A large part of the output in western economies is in immaterial or cognitive assets. Even material goods to a large part are no longer mainly valued through the physical resources that go into their production. This has created a peculiar economy in which some big players appear unbeatable. I would like to argue that not the competition but a generally rising tide will eventually reshuffle the cards and topple the giants of today’s economy.
Let me just spend a paragraph clarifying the language I will use in this article. What I call Cognitive Assets for the purposes of this article is a subset of what is often referred to as Intangible Assets and a superset of Intellectual Property. The problem with Intangible Assets is that this category is incredibly broad. The presence of Intangible Assets is also nothing new: Brand identity was already an important factor before the end of the Fordist economy. What is new is the unique role of assets derived from the resources of the information age: Data, know-how, and access to a unique talent pool, just to name a few. “Intellectual Property” captures some of that but it also has a more technical meaning, limiting it to those Cognitive Assets that benefit from legal protection like copyrights and patents.
Software is, of course, an extreme example of the growing importance of Cognitive Assets. Alphabet’s value is almost exclusively derived from immaterial property. This, for some, is a sufficient explanation of the extremely expensive price-to-book ratio of the biggest tech stocks: The traditional book value of a company does not account for its Cognitive Assets, leading people to conclude that it is an inadequate metric for assessing value in a cognitive economy.
The dominance of Cognitive Assets makes navigating this economy more complex: Back in the days you could in theory stroll over a company’s manufacturing site to get a sense of its book value. Walking into the office of a modern software company, however, does not give you a single clue what value is encapsulated in people’s heads and the hard disks of the machines in front of them.
Furthermore, it is less clear to each employee, how they contribute to the value creation process and, indeed, by the very nature of innovative work, a lot of time will be spent on activities that do not contribute to any value creation.
Any Cognitive Lead will Perish
The biggest software companies seem unattainable because of their lead in cognitive assets. But are they? Cognitive assets are difficult to measure and, I would argue, also very volatile.
Let us first consider, for the purposes of this article, what are some of the elements that make up the lead of a company through cognitive assets:
- Copyrights and patents allow a company to exclusively exploit an innovation (and to employ a weaponized legal department to target smaller competitors).
- Information advantages such as databases, code, and access to information that no one else has access to allow for business models and services with very little competition.
- Big software companies are known to be very selective in recruitment and very generous in compensation, leading to an enormous potential encapsulated in their employees’ skills which could allow them to be just a bit quicker when executing a new project.
- Big companies that rely on network effects can secure a steep barrier to entry over competitors that don’t have access to the same network.
Note, that I am explicitly not including other forms of immaterial value such as brand value even though they do of course play an important role. It just appears to me that these factors have not gained in importance in today’s economy compared to the economy of a hundred years ago.
All of these would seem to be insurmountable obstacles for any competitor in a static environment. In the real world, however, each of these advantages has breaking points:
Copyrights and patents of course expire. More importantly though, even before they expire they will lose relevance due to changed circumstances. Once something is in the world, it is known that it is possible to achieve and commoditization is just a matter of time.
Information advantage in terms of databases, code, and know-how seems massive in a winner-takes-it-all-market, however, there are also commoditization effects: There is usually an open-source alternative to the best known proprietary offering which is quickly used as a basis for smaller players to compete with a much smaller investment.
What about data though? Isn’t Facebook knowing everything about our lives a massive advantage? Of course, this unique position enables business models that other players don’t have. However, data is only valuable as long as it is fresh and relevant. If everyone stopped using Facebook’s services tomorrow due to some scandal or a culture shift, yesterday’s data would be almost worthless.
Concerning network effects, we already see their Achilles heel: They are not necessarily strong across generations meaning that Facebook has to continuously buy up the next generation of social networking to remain in the race.
Employees and their specific skills are probably even more volatile: Employees are not slaves and can quickly migrate once the wind changes. This is especially true for the global, cosmopolitan class which walks through the halls of Big Tech – people that could move from one big city to another without much hesitation if necessary. We have seen that the COVID pandemic has caused large shifts, sometimes referred to as “the great resignation” which demonstrates that employee loyalty is not something big companies can bank on.
I think that for this reason, in a winner-takes-it-all-market, a market leader can be seen as competing not so much with the number two, but rather with the overall rising tide and any slip-up can mean losing the current lead.