The Impact Brand Equity has on your stock price - even in high-tech. Please note - this article was written by David Aaker, Robert Jacobson, and Michael Kelly and appeared in the September 26, 2000 issue of Business 2.0. It's posted here since it's no longer available in the B2.0 archives.

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Brand News
Want to give your stock a boost? Then win over the public with
a stellar brand strategy.
BY DAVID A. AAKER, ROBERT JACOBSON, and MICHAEL KELLY
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s spending to build brand equity a waste
of money in the high-tech world? How
much of your marketing budget should
you invest, if anything?
The traditional argument is that high-tech
marketing, whether for hardware, software,
or Internet companies, should focus on hard
product news, particularly product innovations, manufacturing capabilities, and distribution. Most marketing groups within hightech firms find it very difficult to justify
SEPTEMBER 26, 2000
BUSINESS2.COM
brand building.
This skepticism toward brand-building,
however, is not universal. Some point to the
success of the "Intel Inside" campaign,
which began in 1991 and has enhanced
margins, trust, positive associations, and
sales. A host of tech firms, including Oracle,
Cisco Systems, Sun Microsystems, and Bay
Networks, have tried to replicate the Intel
advertising model. Others, including 3Com,
IBM, and Microsoft, have launched signifi-
cant brand-building efforts. But these
examples, even when associated with stock
market success, do not alone constitute
hard evidence that brand-building pays o
in the high-technology arena.
We decided to see whether we could fin
a relationship between brand-building activi
ties, future profitability, and stock marke
returns in the tech sector. We examined
quarterly data for the years 1988 through
1997 for nine companies: Apple, Borland,
Compaq, Dell, Hewlett-Packard, IBM,
Microsoft, Novell, and Oracle. The brand
equity data source was the Techtel panel of
approximately 1,500 individuals who influence the computer hardware and software
purchases made by their companies; they
indicated whether they had a positive opinion, a negative opinion, or no opinion of a
company. Our measure of brand equity is th e
difference between the percentage of
respondents with a positive opinion and
those with a negative opinion.
We studied the association between stock
price movements and changes in brand equity, controlling for the effects of other variables on stock returns. Specifically, for each
quarterly period we also accounted for
market-wide average stock return and the
company's earnings. This allowed us to
assess whether brand equity supplied incremental information about the financial
prospects of the firm.
Our analysis of the data shows that building or damaging brand equity will, on average, affect stock return. Every 1 point
increase in brand equity is associated with a
roughly 1 percent increase in stock return.
As a point of comparison, we found that a
1 percent increase in earnings—known to
drive stock return—is associated with a 1.5
percent increase in stock return. This stock
market reaction to brand equity makes
sense. It's consistent with the fact that
investors realize that brand is an asset that
can lead to higher future-term earnings, a
relationship we also observe.
When comparing stock market reaction to
brand equity changes, we found that substantial gains in brand equity generated
increases in stock return averaging 5.5 percent. Conversely, large losses in brand equity

2. Brand equity matters in high-tech markets—Wall Street
notices when companies successfully build their brands.
ed by almost 6 percent the day Intel
announced that it would replace the defective chips. This rebound occurred despite
the fact that the exchange was anticipated
to result in a $500 million charge-off.
Investors viewed the long-term benefits of
maintaining Intel brand equity as superceding the short-term costs.
We also found occasions where product
problems did not noticeably impact brand
equity. One key differentiating feature was
the manner in which management handled
the problem. Intel's waffling on its floating
point problem seemed only to have exacerbated customer reaction.
CHANGE IN TOP MANAGEMENT The arrival of
Lou Gerstner at IBM in 1993 and the reinvolvement of founder Steve Jobs with
What really drives brand equity?
Apple four years ago both were associated
If changes in brand attitude are associated
with stock return, what builds and what dam- with brand equity improvements. These
ages brand equity? We did a qualitative analy- changes in brand equity occurred because
new business strategies were articulated and
sis and identified five influences:
these executives were visible and connected
MAJOR NEW PRODUCTS Although product
introductions generated no detectable brand to the brand. The drop in Oracle's stock in
response to the departure of its president,
equity changes in general, there were three
Ray Lane, is consistent with the view that a
blockbuster sub-brands, all supported by
change in well-known company leaders.
both advertising and publicity, that moved
COMPETITOR ACTIONS Brand equity depends
the needle—IBM's ThinkPad, Apple's
not only on the actions of a company but
Newton, and Microsoft's Windows. It's
also on the actions of competitors. A sharp
interesting to note that the ThinkPad and
brand equity downturn experienced in late
Newton products influenced corporate
1992 by Hewlett-Packard was in part due to
brand equity even though they were likely
some hard-hitting comparative advertising
to represent a very small fraction of corpoby Canon, which touted the results of a
rate revenue.
study that showed four out of five people
PRODUCT PROBLEMS The Newton hype in the
fall of 1993 was followed by a disappointing preferred the Canon Bubblejet's output to
customer reaction and was associated with a that of any HP product.
fall in Apple brand equity. A strong sub-brand
The progress of Windows 95 had a dracan adversely affect the reputation of a parent matic impact on the brand equity of Apple.
brand. When Novell's NetWare came under Increases in the brand equity of Windows 95
fire in 1996—and again in 1997—for not
(a product having the strategic and tactical
working on the Windows operating systems goal of neutralizing the advantage of Apple's
and not being Y2K compliant, Novell's brand "user friendly" interface) basically mirror the
equity fell. The Intel response in 1994 to a
fall in Apple brand equity.
defect in its Pentium floating point unit,
LEGAL ACTIONS Borland suffered a sharp
which caused a fall in its brand equity, pro- decline in 1993 after losing a major lawsuit
vides dramatic evidence of the financial mar- by Lotus Development. The U.S. Court of
kets' reactions to actions influencing brand
Appeals found that Borland had infringed
equity. For the period when the chip's flaw
on the Lotus copyright to parts of its popfirst became public until the decision to
ular spreadsheet program, Lotus 1-2-3, in
replace the chip, Intel's stock lost more than
its Quattro and Quattro Pro 1.0 software.
11 percent of its value. The stock rebound- More dramatically, Microsoft, having enjoyed
generated decreases in stock return averaging
4.8 percent. Firms with small gains or losses
in brand equity saw very slight stock return
effects, essentially indistinguishable from
zero. To illustrate, IBM suffered a negative
stock return of 37 percent in the fourth
quarter of 1992 after its brand equity
decreased 45 percent but experienced a
positive stock return of 35 percent in the
fourth quarter of 1993 when its brand
equity increased by 46 percent. On average, there is more than a 10 percent stock
return difference between those doing the
best at brand-building and those doing the
worst, a number that the most skeptical of
CFOs will understand.
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[BUSINESS
a high, stable brand equity over a long time
period, suffered loses in brand equity because
of information arising from the U.S. government's antitrust case.
The results from our study support two
observations. First, brand equity does matter
in high-tech markets, as Wall Street notices
when companies are successful in building
their brands. On average, brand equity
affects stock return and future profits. As a
result, high-tech firms should be suspicious
of strategic visions that do not include
strong brands.
Second, building and maintaining brand
equity in the high-tech arena requires more
than advertising. Blockbuster sub-brands,
visible top-managers, competitor actions,
and publicity associated with legal and product problems also influence brand equity.
These are not things you can delegate to an
advertising manager or to the ad agency.
It's true that we're making a bit of a leap
in saying that the companies used in our
study are representative of the entire tech
industry. Would our findings hold true for
an Amazon.com or a Yahoo!? We're not
sure; to run our model requires years of
quarterly data, which is currently unavailable for new Internet companies. Yet the
fact that Amazon.com during the last half
of 1999 substantially increased its brand
equity (by around 25 percent) may be one
reason that its stock increased sharply
while its quarterly loss per share dropped
from 43 cents to 96 cents.
It is also true that brand equity is only half
the story. The stock market reaction to brand
equity requires a business model where gains
in brand equity translate into higher futureterm earnings, a model that Intel and a number of other technology companies possess.
The tailspin of the stock price of Amazon,
CDnow, and a number of other companies
reflects the skepticism by the market that
these firms will be able to capitalize sufficiently on their brand equity. s
DAVID A. AAKER (AAKEROHAAS.BERKELEY.EDU ) IS THE AUTHOR
OF BRAND LEADERSHIP, VICE CHAIRMAN OF PROPHET BRAND
STRATEGY, AND PROFESSOR EMERITUS AT THE HAAS SCHOOL OF
BUSINESS, UNIVERSITY OF CALIFORNIA AT BERKELEY; ROBERT
JACOBSON (YUSHOOU.WASHINGTON.EDU ) IS THE EVERT
MCCABE DISTINGUISHED PROFESSOR OF MARKETING AND
TRANSPORTATION AT THE UNIVERSITY OF WASHINGTON, SEATTLE;
AND MICHAEL KELLY IMKELLYOTECHTEL.COM) IS CEO OF
TECHTEL CORPORATION, EMERYVILLE, CALIF.
BUSINESS 2.0
SEPTEMBER 26, 2000