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How Wall Street's Short Term Thinking Can Destroy Tech Businesses
from the gotta-look-to-the-long-term dept
For whatever you think of either Amazon.com or Google, one thing that's worth giving both companies kudos for is their ability to ignore the short term questions raised by Wall Street in favor of much more strategic long term thinking. It's been less clear with Google, who has consistently done well. But Amazon has, for years, faced numerous questions from Wall St. analysts who consistently seem to get upset by the company's willingness to invest in big long-term projects. Other companies, unfortunately, get swayed too easily. For example, last year, Sprint gave in to short-term thinking from investors who got upset that the company was spending so much on its next generation wireless strategy -- despite it being an absolute necessity.
The latest place where that may be happening is with Netflix, which has been investing heavily in its digital download strategy -- causing some Wall Street folks to complain that the company is spending too much, and it won't make sense until the majority of users switch over. However, as Greg Sandoval points out, if Netflix follows this path, it'll be dead. That's because these projects take time. If you wait until the majority of your customers will switch over, they've already switched over... to your competitors who didn't wait around for Wall Street's short-term thinking to catch up.
This same issue comes up all too often, by the way, in discussing the various business models that the entertainment industry can adopt -- with people insisting that the record labels and movie studios should wait until the model is proven and everyone else is doing it. The problem, at that point, is that the laggards have lost all relevance, and their brand and reputation are worthless at that point. Betting on the long-term means not being a follower -- because in waiting for others to create the new market, you'll be left too far behind.
The latest place where that may be happening is with Netflix, which has been investing heavily in its digital download strategy -- causing some Wall Street folks to complain that the company is spending too much, and it won't make sense until the majority of users switch over. However, as Greg Sandoval points out, if Netflix follows this path, it'll be dead. That's because these projects take time. If you wait until the majority of your customers will switch over, they've already switched over... to your competitors who didn't wait around for Wall Street's short-term thinking to catch up.
This same issue comes up all too often, by the way, in discussing the various business models that the entertainment industry can adopt -- with people insisting that the record labels and movie studios should wait until the model is proven and everyone else is doing it. The problem, at that point, is that the laggards have lost all relevance, and their brand and reputation are worthless at that point. Betting on the long-term means not being a follower -- because in waiting for others to create the new market, you'll be left too far behind.
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Reader Comments (rss)
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Short-term thinking
The essential problem is the quarterly report, which leaves companies precious little time to think about long-term strategies. I had hopes that with global competition the US would be forced to go to 6-month reporting ... alas, the investment community convinced the rest of the world to go with quarterly reporting.
There's no doubt, the investor community is its own worst enemy.
Brad
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Perspectives
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The problem is...
I believe that the "wall street requirement" for short term profits is at the root of all of our (the usa) current financial problems from the energy crisis to the banking/subprime/credit card meltdown.
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Even microsoft doesn't get it right.
I think Microsoft is the ultimate proof of why waiting can be so devastating, it costs them such massive amounts of money to elbow their way into each new market that it takes too much time to cover their costs. If they had sunk all their windows and office revenue into cutting edge R&D they would have made much more money and Linux probably wouldn't be much of a threat because it would be so far behind tech wise.
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Re: Perspectives
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All investors are not alike.
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Re: Perspectives
All investors want a positive ROI. There seems to be the perspective that this want demands zero risk. This is wrong. Any poker player will tell you, you have to bet to win. You don't bet you don't win. You can still lose the bet. But that is what investing is: a fancy form of betting. So the only chance of making money is to put money at risk.
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Re: Even microsoft doesn't get it right.
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Re: Re: Even microsoft doesn't get it right.
The only area where MS still has the advantage is the desktop market, and even that is under threat (particularly outside the US where companies and particularly government have a vested interested in not being completely beholden to a foreign supplier).
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Re: The problem is...
Asian investors, in the other hand, find it perfectly normal when managers of a new company tell them they'll have to wait 3-5 years to see some ROI.
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Re: Re: The problem is...
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Re: Re: Perspectives
That is my point. Wall street expectations are absolutely common place human behaviour. Risk apetite of investors vary. But, no investor will give you infinite time to cover his risk.
No investor worth his salt invests in the stock market for zero risk. That's why T-Bonds are for. And can a tech company issue bonds? Yeah, but be ready to meet unholy interest expecations. Which is nothing but a risk-reward proposition in portfolio management.
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Re: Re: Re: Perspectives
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