Volatile Markets and the Risks of Image-based Economies

We are all helplessly staring as markets rally and then drop down, and as much as the factors of this behavior are diverse I would like to emphasize the importance that an IP-based economy has on this phenomenon.

As far as our western developed countries are concerned general manufacturing has migrated to other countries, replaced by next-generation, knowledge-based industries, including the life sciences, IT, fiber optics and health care. Just as machine tools and capital equipment were the assets of yesterday’s manufacturers, intellectual property now provides the value in today’s economy.  

A world-wide shift to knowledge based economics has placed more emphasis on an organisation's intangible assets and intellectual property making its valuation highly difficult and very unstable. This is particularly true for companies whose IP resides not so much in a patent or a specific technology but in a logo, depending therefore not so much on the ability to produce a cost-efficient product but on people’s appreciation of a status symbol, idea, fantasy, image…. Whatever you want to call it!

What is Facebook worth? It is only worth 800 million users, with their constant picture uploading and wall-writing. But is facebook really producing an asset with  an intrinsic value? Isn’t it very easy for any other IT geek to produce a “Facelog”? How easy is it for 800 million people to start logging in and uploading photos on “Facelog” instead of Facebook? BWM, or Porsche (for example) undoubtedly have an IP value: their logo (which is a worldwide status symbol and mark of quality) but behind their symbol stand material assets, large investments, an objectively measurable quality and significant means of production.

When we reflect on how much faster it is possible to “duplicate” or “replace” Facebook rather than Porsche and on how hard it is, therefore, to predict long-term user/consumer demand for an IP-based (or shall we say image-based?) company we probably understand one of the many factors that are determining recent market roller coasters.

In addition to these, by nature highly volatile companies, that are earning an ever larger share of our investors’ money (example: LinkedIn’s current market cap is 9B US$) we are also assisting to old and established companies offering a real-value product shifting their attention more and more to their image rather than to the quality or their products.

I think a good example of this phenomenon is Apple. Apple used to be loved and respected for its quality, for its operating system and for its forefront products. I grew up with Apple computers and until my last two ones I never had one breakdown and when I bought one the base model was better than most PCs you could get. Probably (hum???) due to bad luck my last two broke (video card, mother board) and by surfing the net one finds a very large amount of people complaining about their Mac. Until the latest Unibody model all Apple laptops came by default with an anti-glare screen, which is a much more expensive screen but provides an incomparable visibility, now you have to specifically order it and pay an extra amount of money to have it.

What am I trying to say? That Apple, thanks to its quality and undoubtedly also to its design, became fashionable and has since started to sell computers and gadgets not for their intrinsic value and functionality but because they became a status symbol,;being more expensive and having a very good reputation they became the “computer for the elite” leading, therefore, every non-elite person to want one. Now Apple is happy to cut down costs and reach out to a larger group of image-hungry consumers whilst simultaneously cutting down on the quality that made it the brand it is. As Apple shares soared (the good days are probably already behind) we saw its quality fall, making the value of one of the world’s largest companies become more and more an image-based one and therefore a volatile one.

As long as our culture and our pantheon of symbols will remain the dominating, admired, and desired ones we will have something to sell, but the day a pear tastes better than an apple our companies have very little to offer.