E-World

How Do We Gauge Value
Of New Web Technologies?

By TOM WEBER
Staff Reporter of THE WALL STREET JOURNAL

IT ISN'T EASY to put a price tag on ideas. Yet that's what a lot of Internet businesses boil down to. And that's one reason the Net industry's wild ride hasn't been much of a surprise to Baruch Lev.

New Economy companies grow more dependent on intangible assets all the time, says Mr. Lev, a professor at New York University. But if you can't assess these intangibles, how do you price the stocks of companies that are based on them? "A large part of volatility comes, basically, from ignorance," he says.

Dispelling such ignorance means nothing short of measuring the immeasurable. It's one of the hottest topics in accounting and economics, and it will be the subject of debate this week when Mr. Lev, an acclaimed accounting expert, kicks off his fourth conference on intangibles at NYU's Stern School of Business.

If this sounds merely academic, think again. True, intangibles are of great interest to economists working to gauge growth. But they also matter to investors placing bets on a company's patented new system, and to managers deciding whether to upgrade a computer system or set up an intranet. Despite our gut feel for information's power, we're usually at a loss to gauge the return on such investments.

AS THE NET grows up, these issues become even more important. Distinct dot-com businesses are disappearing, and we're weaving Web technology into business and life more seamlessly. As the technology becomes more invisible, our ability to gauge its value will be further strained. Yet implementing all these Web strategies costs real money. So we want to know: Are they worth it?

Priceline.com's stock offers a dramatic cautionary tale about valuing intangibles. When Priceline went public in 1999, bulls touted its intellectual property. Priceline's founders didn't just pioneer name-your-own-price air tickets. They patented the process, too. Priceline fans envisioned the start-up grabbing one market after another, selling everything from cars to groceries to real estate, while its golden-goose patent kept competitors at bay.

It didn't work out that way. Not only did Priceline flounder in attempts to exploit other markets, but Expedia jumped in and offered its own variation on name-your-own price. That sparked a suit over the patent. Eventually Priceline and Expedia settled -- and Expedia continues to offer its Price Matcher service. Priceline stock, once more than $150 a share, now hovers in single digits, and Expedia's market capitalization exceeds Priceline's.

"The notion that owning a patent on something means you own the world -- well, that's a very naive basis on which to invest," says Nir Kossovsky, head of the Patent & License Exchange, an intellectual-property services company. Patents, he argues, are more like call options. They give the holder certain rights but don't represent money in the bank.

Accounting experts continue to look for ways to value patents and other intangible assets, and proposals for standards are on the way. Meanwhile, Mr. Kossovsky's Web site, http://www.pl-x.com/index.php?section=default&sub=none&page=homepage, offers statistics and tools to analyze intellectual property.

The value of internal Web initiatives can be just as slippery as those patents. Vijay Gurbaxani, a business-school professor at the University of California's Irvine campus, studies information-technology investments. He thinks the big payoffs will come from online procurement, which makes it easier for big companies to combine and monitor spending by different departments. "This is one of the easier ones to measure," Mr. Gurbaxani says.

Tougher to evaluate are promising technologies like collaborative design systems, which let people work together online. His advice for companies deciding whether to buy Web systems: assign profit-and-loss responsibility to the appropriate manager and let that person make the call. "The fact is, we all know how to deal with intangibles," Mr. Gurbaxani says. "You usually know what car you want to buy, for instance. We don't all just go buy the cheapest one."

NYU'S MR. LEV advocates using numbers to grasp the sum value of a company's intangible assets, which basically means eliminating the contribution to success from physical and financial assets and looking at what's left over. But when it comes to valuing a specific intangible asset, Mr. Lev says we're just going to have to accept the fact that some things can't be given a dollar value.

But that doesn't mean you can't measure them at all, he says. The trick is to make sure you're headed in the right direction. Think of a car without a speedometer. You may not know how fast you're going, but you do know if you're accelerating or slowing down.

One emerging criterion is whether information systems wind up being tapped only by certain departments or draw usage throughout an organization. If people throughout a company are using a system, the thinking goes, it's probably unlocking information and putting that data to work in new and valuable ways. Mr. Lev suggests that companies start by figuring out what information systems they have, then looking for ways to measure their use.

Many Internet aficionados understand this idea instinctively. It's called Metcalfe's Law, formulated by 3Com founder and Ethernet inventor Bob Metcalfe, and it says the usefulness of a network equals the square of the number of users. In other words, doubling the number of people on the Internet makes it exponentially more valuable. For companies, the same may hold true for information and the number of people using that information.