MISSION INTANGIBLE

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MISSION:INTANGIBLE, the blog of the Intangible Asset Finance Society, offers critical comments on intangible asset, corporate reputation, and finance; supplemented by quantitative reputation metrics. Intangible assets include business processes, patents, trademarks; reputations for ethics and integrity; quality, safety, sustainability, security, and resilience; and comprise 70% of the average company's value. MISSION:INTANGIBLE is a registered trademark of the Intangible Asset Finance Society.

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Amazon: A greater distance to fall

C. HUYGENS - Tuesday, March 12, 2013
Amazon.com (AMZN) recently emerged as the company Harris Interactive ranks as having the best reputation in 2012 among the general public in the U.S.  As Mark Hulbert explains in the Wall Street Journal, "companies that have great reputations tend to be overvalued." The implication is that Apple's fall from grace is the norm, not the exception, and Hulbert backs the claim with several academic studies. Part of the problem, as readers of this blog and the book, Reputation, Stock Price and You, already appreciate, is that the reputational rankings published by Harris Interactive, the Reputation Institute, and others are weakly associated with stock price because:

1. The surveys have several organic challenges
   a. They survey consumers, not necessarily investors.
   b. Historic return on investment is a factor in their reputation rating; by the time a survey is published, a company may be fairly or even over priced
   c. Rather than surveying reputation, which is a going forward expectation that will better correlate with stock price, Harris and others are actually surveying brand affinity. (These "reputation" rankings best correlate with brand recall studies).

2. Rankings do not correlate well. One of the best surveys is published by Barron's. This survey asks money managers to rank firms on the basis of respect. In 2012, the reputation rankings from Harris and the rankings from Barron's showed a 72% correlation. (The rankings from the Reputation Institute and Fortune Magazine's Most Admired companies showed a correlation of 21%.)

3. Reputational value is measurable. But surveys are not the best measurement tool if one is interested in financial reward or risk; i.e., finding stock-picking opportunities or insuring reputational value loss.

Turning to Amazon and the reputational value rankings from Steel City Re, which are based on stakeholder expectations and the behaviors that are expected to create value, the reputational vital signs show consistent top quartile rankings among the 21 companies in the internet retail sector. The historic RVM volatility, a measure of the tightness of the range of stakeholder expectations is great ranking in the 85th percentile. This indicates there were many stakeholders who were going to be surprised by Amazon's performance. The current RVM volatility shows that they are still being surprised, and the resulting ranking, the CRR, is tops. RVM is a non-financial measure of reputational value while CRR is a measure of reputational ranking - call it the reputation premium.

Interestingly, the ROE is not at the top, which reflects the pessimism of some equity investors who, as part of the overall group of stakeholders, are voting with their shares. The other measures shown below indicate an ongoing pattern of high RVM volatility, metrics that place Amazon in the extreme of various measures relative to its peer group, and values that all indicate greater than average risk of a 12-forward month risk of a 7.5% or more fall in market cap.

Amazon and Sony: What happened?

C. HUYGENS - Friday, May 13, 2011
A few weeks ago, two of the biggest names in technology found themselves grappling with huge and potentially embarrassing debacles. As the Economist newspaper (28 April) summarized in their colorful headline, Online reputations in the dirt, on 26 April, "Amazon’s finance chief, Thomas Szkutak, said the firm was still trying to get to the bottom of a glitch that caused numerous websites it hosts for other businesses to crash or run painfully slowly during the previous week. The same day, Sony of Japan revealed that names, addresses, passwords and possibly credit-card details of 77m accounts were stolen when hackers gained access to the network it runs in 60 countries for its PlayStation online-gaming system, as well as for Qriocity, a service offering music, films and television shows.”

Reputation, of course, is the amalgam of impressions held by stakeholders, and it is shaped by such intangibles as these six (6): the means by which a company fosters ethical conformance, innovates, assures quality; and assures safety, sustainability and security. Business processes, really. And reputation manifests in many ways. Importantly, it sets expectations.

Of these six reputation drivers, Amazon faced a quality issue while Sony faced a security issue. The reputational consequences to these two companies are explained, in part, by stakeholders’ preexisting expectations, the degree to which those expectations were impacted by events, and the nature of expectations set going forward. Related, in that like reputation, it is forward looking, is the equity market’s reaction to these two different reputational experiences.


The Amazon reputational experience following the quality event shows increased volatility these past few weeks that is actually less than historic reputational volatility. In other words, stakeholders as a group seem overall unimpressed over background levels. As such, the equity jump is less surprising than it would be otherwise. It reflects the fact that Amazon suffered a reputational even and was resilient (relative to its baseline).

The experience at Sony is quite different. Sony's baseline reputational volatility is almost an order of magnitude less than Amazon's, and its reputation ranking is near the top of the peer group. Its stakeholders believe they have a good sense of what drives the company, and the degree to which it is a state of control. Equity investors, however, don't appear to understand how such a major security event could occur in the setting of what reputationally would appear to be a company in control. Their response is panic, and in our interpretation, suggests that Sony is now undervalued by the equity markets.

Turning to crude metrics of fractional intangible asset value, Amazon is almost purely intangible and thus the high degree of volatility is not too surprising. There may be much upside, but -- excluding IP -- there is probably no floor to the downside

Sony, in contrast, has a surprisingly small intangible asset fraction that is far lower than the median of its peer group. The large book value fraction of the company's value speaks to the relative stability of its economic metrics, but the huge drop from 40 to 20% intangible, as with the drop in stock price, is unreasonable for a company with such iconic brand and technology prowess.

Perhaps it is the overlay of the background geophysical crises in Japan that is making Sony's equity investors especially jumpy?

Nokia vs. Apple: Yearning for a bite

C. HUYGENS - Thursday, February 17, 2011
On Monday 14 February, Barron’s released its list of the world’s most respected companies. Apple (NASDAQ:APPL) tops the list at #1 yet again. And lest your curiosity be left hanging, finishing off the top 5 are Amazon (NASDAQ:AMZN), Berkshire Hathaway (NYSE:BRK), IBM (NYSE:IBM) and McDonald’s (NYSE:MCD).

And then there is Nokia (NYSE:NOK), the world’s biggest telephone handset-maker. Quotes the Economist, “We are standing on a burning [oil] platform,” Nokia’s CEO, Stephen Elop, wrote in a memo to all 132,000 employees. If Nokia did not want to be consumed by the flames, it had no choice but to plunge into the “icy waters” below. In plainer words, the company had to innovate -- quickly.

The value of Apple’s reputation for innovation, earned by actually being innovative, is that while the most respected company in the world only commands 4% of the telephone handset market, it commands 50% of the profits. That's pricing power, a benefit of a superior reputation, in the extreme.

Turning to the reputation metrics, Apple’s popular standing is reflected in its stable top ranking in the Steel City Re Corporate Reputation Index. Over the trailing twelve months, it has made the jump from the 97th percentile to the 100th percentile among the 51 companies in the Electronic Data Processing Equipment sector, and over the past six months, it hasn’t budged from that spot. Its corresponding trailing twelve month return on equity is 58.63% greater than the median of its peer group, its EWMA volatility is 1%, its trailing twelve week reputation velocity is 0.0, and its trailing twelve week reputation vector is undefined.

Its peer group shows a U-shaped drop and recovery in reputation standing relative to the market as a whole, and the intra-sector volatility is at the upper end of average. Significantly, the intangible asset fraction of the group has been progressively rising these past 12 months.

Nokia should wish for such metrics. Over the trailing twelve months, it has dropped from the 36th percentile to the 19th percentile among the 30 companies in the Diversified Electronics sector. Its corresponding trailing twelve month return on equity is 52.22% below than the median of its peer group, its EWMA volatility is 2%, its trailing twelve week reputation velocity is -10%, and its trailing twelve week reputation vector is -.8% which is a material level.

Its peer group shows a slight rise is reputation standing relative to the market as a whole, and the intra-sector volatility is at the low end of average. Last, its intangible asset fraction has dropped from 86% to 78% of market capitalization while the median of its peer group now stands at 88% of market cap.

Mr. Elop believes that one advantage Apple has over Nokia that he believes he can overcome is its access to the innovative genius that is resident in Silicon Valley. Stay tuned, as Finland comes to California.

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