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Three Key Characteristics of the Intangible Economy

· 3 min read

For centuries, our economy has revolved around physical assets. With technological advancements, the modern economic landscape has changed, and the most significant investments and assets are increasingly occurring and existing in non-physical forms.

The highest-valued companies, including Facebook, have their core assets in intangible assets such as software, branding, and development capabilities, rather than real estate or factories. Companies built on intangible assets operate differently from those relying on physical assets due to certain characteristics. From the book "Capitalism without Capital," we summarize the three key characteristics of intangible assets.

1. Rapid Scalability​

Businesses that rely on physical assets share a common drawback — they are easily constrained. When we need more production capacity, we must invest in acquiring more physical assets. In contrast, intangible assets are not subject to such limitations, allowing for rapid expansion in a short period. The scalability of intangible assets is particularly evident in the tech industry. For instance, the development of a software application can often lead to millions of downloads. This means that an increasing number of intangible asset-intensive companies can grow to astonishingly large scales.

However, this rapid scalability also brings the possibility of monopolies, posing significant challenges for new companies entering the market.

2. High Risk and Irrecoverability​

Physical assets tend to outperform intangible assets in terms of value stability. Even if physical assets depreciate, they are unlikely to be completely unwanted at the time of sale, whereas intangible assets are different. Intangible assets are difficult to quantify and cannot be recovered once issues arise, becoming sunk costs that investors have already incurred and cannot reclaim.

Brands do not have mature markets: on one hand, because brand value is hard to assess; on the other hand, a company's failure often leads to the complete disappearance of its brand value. Therefore, if a company relying on intangible assets fails, all previous investments will be lost. In reality, intangible investments carry extremely high risks and can vanish overnight.

3. Ease of Replication​

Intangible assets are generally easier to replicate than physical assets, making them susceptible to theft by competitors; they can be an idea or a concept. Thus, when a tech company creatively solves a problem, a surge of imitators and competitors typically follows. The iPhone is a prime example. To capture a larger market share, competitors often continuously engage in technological improvements and further innovations.

The ease of replication also brings issues of abuse and plagiarism. Policymakers in the intangible economy need to strengthen robust protection of intellectual property to ensure that innovators are not discouraged.

Characteristics of Intangible Economy

· 2 min read

Over the past centuries, our economy has always revolved around physical assets. However, due to the development of technologies, the forms of the modern economy have changed drastically, and investments and assets in increasing numbers become non-physical, namely, intangible.

Nowadays, many of the most prominent companies in the world, such as Facebook, possess a significant amount of intangible assets, including software, branding, and development capacity, instead of real estate or factories. Companies built with intangible assets, for some reason, behave differently from those reliant on physical assets. The book Capitalism without Capital introduces three main characteristics of intangible assets.

1. Intangible assets can expand rapidly​

Businesses based on physical assets have one disadvantage in common: they are easy to be limited. When we need more production capacity, we have to invest more tangible assets. However, intangible assets do not have such limits, and they can expand rapidly in no time, which is particularly evident in the tech industry. For example, one mobile app can attract millions of downloads.

Intangible-intensive companies can likely grow incredibly large and finally become monopolies, creating enormous challenges to new entrants in the same industry.

2. Intangible assets are high-risk and irrecoverable investments​

Physical assets are relatively more stable than intangible assets in terms of value. Although physical assets may depreciate, they can always find a buyer in the market at a lower price. The case of intangible assets is a bit complicated. It’s hard to calculate the investments in intangible assets and recover the costs if anything goes wrong.

There is no mature secondary market for brands: on the one hand, the brand value is difficult to estimate; on the other hand, the brand may lose all the value if the business fails. Therefore, intangible assets are high-risk investments and may drop to zero overnight.

3. Intangible assets are easy to be duplicated​

Your competitors can steal your intangible assets with little difficulties. When a tech company solves a problem innovatively, many imitators and competitors spring up. iPhone is a good example. And in order to obtain a larger market share, competitors always keep improving the current technology and try to innovate further.

However, being easy to be duplicated brings up a problem of abuse. Policymakers in the intangible economy should enhance the protection of intellectual property rights.

About Tian Pan

Driven technology architect and entrepreneur with deep expertise in building highly-scalable, enterprise-grade SaaS applications. Full-stack specialist with a strong focus on designing flexible, scalable solutions that meet complex, evolving demands.

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