What justifies a market cap in the digital economy?


FRI, 28 AUG 2015

It’s been eight months since I last blogged about intuitive tech so according to Moore’s Law, we’re one third of the way to processing power doubling; what’s been benefitting from all that souped-up speed?

Back in September, I wrote about Wearables, focusing on Fintech – which is a term that feels like the new black. Probably because once you become aware of something you can’t help but see it everywhere. However, in this case it clearly shows the rising interest and focus on this area. No more so evident than in the Financial Conduct Authority’s (FCA) requesting input on regulatory barriers to innovation in digital.

In late June, Atom Bank became the first Fintech bank to be given a license by the FCA and Prudential Regulation Authority (PRA). Atom Bank will be an online only bank. Atom will have no branches, no high street presence just a mobile app which also means no opening hours because you can bank anywhere and anytime as long as you’ve got internet access.

This trend provides fascinating insight into what drives market capitalisation in the modern economy.

Uber, the world’s largest taxi company, own no vehicles. AirBnB, the world’s largest accommodation provider, own no real estate. Alibaba, the most valuable retailer, has no inventory.

Google and Facebook have a market capitalisation of $464bn and $268bn (21/08/15) respectively – and billionaire owners on the Forbes rich list – but their value is not derived from being a social media site or search engine – they let us use these services for free!

The value is in the data we willingly volunteer to them daily when using their tools. Data they can then package and sell to businesses, who in turn use it to profile and understand customers to make bespoke products and services. It’s mind blowing to think that in 2013, Science Daily cited that 90% of the world’s data has been created in the last two years. That is an incredibly accelerated rate of growth, there’s more on that here Big Data.

Connecting people, information and the experience of that interchange are the digital age’s most valuable commodities.

Just as the examples show that the physical is losing value, the platform market is evolving too. So what justifies a market cap of an investment platform? The once held focus on asset accumulation appears to be waning as recent platform exit attempts testify. The quality of the book and the ability to derive profitability from the assets is an increasing focus. I can’t help believe that the non-visible assets such as the technology that drives the platform and an efficient/scalable operating model will define value, which leaves the proprietary platforms well placed.

Any opinions given are those of the individual writing this blog and not necessarily those of James Hay Partnership