The concept of money and value has been turned on its head, if not destroyed. Money now costs nothing and banks around the world are even charging customers to store it rather than paying interest. In our country earning from “interest” is so low as to be avoided as an investment alternative. Rather it is a preservation or convenience strategy. Thus, money seeks value rather than interest—things that have intrinsic worth, and as money cheapens, the value alternative will rise in comparison. Since it is hard work to invest in land, buildings, commodities, etc., the equities market “businesses” are the “value” opportunities that most of us pursue. This is true for individuals, retirement planners, venture capitalists, and even other businesses. Sense money is virtually free, the competition for equities is rabid and the Stock Market is breaking record after record. The problem, of course, is “musical chairs”— everything is going along great until the music stops and some are left without a chair.
You are safe and will be one of the lucky ones with a chair if you have invested in enterprises with long term value. But how do you know? How do you know which companies will succeed for the long haul?
What is important? Is it the dollar value of hard assets owned by an enterprise? It is the Present Value of the organization’s future income stream? Is it the appraised, or replacement value, of the company’s intellectual property? In my book The Language of Excellence, I explained how Moore’s Law influences value today. How future value is no longer related to any of the traditional determinants.
Here is the Chapter on Moore’s Law:
Moore’s Law
Moore’s Law is an uncontrollable rate of decay in the value of existing things.
The conventional concept of Moore’s Law is that the power of technology doubles about every two years, but there is a worm in the apple, so to speak. Existing technology is like the apple in the graphic. Moore’s Law is like the worm inside eating away at its flesh. Moore’s Law means that for existing technology there is an uncontrollable rate of decay in economic value.
Technology is so embedded in products and services today that the reach of Moore’s Law extends deep into our economic system, shortening the life cycle of any given product or service. The consequence is that the long-term economic value of any given thing—product, process, or service—is near zero. The enduring value of a thing is in its ongoing capacity to evolve—moving from one life cycle to another. Without that capacity to continually improve and replace, it will have a short life and quickly wind up in the graveyard of outdated ideas, products, and companies.
In the mid-’60s, when I began my career as a CPA, having intangible assets on a balance sheet was not a good thing. Bankers deducted goodwill and other intangibles to arrive at “net tangible book value.” The financial world was all about hard assets and discounted cash flow. Your business was worth its hard assets and some multiple of its profit stream. Today some of our most highly valued public companies have no hard assets to speak of, and some have yet to earn a profit. Perceived value is increasingly concentrated in a company’s intellectual property. There is real danger, however, concerning the preservation of that economic value.
We understand the productive life of a brick-and-mortar building. But what is the life of highly valuable intellectual property? Investors who approach the value of intellectual property on the same level as traditional hard assets with predictable lives are in for a rude awakening due, in large part, to the destructive aspect of Moore’s Law—that worm eating away at existing values. It is not the current state of a company’s intellectual property, but the company’s capacity to maintain, evolve, and innovate that determines the real long-term value of a business.
Moore’s Law is based on an observation made in 1965 by Gordon Moore, cofounder of Intel. He observed that the number of transistors per square inch on integrated circuits had doubled every year since the integrated circuit was invented. Moore predicted that this trend would continue for the foreseeable future. In subsequent years, the pace slowed down a bit, but data density still doubles approximately every eighteen months. As price falls and capacity increases in the future, the value of previously existing technology declines.
I have admittedly stretched the application of Moore’s Law to convey its more general influence now that technology has become a direct, or indirect, component of most goods and services. Moore’s Law focuses on the engineering and manufacturing of integrated circuits, but it follows that as integrated circuits go, so goes the products, processes, and methods that depend on them.
The view of Moore’s Law as an uncontrollable rate of decay in the value of existing things is an important concept. It explains why the economic value of an enterprise, or its loyalty bond with its customers, is increasingly related to its capacity to innovate and evolve. Value rests in the capacity to stay current and competitive, rather than in the tangibility or current state of existing products or services.
Given the uncontrollable rate of decay due to Moore’s Law, long-term economic value rests entirely on the ability to evolve.
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For signed copies of books by Tom Collins, go to TomCollinsAuthor.com. Unsigned print and eBook editions are available from Amazon, Barnes & Noble, and other online bookstores. Audio versions of The Claret Murders and Diversion are available from iTunes, Audibles and Amazon. eBook editions are also available through Apple iTunes’ iBook’s Store and Smashwords.com.
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