How it’s feel hit by something not real or intangible? Ask Samsung. In August 2012, The Jury decide that The Korean Giant has to pay more than $1 billion due to Apple’s patent violation. The jury declared that slide and bounce touch is part of Apple’s innovation property – thus, a company has to pay Apple when using it in their product. This content will discuss intangible as a lasting competitive advantage: including patent, right, and brands.
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In This Issue
- Brands: The Power in The Name
- Patents: Immune from Competition
- License: Immune from competition
- Character: Beyond Magic, HP, LP, Rage, Special Move
- Investor Key Takeaway
Economic moat or in plain English, a business advantage that lasts or extends for a long period of time, can be emerged from intangible assets. In most cases, it can’t be seen, and it is difficult to be valued in dollars. But In most cases, its impact isn’t intangible.
Brand, Casting The Premium Spell: Intangible as Lasting Competitive Advantage
We begin with the elite group.
We don’t know how to explain it. They are the company that can cast higher prices than competitors for the same (or similar) feature or quality. Just because they are who they are. Disney has raised Disneyland tickets and people keep coming – even in pandemics. Apple sells, sorry, present technology with a future price. Interestingly, they still generate positive earning despite the falling unit sold.
Nike, make a “check” and the price of its apparel inflated. How a shoe could be that expensive? We don’t know-how, they just do it. Or Victoria Secret, it just a lingerie – man care inside that lingerie, the lingerie itself isn’t big deal. Why pay more?
To name another company in the same league we have, Tiffany – the diamond seller; Starbuck – the premium coffee maker. Rolex, the time watcher, Lamborghini, the supercar company. usually, this group characterized by a fat margin, excellent marketing, a high fan base, and community. All bounded like magic.
Patent, The Sole Player: Intangible as Lasting Competitive Advantage
The second group has privileges like the first one, but for a shorter period. Amgen patented its drug – Neulasta – as a stimulant for blood cells. The impressive about this drug isn’t its effect on patients, but its revenue. It was one of the most successful drugs in history. But when the patent expired, the party is over.
Drug patent protects its holder from copycat, which means that for a specific period of time, no company in this world is allowed to replicate its ingredients. During that time, the patent holder can exploit the market (Uhm, patient) and generate a significant amount of earnings (read: money) since it is the sole seller. The patent gives the monopolistic right to the company, making it attractive in the investor’s eye.
Another example is 5G technology.
When something new is developed, a standard needs to be created. For 5G, there is a need for related parties to have the same language, same common ground: that is protocols, specs, and others. To create that standard, companies with expertise in this field are invited. They are Snapdragon maker – Qualcomm, China Giant – Huawei, Former star – Nokia, and Swedish telecom giant Ericsson.
These companies contribute to developing the 5G process in order to be compatible with all related parties. A signal provider like AT&T can deliver its data in a 5G network for any smartphone brand. In return, a communication expert like Huawei and Qualcomm charges royalty when a company uses its devices or algorithm.
The characteristics of this group are highly efficient R&D, leadership in technological.
Right to Sell
This is the group that protected by government regulations. They preserve the market due to regulatory backup. The idea of investing in a betting company like a casino company – like Full House suit – isn’t bad. The regulation force that this kind of business can’t exist in large number. Same with casino, the alcoholic beverages company like Anheuser-Busch, part of AB InBev, who makes Budweiser enjoy such legal protection from authority.
if readers reluctant to invest in such “unethical business which associated with hot girl parties and losing money”, they could choose airport stock. In most case, local authority only allows one airport to operate, making its monopolistic in nature.
Unlocked New Character
This group is a little bit inferior to the first group – they operate in a unique product but have little pricing power. This is a licensed character group – mostly happens in sports gaming. I would like to take EA as an example. EA franchise for football (not American football, we call it soccer) is FIFA – given the exact name for the highest authority for football.
EA’s FIFA has licenses for top players like Lionel Messi, Cristiano Ronaldo, Neymar Jr, and most of the top clubs like FC Barcelona, Real Madrid, etc. Once used by EA, the rival can’t replicate these advantages. And this is a big deal for football fans and gamers. Missing iconic number 7 Cristiano Ronaldo or UEFA Champions League theme song is not football. By acquiring a license, EA bolsters its position as the top sports franchise in the gaming industry.
Same with when you play a basketball game. Play as if we are Stephen Curry or Lee Bron James with name and number on its back jersey give unique gaming experience. It will be far different when you do not find it.
Investor Key Takeaway for Intangible as Lasting Competitive Advantage
- Try to find a company with privilege, a company that can cast higher prices for its product as nothing happens; a company that has the “right” to sell something that a rival can’t.
- Several characteristics that describe these groups are huge and die-hard fan base, community, unique design, great marketing. imitating something great, hold patents, has government back up.
- Beware of the traps – we will discuss them later. A superb product isn’t necessarily an economic moat. BMW makes a great car, Sony makes a great disc, but none of them could cast premium for their product. Patents protect the business, but it erodes, the investor needs to account for it in the margin of safety calculation. And don’t forget to stay alert on regulatory changes – maybe the casino you are invested in has to stop operating. Who knows.
Hope that helps.