Measuring the full impact of digital capital

29. July 2013
McKinsey & Company
Article|McKinsey Quarterly

Although largely uncounted, intangible digital assets may hold an important key to understanding competition and growth in the Internet era.

July 2013| byJacques Bughin and James Manyika

On July 31, 2013, the US Bureau of Economic Analysis will release, for the first time, GDP figures categorizing research and development as fixed investment. It will join software in a new category called intellectual-property products.

In our knowledge-based economy, this is a sensible move that brings GDP accounting closer to economic reality. And while that may seem like an arcane shift relevant only to a small number of economists, the need for the change reflects a broader mismatch between our digital economy and the way we account for it. This problem has serious top-management implications.

To understand the mismatch, you need to understand what we call digital capital—the resources behind the processes key to developing new products and services for the digital economy. Digital capital takes two forms. The first is traditionally counted tangible assets, such as servers, routers, online-purchasing platforms, and basic Internet software. They appear as capital investment on company books. Yet a large and growing portion of what’s powering today’s digital economy consists of a second type of digital capital—intangible assets.

They are manifold: the unique designs that engage large numbers of users and improve their digital experiences; the digital capture of user behavior, contributions, and social profiles; the environments that encourage consumers to access products and services; and the intense big-data and analytics capabilities that can guide operations and business growth. They also include a growing range of new business models for monetizing digital activity, such as patents and processes that can be licensed for royalty income, and the brand equity that companies like Google or create through digital engagement. Read the rest of this entry »