Introduction
Moat refers to a company’s capacity to preserve its competitive advantage and defend its long-term profitability. This series on moat investing examines the numerous key sources of moats, including Data, economies of scale, switching costs, and network effects. In this piece, we will cover another form of moat, named as Intangible Assets.
Patents are a legal entry barrier that protects businesses against the illegal commercial use of their products by competitors. In a similar fashion, government licencing may increase the entry barriers for new rivals. Additionally, brand equity might boost a customer’s propensity to pay for a product or service. The examples mentioned above are instances of intangible assets.
Intangible Moat
Patents, logos, regulatory licences, and other intangible assets can prevent competitors from copying a company’s products and enable it to charge a premium.
Although not always simple to quantify, intangible assets are one of the principal sources of significant competitive advantages for organisations and a significant source of economic moat. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licences, and business techniques that assist corporations in generating profits. Intangible assets assist businesses in protecting their competitive advantages. Using patents, for instance, businesses can protect their inventions against unlawful commercial use by competitors. Government licences, like patents, increase the entry barriers for new rivals. Reputation, which is frequently assessed by goodwill and brand recognition, is also seen as an intangible asset. Brand identities play a crucial part in helping businesses stay ahead of the competition, and a positive brand encourages sales, fosters customer trust, and inspires customer loyalty.
Examples of Intangible assets Moat
An intangible asset moat is an asset or feature that provides a distinct competitive advantage to a company despite lacking physical existence. This type of economic moat typically requires years to construct and is very impossible to duplicate. In India, the Tata Group is synonymous with reliability. This is an intangible asset moat that gives a competitive advantage that will be extremely challenging for other companies to reproduce.
This competitive advantage was not developed by the Tata Group’s marketing department. Its decades worth of commitment towards nation-building, transparency, and employee-friendly practices has earned its credibility.
Other firms with intangible assets include WhatsApp, Google, and Fevicol. The services provided by these companies have become synonymous with their products, making it difficult for a new company to challenge their dominant market position. These brand-led organisations frequently find it simple to retain customers, attract the greatest people, and offer high capital returns to shareholders.
Patents, trade secrets, and intellectual property are further forms of intangible assets that can offer a competitive edge. Patent-holding companies have a substantial economic moat that can generate money for up to twenty years. Due to the numerous patents Qualcomm controls in the communications business, it receives royalties on every phone developed and sold around the globe. This royalty income is a significant contributor to the company’s annual revenue.
Coca-Cola, for its iconic beverage, is most likely the best example of a trade secret. By keeping its recipe a secret, the corporation has ensured that none of its rivals are ever able to copy and sell its distinctive beverage till date.
Copyrights and licences that are legally protected are also instances of intellectual property. Therefore, businesses that wish to utilise protected intellectual property must obtain authorization or a licence beforehand.
For instance, if a corporation wants to employ recognizable characters such as Mickey Mouse or Donald Duck, it must obtain prior approval from The Walt Disney Company and pay the applicable cost. Without such legal protection for its intellectual property, Walt Disney may not have become the dominant player it is in the entertainment world today.
As an investor, you should therefore seek out businesses with economic moats such as patents, trademarks, trade secrets, etc. These provide businesses with an unparalleled competitive advantage in their chosen industry.
Diverse Strategies for Developing Intangible Assets Moat
Intangible assets moats refer to the competitive advantage created by an organisation’s intangible assets. Valuable intangible assets, like patents, trademarks, copyrights, and brand reputations, are examples of intangible assets. A corporation can construct a moat based on its intangible assets by using the following strategies:
- Obtaining patents, trademarks, and other kinds of intellectual property can create a moat by preventing competitors from replicating the company’s products or exploiting its brand.
- Establishing a strong brand identity and reputation can create a moat since it can make the business more memorable to customers and improve their loyalty.
- Customers are less likely to switch to a competition if they have a good relationship with a company that has fostered excellent customer interactions.
- Establishing a positive company culture helps build a moat by attracting and retaining top talent and enhancing staff productivity and customer happiness.
- Providing employees with continual training and development can generate a competitive advantage by enhancing employee abilities and making the business more competitive.
- Implementing a customer loyalty programme can build a moat by encouraging customers to continue doing business with the company.
- Developing robust alliances with other companies helps create a moat by granting the business access to new markets and resources.
An Investment Perspective
A recent research by Columbia Threadneedle indicates that 95 percent of senior investment decision-makers think that a company’s intangible assets include crucial information regarding the future viability of its business model. In addition, 88% concurred that standard valuation methodologies (such as discounted cash flow) are inappropriate if intangible assets are not thoroughly considered.
These figures are extraordinarily high since intangible assets are now the primary driver of a company’s profitability and growth. Through the prism of intangible assets, a firm’s performance and potential may be shown.
Therefore, effective investment decisions should accord a greater (but proportional) weight to the quality and robustness of a company’s intangible assets. These assets include, among others, data, branding, content, code, trade secrets and industrial know-how, internet assets, design rights, contractual rights, regulatory approvals and compliance with standards, and plant variety rights.
Although these assets are the fundamental drivers of enterprise value, they rarely appear on the balance sheet, and when they do, their recorded value is frequently erroneous and fails to identify any inherent value components.
This is largely the result of obsolete accounting rules that no longer reflect an organisation’s genuine value. Accounting rules were designed when physical assets dominated commerce and industry, but these principles are insufficient for characterising intangible assets. Given that intangibles account for over 90% of business equity value today, investors must spend a proportional amount of effort conducting due diligence on non-financial statement intangible assets.
Conclusion
Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licences, and business techniques that assist corporations in generating profits. An intangible asset moat is an asset or feature that provides a distinct competitive advantage to a company despite lacking physical existence. Creating such an intangible asset moat will create an edge over other businesses that will be extremely challenging for other companies to replicate, thereby keeping the business always ahead of the curve. Startups should also constantly search for such opportunities to build strong, defensible businesses with intangible moats and secure their long term sustainability.
