"Yahoo!" - A case study about brand valuation

Table of Contents

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1 Definition
1.1.1 Brand
1.1.2 Brand Equity
1.2 Problem Definition
1.3 Course of Work

2. Framework of Brand Evaluation
2.1 The Internet Service Provider Yahoo!
2.1.1 The Company
2.1.2 The Funding
2.2 Brand Functions
2.2.1 Producer’s View
2.2.2 Sales Representative’s View
2.2.3 Consumer’s View
2.2.4 Yahoo!’s View
2.3 Meaning of Branding
2.4 Situation Analysis
2.4.1 Economic Framework
2.4.2 Acquisition as Relevant Cause for Brand Evaluation
2.4.3 A Brand’s Value in the existing Accounting Standards
2.5 Method Requirements for the Cause of Acquisition

3. Methods of Brand Evaluation
3.1 Classification and Choice of Methods
3.1.1 The Different Approaches
3.1.2 Finance Orientated Methods
3.1.3 Behavioural Science Orientated Methods
3.1.4 Integrative Methods
3.1.5 The Choice

4. Methods of Brand Evaluation
4.1 Presentation of the Selected Methods Regarding the Case of Acquisition
4.1.1 Brand Rating
4.1.1.1 Method Presentation
4.1.1.2 Critical Assessment
4.1.2 Millward Brown
4.1.2.1 Method Presentation
4.1.2.2 Critical Assessment
4.1.3 Interbrand
4.1.3.1 Method Presentation
4.1.3.2 Critical Assessment
4.2 Development of a new reliable Method
4.2.1 Framework
4.2.2 Application

5. Conclusion
5.1 New Method as Objective Solution
5.2 Outlook: A Standardised Method

Appendices

Appendix 1: Model of the Interbrand Brand Valuation I

Appendix 2: Model of the Interbrand Brand Valuation II

Appendix 3: Yahoo!’s Brand Value Calculation based on Intebrand

Appendix 4: Yahoo!’s Brand Value by changing only one Figure

Appendix 5: Optimistic Calculation on Yahoo!’s Brand based on the new Method

Appendix 6: Microsoft Steps up Battle over Yahoo! Board

List of References

List of Figures

Figure 1: Yahoo! 6 Months Stock Chart

Figure 2: The Web Portal www.yahoo.com

Figure 3: Advertising Solutions of Yahoo!

Figure 4: How Yahoo!’s Sponsored Search works. Step 1

Figure 5: How Yahoo!’s Sponsored Search works. Step 2

Figure 6: How Yahoo!’s Sponsored Search works. Step 3

Figure 7: Creation of an Ad

Figure 8: Reasons for Brand Valuation

Figure 9: Number of Registered Cases Between 1999-2006 on Counterfeit and Pirated Articles

Figure 10: Classification of Methods of Brand Evaluation

Figure 11: Structure of Finance Orientated Methods

Figure 12: Icon Iceberg

Figure 13: Brand Rating "formula"

Figure 14: Advantages and Disadvantages of Brand Rating

Figure 15: Structure of Brand Evaluation Methods

Figure 16: Three Steps Model

Figure 17: Three steps of Brand Evaluation

Figure 18: Overview of the Interbrand Method

Figure 19: Interbrand’s S-Curve

Figure 20: Brand Value Change by Modification of one Figure

Figure 21: Brand Loyalty

Figure 22: Modifying Interbrands Brand Value by one Figure

Figure 23: Optimistic Calculation on Yahoo!'s Brand Value

List of Tables

Table 1: Worldwide Search Top 5 December

Table 2: Annual Reports According to HBG, US-GAAP

Table 3: Requirements to a Valuation Method in Case of Acquisition

Table 4: Brand Rating Degree of Performance

Table 5: Top 100 Brands

Table 6: Top 20 Technology Brands

Table 7: Development of Microsoft and Yahoo!

Table 8: Advantages and Disadvantages of the BrandZ Method

Table 9: BrandZ Degree of performance

Table 10: The Financial Analysis of the Interbrand Valuation Method

Table 11: The Demand Analysis of the Interbrand Valuation Method

Table 12: The Brand Strength Score’s Components and their Weighting

Table 13: The Strength Analysis of the Interbrand Valuation Method

Table 14: Advantages and Disadvantages of the Interbrand Method

Table 15: I nterbrand Degree of performance

Table 16: Brand Discount Rate

Table 17: Model of the Interbrand Brand Valuation I

Table 18: Model of the Interbrand Brand Valuation II

Table 19: Interbrand: Yahoo! Brand Value Calculation with a Discount Rate of 7.1%

Table 20: Lastest News on the Battle Microsoft verses Yahoo!

List of Abbreviations

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1. Introduction

1.1 Definition

1.1.1 Brand

To provide a basis for the present study, it is necessary to specify the domain of the construct by discussing the different possible definitions. The following part will delineate what is included in the definition of brand and brand equity to point out which comprehension will form the basis for the present study.

In literature, one can still find a large number of different definitions for the word brand. This is due to the fact, that the numerous research areas have different comprehensions of it and that brand’s functions changed to a great extent over the years (Bruhn 2003, p. 180). To date there is no standardised terminological delimitation for it (Kriegbaum 2000, p. 27).

Basically one can distinguish bifocal perspectives; the formal one and the one which regards the content. The formal definition contains the outer marking of goods. Marking a good means to change an anonymous product into a branded one (Bruhn 2004, p. 478). In 1960 the American Marketing Association defined a brand as “a name, term, sign, symbol, or design, or a combination of them, intended to identify the goods or services of one seller or group of sellers and to differentiate them from those of competitors” (Kotler 2006, p. 418). The German Trademark Act is very similar to this formal consideration. In § 3 it is appointed that every sign, particularly names inclusively names of persons, images, letters, numbers, audible signals, three-dimensional forms inclusively the form of the product or its package and other designs inclusively colours and colour combinations, which are able to differentiate the product from those of the competitors, can be protected by law (§ 3 Trademark Act). Thus the formal perspective of a brand regards it as a legally protected sign, which is used by companies to mark and differentiate their products from those of their competitors (Bruhn 2004, p. 479).

The definition in respect of content extends the formal one. A brand is not only a sign but also evokes associations and can satisfy the consumers’ needs or wants (Kriegbaum 2000, pp. 30-31). You can find a large number of these definitions in literature. Bruhn classifies seven different categories to delineate a brand (Bruhn 1994, pp. 7-8). Because some of these definitions abstract away from the customers’ perspective (Esch 2008, p. 20), the following explanations will concentrate on the object-related and the impact-related approaches.

The definition of Mellerowicz is representative for an object-related approach. He defines a brand as a finished product with a trademark, offered in consistent or better quality, stable quantity and continuous design on larger markets, supported trough advertising and achieving widespread consumer acceptance (Mellerowicz 1963, p. 39). This very stiff approach turned out not to be contemporary. Baumgarth criticised it, because it is too deterministic and because it is too difficult to operationalise the criteria. For example the restriction that a brand has to be a finished product excludes preliminary products, services, persons and regions as brands (Baumgarth 2008, p. 4). Therefore the definition of a brand merely regarding its formal attributes is obsolete.

The impact-related approach explains a brand from the customers’ point of view (Meffert 2008, p. 357). In contrast to Mellerowicz, Berekoven (1978, p. 43) stated, that a product is not a brand till the consumer call it a brand. Consequently the consumer decides which product he or she accepts as a brand. Finally also Meffert (2000, pp. 847-848) defines a brand as an unmistakable image of a product or service in the psyche of consumers. Today the emotional value of a product plays a decisive role during the buying decision (Kroeber-Riel/Weinberg 2003, p. 115). On this account, especially today, it is very important to make sure that a brand works on consumers with a positive impact.

The formal perspective of a brand contains only the legal meaning of the word. This definition doesn’t suffice for the present case. As aforementioned the object-related approach within the definition in respect of content is obsolete and is therefore not suitable for the present case, too. But the impact-related approach includes all important factors, which account for a complete definition of the word and is contemporary. On this account the definition of Meffert will form the basis for the present case.

1.1.2 Brand Equity

The definition of brand equity will have an essential meaning for the present study, because it will form the origin for the approaches to calculate it. Similar to the definition of brand, the word brand equity is still not well-defined, because it depends significantly on the market participant’s point of view (Bruhn 2004, p. 489). Over the past years three term categories became accepted; the definition of brand equity based on finance, based on consumption and the integrative perception definition including both (Franzen et al 1994, pp. 1376-1378).

The financial perception regards brand equity as a monetary parameter to evaluate the absolute value (Bruhn 2004, p. 490). Middleton and Dalla Costa (cited by Haigh 1999, p. 24) denote brand equity as “the specific dollar worth of a product or service, beyond its physical and delivery costs, that is realised because of the impact of its branding”. In this perception the profit results from the revenues which are generated with the branded product, less the costs, which can be directly attributed to the brand mark (Sander 1994, p. 46). In practice the defining and the assignment of the brand’s costs and revenues is problematic. Therefore it is difficult to quantify the financial brand equity (Bentele et al 2004, p. 13).

To sum up, the definition of brand equity merely regarding the financial aspect of a brand is not sufficient for the present study. The evaluation is too imprecise in practice and does not consider the consumers’ estimation (Bentele et al 2004, p. 13).

By contrast the definition considering the consumers’ perception regards brand equity as the consumers’ estimation. Brand equity is reflected in the consumers’ heads. It is the result of a process, which is associated with the consumers’ associations, attitudes and feelings (Bruhn 2004, p. 490). It is a qualitative parameter, which has not necessarily to be described with a monetary value. Furthermore is it a comparative benchmark, which can be applied to compare competitors (Franzen 1995, p. 562). The definition based on consumption seems to be insufficient, too, because brand equity is also important for the owner of a trademark (Sander 1994, p. 48).

The definition based on the integrative perception connects the financial and the consumers’ perception. In addition to the consumers’ the perception of the owner of a trademark is included. Based on this approach, brand equity is defined as the entirety of all positive and negative associations a consumer suggests, when he or she perceives the brand and the sum of all economic data, which are reflected in the market competition (Schulz and Brandmeyer 1989, p. 366). Consequently not only the intangible value and the consumer behaviour as the result from it but also the financial aspects are included.

To provide a preferably comprehensive basis for the present study, this integrative definition of brand equity will be selected. The comprehension of the word will be based on Bekmeier-Feuerhahn (1998, p. 46), who defined brand equity as the present and prospective accretion of the consumers’ and companies’ benefits, which are caused by the marking and which are economically useful and are measurable in monetary units. This definition includes the perspectives of all market participants and makes it possible to evaluate a monetary value. Furthermore, the brand’s potential for the future is being taken into consideration.

1.2 Problem Definition

The 100 most valuable brands in the world increased their value last year by 21% to a total of USD 1,940 billion (Gapper, 2008 p. 1). In the recent past many companies have been sold. The upcoming problem with each such a transaction is to determine the right pricing for the company to be sold. The pricing is a composition of all company assets. Most of these assets, such as property and row material, can easy be translated into a certain monetary amount. Brand value is playing, due to its large increasing amount, a more and more significant role in each transaction. This paper will try to find out a reliable way to calculate the brand value.

The study will be based on the recent deal in which Microsoft wanted to take over Yahoo!. Was it correct that Jerry Yang, co-founder and CEO of Yahoo!, rejected Microsoft’s take-over offer of USD 47.5 billion (Laube, Helene. 2008, p. 4)? After many negotiations in 2007 Microsoft CEO Steve Ballmer made on February 1st, 2008 an offer to the shareholders of Yahoo! of USD 31.-- per share. Based on all shares this offer had a value of USD 44.6 billion. Before the announcement of the offer the stock pricing at the New York Stock Exchange closed at USD 19.18 (ADVFN, 2008). Therefore the offer meant an increase of more than 61%! The stock price went immediately up to just below USD 30.--. On May 3rd Microsoft withdraws its offer, what volume has been increased to USD 47.5 billion. In the following days the share went down and remained around the mark of USD 22.--. (25th June 2008). Figure 1 shows the stock pricing of Yahoo! in the time Microsoft made and withdraw its offer to take over Yahoo!. Does this mean that Microsoft was willing to pay too much for Yahoo!?

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Figure 1: Yahoo! 6 Months Stock Chart Source:(advfn. 2008)

USD

With this takeover, Microsoft mainly wanted the search machine of Yahoo! to increase Microsoft’s position against Google. Some other parts of Yahoo! Inc. like Flickr & Co, Alibaba.com & Co, Rovals.com and others are of less interest and represent only a minor value of the offered pricing. The main part of the USD 47.5 billion is related to the brand Yahoo!.

According to the experience of Petra Klann from Mayland AG, Düsseldorf, a merger and acquisition company (Interview, 2008) over the last 25 years 60% to 80% of mergers or acquisitions are based on emotional behaviour. Mayland is a mergers and acquisitions advisory company with head office in Düsseldorf and a worldwide network. Did Steve Ballmer, CEO of Microsoft, calculate the brand value right?

After Microsoft has withdrawn its offer a new discussion from Microsoft’s side came up. According to the Wall Street Journal (Johnson/Russolillo. 19th May 2008) a plan to divide Yahoo! in various portions is being discussed. Microsoft itself is interested in the internet search part and could pay for this portion around USD 21 billion. Can the correctness of the offered price be proved or can another pricing being calculated?

1.3 Course of Work

First of all, the following chapter will deal with the framework of brand evaluation. To give an idea of the internet service provider Yahoo!, the company will be introduced in the first part. A statement is made about the company’s business and the background of the funding. This allows a better understanding of what a company like Yahoo! depends on and what aspects are important for a successful brand and its business.

The next part concentrates on the role an established brand plays and what effect it has. In this chapter it will be shown that a brand fulfils a multitude of functions for every market participant, which also a brand of an internet service provider implements. The following chapter will point out what it means to lead a brand and which value it has to a company. As a matter of course, the conclusions will be related to the special case of Yahoo!.

To provide a general survey of the topic of brand evaluation, the next chapter deals with the economical and judicial frame. It explains the situation within the topic of intangible assets and their special treatment concerning the balance sheet. In Chapter 2.4.2 the different causes for brand evaluation will be described and the cause of acquisition will be determined as the appropriate cause for the present case of Yahoo!.

Chapter 2.5 concentrates on the necessary requirements for a sufficient and objective brand evaluation, especially in the case of acquisition. A list of the required qualities of an adequate method will be compiled, which will be the measure of the analysed models in chapter three.

Before three of the most important and established methods of brand evaluation will be analysed, the large number of all current methods have to be categorised. For that reason the third chapter will start with the classification of methods. After regarding the three possible categories, the last part will come to the decision for just one category, which comes into question for the present case. In the following part three of the possible methods within the chosen category will be selected.

The next chapter will concentrate on the three chosen methods. Every method will be presented in detail and afterwards critically assessed by means of the list of the compiled requirements out of Chapter 2.5. That means to check how far the methods comply with the requirements.

After these three analyses, it is possible to overlook the whole topic of brand evaluation. Chapter 2.5 defines the general requirements for an objective method of brand evaluation. The following chapters will survey three of the most popular models and will point out their advantages and disadvantages. In the result conclusions can be drawn from the accomplished analyses. In this way a new suitable method of calculation will be developed in Chapter 4.2. It is a try to find a solution for the problem of the current methods’ weaknesses and to create an objective method, which regards the most important criteria and fulfils the requirements for an impartial evaluation.

This new method offers the chance to find out, which criteria could have accounted for the price of Yahoo! and what would have been probably a satisfying price for both sides of the negotiations. What price will come up in other circumstances? What will happen, if certain levers are thrown in a different way? Was there at all a realistic chance to find a price, which would have satisfied Yahoo! as well as Microsoft? The last chapter will give a closing future prospect and will try to answer the question if there will be a standardised method available in future.

2. Framework of Brand Evaluation

2.1 The Internet Service Provider Yahoo!

2.1.1 The Company

Yahoo! Inc. is an American public corporation incorporated and headquartered in Sunnyvale, California, in Silicon Valley and a global internet services company, with a presence in more than 20 markets and regions around the globe. It provides a range of products and services including a search engine, a web portal, Yahoo!- Mail, -Posting and -News. Founded in 1994 by Stanford Ph.D. students David Filo and Jerry Yang, Yahoo! began as a hobby. It was incorporated on 1st March 1995 and in the meantime has evolved into a leading global brand (Yahoo 2008a).

According to the web traffic analysis company Compete.com, the domain yahoo.com attracted at least 1.575 billion visitors annually by 2008 (Compete 2008). It is the most visited website in the world and the second most visited website in the U.S. (Alexa 2008).

Yahoo! provides a wide range of internet services. It operates the web portal http://www.yahoo.com which provides contents including the latest news.

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Figure 2: The Web Portal www.yahoo.com Source: (Yahoo 2008b)

It allows users quick access to all Yahoo! services like Yahoo!-Mail, Yahoo!-Maps, Yahoo!- Groups and Yahoo! Messenger. The majority of the services are available globally in more than 20 languages (Yahoo 2008a).

2.1.2 The Funding

Yahoo!’s revenues were USD 1,818 million for the first quarter of 2008, a 9 percent increase compared to USD 1,672 million for the same period of 2007. Thereof marketing services revenues were USD 1,572 million, a 7 % increase compared to USD1,469 million for the same period of 2007 (Yahoo 2008c, p. 1). It is incidental that marketing services are essential and that this company is funded by advertising revenue. Yahoo! offers different advertising solutions. The Search Marketing provides services such as Sponsored Search and Local Advertising.

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Figure 3: Advertising Solutions of Yahoo!

Source: (Yahoo 2008d)

The web search engine takes up the main part of Yahoo!’s internet services. Web search engines are able to compile information and links on the basis of the internet user’s search term. Information may consist of web pages, images and other types of files.

Within Yahoo!’s web search engine, Sponsored Search is an efficient way for businesses to connect with customers, who are searching for products or services they offer. The following part will describe how this special advertisement works. When, for example a music fan searches for a new guitar, he or she goes to Yahoo!, types the search term “acoustic guitar” and clicks the search button.

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Figure 4: How Yahoo!’s Sponsored Search works. Step 1 Source: (Yahoo 2008e)

A page of search results appears. Above, below and to the right the search results, there are sponsored search ads.

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Figure 5: How Yahoo!’s Sponsored Search works. Step 2 Source: (Yahoo 2008e)

When the customer now decides for one ad, he or she goes directly to the seller’s page.

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Figure 6: How Yahoo!’s Sponsored Search works. Step 3 (Source: Yahoo 2008e)

A company, that wants to connect directly to consumers, who are searching for what it sells, has the possibility to choose key words, which are relevant to its website’s content. It can create its own ad, which consists of a title or headline, the description and the URL.

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Figure 7: Creation of an Ad Source: (Yahoo 2008e)

The company can set a price for its ad. It determines a price per click amount, which is the maximum amount it is willing to pay, when someone clicks trough on its website. In this manner a company pays only, when the ad is clicked and not for the only appearance within the search results. One click costs for example USD 0.56.

This advertisement allows companies to bid for search terms based on their popularity to display their ads on search result pages. The system takes bids, ad quality, click-through rates and other factors into consideration in determining how ads are ranked on search result pages (Yahoo 2008e).

Yahoo! belongs to the most popular search engines. In the worldwide ranking it comes in second. By far the most popular one is Google. Lately some of country- specific search engines have been established, like for example Baidu, which is the most popular search engine in the People's Republic of China (ComScore January 24, 2008).

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Table 1: Worldwide Search Top 5 December 2007 Source: On the Basis of (ComScore January 24, 2008)

2.2 Brand Functions

2.2.1 Producer’s View

The functions of a brand are numerous and vary depending on the market participant’s point of view (Dichtl 1992, pp. 4-6).

Derived from the formal definition of brand, for the producer the brand first of all fulfils the function of differentiation. It separates the own products from the competitors’ ones and shows the product’s origin. The extended definition offers many more functions (Esch et al 2005, p. 10). It can raise safety concerning the disposal, because the consumers can apply a high pressure on the retail market. The so-called “pull-strategy” is generated, which means that the retail market has to accommodate the consumers’ desire (Dichtl 1992, p. 21). Furthermore the consistent or better quality promotes sales. By means of advertising a producer is able to establish a brand image, which can additionally help to differentiate from other homogeneous products. In this manner a producer can reach a close customer loyalty, if the product fulfils the customers’ expectations (Kriegbaum 2001, p. 45).

In addition to these functions, an established brand offers the potential for brand- or line-extensions. That means to launch a new product using the successful brand to minimise the risk to fail (Esch et al 2005, p. 12).

2.2.2 Sales Representative’s View

A sales representative cashes in on a brand, too, because it reduces the merchandising risk. By contrast to an anonymous product, the consumers have a precise idea of its quality and price and demand for it. For the retail market this requires a modicum of effort. Selling a brand requires less sales staff and generates a rapid stock turnover (Dichtl 1992, p. 21). In addition to this, normally a brand gains higher revenues, which causes a higher profit margin (Bruhn 1994, p. 22). To sump up, a brand helps to save costs.

Furthermore a positive brand image can be transferred to the sales representative. If a store offers the favoured assortment, the consumers’ brand loyalty can turn into a point of sale loyalty (Homburg and Krohmer 2006, p. 518).

2.2.3 Consumer’s View

For the consumers, a brand acts as an important aid for orientation and supports him during his buying decision (Bruhn 1994, p. 22). Beside the function of differentiation and the indication of origin, a brand features further characteristics, provided that the consumer attaches great importance to it (Geffken 1999, p. 139). The indication of origin disburdens the customer the orientation on the market. A brand helps him to get his bearings in the flood of products. This results from the fact that it is easy to resort to proven goods (Rüschen 1994, p. 124). By reason that the aggregation of product information in one symbol constitutes high brand awareness, it can be silhouetted against other products and is therefore better memorable (Uhr 1980, p. 528).

The consistent or better quality gives the consumer a guarantee and a secure feeling during the buying decision. He or she can trust in the familiar quality of the product. By this reason the consumers generally have a higher degree of trust in brands than in anonymous products (Uhr 1980, p. 534).

In addition to these functions, a brand serves a high intangible value. A brand represents not only the functional product, but can also provide an additional value. It can express a particular lifestyle and enhance prestige (Rüschen 1994, p. 129), because every brand raises particular associations (Kotler 2007, p. 509). In this manner a brand can create its own personality, a consumer can identify with (Uhr 1980, p. 530).

2.2.4 Yahoo!’s View

For an internet service provider like Yahoo!, the brand functions can be almost completely adopted. There is an essential difference, which makes this case special. The provided services, like for example the web search engine, are for free. The internet user can make use of all offered services without any obligation. The only one, who has to pay, is the advertiser. Therefore the real product, which is sold, is advertising.

This means, that if it is about an internet service provider, it is mostly the advertiser, who is the real customer, because he or she is responsible for the companies’ revenues. The internet user is the second customer, who in fact doesn’t make a direct contribution to the companies’ profit, but is definitively considerable for the advertisement. As a result, an internet service provider like Yahoo! always has two sorts of customers; the users, whose number is important for the attractiveness of the website for an advertiser and the advertisers, who pay for the marketing services.

One further feature is the fact, that there is no sales representative between the owner of a trademark and the customer. It is mostly a direct commercial relationship.

For the company Yahoo!, the brand has primarily the function to separate the own website from the competitors’ ones. Furthermore the consistent or better quality of the provided services indirectly promotes advertising revenue, because the internet users’ clicks traceable reveal how attractive the website is. Its established brand image helps Yahoo! to differentiate from other websites. Thus Yahoo! reaches close customer loyalty, if on the one hand the provided services were satisfactory for the internet user, and on the other hand for example the online advertising in form of an ad caused many accesses to the advertiser’s website.

In addition to these functions, Yahoo! can anytime develop new internet services and merchandise them using the brand Yahoo!, which means a high probability of success, but a relatively low risk to fail.

The brand Yahoo! helps the advertisers, who are responsible for the companies’ revenue, to orientate within the numerous possibilities of advertisement within the World Wide Web. The consistent or better quality of the website and its stable or increasing number of internet users give them a guarantee and a secure feeling during their buying decision. They can trust in the familiar quality of the website content and its performance. The advertisers are the ones who cash in on the click- trough rate, which is caused by the internet users’ demand. Furthermore the positive brand image of Yahoo! can be transferred to the advertiser.

For the internet user, who uses for example the web search engine, the brand Yahoo! has some important functions, too. It helps him or her to orientate within the numerous offerings of websites and internet service provider. The quality of the website gives him a secure feeling for example concerning its search results. If the internet users trust in the search because they are convinced that it taps the full potential of all websites within the World Wide Web, they will use it again. For an internet service provider like Yahoo! this means that they can get a precise idea of the quality of the web search engine’s results and keep it in mind, what will influence them for the future.

To sum up, it can be stated that a brand fulfils a multitude of functions for every market participant, which also a brand of an internet service provider implements. Against the background of this fact, the next chapter will point out what it means to lead a brand and which value this has to a company.

2.3 Meaning of Branding

As aforementioned, leading an established brand has a lot of advantages for a company. The added value a brand delivers leads to an increasing disposition to buy and a higher rate of repeat-buyers. The company reaches a close customer loyalty, which leads again to a rise in value (Biel 2001, pp. 66-67). In consequence of this a brand can generate a high loyalty and a big regular clientele. This means that the company can realise a higher profit, because it can enforce a higher market price for the brand (Kotler 2007, p. 515). In addition to that, winning over the consumer is cheaper than the acquisition of new consumers (Esch et al 2005, pp. 44-45).

Furthermore, an established brand evokes the so-called halo effect¹. In this manner a positive brand image leads to a positive estimation of the product. This leads in turn to a higher efficiency of communication, because the brand value positively bears on the perception of the marketing actions (Esch et al 2005, pp. 44-45).

A well-known example for this effect is the one of Coca-Cola. The brand Coca-Cola continuously loses taste tests in comparison to Pepsi, if the labels are covered. By contrast, when the labels are revealed Coca-Cola is rated better than Pepsi. In this case it is quite obvious that the prominent image of Coca-Cola influences the particular attributes of the product; the taste of the drink (Esch et al 2005, p. 7).

An established brand can furthermore act as an entry barrier, because it can make it difficult for competitors to enter the market. By this means a brand can shield the company from a high competition (Esch et al 2005, p. 45). In addition to that, established brands have a much longer life cycle than no name products. Brands like Levis or Kodak exist for more than 100 years and are still successful (Biel 2001, p. 69).

In Chapter 1.1.1 the pull-strategy was already mentioned. The effect that the retail market asks for the products as a result of the consumers’ demand gives the owner of a trademark a more comfortable negotiating position (Klein-Bölting 2003, p. 17). Also in this chapter the function of an easier brand- or line-extensions was declared. The company is not only able to launch new products using the successful brand to minimise the risk to fail, but it can also grant licenses. In this manner it can expand internationally in a smart wise (Esch et al 2005, p. 12).

These advantages of leading a brand can be again assigned to Yahoo!. For this company being an established brand means to reach a close customer loyalty and a big regular clientele, if the two customer groups’ expectations are fulfilled. On this account it can realise a higher profit with higher market prices than its competitors, whose brands are not established yet. While an ad within the sponsored search of Yahoo! starts with a minimum bid requirement of USD 0.10 per click (Jordan 2005), an ad within the Web search engine of Lycos, a less known internet service provider, bidding starts as low as USD 0.05 per click (Anon 2008).

For new competitors, who want to enter the market, established brands like Google and Yahoo! act as entry barriers and can in this manner shield the current internet service providers from new ones. For Microsoft the takeover of Yahoo! would have some additional effects. Microsoft could work its market position, because it is already in the web search engine’s business. On this account the brand Yahoo! has a much higher value for Microsoft than for any other internet service provider, who is not already active in the market of web search engines.

Furthermore, the already mentioned function of an easy launch of new services using the successful brand Yahoo! plays an important role for the company, when it wants to extend its expertises.

2.4 Situation Analysis

2.4.1 Economic Framework

Tangible assets have been for many decades the dominant assets in balance sheets of any company (Wöhe 1982, pp. 95-96). The economic market has changed more and more from an industrial environment to a service and high technology market. In the same matter the importance of intangible assets increased (Küting/Weber/Wirth 2002, pp. 57-60). This means, that intangible assets, such as brands, increase values and that the management as well as actors on the capital market pay a higher interest to these assets. Lifetime of markets and products are constantly decreasing, therefore the influence of the intellectual assets is increasing. This can also been seen on the prices which are being paid for these assets (Haller 1998, p. 561). The increasing difference, mainly since the beginning of the 1990th, between market capitalisation and book value shows the shift toward the importance of intellectual assets. The two publications of Stewart in 1997 and Edvinson/Malone in 1997 both with the title "Intangible Assets" (Kahre/Schwetje 2003, p. 123) are stating that the added value of tangible assets has been moved to intangible assets such as human capital, knowledge and innovation. According to a paper from Price Waterhouse Coopers from 2007 (Menninger/Günther/Beyer) the accounting has to face large changes to state the intangible assets in the right way. The Management tool and the controlling instrument intangible assets are according to this study still underdeveloped and it is necessary for value brands, patents, licenses and own developed software.

Intangible assets follow different rules than tangible assets; therefore special treatment is needed on the accounting side (Stroi 2003, p. 175). Many enterprises have invested a lot in branding, research and development, and information technology. This has created value. Partly it appears in the balance sheet, but it has no influence on the accounting so far.

An important year for the brand in Germany was 1992, as a stand alone asset. The Law of "Erstreckungsgesetz" (ErstrG) came into force. With this law the brand became independent from the good it stands for and could forth on be sold alone. 1995 The German “Brand law” came into force (Markengesetz). From now on the brand became also independent from any business. Due to the cancellation of the accessoriness between brand and business the brand became an intangible asset.

2.4.2 Acquisition as Relevant Cause for Brand Evaluation

There are various reasons to value a brand. Figure 8 shows an overview of possible reasons. Sattler (1995, p. 665) and Kranz (2002, p. 436) are using the corporate view and Maretzki (2001, p. 41) the marketing and financial-juridical perspective.

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Figure 8: Reasons for Brand Valuation Source: on the basis of (Sattler 1995, p. 665)

The internal corporate view is mainly for internal people, such as the management board, marketing manager and the owner of the brand. The value can be used as incentive wage within the performance analysis of the employee and to determine the bonus (Göttgens et al 2001, p. 4). This leads to the fact, that employees will not only be measured on short term earnings out of a brand but also on the long term development of the brand itself. Brand valuation is therefore an additional figure beside turnover and revenues.

In discussions regarding marketing budgets between marketing managers and finance managers the brand value has a significant role. Through the brand value the marketing investments in branding are characterised as long term instead of short term investment (Sattler 2005, p. 665). An increase in brand value can additionally increase the standing of the marketing department within the corporate.

Out of the internal corporate view a major aspect of brand valuation is the management and controlling perspective (Berndt/Sander 1994, p. 1358). It is of great interest for the management how the development of the value during a longer period of time will be. Comparing the brand value with the brand value of competitors makes clear what position the company has in the market. Furthermore the brand value has a large influence on the planning and budgeting of a company (Ellerbrock/Frank 2004, p. 511). Goals like turnover, net income and market share are short term oriented and can have a negative impact on the long term success of the company. The brand value goal works here as a counterbalance to secure the long term growth of the company. Not only the value itself of a brand is essential, but mainly the reason has to be determined.

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¹ The halo effect describes the phenomenon, when the opinion of the whole product is influenced by particular attributes (Kroeber-Riel and Weinberg 2003, p. 310).