Intangibles = Monopoly

by John Quiggin on August 11, 2020

In a recent post, I pointed out that long-term (30 year) real interest rates on safe (AAA) bonds had fallen to zero, and suggested that this meant the end of capitalism, at least in the sense that the term was understood in classical economics. On the other hand, stock markets have been doing very well. So what is going on? This is a complicated story and I’m still working it out,
An important starting point is the fact that the most profitable companies, particularly tech companies, don’t have all that much in the way of capital assets compared to their market value. What they have is monopoly power, which has been increasing steadily over time. That benefits those who already own and control these firms, but it does not provide new investment opportunities.

I’ll start by looking at price-to-book ratios. Alphabet, which owns Google has a market value five times the book value of its assets The ratio is 15 for Microsoft and 21 for Apple. By contrast, for General Motors, the classic 20th century corporation, it’s just under 1.

For the corporate sector as a whole, the comparable measure is Tobin’s q ratio, which has been trending upwards since the late 1970s and is now near the all-time high reached during the dotcom bubble.

The value of companies like Apple, Google and Microsoft is made up primarily of “intangibles”. That term can cover all sorts of things, and is often taken to refer to some special aspect of the firm in question, such as accumulated R&D, tacit knowledge or ‘goodwill’ associated with brands.
R&D is at most a small part of the story. The leading tech companies spend $10 – 20 billion a year each on R&D, a tiny fraction of market valuations of $1 trillion or more. And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.

A simpler explanation is that the main intangible asset held by these companies is monopoly power, arising from network effects, intellectual property, control over natural resources and good old-fashioned predatory conduct.

In this context, the crucial point about intangibles isn’t that they aren’t physical, it’s that they can’t be reproduced by anyone else. No one can sell a Windows or Apple operating system, even if they were willing to invest the effort required to reverse-engineer it. While there are competitors for the Google’s search engine (I recommend DuckDuckGo), there are huge barriers to entry, notably including the fact that the product is ‘free’ or rather supported by advertising for which all consumers pay whether they use Google or not.

There’s a complicated relationship here between the rise of monopoly and the development of the information economy in which the top tech firms operate. Information is the ultimate ‘non-rival’ good. Once generated by one person it can be shared with anyone else without diminishing in value. As the cost of communication has fallen, it’s become possible for everyone in the world to gain access to new information at essentially zero cost.
What this means is that there is very little relationship between the value of information and the ability of corporations to capture value from it. The protocols and languages that make the Internet possible are a public good, created by collaborative effort and made freely available. The information on the Internet is generated by households, business and governments using these protocols. Without these public goods, Google would be worthless. But because advertising can be attached to search results, ownership of a search engine is immensely profitable.

In turn, this means that traditional ideas about capital and investment are largely irrelevant in the information economy. More on this soon, I hope.



rjk 08.11.20 at 9:47 am

And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.

This is going to need more evidence to back it up. The Verge (a mainstream but critical tech consumer website) has run opinion polling on the popularity of different technology companies, and their recent results show very favourable opinions of most of them. It’s true that most also favour increased regulation, but there are few industries of which that isn’t the case. Some highlights:

Amazon: 91% favourable
Google: 90% favourable
Microsoft: 89% favourable
Apple: 81% favourable
Facebook: 71% favourable

For most consumers, these services provide an abundance of cheap or free goods, services, entertainment, and information, or the means to access it safely and conveniently (and in Apple’s case, stylishly). There is a minority of privacy advocates, producer interests, and small-c conservatives who dislike them on principle, but this is a much smaller minority than it appears from our corner of the internet.

I don’t take issue with the gist of the post – in fact, it’s Silicon Valley orthodoxy. However, it is not (yet) meaningfully unpopular among the public. The horror stories of the gilded age and the oil barons have simply receded so far into the past that being told that something “is a monopoly” doesn’t cause the average person to recoil in horror, particular if the monopoly is something that they see as a useful service. Telling people you want to break up Facebook is, to the average person, telling them that you want them to exist in a different social network from their friends – an inconvenience with no obvious benefit to them.


SusanC 08.11.20 at 10:06 am

The value of a company like Apple or Microsoft is partly that they own the operating system they’ve developed, but more what is sometimes called the “ecosystem”: that lots of other companies have invested in developing their own products for Apple or Microsoft’s OS rather than some other OS.

It’s kind of weird for most of a companies value to not be in the thing that it owns, but in the investment other parties have made in other products that depend on the thing they own. (I.e. customers with high switching costs).


Zamfir 08.11.20 at 10:47 am

To what extent is this a new thing? My impression is that this was always a core part of capitalism, just not captured well in some models of capitalism.

No one becomes rich from getting a market return on investments in a competitive market – at best they stay rich that way. They become rich from controlling parts of the economy that are sheltered from much competition, if only for a while.

That was always the case, wasn’t it? Perhaps a lot of the economy is somewhat ruled by competition, but some parts are not. And those parts determine who is in charge of the rest.

On a different note: might the Q-factor calculations be biased by using the stock market as basis? I would assume that “high-Q” businesses do not need to be on a public exchange. Almost by definition, they can easily finance their investments. And their owners do not need small-scale liquidity either – the company can just hand over gobs of cash if the owners need it.

My (uninformed) impression is that Silicon Valley has a somewhat unusual relation to the stock market – similarly profitable companies in other times and places might stay private.


Barry Cotter 08.11.20 at 10:52 am

And feelings towards most of these companies are the opposite of goodwill – more like resentful dependence in most cases.

Amazon, Google and PayPal are all in the top 10 most trusted companies in the US. Feel free to check that by putting “ 10 Most Trusted Brands In America: US Postal Service, Amazon Top The List” into your search engine of choice. To put that in perspective the public trusts the Big Tech companies much more than they trust the media, where a majority say they have hardly any confidence in the press at all, according to CJR’s “ Poll: How does the public think journalism happens?”.


Tim Worstall 08.11.20 at 12:04 pm

“Without these public goods, Google would be worthless. But because advertising can be attached to search results, ownership of a search engine is immensely profitable.”

How much of Google’s value comes from advertising on the search engine and running the ad system for other people? I have no idea at all but it would be one of those important questions.


oldster 08.11.20 at 1:08 pm

In the case of Google and Facebook, each business seems to me to have a collection of genuinely beneficial services, combined with a collection of predatory practices.

In the case of Google, the helpful stuff is a sort of updated phone book plus reference library. Helpful!
In the case of Facebook, it’s an updated postal system where you can keep in touch with friends and family and send them pics of the grandkids.

The predatory stuff is all separable from that — the engagement algorithms that trap people, the pushing of right-wing propaganda, the marketing of personal data.

When you ask people to cancel FB, they always say, “but then I would lose track of old friends!”. They don’t say, “but then who would monetize my preferences and feed me Russian propaganda?”

So all the good stuff is easily separable from the bad stuff. Government post offices have had monopolies on delivering letters and generally avoided stuffing the envelopes full of Russian propaganda before putting them in your mailbox.

We can imagine a different evolution of the web in which FB and Google had emerged as public utilities run as non-profits like Wikipedia.

I hope in a few years, some govts will push to provide alternatives and eventually drive both out of business. All the public benefit will be preserved.

(The cases of Amazon and Apple are a bit different, since they essentially move goods. They are modern evolutions of functions that were traditionally non-governmental).

A history of Minitel might be interesting in this regard.


Anarcissie 08.11.20 at 1:43 pm

I think in addition to other forces mentioned, in contemporary asset pricing there is a strong influence of bullshit/superstition, especially in high tech, and of funny money of various kinds. I don’t know what the terms of art here are.


SusanC 08.11.20 at 2:37 pm

I would think that the non-rival nature of the good is part of what makes market capture possible.

E.g. it is enormously expensive for Microsoft to create a new Windows release, but once they’ve done it, the marginal cost to them of selling it to n+1 customers instead of n customers is near zero. But any rival vendor would have to spend the enormous cost of entry into the market before they could sell a single copy. (Plus customer switching costs, plus network effects)


We’re now seeing an additional effect: government sanctions can suddenly prevent the vendor selling their product to a big slice of their customer base, forcing those customers to take the aforementioned huge switching cost. As we’ve postulated that this switching cost is a big component of the company’s value, presumably such sanctions have the potential to cause a big slice of the company’s value to suddenly evaporate.

A public choice economist would presumably point out that the tech vendors have a rational incentive to give Trump a ton of money in return for not destroying their business, if their lawyers can somehow structure the transaction in a way that makes it legal.


Kenny Easwaran 08.11.20 at 7:13 pm

What does it mean that this ratio was less than 1 for most of the period before 1990? I would have thought that 1 was a kind of floor, because the book value would represent something like the price you could get by disassembling the corporation and selling its assets for scrap, while the value above 1 represents the value of holding the corporation itself rather than just its parts. But perhaps I’m misinterpreting something about this calculation.


aepxc 08.11.20 at 8:15 pm

Isn’t saying that no one can sell a Windows or Apple operating system a bit like saying that no one can sell a GM car? Or in Apple’s case, like saying no one but Chrysler can sell a HEMI engine car?

We used to be in a world where the limiting factor was our ability to make things. We are now in a world where the limiting factor is knowing what to make… or just lucking out and finding an audience. It seems to be the same case with entertainment and media – if 300 years ago owning a printing press pretty much guaranteed you readership, the value opening a Twitter account today is pretty much zero.


Peter Dorman 08.11.20 at 9:09 pm

Yes, this is a really interesting and important topic, one that was put on my radar a couple of decades ago by Margaret Blair and her intangibles project at Brookings. Coming at it from a labor perspective, I suspected a large part of the nonphysical value came from knowledge embedded/embodied in the workforce. That leads to issues of “knowledge management” and its relationship to worker skill development and organizational learning (and remembering), but of course the intellectual property aspect is also intimately connected to monopoly: monopolizing information requires the ability to suppress competitors who possess some or all of the same knowledge. I suspect M&A of competitors is often as much about this as good ol’ fashioned market share.

When I wrote my micro textbook ten years ago, I played up Tobin’s Q in the chapter on capital, but in retrospect it’s clear, as JQ shows, that I paid too much attention to its cyclical trough. It’s back up to nearly the 2:1 range, as it was when Blair was doing her work.


Michael 08.11.20 at 9:25 pm

Two observations:

In your first paragraph, you seem to suggest a contradiction between low long-term interest rates and high valuations in the stock market. I’m not sure where you see the contradiction? It’s common to value companies using discounted (expected future) cash flows; if interest rates go down then mechanistically a DCF model will produce a higher valuation.

Secondly, goodwill in the accounting sense means no more or less than the amount spent on corporate acquisitions in excess of the book value of assets. The feelings of the general public on the company do not come into play in this matter. It’s slightly odd that you dismiss goodwill so quickly as it seems central to your thesis. Why would a company pay over the odds to acquire a competitor? One reason could be: because it gains market power.


john halasz 08.12.20 at 12:02 am

Something on the order of 80% of the capitalized “value” of the Fortune 500 corps. consists in “intangible assets”, mostly IP “rights”, patents and copyrights, i.e. private monopoly rights granted by states and constructed by lawyers. (Don’t make me quote Shakespeare here). And it’s not just the tech big 5; for Exxon-Mobil the figure is 74%, since they make their living less by capitalized ownership of proven reserves, than as a oil technology company, (since most reserves are owned by state oil companies anyway and my guess is that 20% production sharing agreements can’t be claimed as reserves under corporate accounting rules).

Just as returning veterans of the Spanish Civil War were stigmatized as “premature anti-facists”, so these guys were premature anti-monopolists, (due to the falling rate of profit, saturation of markets, increasing resort to speculative finance over actual productive investment and blah, blah, blah):

Though he’s growing long-in-the-tooth now, nearly 100 years old, I believe Mickey Mouse is still under copyright, thanks to the due diligence of Disney lawyers, despite having thoroughly saturated popular culture. How many times have you heard something referred to as a “Mickey Mouse operation”?


John Quiggin 08.12.20 at 12:32 am

Fair points on goodwill, above. I meant to edit this before reposting from my own blog, but didn’t get to it. I’ll try to work on something that gets closer to the complexity of the problem.

Michael @12 Your first para anticipates my next post.


mpowell 08.12.20 at 12:36 am

R&D is not just represented by owned IP, but organizational capability. How are you going to build a product to compete with Google or Apple? You have to build a world class engineering team and work for years to develop similar products. Not only does it cost you tens of billions of dollars, you have to recruit and build a team without the credibility that would enable you to recruit and retain these engineers, regardless of the compensation offered. A company like Facebook can rely heavily on network effects. But that’s not the main story for most of these companies.

Of course, there’s still plenty of competition in the software space. And if you do well, maybe Google will buy you for several billion dollars! I don’t think it changes your story very much though. These companies have the size, stable revenue streams and generous market cap that make them extremely powerful. This is inherently dangerous. But they are also extremely well run organizations doing extremely difficult to duplicate R&D every year. I don’t think this should be overlooked.

The main question is whether they are developing technologies that are socially valuable enough and requiring such corporate scale that justify allowing this kind of concentrated power. Certainly a lot of very valuable work that is being done. But I am doubtful the useful stuff requires this scale.


hix 08.12.20 at 3:05 am

“How much of Google’s value comes from advertising on the search engine and running the ad system for other people? I have no idea at all but it would be one of those important questions.”
The adds for other people are almost meaningless these days and never mattered that much. Don´t think it is a particular important question anyway. Googles third party add system works with pretty much the same monopoly mechanism. A) the conventional high fixed low variable cost business aspect and B) the value of having the best tracking data, which depends on having the biggest search engine as well as the biggest third party add network, also android which has gps for (almost) everyone.

Sidenote: Download your national covid app NOW, its privacy protection is guaranteed to be 1000000 better than anything else everyone got on his phone anyway.

Of the billion or so google is worth, if you´d like to split it out, which only makes very limited sense, as the monopolies reinforce each other, third party search would probably be the 5th or 6th most valuable business unit. Search and android a fare more valuable, youtube, waymo and even cloud computing should also make the cut. In case is its not apparent to everyone why android, given away free is so valuable: Google pays Apple a fortune to be the pre set search engine at Apple devices and the store cut at app stores is ridiculous high.


Phil 08.12.20 at 6:58 am

I think the term of art is “two sided markets”. Almost all the tech companies serve at least 2 markets. One market is providing the free (or cheap) services to consumers. That’s what gives them their good reputations.

The second market side is serving advertisers, in the case of Google & FB. Or serving developers in the case of Microsoft / Amazon. That’s how they make their money. It’s also the direct or indirect cause of their sketchy practices.

The hardest part of duplicating them is the interaction between the 2. The 2 markets subsidize each other. You could, with a lot of effort, duplicate most of the technical features of the Google search engine. But they’ve also got a lock on the advertising market, which you won’t pry from them unless you already got the consumer market dominated. Meanwhile the advertising market spins off endless amounts of profit for them to subsidize freebies in the consumer market, which makes it hard for you to outleap them technically on the consumer front.

Most of this stuff is already well known / established in the mindset of Silicon Valley. But it’s only starting to penetrate into mindset of the antitrust people.

This system seems quite impenetrable without regulation but it’s not necessarily so. Local newspaper used to be like this too. They gave free / cheap/ subsidized news content to readers, and made all their money from classified ads (money of them job ads or rental ads). When the interaction between the 2 was disrupted by the internet, local newspaper almost all crashed hard at the same time, very quickly. They weren’t beaten just by “better news” though.

Whatever brings down the current tech giants will be something similar. Not better technical services, but something that breaks the interaction between their 2 markets. Like newspapers, it could easily be “worse” quality news (services) that beats them. Privacy regulations might also do them in, but as a result I’d expect them to fight tooth & nail precisely against any privacy regulations strong enough to have this effect.


Zamfir 08.12.20 at 9:25 am

Michael says:
—It’s common to value companies using discounted (expected future) cash flows; if interest rates go down then mechanistically a DCF model will produce a higher valuation.—

Sure, if the company will keep delivering that cash flow. In a competitive model, that shouldn’t happen. If generic “capital” is cheap (and interest rates low), you might expect competitors to raise such capital and use it to enter the markets of the profitable firms. Until the profit margin in those markets is more in line with the low returns on generic capital.

It’s telling that we do not expect this to happen in the real world. There is no straightforward proces that goes from low interest on treasuries, to succesful challengers of profitable firms. But such a proces is implied in many models of captitalism.


Tm 08.12.20 at 9:36 am

Some of these companies also make little profit compared to market cap (Amazon factor 120). It’s hard to argue this is not a bubble. But bubbles are unpredictable as to when they pop. I find it hard to believe that regulation will not become far stricter in the near future, which I suspect will drive down stock prices.

The whole stock market recovery since the Covid crash is beyond irrational. It does make some people incredibly rich and powerful, with disastrous consequences I’m afraid.


Trader Joe 08.12.20 at 10:59 am

@15 mpowell
“R&D is not just represented by owned IP, but organizational capability. How are you going to build a product to compete with Google or Apple?”

I would observe that had you wrote this 15-20 years ago it would have said “How are you going to build a product to compete with Blackberry, Nokia and Motorola” ….yet it happened and for practical purposes those prior leaders who together held ‘monopoly power’ are now fractions of their former selves.

I’m not enough of a tech-head to say who, what or why but I wouldn’t be betting on my grandchildren holding an Apple phone….monopolies in telecom don’t last but are extraordinarily lucrative while they do.


Tm 08.12.20 at 12:06 pm

There is a riddle in this connection that I hope somebody here may help solve. One often hears that share prices are rising because there is an influx of capital that doesn’t find any other profitable investment opportunities. Sounds plausible until you realize that every share bought is sold by a counterparty, so there is no net “influx” of capital, except in case of a public offering. Share buybacks are actually the opposite, the amount of capital “bound” in the stock market decreases. So can this account of stock bubbles induced by capital in search of investment be made plausible or is it a fallacy?


Trader Joe 08.13.20 at 11:32 am

@21 TM

You’re correct that its a zero sum game inasmuch as there is one buyer and one seller in any given transaction but that doesn’t tell you about the funding of the transaction and the leverage employed.

If I take cash and buy 1 share from you and you sell the share and now hold cash the market is neutral…no ‘influx’ of capital.

If however I borrow 1 dollar against my existing share and buy another, now I have 2 shares in the market using only 1 dollar and you have 2 dollars in cash so effectively 1 dollar of assets deployed into the market has been created by my borrowing.

Thats very simplistic though.

In reality the leverage comes from options. Say I own a portfolio that represents the S&P 500 for $1 million. I sell you an option for $10,000 that gives you the right to the performance of the S&P at price X. I still own the shares, you own the exposure to the shares. More capital is now exposed to the performance of the market with no new shares being issued. Imagine further that I had borrowed to buy my $1m portfolio or you had borrowed to buy the option and you can quickly see how market exposure can multiply without any new actual capital (in the economic sense) being issued.

Hope that helps…its a combination of hypothecation and leverage that creates the sort of inflation you describe. At times this is a real driver of the market, at other times (as you suggest) it really is just an excuse since as you say – 1 buyer, 1 seller doesn’t create new net demand.


Raven Onthill 08.13.20 at 6:21 pm

It’s a singularity in the mathematics of capitalism; the cost of providing the service is low compared to the cost of setting up the service, and network effects drive people into monopolies.

It may be that large-scale public social media can only be deployed ethically if operated as non-profit socialist organizations, otherwise they degenerate into profitable toxic troll farms.


MisterMr 08.13.20 at 7:44 pm

@Tm 21

In my opinion, “influx of capital”, “saving glut” and low interest rates are the same thing.

Basically nobody feels the need to invest in real capital, therefore the interest rate on private borrowing is low, therefore the price/earnings ratio of other financial stuff goes through the roof.

IMHO it is important to note that there isn’t really something like a fixed quantity of money, and that savings and debts are just the two faces of the same coin (and therefore savings do not really correspond to a quantity of stuff or to lower consumption).

Therefore while we can speak of a lot of money which has nowhere else to go (I often speak in these terms) this isn’t really what happens, it is only a metaphore.



hix 08.13.20 at 11:15 pm

Here is Alphabets (Googles) revenue split for last quarter. They are now somewhat more transparent, showing youtube and cloud seperate. The profit margin is much higher for ads at google search obviously. Youtube might be worth somewhat less since costs are substancial there and cloud is relativly small, but the general direction of my guess from memory was correct, third party site adds hardly matter for googles value.
Three Months Ended
March 31,
2019 2020
Google Search & other $ 22,547 $ 24,502
YouTube ads(1)
3,025 4,038
Google properties 25,572 28,540
Google Network Members’ properties 5,015 5,223
Google advertising 30,587 33,763
Google Cloud 1,825 2,777
Google other(1)
3,620 4,435
Google revenues 36,032 40,975
Other Bets revenues 170 135
Hedging gains (losses) 137 49
Total revenues $ 36,339 $ 41,159


Cian 08.14.20 at 4:37 pm

Hope that helps…its a combination of hypothecation and leverage that creates the sort of inflation you describe. At times this is a real driver of the market, at other times (as you suggest) it really is just an excuse since as you say – 1 buyer, 1 seller doesn’t create new net demand.

And the flip side of leverage is that in a crash it can create significant deflation.


Cian 08.14.20 at 4:48 pm

I’m not enough of a tech-head to say who, what or why but I wouldn’t be betting on my grandchildren holding an Apple phone….monopolies in telecom don’t last but are extraordinarily lucrative while they do.

I tend to agree with this. I suspect Apple has peaked (remember when Sony was the consumer electronics company to beat?). Amazon is selling an extraordinarily crapified product at this point (fraud is rampant on their platform – and if you’re buying cosmetics from Amazon you’re putting your health at risk). Facebook is a scam that’s been lying about numbers for years, whose conversion numbers are pitiful. Google has good technology and smart people, but their core business is commodity advertising which is looking shakier and shakier every day (and is also filled with rampant fraud and mis-selling). Some of these companies will survive, and even thrive, but will no longer dominate (look at the history of IBM, Microsoft and to some degree Intel). Others will disappear and everyone will forget about them. And a few will linger on – profitable, but not of any great significance (Dell is a good example of this).

However, these are currently monopolies, they are doing a huge amount of damage and they should still be regulated. Eventually everything dies, but it would be nice if they didn’t leave behind death and destruction when they finally pass on.


Steve Irons 08.15.20 at 4:12 am

A very interesting article. The “Intangibles” are a book entry using traditional accounting mentality. As is a “Balance in the Capital Account” BITCA at the end of the year, Profit made in the year (or the amalgam of profit in the years previous to this current EOY) not yet subject to dividend profit distribution to the shareholders. The difference between the “value of net assets” on the market “as a going concern” and their value upon “wind-up” and the Σ of price of the shares on the stock market is a different matter entirely. In traditional accounting there are different reasons for each. The Intangibles are there to boost the net assets. They are a way of taking hold of some of that profit from the BITCA and keeping it for future use by those in charge of operations, a value that can only become available to the so-called “owners” (the shareholders) upon wind up (which in the minds of those running the show is never gunna happen). The BITCA represents the net of the funding strat/development plan in the minds of the capitalists in control of operations. It’s either gunna be added to by further sale of shares for new projects, be held by them in abeyance for unknown current uncertainties, be used by them to buy back shares from shareholders, or be marked for distribution as shareholder return on investment ROI. All of this is happening at values represented by historical cost accounting HCA. These are nothing to do with real values in the market RMV. It is possible to bring all these values into RMV by changing asset values to represent their real worth in generating profit but that is not how capitalism operates. It would increase the pressure on those in charge to pay some taxes, or distribute to the shareholders, or admit certain profits are poor performance, or a rort, etc. Best to keep everything low key, hide the real value of assets and only have to deal with that at some point in the future. And, if the company is majority owned by a handful of big players, that is exactly how they want it to be played out. The minority shareholders get whatever they want them to get, and are grateful. Value can also be sent sideways to other operations outside the operations of the company to the benefit of those in control with little market knowledge or understanding of what it happening. Message to the shareholders: We are playing the market big time. The future will unfold. Hang in there. We have your interests at heart. The market value of the shares should be about 5 times to 10 times the yearly ROI. That is to say the current value of an annuity in perpetuity (as the company will always be monopoly capitalism as you say, it’s never gunna die). The fact that you place a value of 15 to 21 times that (even when interest rates have fallen to very little, its not the interest rate on the bonds market here but generic ROI for alternative investment) is IMHO a measure of just how much is hidden by normal operations, and just how switched in shareholders see themselves on how this will play out in the future. Also there’s a factor of “certainty” for ROI involved. Risk mitigation means lower payouts are OK over time as long as their monopoly hold on the industry remains. It guarantees ROI over time. The alternatives could be huge losses.

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