhrvold, the company's primary business model is acquiring patents and then licensing or enforcing them against other companies. It squats on tens of thousands of patents across various technology sectors.

Patent squatting, also known as patent assertion or patent trolling, is when a firm acquires a patent with no intention of developing products but rather to assert them against other companies for financial gain. Patent squatters often rely on the threat of litigation to extract licensing fees or settlements from other companies, even if the patents are not being used. Especially if they aren’t being used. You can see why no one likes them.

The way Intellectual Ventures operates has sparked plenty of debates about how patent trolls hurt innovation. Some argue they stifle innovation by creating legal uncertainty which saps resources that would otherwise go to R&D. On the other hand, patent squatters say they provide a way for inventors to monetise their inventions and unlock the value of their patents.

Many countries are reforming their laws to rein in patent trolls. Several countries, including the US, have already introduced reforms to strike a balance between protecting legitimate IP rights and preventing abusive patent litigation practices.

Here’s the thing, though: by some estimates, Intellectual Ventures turns over about $US290 million annually. That’s a lot of money. If a company can generate that much cash from sitting on people’s ideas and starting legal fights with real, productive businesses, then that proves how invention and innovation are amazingly valuable intangible assets.

If your company hasn’t come up with new ideas – or tweaks on existing ideas – then perhaps it’s about time to parcel some budget for R&D. You never know who might come up with an idea like the internet that could change the world.

The core definition of an asset – tangible or intangible – is if you have control over it.

Property can be an asset if you have a deed. Data can be an asset if your company has collected it using its own systems. But what about people? Can they be assets?

The short answer is, no. After all, slavery is outlawed. I don’t know about where you live, but I couldn’t tell you where my nearest open-air slave market is. People can be employed by a company, but that company can’t legally own its employees. No matter how loyal they might be, there is always a risk of an employee walking out.

The expertise and skills of an employee are intangible assets for a company. But the person themselves cannot be an asset. Next to skill and competence, the most important intangible asset a person can bring to a company is their relationships with fellow professionals and strategically-placed peers across the sector (or even between sectors).

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Relationships age like wine, not like bread. The higher a person progresses in their career, the more people they connect with along the way and the more useful those relationships become. Networking is useless for a person fresh out of college because, well, they have no experience. But it’s always a good idea to start building a network early in one’s career. It’s an investment because you never know when a connection relationship may come in handy.

The popular TV show Suits was full of great examples of how relationships save businesses from sticky situations or help get deals across the line. While sometimes the writers relied too much on “favours” to advance the wider story, the concept of “banking” goodwill to “cash it in” at a future date is a well-known practice in the legal industry – and in many other sectors.

The ability to pick up the phone and talk directly to a key person in a complex supply chain or the exact decision-maker at a partner company can be just as valuable as owning a high-rise building.

Sometimes, people with great relationships are hired precisely because of those relationships. Their skills are important to get the job done, but not nearly as important as the access they can create.

Toyota - champion of relationships

As mentioned, the value of relationships comes from the trust, cooperation and mutual benefit they develop over time.

Strong supplier relationships (and with consumers, don’t forget the consumers) are essential to succeed in today's globalised world. A lot of companies even choose to say their suppliers are part of a “family” to emphasise how important those relationships are.

For example, Toyota, a leading carmaker, recognised early in its existence that turning its supplier base into a “family” was crucial for its growth and innovation. So, it began a journey to build deep relationships with its suppliers that were based on trust, respect and shared values. Toyota understood that nurturing its relationships would be a win-win situation.

As the years passed, Toyota developed a "kaizen" culture of continuous improvement in which suppliers were encouraged to offer their ideas and expertise at any time. In this way, Toyota's suppliers became more than just providers of parts; they were valued collaborators.

With trust at the core, Toyota's suppliers felt free to take business risks and invest in R&D to find creative solutions to challenges and design high-quality components. Soon enough, Toyota's vehicles became well-regarded for reliability, safety and efficiency – a testament to the dedication of the entire supply chain.

Its robust relationships were even more valuable in times of crisis. When natural disasters or recessions disrupted supply chains, Toyota's network banded together to support each other which ensured a quicker rebound for Toyota and minimised production disruptions.

Toyota’s relationships also offered a competitive advantage in cost management. Since it was creating a mutually beneficial relationship, the suppliers were invested in Toyota's success and found innovative ways to share costs because they knew making things cheaper would help everyone in the group. This synergy ultimately translated to making Toyota vehicles more affordable, which improved the brand further.

In a real way, Toyota’s car business is just a nice epiphenomenon of its real business: building trust with its suppliers. That’s what it does best. Through thick and thin, Toyota and its suppliers stand united, driven by a shared commitment to quality cars that are cheap to run and maintain.

Don’t bet the house on a relationship

However, like all assets, a relationship isn’t foolproof. Just because you may be friends with a well-placed contact doesn’t guarantee this will translate into success. Anything could happen, you never know.

The founder of NZX-listed company BurgerFuel (it makes burgers, obviously) developed a close friendship with the founder of sandwich brand Subway. The two companies were wildly different in terms of size and revenue, but the leaders had a great relationship and wanted to work closer together.

After a series of conversations, plans were set in motion in 2012 to have BurgerFuel outlets attached or connected to 1000 Subway outlets across major US cities. It was going to be a huge win for the small New Zealand-based company that until then only had an international foothold in Australia and a handful of Middle Eastern countries.

Everything was ready to go and then tragedy struck. In 2014, soon after the plans were announced Fred DeLuca, the Subway founder, was diagnosed with cancer and immediately admitted to hospital. He soon after died at the tender age of 67. The tragedy was completely out of the blue for everyone, including the BurgerFuel founder.

After the funeral, Subway’s new CEO decided to reassess the company’s strategic direction and ultimately decided against progressing with the BurgerFuel deal.

A year and some depressing legal reversals later and the partnership was over. The relationship almost made BurgerFuel an international heavyweight with a serious presence in the world’s biggest fast-food market. But now that opportunity was lying scuttled on the bottom of the ocean.

It was a lesson in the vicissitudes of relationships. They can be everything or nothing, always in the hands of the Fates.

It was also a reminder that relationships are just like every other asset: they are never a guaranteed win. So, while it’s wise to plan to leverage a good relationship, it is dangerous to bet everything on a single connection – even if it looks secure at the time.

Takeaway: Plant variety rights are like copyright for living organisms. They can be expensive to create but can generate outsized returns if well-protected.

Once upon a time, in a small farming town in the middle of Whoknowswhereistan, there was a passionate plant breeder named Emily. Emily dedicated her life to improving plant varieties that could survive a forecasted plague.

While wandering through a crop field recently killed by the new disease, Emily discovered a survivor that seemed to have a remarkable genetic trait that made the plant highly resistant. Recognising the immense potential, she began a process of crossbreeding this type with an existing variety that was known to have a larger yield of fruit.

After a few years of careful selection, Emily successfully bred a new plant variety that had great taste and could also grow in more diverse soil mixtures. Her breakthrough soon gained the attention of keen farmers who wanted to protect their crops from the disease and, of course, make more money.

Emily, realising the value of her creation, decided to protect her new genetic creation by applying for plant variety rights. Once granted, she became the sole owner of this unique variety, allowing her to deploy legal force to control its production, distribution and commercialisation.

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As word spread about Emily's remarkable plant variety, demand soared. Farmers from across the world sought her seeds, even though they were priced at a premium. Emily then established licensing agreements with a handful of important seed companies, allowing them to produce and sell the seeds under strict quality control measures. As a result, Emily's variety gained a reputation for exceptional performance and became a significant source of revenue for her.

The licensing agreements and royalties generated from seed sales also allowed her to invest in further research and development, expanding her breeding programme and introducing a whole range of plant varieties to address other agricultural challenges.

What is a plant variety patent?

Think of plant variety rights as copyrights for plants.

These protections safeguard the unique characteristics and qualities of specific plant varieties, granting exclusive rights to the breeder or company. These rights ensure that all the hard work, time and investment put into developing new plant varieties are protected and rewarded.

Very simply, patents are intellectual property rights granted by public authorities for human inventions. Patents are a type of market intervention and were initially intended back in the early Industrial Era to trigger more investment in R&D.

Patents on life differ from patents on machines or chemicals, however, as the monopolies can and do extend to the offspring of the plant varieties. Over time, patents for plants have become powerful legal tools used by companies like Monsanto to dominate seed markets by restricting their competitors’ access.

Patenting life forms has been highly contested pretty much from the first case in the US in 1980 when a patent was granted for an oil-eating bacterium.

Critics argue that life forms cannot and should not be regarded as human inventions that can be owned or controlled. Conversely, proponents point out that any DNA strand which can be sufficiently manipulated by humans is no longer "natural" and falls into the box called "things that can be patented."

Plant variety rights patents are generally divided into two categories:

1. Process patents relating to an inventive process such as the modification techniques for new GMOs. Anyone who wants to use the patented process must have the consent of the titleholder, paying license fees and usually also royalties; and

2. Product patents relating to an invented product, such as how Emily altered the DNA sequences of her plant variety to create stronger disease resistance.

Traditionally, intellectual property rights are granted by governments through "plant variety protection" or "plant breeders’ rights" based on national laws. Plant variety protection (PVP) rules, like patents, largely prevent farmers from saving any of their own seeds without paying royalties to seed companies.

While regulations regarding GMOs vary from country to country, there are only 13 crops with GM varieties commercially available around the world. These include:

• Alfalfa

• Apple

• Canola

• Corn (Maize)

• Cotton

• Eggplant

• Papaya

• Pineapple

• Potato

• Soybeans

• Squash

• Sugar Beets

• Sugarcane

The Monsanto example

Emily doesn’t exist, but her success story demonstrates how a newly-created plant variety, with its unique genetic traits and intellectual property rights, can become a valuable intangible asset for the owner.

But while Emily is a fictional character, there are plenty of companies that play around with the building blocks of life (DNA) to create new forms of plants and animals all the time. Some, like Monsanto (now owned by Bayer) make billions of dollars from this process every year.

Monsanto has been at the forefront of genetically modified organisms (GMOs) and is perhaps best known for its weed killer product, Roundup, along with its production of GMO crops.

After the merger in 2018, Bayer/Monsanto now own about 77% of all seed corn, 69% of all seed traits and 58-97% of the markets in cotton, soybeans and canola. Monsanto is also the assignee of over 4000 granted and unexpired US patents while Bayer is listed as the assignee of over 6000 granted and unexpired US patents.

The company may even employ someone called “Emily” as well, but that’s unconfirmed.

One of these GMOs, a herbicide-resistant corn, was developed by Monsanto researchers through the identification of a specific gene that resisted glyphosate, the active ingredient in Monsanto's herbicide, Roundup. This modification means farmers can use harsher measures to control weeds without fearing too much damage to the corn.

To protect this new corn variety, Monsanto sought patent protection in the same way that Emily did. It filed patent applications with the appropriate intellectual property offices (mostly in the US), providing detailed descriptions of the modified corn's genetic makeup, traits and how it was created. The patent applications included claims defining the scope of the protection sought.

How plant variety rights become intangible assets

The three primary categories of genome-editing tools are zinc-finger nucleases (ZFNs), transcription activator-like effector nucleases (TALENs) and the CRISPR/Cas system (Clustered Regularly Interspaced Short Palindromic Repeats).

Over the past 10 years, improved versions of these “genetic scissors” have been introduced by many researchers. In a 2022 report, the World Intellectual Property Office (WIPO) Patentscope, which covers 103 patent jurisdictions, identified 20,081 patents that reference the “Crispr-Cas9 plant.”

A report by AgbioInvestor found that the cost of discovery, development and authorisation of a new plant genetic trait has declined from $US136 million in the 2008–2012 period to about $US115 million today, while the time required to complete the process increased from 13.1 years to 16.5 years. At the crop level, time to market varied from 11.6 years to 24.0 years.

So yes, GMOs are very expensive to create.

Regulatory hurdles are another factor in the development of new plant and genetic varieties. Companies must navigate complex and ever-changing regulatory frameworks, particularly in the areas of genetic engineering and biotechnology. These regulations can vary by country or region and failure to comply with them can result in significant legal and financial consequences.

In short, agricultural companies would find immense value in protecting their plant variety rights and turning them into game-changing intangible assets.

By obtaining plant variety rights, a company can prevent others from selling or reproducing its unique variety without permission. By developing varieties that offer desirable characteristics, companies can differentiate themselves from their competitors and attract customers who value these traits.

This can lead to increased sales and greater profitability in markets with a high demand for specific traits such as disease resistance or drought tolerance (thanks Emily!).

Genetic innovations, protected by patents and other intellectual property rights, can be enormously valuable assets for a company. They open doors to collaborations, licensing agreements and the potential to sell seeds or technology to farmers around the world.

Takeaway: Content isn't king, it's the kingdom. It refers to any valuable information that can be used to engage and inform audiences.

Let's say you're interested in learning how to play a musical instrument. While flicking through a few websites, you stumble on a well-crafted video tutorial that explains everything from the best way to hold the instrument to presenting the easy first steps for playing your first melody. To you, that video is gold dust. It’s like the video itself possesses a special power to teach you something new.

Good content is like a secret treasure that empowers you to succeed in whatever you put your mind to. It can enhance your creativity with inspiring stories, breathtaking visuals or thought-provoking ideas. Content can also be a powerful tool for connecting with others.

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Just as sharing stories around a campfire brings people together, sharing valuable content can create communities and foster meaningful relationships.

Content Is A Treasure Map

High-quality content, like a treasure map, guides and captivates audiences. It acts as a pathway to engage, inform and entertain, leaving a lasting impression on anyone who interacts with it.

Content comes in all sorts of types, forms and iterations. We asked ChatGPT for a list of what constitutes “content,” and it bashed out the following set:

Articles, blog posts, books, essays, poetry, scripts, newsletters, social media posts, website copy, images, photographs, infographics, illustrations, charts, graphs, memes, visual designs, films, TV shows, documentaries, advertisements, vlogs, tutorials, animations, video clips, podcasts, music tracks, sound effects, audiobooks, interviews, radio shows, voice recordings, quizzes, surveys, games, interactive websites, augmented reality (AR), virtual reality (VR) and immersive experiences.

[deep breath]

Content can also include social media posts, updates, stories, live streams, memes, videos and images shared on platforms. And don't forget PowerPoint presentations, keynote presentations, slide decks, multimedia presentations, online courses, tutorials, webinars, e-books, whitepapers, educational videos, learning materials, advertisements, promotional campaigns, brochures, flyers, catalogues, product descriptions sales materials, reviews, testimonials, comments and community-generated content.

As you can see, content is everywhere, in everything and it is simultaneously tangible and intangible. For this reason, content can be extremely valuable for organisations and must be managed and protected properly. Unfortunately, companies often take content for granted and only realise its true worth when they no longer have it.

Content has a unique characteristic compared to physical assets: it can depreciate over time if not maintained but is not diminished through use. Content can be reused multiple times without loss – and can even be used by multiple people concurrently. This trait of non-consumability makes the marginal cost of using content remarkably low and often creates a winner-take-all dynamic.

For instance, building a state-of-the-art factory for $1 billion will surely be a substantial investment for any company, and once it reaches full capacity there is plenty of room for less efficient plants to enter the market and undercut that investment. On the other hand, if a company creates a suite of high-quality content it can monopolise an entire market without any capacity limitations at all.

Content is a clear example of the wildly different constraints faced by companies operating in the realm of intangible assets compared to those which are top-heavy with tangible assets. The rapid rise of a dozen or so trillion-dollar digital companies over the past 15 years with nothing else besides content is sufficient proof that content is, quite literally, king.

Content As A Path To A Better Brand

A key reason why content is valuable is that it can be the backbone of a company's brand.

To learn more about brand, you can read this article. But the short explanation is that brand is an intangible asset that represents a company's identity, values and products. Content can be used to paint a positive brand image and help customers connect with a company on an emotional level to entice them into paying a premium for products or services. The vehicle for this connection is advertising.

A well-crafted ad campaign can increase customer awareness of a product by creating a strong emotional tie to a brand. “Emotionally invested” humans are far more likely to be loyal to whatever entity (person or company) is generating the desired emotion. They are also likely to recommend the brand to others, boosting the reach of the campaign far beyond the initial investment.

Coca-Cola, the global beverage giant, has mastered the art of using content to promote its brand and mould a strong connection with consumers. Over the years, the company has created many emotionally gripping ads, some of which managed to escape the four walls of Coke’s headquarters to become part of popular culture.

Coca-Cola’s ads often mix the drink with images of fashionable ideas and values. The timeless "Hilltop" commercial, for example, featured people from diverse backgrounds singing "I'd Like to Teach the World to Sing." Coke’s strategy was to link its beverage to the values of unity, harmony and happiness while tapping into universal human experiences like friendship, love and nostalgia. Content was the foundation of this campaign’s success.

Coca-Cola also understands the power of user-generated content as a means of promoting its brand. Through campaigns like "Share a Coke," whereby its bottles were personalised with names, Coca-Cola fostered a sense of ownership among consumers. It also encouraged people to create their own content and share those experiences on social media.

The genius of this ad campaign was that it convinced consumers to essentially do Coke’s marketing job on behalf of the company – all for free (well, aside from the “payment” of social media clout, which some people would consider to be valuable). They say the best marketing is when your customers do it for you, so the “Share a Coke” campaign by Coke probably had a fantastic ROI.

Is Content An Expense Or An Asset?

When it comes to accounting, the International Financial Reporting Standards (IFRS) defines an asset as a resource controlled by a company because of past events, from which future economic benefits are expected.

So, under this description, is content "controlled by the enterprise as a result of past events"? The answer is yes, because content is either created in-house or produced under contract and is therefore owned by the company that created it (or commissioned it). The act of content creation is the “past event” and the control stems from that direct ownership.

But what about "future economic benefits"? The key here is the word "future" which refers to the timespan over which content holds value. Some content, like the ad campaigns for Coca-Cola, could have a short lifespan and therefore limited value. In that case, the content is likely to be classified as an expense since it only incurs costs for the company during the sales generation process.

However, other types of content can be valuable in the long run. Considering content as an asset goes beyond semantics and accounting principles. It has significant implications for content creation and management. Developing content is not always just an expense. It regularly creates valuable assets that enhance a business's worth. Recognising this can help justify investments in content, particularly during cost-cutting phases and tight economic conditions.

Take, for example, a go-to whitepaper created by a cybersecurity firm on the basics of practising good digital hygiene for employees. This kind of content would carry lasting relevance and might stay online indefinitely with only minor updates. If it gains popularity, generates web traffic and builds trust for the brand that wrote it, that whitepaper could become an asset that provides ongoing economic benefits for the cyber firm. In this case, the content would be considered an asset rather than an expense.

And although unlike physical assets like petrol, content cannot be "used up," it can be repurposed, repackaged, published in multiple media formats, or combined with other content, continually delivering value. But this means content requires upkeep, such as updates or additions. Neglecting maintenance reduces its value, resulting in depreciation, just like with physical assets.

A good example here is the streaming service Netflix. Netflix invests heavily in producing and acquiring a wide range of content, including movies, TV shows and documentaries. Its strategy focuses on providing original programming, such as the series "Stranger Things" or "The Crown," which sets them apart from competitors. This exclusivity drives subscriber growth and enhances customer loyalty. Netflix also uses algorithms to put the most relevant shows in front of viewers.

But if Netflix were to take its foot off the gas for a few months and cease producing fresh content, its users could get bored with the stagnant library and cancel their subscriptions. Even with this hypothetical “with-or-without” test, it’s easy to see that content is perhaps the most valuable intangible asset for Netflix.

Why Value Content Assets?

Not all content is equally valuable. As an intangible asset, content is not valued in the same way as physical assets and so may not appear on the balance sheet. Yet this doesn't mean its value cannot be determined or that it’s pointless to expend any effort to assess its worth.

Very simply, if the value derived from content surpasses the cost of its creation, then it can be considered value-adding. If it fails to cover its own costs, it would be value-negative.

To gain a clearer picture of your content assets, an audit can be conducted, and the results placed in a content asset register. This process would involve examining each piece of content and recording data such as title, subject, author, creation date, last modification date, versions or editions produced, extent (word count, pages, etc.), places of use or publication, filename or storage location and the responsible person.

At a wider angle, several methods are commonly used to value content assets, each with its own merits and suitability depending on the context. Here are a few:

1. Market-Based Approach: This method assesses the value of content assets based on comparable transactions or market data. Companies look at similar content deals, acquisitions or licensing agreements to gauge the market value and come to a valuation;

2. Income-Based Approach: This focuses on the potential income or cash flow generated by content. It involves estimating future revenue streams, considering factors such as audience size, advertising revenue, subscriptions or sales. Discounted cash flow (DCF) analysis is often used as part of the evaluation;

3. Cost-Based Approach: This method estimates the value of content assets based on the cost incurred to make them. It considers factors such as production costs, R&D expenses and IP investments. While this approach provides a baseline value, it may not capture the true market worth of the content.

Takeaway: Brand is how customers choose between similar products or services. A strong brand is a valuable intangible asset, while a weak brand can easily scuttle a business.

An alien landing on Earth would be a bit confused about why the average shopping centre has dozens – sometimes hundreds – of what appear to be identical jeans.

What exactly is the difference, it might ask, between a pair of Levi’s jeans and the jeans offered by, say, Diesel or Gap?

And to a first approximation, the Martian is right to question the sanity of these strange humans. The jeans do all look the same no matter who is selling them. But the alien would be missing a crucial layer to navigate the maze of human commerce: brand power.

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Each of those apparel outlets rates higher or lower in the minds of consumers depending on a series of metrics that reflect whatever the individual feels is important to them. This subjective rating (some people like Levi’s jeans, some don’t) allows some apparel manufacturers to price their clothing in a higher retail bracket while others are forever stuck in the doldrums of the bargain bin.

The alien might see that brand is the outward reflection of a company’s reputation. Brand imparts a sense of whether an item (like a pair of jeans) will make a wearer feel “sexy,” “cool” or appear “down-to-earth.” Customers gravitate to certain items if the brand complements the identity they have already chosen for themselves.

The Martian might be a bit cynical and say a brand is little more than a manufactured method used by companies to create an illusion of choice. Yet brand is a highly effective marketing strategy that can make or break a company.

How to think about brand

Brand is the sum of all the signs, signals and perceptions other people have about a company. In that way, brand is a bit like reputation.

A reputation, like a brand, is carefully built over years through the thousands of interactions a company has with its customers, both directly and indirectly. For this reason, a brand image can collapse in much the same way as a compromised personal reputation – and sometimes for the same reasons.

Reputation is a nice analogy for brand. Consider a hypothetical scenario where you're looking to hire a contractor to remodel your home.

You have two options: Contractor A and Contractor B. Both have similar qualifications, experience and pricing. However, you've heard positive things about Contractor A's reputation from friends, neighbours and even online reviews. Contractor A is known for its attention to detail, great work and excellent customer service. On the other hand, you haven't heard much about Contractor B at all.

In such a situation, you'd likely feel much more confident choosing Contractor A due to its established reputation. From everything you’ve seen, the brand has almost become a social shorthand for trust, reliability and quality. That kind of reputation screams “spend your money with this company.”

Even though Contractor B might provide similar services, it doesn’t have a recognisable brand which means you have no way to gain assurance about its capabilities.

Of course, without actually experiencing Contractor A’s services it is impossible to know if it’s better than Contractor B’s. But you need to make a choice at some point and brand is all you really have to go on. It’s not an example of pure rationality (almost nothing human is purely rational), but it’s enough to compel you to pick up the phone and book a session with Contractor A.

Just as a reputable person is more likely to attract opportunities and maintain relationships, a well-established brand can attract customers, drive loyalty and ultimately lead to increased sales and market share.

Why do companies need a strong brand?

Developing a strong brand has a lot of upside.

A study published in the Journal of Marketing found that brand trust positively affects customer loyalty and engagement, leading to increased repurchase intentions and positive word-of-mouth referrals. Patagonia is a great case study for this.

From its humble beginnings in 1973 as a small climbing equipment manufacturer based in sunny California, Patagonia is today a globally recognised brand with a loyal customer base and a hefty market presence.

Part of Patagonia's success was down to its unwavering commitment to its values and purpose. The company became an advocate for environmental sustainability, social responsibility and decent products. This clear brand identity resonated with consumers and allowed Patagonia to stand out in a crowded marketplace.

The company went out of its way to create sustainable practices across its entire supply chain such as using recycled materials in its products to minimise waste and carbon emissions. This programme was more expensive but it attracted a loyal following of environmentally conscious consumers who shared those same values.

Patagonia's commitment to quality and durability further strengthened its brand image. The company embraced a "Buy Less, Choose Well" philosophy to discourage the throwaway culture of consumerism. Unlike its competitors, Patagonia offered a repair programme on all its garments to increase the lifetime of its garments.

Consultants would rubbish this idea. Doesn’t Patagonia know that deteriorating garments lead to repeat sales? Of course Patagonia understood that it was limiting its own profit margin, but its brand image of sustainability was more important long-term for the company, so it chose the more expensive option.

Patagonia generated about $US200 million of revenue in 2022, so it must be doing something right.

In all its marketing, Patagonia adopted a bold and authentic voice to create purpose-driven promotions, such as the "Don't Buy This Jacket" campaign which urged customers to consider the impact of their purchasing decisions. Customers not only continued to buy Patagonia products but also shared their experiences with others, amplifying the company's reach and brand image.

How can companies develop a strong brand?

The computer company Apple is widely considered the blueprint for building a powerful brand.

Apple's brand has become almost a synonym for innovation, elegance and a seamless user experience. It represents more than just a technology company; it has become a symbol of creativity, empowerment and aspiration. Apple's brand power has not only contributed to its financial success but has also created a loyal and passionate customer base that eagerly awaits its next ground-breaking product release.

Companies hoping to build a powerful brand should focus on developing a unique identity that resonates with a target audience and reflects their values and mission.

And since word tends to get around in the age of social media, it’s important for a company to develop a consistent brand experience across all customer touchpoints, including marketing materials, product packaging and customer service interactions.

Story, after all, is king and being in control of your company’s story is a fundamental strategy for any business no matter the size.

What happens when a company doesn't have a strong brand?

United Airlines serves as a real-world case study that demonstrates the consequences of neglecting brand development.

The airline has been regularly criticised for failing to prioritise the passenger experience, leading to several high-profile incidents of poor customer service and mishandled situations. These incidents, widely shared on social media, tarnished the company's reputation (an analogue of brand) and eroded customer trust.

The lack of a strong brand left UA vulnerable to public backlash and the effects of negative media coverage. Other airlines seized the opportunity to attract dissatisfied United Airlines customers, further exacerbating the company's decline.

Rebuilding the brand's reputation required substantial investment in marketing campaigns, customer service training and organisational restructuring.

While creating a brand can be expensive, there are cost-effective strategies that companies can use to develop a strong brand identity. By building a strong brand, companies can establish a unique position in the market, build trust and credibility with customers and command a premium for their products or services.

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Takeaway: Software enables companies to innovate, enhance efficiencies, deliver unique customer experiences and maintain a competitive edge.

One fun way to think about software as an intangible asset is to imagine it as a "digital wizard" that brings magic to your business.

Imagine your business as a magnificent castle, filled with an expansive library of enchanted books. Each book represents a unique software application or program, and within its pages lies a collection of powerful magic spells.

Both magic spells and software possess extraordinary abilities. Each spell in the library represents a specific solution designed to solve a problem or achieve a desired outcome. When a problem arises, you consult the enchanted library, select the appropriate book and within its pages, you find the precise spell (software). It’s even written down in “code,” just like a magic spell.

Just as magic spells can conjure illusions, create transformations, or bring objects to life, software has the power to automate processes, streamline workflows and unlock new value. Moreover, spells can be combined to boost the effect. In the same way, one piece of software can interact with another piece of software, creating synergistic effects.

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The analogy extends even further. Wizards can create and modify spells to suit their needs while software can be tailored to fit pretty much any business or process requirement. And while an enchanted library protects the magic spells, proper maintenance and security are both crucial for protecting your software assets. Think of regular updates, bug fixes and security patches as the dragon perched on the crenelations. The bigger the dragon, the safer the spells (software).

By thinking of software as a collection of magic spells, it is a bit easier to see how software is a hugely important intangible asset. Depending on how it’s used, software has huge potential to provide a serious competitive advantage.

How does software become an intangible asset?

Is software a tangible or intangible asset? That’s a good question and the answer is, both.

In most situations, software is classified as an intangible asset because it cannot be touched (from the Latin “tangere,” meaning “to touch”). However, certain accounting rules allow computer software to be classified as a tangible asset under Property, Plant, and Equipment (PP&E).

From this perspective, if software is used to deliver goods and services, then it can be classified as a tangible asset. Accountants also look at the cost of software to either buy or develop internally. If the cost of one copy of software is more than $100,000, then it is considered tangible. On top of this, if the software is used regularly (daily) and requires routine maintenance and updates, much like equipment, then accountants would probably classify it as a tangible asset.

However, software doesn’t really depreciate over time unlike items of physical nature that go through wear and tear. Conversely, software is still vulnerable to becoming outdated over time.

But from a company's perspective, software can only be an intangible asset since the ideas behind the code cannot be touched and it will be used to achieve business goals, which are intangible. Online services can also be considered intangible assets if they can be separated from the entity that created it. To be valuable, an online service must also be expected to generate future economic benefits for the entity, such as revenue or cost savings.

Another intangible asset dynamic of software is that it can be customised to meet the specific needs of a company or organisation and improve efficiency, productivity and accuracy in ways that off-the-shelf software cannot. And the ability to update and improve the asset, making it a valuable long-term investment, turning it into a new source of revenue for a company, are all characteristics of an asset that could be tangible or intangible. It all depends on how it is used.

What makes software a valuable intangible asset?

Rapid digital transformation has elevated the significance of software in every business – from the smallest to the largest. It has become the backbone of modern businesses, enabling automation, process optimisation and improved efficiency. As organisations rely more on software for their operations, the value of software as an intangible asset continues to rise.

Software also plays a pivotal role in providing a competitive edge. Innovative digital solutions can differentiate businesses by offering customers unique features, enhanced user experiences and improved customer satisfaction.

Unlike physical assets, software can scale much easier. Once developed, software can be replicated and distributed at a relatively low cost and almost zero labour effort. In fact, the post-scarcity copy/paste dynamic inherent to software poses some interesting questions about the true value of software under the labour theory of value.

Furthermore, the software can be easily updated, upgraded and customised to meet market demands and changing user requirements, ensuring that it will remain an important intangible asset for many years to come.

Does proprietary software offer a competitive advantage?

Open-source software is a great resource for most businesses. The open-source community has been diligent and charitable in building solutions for thousands of processes and offering the resulting software for free. However, open-source code can only get a company so far. After all, if everyone is using the same systems, where’s the differentiation or competitive advantage?

Creating a competitive advantage requires a unique solution that cannot be easily replicated. This is where proprietary software comes in. Most of the time, it can be customised to meet specific needs far better even than off-the-shelf software.

The upfront investment for building your own software can be substantial. Not only will it require skilled developers, software engineers and new tools, but there are also ongoing costs for maintenance, bug fixes, feature enhancements and technical support to keep the software up to date. On top of that, there are also intellectual property protection considerations, such as patents or copyrights, that need funding to ensure exclusivity and prevent unauthorised use or replication.

Building your own software will require some financial investment, but it can lead to significant gains in efficiency and new revenue streams should the company choose to sell it or issue licensing fees and subscriptions rather than keep it in-house.

Moreover, proprietary software is one of the best ways to create intangible assets with long-term value. This exclusivity can lead to strategic partnerships, licensing opportunities, or even acquisition offers, further enhancing the ROI.

But there is a lot more work involved with building and maintaining in-house software. Careful planning, effective execution and continuous evaluation are necessary to maximise the ROI on proprietary software development.

How Salesforce built an intangible asset edge

One notable example of a company that dramatically increased its value by building its own software is Salesforce.

Salesforce is a US-based customer relationship management (CRM) platform with a cloud-based software-as-a-service (SaaS) model that gives businesses a flexible and scalable platform for managing customer relationships and sales processes. Its proprietary software offers a range of features, including lead management, opportunity tracking, analytics and automation tools.

The company differentiated itself from traditional on-premises CRM software providers by combining user-friendly interfaces, customisation options and seamless integration with other common business systems, making it highly attractive to companies of all sizes and industries. It was able to effectively monetise its software through subscription-based licensing and recurring revenue models.

Salesforce's software has not only increased its company value, it has also provided immense value to customers. Coupled with a clear focus on continuous innovation, new product development and expanding software offerings (sometimes achieved through buying other software companies and wrapping the outside solution into its own) has cemented Salesforce as a global leader in the CRM market.

• Takeaway: The network effect occurs when the value of a product or service increases as more people use it.

The network effect is a valuable intangible asset for companies because it can create a virtuous cycle where the more people use a product or service, the more valuable it becomes. This can lead to higher customer retention rates, the attraction of new customers at a much lower marketing cost and improved revenue growth.

Also, the network effect can create barriers to entry for competitors because it is challenging to replicate an organic network effect of an established product or service.

How can companies develop a network effect?

Developing a network effect is a strategic goal for many modern companies seeking to build a strong competitive advantage. Thankfully, the path to creating a workable network effect (or at least encouraging one to form) is well-trodden.

Firstly, a company needs to create a compelling value proposition that attracts users to its platform or product. This value proposition should clearly communicate the benefits and advantages people will gain by participating. The best way to attract people is to solve a problem. The more efficiently a problem can be solved, the more likely people are to share that solution with friends.

Secondly, achieving critical mass is crucial for developing a self-driving network effect. Critical mass refers to reaching a point where a network's value significantly increases with each new user. To get there, companies may need to organise targeted marketing, create partnerships with incumbents, or develop incentives to attract an early user base. Achieving critical mass is worth the effort since it lays the foundation for a network effect to take hold.

Thirdly, think about ways to maximise the value of the network by enabling connections, communication and resource-sharing between users. It should be as easy as possible for people to talk with each other no matter where they might be located on the platform or service.

Think of messaging systems, user profiles and collaborative tools. By continuously iterating on a network's features, analysing user feedback and fostering a vibrant ecosystem, companies can create sustainable value for their users.

Why is it important for companies to create a network effect?

A network effect is the secret sauce of competitive advantage in the Information Age. If a company has a strong network effect, it becomes increasingly difficult for rivals to enter the market and compete.

A me-too company or rival might have a better product, but if no one knows about it or that service doesn’t have the same level of social proof, then it simply won’t outcompete an incumbent that does. That’s the awesome power of the network effect.

On top of acting as a mosquito repellent for competitors, companies with a strong network effect can charge higher prices or monetise their user base through advertising or data analysis.

What kind of companies benefit from a network effect?

Network effects are particularly valuable for companies that operate in sectors where the cost of acquiring new customers is high. One example is social media platforms. Companies like Facebook, Twitter or Instagram thrive on network effects since the value of these platforms increases with the number of active users.

As more users join, social media becomes more attractive to others, leading to an ever-growing user base, increased engagement and more opportunities for advertisers or creators.

Another beneficiary of the network effect is online marketplaces. Companies like eBay and Airbnb are only successful if they can connect buyers with sellers or hosts with guests. As the number of participants on the platform increases, a marketplace becomes more attractive to both buyers and sellers.

A larger user base means more product variety, competitive pricing and a higher likelihood of people finding what they need. As the network effect strengthens, these marketplaces dominate their respective industries, making it challenging for new competitors to enter and catch up.

Examples of companies that have created a network effect

Facebook: Facebook is widely regarded as one of the best examples of a successful and leveraged network effect. From its early days as a social networking platform exclusively for Harvard University students, Facebook expanded rapidly to become a global phenomenon today (and change its name to “Meta” along the way).

Facebook's massive user base is a crucial aspect of its network effect. With billions of active users, Facebook has created a vast interconnected network where people can connect, communicate and share content. The more users on the platform, the more valuable it becomes for each individual user.

The website’s engagement features also play a significant role in strengthening the network effect. Features like news feeds, likes, comments and sharing facilitate connections and information flow between users. People are encouraged to spend more time on the platform, engage with content and build connections with others. As users interact with posts, their actions are visible to their network, leading to further engagement and content discovery in a positive feedback loop.

Facebook has acquired and added complementary services like Instagram, WhatsApp and Oculus to its ecosystem. These services leverage Facebook's user base, infrastructure and features offering ways for users to seamlessly connect and share across multiple services, expanding their social circles and interactions.

Uber: One of the key elements of Uber's network effect is its large and diverse user base. As more riders join the platform, the availability of drivers increases meaning people don’t need to wait as long to begin their journey. This cuts both ways. As more drivers join Uber, riders have access to a broader pool of drivers, increasing the likelihood of finding a ride quickly. This positive feedback loop attracts more users to the platform, creating a virtuous cycle of growth and enhancing the overall value of the service.

Uber's network effect is further strengthened by its global expansion. As the company enters new cities and regions, it increases its potential user base, making the service more appealing. Moreover, Uber's global presence means users can rely on the service wherever they go and drivers benefit from a larger pool of potential passengers.

Uber's reputation mechanism plays a vital role in building its network effect. Both riders and drivers rate each other after each trip, which helps improve trust and ensure a positive experience for everyone. High-rated drivers attract more riders, while high-rated riders are more likely to receive prompt and quality service. This rating system incentivises users to maintain a good reputation, creating a reliable and trustworthy network that drives user engagement and encourages more individuals to join Uber.

Airbnb: Airbnb's focus on building a strong sense of community sets it apart from other online travel platforms. Through its review system, communication tools and shared spaces, the hospitality app fosters a sense of trust and connection between hosts and guests. Positive experiences and interactions within the community encourage hosts to continue listing their properties and for guests to return to the platform if they have future bookings. The network effect is reinforced by the social aspect of Airbnb, where users benefit not only from the accommodations but also from the relationships and shared experiences they have with hosts and other guests.

Airbnb also taps into the sharing economy by allowing people to monetise their spare rooms or properties. This has empowered a new wave of entrepreneurs around the world. As more hosts join the platform, they contribute to the network's growth and diversification, making Airbnb increasingly valuable for both hosts and guests. Airbnb has already disrupted the traditional hospitality industry by adding a sense of community-driven commerce to the sector that simply didn’t exist before.

Facebook, Uber and Airbnb each demonstrate how companies can create a strong network effect by offering a product or service that is valuable to a large number of people and incentivising adoption and sharing. Each of these examples may have competitors, but those rivals cannot boast the intangible asset of the network effect in quite the same way. And that makes all the difference.