"If you have ideas, you have the main asset you need, and there is not any limit to what you can do with your business and your life." — Harvey S. Firestone
For years, a company value was defined by PP&E (Property, Plant and Equipment). Lately that has been changing. An intangible asset is not physical in nature. Identifiable intangible assets can be separated from other assets and can even be sold. These are assets such as intellectual property, patents, copyrights, trademarks and trade names. Software and other computer-related assets, outside of hardware, also classify as intangible assets. PP&E worked in a different time. Now we classify these assets under intellectual property. In a knowledge-based economy, it is an attempt to bring accounting in touch with the reality of GDP. AI only increases the problem.
Digital capital and human capital produce the products and services that thrive in most developed economies. There are tangible assets like servers and routers and basic software. These appear as capital investments in a company books. But what is even bigger and growing rapidly is a second type of asset — intangible assets. This includes all of the more subtle aspects of unique design, engaging user experiences, and digital capture of human behaviors. It includes social profiles, intense big data and algorithmic capabilities that can guide companies to growth. More intangibles include things like digital engagement and branding. Think ChatGPT, Google and Anthropic, or new business models, patents and processes licensed through AI.
The traditional way of looking at this is to treat all of these intangible things as expenses. This means the funding is not reflected in capital because they are not company investments. Since the amounts are not amortized, they take a large bite out of reported income. Sometimes, spending on intangible assets should be treated as capital investments. They are long term not short term. Amazon efforts to match product recommendations to your tastes or suggest video selections to Prime subscribers are more than expenses. These kinds of AI capabilities are expensive to build but they can create enduring competitive advantages.
It is important to realize these kinds of intangibles are not just the exception but the rule. The rule everywhere except education. Now the majority of the digital economy is part of the mix. Much of the spending in these digital companies is long term investment. This is particularly relevant with AI. These intangible assets can define the competitive landscape. In education, long term investments look like buildings, land, football stadium and district offices.
Bobbe Baggio, Ph.D.
Advantage Learning Technology