According to Interbrand Corporation’s Best Global Brands Ranking the value of Microsoft brand was $60.8 billion in 2010. How can the Microsoft brand be worth so much?
Lets start by figuring out what that number means. In the past, one of the undervalued assets of companies was their brand, because they are off-balance-sheet items. Haigh & Knowles, (2004) tell us that today, looking at a typical company like Microsoft, net tangible assets make a small percentage of total value. When comparing brand value to percentage of market capitalization we find that, based on the 2005 Interbrand study, Microsoft’s brand value was $59.9 billion compared to a market capitalization of only $13.2 billion.
So why does the Microsoft brand contribute so much to its value? There has been this value shift from tangible to intangible assets. The tangible assets of Microsoft including land, equipment, inventory, networking, only account for roughly 22% of its value. Especially in a software company like Microsoft, its real value comes in its intangible assets such as patents, distribution rights, customer data bases, brands/sub-brands, and the quality of their workforce and management. Intellectual property rights, trademarks, trade names, patents, and designs protect these intangibles and help make a brand a valuable asset.
Brands like Microsoft establish a level of quality and performance in the minds of individuals and businesses. These satisfied buyers choose to buy the product again. The brand loyalty represents predictability and security for demand. It also makes it very difficult for competitors to enter the market. As the old saying goes, “No one ever got fired for buying IBM.” All the years of marketing and product experience have helped secure a competitive advantage for Microsoft. That’s why there is such a price premium paid for companies like Microsoft. Imagine trying to build a Microsoft from scratch? Even if you were given the 22% in tangibles of equipment and other assets it would be a difficult task. In creating a new software company from scratch that 78% is a high hill to get over.
A good example of how the power and value of Microsoft’s brand created competitive advantage was back in the late 1990’s. Netscape tried to compete with Microsoft by getting into the Internet browser arena quickly while Microsoft underestimated its popularity and potential.
Discovering it made a mistake as Netscape gained prominence, Microsoft used its brand power to squelch Netscape’s threat to its desktop software dominance by pressuring its distributors (PC manufactures) to restrict the distribution and usage of Netscape’s browser. Today Wal-Mart uses its brand power to negotiate, or as some would say demand, lower prices from its supplier.
Do you think the rise of store brands lowered brand value in package goods?