The Valuation of Digital Intangibles

An intangible is a non-monetary asset that manifests itself by its economic properties. It does not have physical substance but grants rights and economic benefits to its owner. The examination of the general approaches of the valuation of companies is preliminary to the estimation of assets such as the intangibles. Intangibles are more specific than other assets and incorporate higher information asymmetries, linked to higher risk profiles and lower collateral value. Their accounting is controversial, privileging prudence over substance. The most widely used approaches of assessing intangibles are based on market, income, or cost-related metrics.

Scalability indicates the ability of a process, network, or system to handle a growing amount of work. Scalability fosters economic marginality, especially in intangible-driven businesses where variable costs are typically negligible. Massive volumes may offset low margins, producing economic gains. Digitalization is defined as the concept of “going paperless”, the technical process of transforming analog information or physical products into digital form. Digital scalability operates in a web context, where networked agents interact to generate co-created value. Economic and financial margins that represent a primary parameter for valuation are boosted by cost savings and scalable increases in expected revenues. Digitalized intangibles synergistically interact through networked platforms that reshape traditional supply chains.

The know-how (to do it) and trade (industrial) secrets are proprietary information or knowledge that assists or improve a commercial activity, but that is not registered for protection in the manner of a patent or trademark. The sharing and transferability of know-how is the basis of its economic appraisal, which is based on complementary methodologies projecting the future usefulness of the costs incurred, the relief-from-royalties by the license, or the differential income from internal exploitation. Unlike patents, the know-how is not independently negotiable and is more difficult to enforce against third parties, but at the same time, it retains some characteristics of confidentiality that with the patenting in part must be disclosed. Within a digital process, the know-how is the “glue” behind the integration of synergistic intangibles that drives product and process innovation.

Patents are the result of risky and costly R&D, and the developer will try to recover its costs (and earn a return) through the sale of products covered by the patent, licensing others to use the invention (often a product or process), or through its outright sale. Patents are registered for protection and are typically valued for litigation or licensing purposes. They can create scalable value, levered by debt, and serviced by intangible-driven incremental EBITDA and cash flows. Intangibles like patents are a vital component of cash-generating value and goodwill as an excess return. Operating leverage is enhanced by patent-driven scalability, with a positive impact on cash generation. Bottlenecks that limit the potential of patents’ value are critically examined, with some tips for their minimization.

Innovative startups are newly formed companies with high growth potential, which usually absorb a lot of liquidity in the early years of life, to finance development, against minimal collateralizable assets. This is unattractive for traditional banking intermediaries, usually replaced by other specialized intermediaries such as venture capital or private equity funds, which diversify their portfolio basing their strategies on a multi-year exit with substantial expected increases in value from investments that survive a Darwinian selection.

The evaluation of the target companies follows traditional methodologies, accompanied by specific features deriving from varied probabilistic scenarios and multiple exit methods. The technological footprint implies evaluation analogies with patents, know-how, and intangibles linked to specific sectors (biomedical, internet, etc.).

The software, generally understood as a sequence of computer instructions for performing functions on devices such as hardware, falls within the category of intangible assets and, due to its pervasiveness in people’s daily life, represents an essential tool for any user. As a result, some complex legal issues, as well as sophisticated economic evaluation approaches come out, to estimate the damage caused by counterfeiting, in an evolutionary scenario characterized by sharp technological discontinuities. The database indicates a set of data, homogeneous in content and format; these data are stored in a computer and interrogated via a computer-implemented system by using the provided access keys. The estimation follows the general evaluation criteria of the other intangible assets—the income, cost, or market approach—to be adapted to the specific characteristics of the software or database.

Artificial intelligence allows us to think and act humanely and rationally through hardware systems and software programs capable of providing performances that, to an ordinary observer, would seem to be the exclusive domain of natural (human) intelligence. The applications are more and more extensive, thanks also to the big data available today and the ability of self-learning (machine learning) or instead to the synergies with the natural intelligence, which for vision and flexibility remains irreplaceable. The examination of the business models of the companies that base their strategies on artificial intelligence or, more extensively, of the traditional companies using specific applications, is preliminary to a framework of the legal problems (still pioneering) and of the profiles of economic evaluation.

Trademarks (brands) are intangibles that represent distinctive characters (with originality, truthfulness, novelty, and lawfulness as requirements) that identify a good of which they represent quality, provenience, and distinctive capacity. The surplus value that the trademark confers on a product (compared to an unmarked equivalent) is an expression of the value of this classic intangible asset, which can be exploited internally or licensed. The international standard ISO 10668 (2010) (Available at https://​www.​iso.​org/​standard/​46032.​html.) defines and identifies a methodology for assessing the economic value of brands, outlining the objectives, approaches, valuation methods, and the modes of selection and identification of the baseline data, to be used during the valuation process with the scope of guiding the evaluator, reducing the discretional margins, and suggesting a sort of evaluation “protocol”. Digital brands represent an informatic extension of the trademarks operating on internet platforms and connected to other intangibles as domain names.

The concept of heading, in terms of valuation and legal protection, shows similarities with the trademark, identifying itself with the name and logo it expresses. Copyright is a classic intangible right that regulates the creation and use of cultural goods (books, songs, films, etc.), and is completely reshaped by its digital diffusion. For the valuation of the newspaper headings, empirical formulas proposed by appraisal practitioners are used, considering the expected typical revenues (sales/subscriptions, advertising, …) and the operating losses accrued for their development. The valuation of online headings and thematic websites/channels presents further peculiarities. The valuation cannot ignore a strategic analysis of the business models, characterized by a sharp technological and market discontinuity, with gradual transmigration toward online headings, eBooks, and digital printing. Copyright is evaluated considering potential royalties or other income and market approaches, consistent with International Valuation Standard 210.

Web domain names represent the gateway to Internet connections and access to specific websites. Their value depends on several parameters, such as Web traffic or search engines, and is typically calculated with “quick and dirty” algorithms freely available on the Web. The value of a web domain depends on its capacity to attract traffic, i.e., visitors, and to transform them into cash-generating customers. All domain names are unique, and so there is no standard valuation method, especially if they are appraised within an IT bundle of related intangibles. Comparable transactions represent a benchmark for valuation, considering even the hypothesis of licensing the domain name to get a reasonable royalty. A more detailed appraisal should consider not only the stand-alone value of a domain name, but rather its synergies with collateral intangibles such as websites, digital brands, or M-Apps. Considerations about domain names can be easily extended to websites that represent the contents of the domain. Valuation of domain names and websites, in many cases, tends to coincide.

M(obile)-Apps are programs used by mobile devices (smartphones, tablets, smartwatches, …), now widespread, for various uses (system operation, chat, games, social networks, geolocation, e-commerce, …), available for download on unique digital platforms (store). Their legal and fiscal framework is still under discussion and is based on the distinction between the developer, distributor, and final user. Preparation of a business plan is propaedeutic to the identification of the key variables to be used in the estimate (e.g., EBITDA, operating or net cash flow, etc.). Strategic SWOT analysis can complement the envisaged scenarios.The economic evaluation of apps is based on software estimation methodologies appropriately adapted to the specific case (incremental economic or financial flows; expected royalties; …), considering the potential applicability on a large scale, with potentially exponential revenues and reduced additional costs.

Big data consists of the computerized collection of vast amounts of data, processed with algorithms in sequential software, to be classified and stored to feed interoperable databases and decision-making processes. Data are an increasingly worthy asset, and they reduce information asymmetries, soften conflicts of interest, and mitigate risk (as far as they reduce the difference between continuously updated expected outcomes and reality). The impact on product and process innovation, know-how, patentable inventions, and digital marketing intangibles (trademarks, mobile apps, web domains, etc.) represents a sharp discontinuity in business models, allowing for scalable extra returns. The economic potential is still mostly unexplored, in terms of improving business planning accuracy.

The Internet of Things is based on technologies that transform inanimate objects, equipped with sensors that collect and exchange data. It so consists of a set of connected devices. The connectivity between objects, the network-web (as a virtual exchange platform), and the intangibles, represents a driver of value creation, through product and process innovation. The consequences of these epochal changes in the functionalities and potential of the IoT pose critical legal questions concerning liability, privacy, and security. This positively affects valuation, improves economic and financial margins, and reduces discount risk factors. IoT fuels big data and improves the valuation contents of the information.

Internet companies are Internet access providers for consumers, while social networks consist of social platforms on the Internet developed as free mass media, where users can present themselves to a wide audience, creating virtual communities where various contents are shared. The growing spread of social networks has given rise to problems of copyright protection and the preservation of sensitive data. Social networks become an advanced tool for personalized marketing and digital branding by providing third parties with user preferences. The attribution of economic value for social networks is complicated since most of the value resides in the users, the number and quality of connections, and the network effect.

Value co-creation between providers and users is increasingly embedded in web-based business models.

The blockchain is a decentralized and distributed digital ledger—an open database with a pattern of sharable and unmodifiable data that are sequenced in chronological order. This new digital infrastructure is validated with mathematical consensus rather than by humans.

Practical applications go well beyond the controversial cryptocurrencies, even thanks to smart contracts and the digital scalability of innovative business models. Blockchain technology can be used for e-commerce, for the recording of copyright data, or to track digital access.

Thanks to the Internet of Value, transactions do not require intermediaries, exploiting digital networks where different players interact and contribute to value co-creation.

The legal nature of the blockchain (public, private, or part of a consortium) and its revenue-driven business model are prerequisites for the appraisal. Utilization value for adopters (regarding lower costs, higher reliability of data, immediacy, etc.) should be considered.

The valuation shares similarities with other digital intangibles (database, Internet of Things, big data, etc.) and is primarily founded on the cost savings that derive from the use of blockchains. The valuation of blockchains can so be complemented with an estimate of the value that they add to traditional businesses.

Blockchains revolutionize the possibilities for individual ownership and market exchanges of any digital asset.

Digital art uses digital technology as part of the creative process or exhibition presentation. Crypto art is linked to blockchain technology and concerns certified digital artworks. Valuation profiles take their cues from the metrics traditionally used for copyright (royalty monetization or otherwise) and adapt to the peculiar case at hand. Compared to traditional art, the greater usability through web channels is typically counterbalanced by an absence of exclusivity.

The physical reality can be partially mapped with network theory, showing the edging links between connected nodes, and their spatial and intertemporal dynamic interaction. The Internet is a network of networks representing a global system of interconnected computer networks. The metaverse is an immersive network of 3D virtual worlds—a virtual realm—focused on social connection. There is so an evident Ariadne’s thread between these ecosystems, interpreted with multilayer network theory that examines the connectivity and interdependency between nodes positioned in the physical world, the web, or the metaverse.

A valuation methodology of the metaverse ecosystems will be proposed, using a with-and-without approach or multilayer network metrics.

Cloud computing is the delivery of different services through the Internet. These resources include tools and applications like data storage, servers, databases, networking, and software. Rather than keeping files on a proprietary hard drive or local storage device, cloud-based storage makes it possible to save them to a remote database. If an electronic device has access to the web, it has access to the data and the software programs to run it. The analysis of the innovative business model of a cloud computing company is a prerequisite for its appraisal. The evaluation depends on the prioritizing identification of the crucial value drivers.

The digital platform is a hardware or software infrastructure that provides technological services and tools, programs, and applications, for the distribution, management, and creation of free or paid digital content and services. Digital platforms are the basis of innovative business models of highly profitable companies (such as Google or Facebook), thanks to the (presumed) gratuitousness of the services offered, offset by advertising revenues. Smart working and e-commerce also revolve around the intermediation of digital platforms. The evaluation metrics are of relevance for the managers and users of the platforms, who participate, sometimes unwittingly, in an innovative process of co-creation of value.

The economic valuation of goodwill is based on an interdisciplinary approach that synergistically considers its legal, accounting, fiscal, and strategic aspects. The controversial concept of goodwill (if positive, badwill if negative) has always divided lawyers, businesspeople, and economists and is applied in M&A transactions. Digital goodwill is even more slippery, as it refers to the scalable properties of innovative intangibles, whose business models and market comparisons are difficult to figure out. Any competitive advantage is intrinsically ephemeral.

Goodwill is a residual intangible since it incorporates all the added value that cannot be directly allocated to any other specific immaterial asset. The customers’ portfolio is one of the most critical components of goodwill.

The damage due to loss of goodwill, the diversion of customers, infringement of exclusivity, and counterfeiting can hinder the bankability of the damaged company and is very frequent and uneasy to estimate.

This chapter analyzes some heterogeneous topics that have a common denominator in a synergistic portfolio of intangibles. The portfolio of intangible assets allows enhancing synergies, as it happens with patent pools or with interactions between brands and web domains, know-how and following patents, etc.

Bundled intangibles are used in digital infrastructural investments (for smart cities, smart hospitals, etc.) where Public and Private Partners interact, and the latter are remunerated for their risky investments with fixed and variable reward schemes. Whereas the private firm is represented by a Special Purpose Vehicle in Public–Private Partnerships, in other cases concentrated on the exploitation of intangible resources, they may be concentrated in a royalty company.

Royalty companies act as a container for intangible assets, guaranteeing their synergic use. Centralization of intangibles may ease their worldwide exploitation.

Capital consists of assets used to produce goods and services. Whereas financial capital—i.e., monetary equity conferred by the shareholders in a business entity—has traditionally been a scarce and expensive resource, other complementary forms of equity have progressively emerged. Book versus market value of equity/capital is formed by (in)tangible capital and/or (non) monetary equity. These traditional features of capital are being complemented by social and human components, harder to detect in accounting terms and so to appraise. Social/human capital, or variants represented by circular, narrative, relational, or reputational capital, are increasingly used and embedded in ESG metrics that are part of the wider Sustainable Development Goals (SDGs). Network capital links firms to the external ecosystem, promoting joint ventures increasingly mastered by digital platforms. Sustainability emerges as a common denominator of any equity/capital definition that needs to be continuously nurtured by complementary stakeholders to achieve long-lasting survival strategies. Even the beneficiaries of capital exploitation go well beyond the narrow boundaries of shareholding stakes. Even if sustainability embraces social and environmental issues, its economic features represent the backbone for long-term durability (… no money, no party). Sustainable capital is counterbalanced by mostly intangible assets, as they reflect immaterial features consistent with ESG patterns. This chapter shows how the complementary capital/equity sources interact in the formation of shared and long-lasting wealth. Implications ignite an insightful reexamination of corporate finance core principles and jeopardize value creation and measurement patterns. Cost of capital smart collection fosters “augmented” business planning, nurtured by timely feedback of value co-creating stakeholders. Sustainability patterns overcome the Malthusian deadlock of overexploitation, when the bones of society fracture, readdressing the capital where it is most needed, so maximizing its socio-economic return.

The bankability of digital assets represents a dominant aspect of the investment and valuation process. Digital intangibles create scalable value, levered by debt and serviced by incremental EBITDA and cash flows. However, they intrinsically incorporate information asymmetries and may so discourage debt but are a vital component of cash-generating value, so representing a key factor for debt servicing, with paradoxical effects (more guarantees with less collateral?). The ability to improve cash flows emerges as a key feature of value-enhancing intangibles, bypassing their lack of collateral value. Corporate governance concerns, unless softened, exacerbate bankability issues, and make the fair appraisal more difficult to carry on.