How do you value a high Google search ranking?
Lawyer and company director Adam Schwab writes:
The
power of Google is no secret. Apart from creating a huge amount of
wealth for shareholders, Google has had a profound influence on how
people use the internet. And given its market position (it has more
than 50% of the US search market, and is believed to have as much as of
90% in the search market in the UK and Australia) if a business can
achieve a high ranking on Google, the difference to sales and profit
can be enormous.
High
Google rankings don’t generally happen by accident and the key for
businesses to maximise their ranking is a process known as "search
engine optimisation" or SEO. Essentially, Google ranks a page highly
when it has other pages linking to it. The better the page which links
to your page, the higher your page will rank on a Google keyword
search. Weight is also given as to where certain keywords appear on the
page.
London-based SEO guru, Phillip Berryman of Simply Business,
explained that “to secure high positions for competitive terms takes a
combination of search engine friendly HTML code and high quality
external links pointing to the site. [As such] a new domain may take as
long as six months before it ranks for any of the sites key terms (an
effect known as ‘The Sandbox’). However, once a high position has been
achieved, as long as moderate maintenance is done, the high position
should be maintainable for long periods. The hard part [for the SEO] is
going from nowhere to the top three."
A
top ranking position on Google can literally be the difference between
business having millions of dollars of sales or a pittance. A top
Google position is the 21st century equivalent of Times Square
shopfront. So given the massive importance of a business’ Google
position, a key question for investors and lenders arises – how can you
account for a top ranking on Google?
AASB138
is the accounting standard which deals with intangible assets. Common
intangible assets include "licences, intellectual property, market
knowledge and trademarks (including brand names and publishing
titles)". To fit within the definition of an "asset", under AASB138, it
is essential that the entity has "control". For example, intellectual
property (such as licences or even brand names) can be controlled by
patents or trademarks. AASB138 notes however that "relationships with
customers or the loyalty of the customers to the entity, the entity
usually has insufficient control over the expected economic benefits
from customer relationships and loyalty for such items (e.g. portfolio
of customers or customer relationships) [fail] to meet the definition
of intangible assets."
Under
the current standard, due to the control requirement, a high Google
position cannot be considered an asset to a business in an accounting
sense (it is comparable to "internally generated goodwill"). This is
because even though a company can do its best to obtain a high
position, essentially, the ranking is controlled by Google’s mysterious
algorithms. Therefore, even if a high Google position is the sole
driver of a company’s sales, under accounting standards the ranking
would not be considered an "asset".
If
for certain businesses, the sole generator of revenue and profit isn’t
considered an asset – what value can investors or lenders place on
traditional balance sheets?
Widespread
acceptance of the internet has changed the way companies do business.
Instead of a shopfront, businesses have a website. Instead of a Collins
Street address, a web-based business merely needs a high Google
position. Unless the accounting bodies recognise this revolution and
act accordingly, the way accountants and investors value business will
continue to diverge in the years to come.
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