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Sony and Microsoft Hack Hurts Brand Value

With a combined total of over 150 million users, Sony's PlayStation Network and Microsoft's Xbox Live ecosystems of software and servers are large, critical, chunks of two of the world's most recognizable brands. While Sony started life as a consumer electronics hardware manufacturer and Microsoft has dabbled in the same space, they both rely on their internally developed software to turn profits. This is why the cyber hacking attacks on their most valuable intangible assets on Christmas day is so serious.

Whether it is internally created or externally purchased, software is considered an intangible asset because it does not fall under the tangible, plant, property and equipment (PP&E), category on the balance sheet. Even though it does not show up on the balance sheet - a glaring omission by GAAP - software clearly has incredible value. One of the most valuable companies in the world, Google, has a tangible book value of $78B (as of Sept. 2014) while its market value is $360B. That means that 78% of the company's value is made up of intangible assets.

This intangible asset value isn't just derived from the software code, it is made up of an entire technology bundle. Code is swell, and has stand-alone value, but is many times more valuable when paired with supporting intangible assets.

A technology bundle is usually made up of such intangible assets as, employee know-how, data warehouses, patents, databases, data mining, favorable employee contracts, source code and security systems. As the Christmas day hacks have shown, that latter is becoming an increasingly valuable component of the tech intangible asset bundle.

It took Microsoft three and Sony four days to completely restore their online entertainment networks. During that time, millions of users were left in the dark, not able to play their favorite / new games (many of which are purchased through the network or require the network to play) or stream online content. The short-term financial impact is not known at this time, but the last substantial hack of Sony's PlayStation Network in 2011 took a month to restore and cost Sony an estimated $250M.

More importantly, the long-term financial impact of the Christmas day hack will be seen in the loss of brand value for both Sony and Microsoft. Consumers expect large corporations to take the necessary steps to protect themselves from cyber attacks and downtime is not acceptable. Consumers will take their cash elsewhere - such as the computer based Steam service - when they lose confidence in the brand.

As with every company in existence today, Sony and Microsoft are heavily leveraged by their intangible assets. The care and nurturing of them is critical to their competitive advantage, and thus bottom line. Sometimes it takes an event like this to emphasis how important intangible assets are.

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