What is Digital Capital
- Posted by admin
- 16 January 2018
The world is digital. There's an entire digital economy that the world connects to through personal computers, smartphones, tablets and an array of other devices. Economically, digital capital makes sense.
New products and services are created all the time on the digital sphere.
And you can break digital capital down into two main categories:
- Tangible assets
- Intangible assets
Understanding the difference between these two forms of assets is the key to understanding digital capital.
Tangible Assets and Digital Capital
At the basis of a tangible asset is the ability to hold an item. Tangible assets can be classified as physical assets, but they can also include platforms and software. When discussing digital capital, tangible assets may include:
- Purchasing platforms
From an accounting standpoint, these are assets that are often put on the company's books as an investment. We'll use Facebook as a prime example. The company has a plethora of tangible and intangible assets.
Facebook doesn’t disclose the full extent of their servers, but we know the company had 60,000 servers in 2010. Facebook has grown massively since then, and it's not out of the realm of possibility that the company, after building four massive data centers, doesn’t have over a million servers.
The company reported some $3.63 billion in network equipment in 2015, so this would be considered a tangible asset.
These servers are write-offs for the company and are part of the assets they maintain.
Intangible Assets and Digital Capital
Continuing with the Facebook example, the company has 2 billion users, and they have a lot of software and technology that they've built in-house. Patents are a part of the company's existence, and the intangible assets can include:
- Big data
- Analytic capabilities
- Social profiles
- Licensed technology
- Brand equity
Facebook, for example, collects user data and monetizes this data. Advertisers pay for access to this data, which is used to show relevant ads to the users on Facebook. These intangible assets have a hefty price tag.
Digital capital is new terrain for many of the world's economies. Accountants have been talking about digital capital for years, and the concept is shaping economic growth and policy. Intangible assets can lead to:
- Infrastructure investments
- Internet-related investments
Investments, on the government level, can be made to strengthen the world's digital capital.
Big Data's Role in Intangible Assets
Online companies have digital assets. The assets may be different than tangible assets, but they still remain valuable. Many companies have amassed a lot of user data. Facebook, our prime example, captures user data at every chance it gets.
The company even allows other websites to use their commenting system.
And this benefits Facebook because it allows the company to track users even when they're off their own website. The issue of big data is that many companies don’t even realize that they have valuable assets they can leverage.
Taking stock of intangible, digital assets can lead to growth opportunities.
Data can be organized, compiled into different datasets and leveraged by many companies. Oftentimes, the data doesn’t make much sense in its original form, or it doesn’t hold the same value until its organized properly.
This is digital capital that goes to waste.
Banks, for example, can use trends in loan applications to better judge a business's needs. If a business always requests a line of credit in May, and this is a trend, the bank can leverage this data to provide better loan packages that consumers can use.
There's also the argument that digital capital can be utilized improperly.
For example, if Facebook didn't create a social network or use the data they amass to add user-centric features, they would miss out on potential growth opportunities. The company's insight and ability to "make sense" out of their data is the key to the company's success. Facebook wouldn’t be the profitable, powerhouse of a company it is today if they weren't using their intangible digital assets properly.
Capital and the Treatment as Expenses
Digital capital is tricky from an accounting standpoint. Imagine Google in their effort to create Google+ to compete with Facebook. The company incurred massive expenditures during the creation of the social network.
Accountants treated the creation of Google+ as an expense.
Google's foray into social media didn't go as planned, but had it been a success, it might be capital. The social network still exists, and while it might never be Facebook or as popular as other social networks, it is long-lived.
Viewed as expenses and investments, these forms of technology grow into digital assets which must also be accounted for in the long-term.
Intangible assets are also what give many tech companies their high value. The data these companies hold and the technology they have created adds to the company's value. We've all seen the massive value that was placed upon tech companies in the 90s and early 2000s.
These companies may not have had the finances or tangible assets to make sense of their reported value, but the intangible assets helped push their value up.
New technologies and ways of offering services had led to a completely new way for businesses to make money.
Spending on the intangibles makes up a majority, over 66%, of digital capital. This capital is starting to become a real force in the world's GDP growth. It's estimated, back in 2013, that digital capital made up 33% of all GDP growth on a global scale.
Tangible assets accounted for the remaining 66% of GDP growth.
The new terrain is changing the way that businesses and accountants view capital. Businesses that leverage the data they have amassed, license out their technology and make sense of big data are experiencing digital capital growth.
More dollars are being funneled into investments that lead to digital capital, too.
Companies are launching new business models to enter existing markets and even create them in many instances. Digital capabilities are becoming a requirement in many industries, with the potential to lead to digital capital growth.
Expenditures, in many circumstances, may need to be viewed as assets when it incorporates digital advancements and technology for a company.
Meta Description: Digital capital is shaping the world's economy, and many businesses fail to realize its importance. Learn what digital capital is and what it means for economic growth.