Snapshot: What is a Trademark Worth?

What is a trademark worth? That is the question that researchers from Nova School of Business and Economics set out to answer in a brand-focused working paper. After looking at more than a million trademarks used by upwards of 20,000 different publicly-traded companies and quantifying the stock market reaction to the publication of those marks for the companies at issue, Nova’s Pranav Desai, Ekaterina Gavrilova, Rui Silva, and Margarida Soares found that trademarks possess “substantial economic value for firms.” Specifically, the authors state that the average individual trademark for the publicly-traded companies in their sample was worth $36.76 million, and the annual output of new trademarks represented approximately 2 percent of a company’s total assets.

Looking ahead, Desai, Gavrilova, Silva, and Soares assert that based on their research, companies’ future performance is “positively related” to their trademark application filing activity and any subsequently-issued registrations. “In the five years following the [registration] of a trademark, firms experience “considerable” increases in profitability and market share, they state, noting that these same companies also “subsequently invest more in physical capital, hire more employees, [and] increase production output.”

> The authors found that a one-standard-deviation increase in trademark output resulted in a 1.66 percent increase in profitability and a 1.13 percent increase in production output one year later. For the median firm in its sample, this increase amounted to $1.71 million higher profits and $4.81 million higher production output.

Drivers of Value: Having established that trademarks contribute to the creation of firm value and growth, the researchers delve into two key sources of trademark value: innovation and reduction of search costs.

> Innovation: In terms of innovation, Desai, Gavrilova, Silva, and Soares contend that trademarks are “complementary to patents and positively correlated with measures of knowledge capital, suggesting a strong association between trademarking and innovation.” Put another way, “Firms that trademark tend to subsequently increase their patenting activity, and vice-versa.” According to the authors, these results “imply that trademarks are an important determinant of firm value and growth.”

> Reduction of Search Costs: The latter value driver is particularly interesting for entities in increasingly crowded market segments like fashion, luxury (which, while largely dominated by a number of conglomerate-owned brands, is seeing an influx of new brands as Tapestry and Capri recently documented in defense of their proposed merger), and retail, more broadly. Desai, Gavrilova, Silva, and Soares found that “trademark output is more valuable in industries where consumer search costs are larger.”

On this front, they assert: “We hypothesize that industries with many competing firms (low Herfindahl-Hirschman Index (‘HHI’) of sales) and industries with many similar products (high product market fluidity) are those where consumers face the biggest burden of searching for the product attributes of their liking. In these industries, having a trademark may allow a firm to differentiate its products in the eyes of potential consumers. Consistent with this hypothesis, we find that the market reaction to the registration of a trademark is stronger in industries where customers have more options to choose from, i.e., industries with a low HHI and high product market fluidity.”

By way of examples, the authors maintain that companies may use trademarks to “boost product recognition and extract monopoly profits in highly saturated markets,” pointing to the Nike “swoosh,” the Apple logo, and the Nokia “Grande Valse” ringtone as key examples of prominent trademarks that help consumers distinguish products in crowded market segments.

At the same time, they argue that trademarks “seem to be particularly valuable in less patent-intensive industries, such as wholesale, retail, consumer nondurables, and finance.”

The Bigger Picture:  The broader picture here is the rising economic importance of intangible assets, which “has increased tremendously over the past decades,” the authors state, noting that “while a century ago firms’ main source of competitive advantage was derived from their stock of physical capital, recent estimates suggest that most of the value of today’s corporations is in the form of intangible asset.” In particular, they claim that “much of the value of modern firms ‘comes from things you can’t see or count: algorithms and brands and lists.’”