The Hulu IPO: Wrong thinking on intangibles accounting hurting its chances

August 16, 2010 by  

The internet television video company Hulu is reportedly considering an IPO. But, reports the NY Times, the company “evidently makes little in profit.”

I am not privy to their numbers but I can tell you from experience that their income statement is probably full of “expenses” that are actually investments in their intangible productive capacity (also called intangible capital). These include investments in some investments in processes, training, networks, and other forms of organizational knowledge.

We know that U.S. corporations invest more in intangibles than they do in tangibles (in 2007, it was $2.6 trillion in intangibles versus $1.2 in tangibles). But because accounting has not yet adapted to the knowledge economy, most of these investments wash through the income statement, lowering profits. For mature companies, this is a boon in tax savings. But for a younger company like Hulu, this expensed investment can tip them into a loss for the year.

There is a longer-term, more insidious aspect to this story too. Because these investments are not tracked year to year, there is no understanding of the accumulated investment. So the critical intangible productive capacity of a company (its ability to support customer value creation with consistent processes, knowledge and capabilities) gets no attention. 

I worry about this a lot. Not just because it hurts IPO chances of companies like Hulu (funds get allocated instead to companies that fit the model better). But because our understanding of corporate productive capacity is being distorted by industrial-era accounting. The only way to get our economy back on track is to improve our collective use of knowledge. And we cannot even see it.

The U.S. has incredible latent knowledge capacity. This knowledge capacity can be the source of innovation and jobs growth if only we identify it and put it to work.

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