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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 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?

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