That single word used to be
‘Brand’, but no longer, despite the role of
intangibles in the market valuation of an enterprise.
With the tectonic changes in business models over the last 25 years, it seems the focus has moved to ‘Control‘. This change applies even when considering the legacy business models of the last century that are being renovated to meet the demands of this century.
You can tell the value of your brands, and intangibles more generally, if you look at your balance sheet and apply an ‘industry standard’ multiple to net assets. The difference between that number, and the saleable price of the business is the value of your intangibles. If it is a public company, the market value is simply the current stock price, but more complicated if the enterprise is not listed. However, the accountants will tell you there are benchmarks depending on the industry and your position in it. Their valuation will usually be a single figure multiple of the free cash flow, plus the recoverable value of assets.
That calculation simply does not compute with the stratospheric valuations of the successful tech companies around, or the volatility of their stock prices, so something is missing.
A few of the ‘old industry’ businesses with deep branding, also defy that quantitative logic, but not many. P&G’s Tide detergent in the US, Vegemite here in Australia, Coca Cola, and a few others defy, for the moment, the trend to homogeneity.
The common theme amongst those whose valuations defy the accountants calculations, largely the ‘new age’ unicorns, is captured by that single word: Control.
They all have some level of control over the value chain that reaches the end customer.
Remember Netscape? It was the original web browser that delivered smooth browsing to web walkers. It was sensationally successful, paving the way for the web trawling we all now just accept as a normal part of life. Killed off by Microsoft, who at that time had a virtual monopoly over peoples PC’s via MS Office. Microsoft simply bundled Explorer into Office, free, and whammo, Netscape is dead. Microsoft controlled the distribution channel, so was able to squeeze out Netscape.
Domestically, the NSW dairy industry used to be a regulated monopoly, delivering monopoly power to the designated processors via control of the distribution channels, supposedly for social reasons. That monopoly ensured that there was no innovation, and nothing that would disturb the comfortable monopoly was allowed, until economic logic shone through, and deregulation occurred. In a day, deregulation demolished the control the processors had over distribution, and handed it over to those with the control of the channels: supermarket retailers.
That sudden change, for which the processors were largely unprepared despite years of warning, led to the current situation where there are now no domestically controlled dairy processing companies of any real scale.
Spotify, a genuinely innovative platform that has changed, again, the way we obtain our music, relies on Apple for its distribution via the Apple App store. It seems Apple is actively pushing Apple music, so the future of Spotify must be at huge risk, unless they can find a way to gain control of their distribution channel. Apple will squeeze them to death over time, and take not just the subscription revenue from the consumer, but also squeeze down the royalty payments to the music creators at the other end, building monopoly margins.
Nice work if you can get it!
Supermarket retailers around the world have played the same game for ages, nowhere better than Australia, where the two gorillas control somewhere around 70% of FMCG sales to consumers. Proprietary brands have all but disappeared, and most of those that remain have little real value, as the customers have been taught to buy on price by the retailers house brands. This has squeezed proprietary margins by restricting access to the consumers.
Monopolies are great, when you are the monopolist, oligopolies are almost as good, and when you reach unstated arrangements with the other oligopolist, the margins are terrific. Just look at Australia’s banks, who collectively are the most profitable in the world as a % of GDP. Their profits are boosted by the lack of competition, and small regulated number, while their duty of care to customers becomes almost irrelevant, despite their protestations to the contrary. Let’s not talk about Australian petrol retailing, another example of profitable oligopoly control.
Amazon controls a huge chunk of the on line market by direct access to consumers. Third party products sold via Amazon that are successful find themselves faced with Amazon branded competitors very quickly, as Amazon knows more about your financials than you do, and controls the relationship with customers. They will suck out the margins, competitive advantage and shareholder value.
The lesson: build vertical control of your distribution channels into your business model.
In years to come, there will be no alternative.
It will be expensive, and risky, and certainly different to the model those of us over 40 grew up with, but that is the new world of vertical competition we now live in.
