On March 13th, 1986 the New York Stock Exchange was bubbling with activity. Microsoft was to go public on that day, for USD 21 per share – surprising investors, competitors and Bill Gates alike. A company with huge cash reserves, steady revenue and a solid business model, it had a fantastic record with its market cap hitting USD 600 billion in 2000. Then, the dot-com bubble burst and it took Microsoft over a decade to reach that position.
The dot com bubble presented US lawmakers with a new but familiar problem. When innovation resulted in new creations, markets often had no idea how to value those assets. Valuing technology companies was always a hassle; however, it was easier for the investors to look into Apple’s and Amazon’s sales and gauge their performance every quarter. But most of Silicon Valley right now, makes its fortune by collecting, analysing and selling binary gold – ‘data’.
How does data really function?
To better value it, we must understand the key features and primary use of data. Data in isolation has lesser value when compared with a collection of numerous data points. At one point, data collection was a resource intensive process and only a few companies were able to do this successfully. The information extracted from this was used to understand consumer preferences and, thereby, the market more efficiently. This changed when Facebook announced its business model of targeted advertisements which were based on individual user data. There are several present-day organisations that capitalise on various parts of this process. Google and Facebook collect huge amounts of data through their free services. Microsoft offers cloud services to host this data. Oracle and Snowflake offer database software to structure and store this data. SAP and Salesforce offer analytics services to make sense of this data. Each of these companies cater to a specific purpose in the supply chain. Unlike a conventional supply chain, value is not added at every step of the process, but only at the final stage.
Valuing data and IP assets from the company’s perspective doesn’t give an accurate picture. A more fundamental approach must be taken towards commodities and their valuation. In a conventional market, every product or service is paid for, since the consumer derives utility from it. But the economic transactions are backed by the actual give-and-take of physical commodities (a product or service, or payment for it). This isn’t the case with data. The Gross Domestic Product (GDP) of a country measures the value of the final goods that the country possesses, i.e., the bottom line on a balance sheet. But data derives its value from the consumers using and obtaining value from it.
Erik Brynjolfsson, an economics professor at MIT uses the term ‘consumer surplus’ – a measure of the maximum that a customer is willing to pay for a service versus what they are already paying for it. The perfect example of this is the contrast between Wikipedia and the Britannica Encyclopaedia. Wikipedia allows users to search from a wide range of articles that are updated regularly and (most importantly) are free-of-cost. But thirty-two editions of the Britannica Encyclopaedia cost USD 1400, with several barriers to searching real time information. Therefore, Wikipedia’s value, while measured by this metric, should be around USD 1400 per year, but the company as such does not have any value.
Dr. Erik’s research involved asking several thousand participants a range of questions such as, “how much would you pay to use a service?”, “would you use Wikipedia over Facebook?” and “how much would you like to be paid to not use Facebook for a month?”. This helped him understand the value generated by these companies for consumers over time. He found out that consumers had derived value of more than USD 230 billion from Facebook since 2004. To put this into perspective, Facebook is a company whose market cap is around USD 800 billion today. Advertising revenue is never an accurate indicator of net value provided, since there are several services that generate value without advertisements, like Wikipedia. In the case of streaming services like Netflix, Amazon Prime and Disney+Hotstar, users are willing to pay more than five to ten times of what they already pay, to avail these services.
Consumer surplus isn’t new. Repurposing this metric and using it in the right context offers new insights and helps make important policy decisions.
Where can this be used?
There are three key areas where this could be useful – taxation, competition law and economic output. Facebook, Amazon and several other technology companies paid no corporate tax for several years, since they weren’t profitable in their initial years. In some cases, they didn’t pay taxes even after turning in profits, since corporations aren’t taxed annually, but by taking into the account their books for several years. While lawmakers have been puzzled about how to levy taxes, they could always build new frameworks to value these digital assets and tax them. In the status quo, property, corporate gains and other business assets are taxed, as these are essential to business and the company loses value if these assets are taken away.
Unfair pricing strategies have often helped certain corporations capture a huge market share and emerge as monopolies. Using consumer surplus to value data and examine relative pricing strategies among companies will help competition watch dogs identify outliers that are exploiting their market advantage. Apart from this, huge mergers and acquisitions (Facebook’s acquisition of Instagram and WhatsApp) can be judged better if the real value of these companies is understood. Finally, GDP isn’t the most accurate measure of economic health in a changing economy. Countries like India that have a competitive advantage in providing skilled labour and services for technology firms, will be ‘valued’ differently, if these indicators factor into the GDP calculation. If governments ascertain the value of the data economy, it will enable them to prioritise the right industries and use traditional frameworks while making policy decisions.
International organisations like the Organisation for Economic Cooperation and Development (OECD) are working in tandem with several governments in order to try and develop multiple frameworks like consumer surplus. Until then, identifying new indicators will help accurately value this newfound treasure.
Harsith Ravichandran is a freshman majoring in physics and mathematics. He’s curious about technology, environment and their interaction with politics and economics. He enjoy’s debating, hiking and a nice cup of tea.