Confidential Information

IA Glossary Term

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.