The rise of the intangible business model

Around this time last year I wrote a prediction blog entry for 2008 where I used my then delicious cloud tag as the basis of formulating the subject of the entries. Well this year, the top two tags from last year, being SaaS and Business are still the same. So instead of repeating what I did last year, I thought I’d summarise what I see emerging in 2009 as more dominate, being that of the intangible business model. 

Let me explain this over the next few paragraphs. I work, and most likely if you are reading this you do to (or at least in your department), in a business that is focused around the production of intangible assets – they cannot be seen, touched or physically measured. That is, there is no physical product or building (bricks & mortar) produced.

However, to produce these intangibles assets some property, plant and equipment also known as fixed assets (eg buildings, land, software, computers) are acquired. In the case of a software company that hosts software for other organisations, this may also extend to include a production data center. These costs quickly mount up, and financing operations until profitability or an exit is achieved has become near impossible. Not to mention the expectation of customers to not pay as much for the software or services as they view it as a commoditised transaction.

This means you either need to sell more volume at a lower price, or reduce your costs to achieve a cash positive position sooner.

Cash is good, Assets are bad

I’ve heard the above phrase a number of times in the past, and the first time I heard it, I was a little confused as I thought Cash was an asset to. Which it is, but I believe that it is a current asset (eg cash, receivables, inventories and prepayments) as opposed to a non-current asset (eg investments, fixed assets, intangibles and deferred tax assets). I also thought that not all non-current assets are bad, maybe it should really say fixed assets are bad.

I apologise for all the accounting speak, it is not my native tounge either, so I hope it is making sense so far! If you have an accounting background and I’ve got this wrong, please be gentle on me; but please tell us where?

The intangible business model in my mind, will minimise fixed assets, hence the need for debt (liability) to finance it. Who is going to be able get financing anyway in 2009? (unless of course they already have it)

In the case of a software company, how are they going to get the costs down? They’ll provide it as a SaaS based service over the internet, right? If they host it themselves, up goes those fixed assets and liabilities through the debt to fund it. Well, thats not going to work is it? (fixed assets are bad) So they’ll use cloud based services, such that costs will rise propotional to sales and the major non-current assset on the balance sheet will be the intangibles comprising the software service. Operational costs will be reduced, thus lower pricing for customers in an increasingly commoditised SaaS world.

So in my humble opinion I’m predicting that in 2009 we will see the rise of the intangible business model. Hopefully also better recognition that a larger preportion of our economies depend on them and not on factories that produce physical products with inventories.

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