The Short-Sightedness Of Wall Street When It Comes To Broadband Infrastructure Investment
from the short-term-thinking dept
Karl Bode, over at Broadband Reports, absolutely destroys stock analyst Craig Moffett for doing his usual song and dance. If you’re unfamiliar with Moffett, Bode has the details:
Like any good short-sighted investor, Moffett has urged companies to not upgrade their networks, insiting that caps and overages are the “next generation of communications.” The irony of course is those telcos who listened and didn’t upgrade their networks are now having their lunch eaten by cable providers on a massive scale, which, if Moffett’s firm and client investment interests lean heavily toward cable operators, is something that’s working out rather well for him and them.
Less network investment, less competition, higher prices. Great for investors, not so great for you
Bode’s piece focuses on Moffett’s silly analysis that the DOJ’s interest is in how Comcast and Time Warner are trying to stifle Netflix and Hulu and that will somehow increase prices (huh? what?!?) because they’d take away Moffett’s preferred solution of anti-consumer data caps.
However, I wanted to focus in on the larger issue here: the idiocy of short-term Wall Street thinking over long term strategy. Wall Street functions on a quarterly basis mostly — with an occasional nod to looking out a full year, but rarely anything further than that. This creates stupidly short-sighted incentives that are deathly towards anyone with any long term goals or strategy. It argues that any big strategic investments don’t make sense, because they cost lots of money in the short term, but you won’t see payback until outside the myopic window of vision of these Wall Street analysts.
Perhaps that’s great for day traders, but as Bode notes, it’s bad for the public. And here’s the thing: it’s actually even worse for companies. It’s unfortunate how many companies find themselves slaves to Wall Street analysts views in making their strategic planning efforts. Because that holds them back from actually making the important big strategic investments they often need for the future. Every so often you have a more visionary leader who simply ignores the folks like Moffett. You get situations like Ivan Seidenberg at Verizon, who ignored Moffett and invested in fiber — which is why it’s still competitive today. Unfortunately, as Seidenberg got closer and closer to retirement (which happened last year), the company backed away from continuing its build out. Short term thinking over long term thinking.
In some ways, this is the flipside to the Innovator’s dilemma. It’s an explanation for why big legacy companies fail to respond to disruptive innovation: because they can’t. Because they can’t put in the effort to be ready for disruption and instead leave themselves wide open to such disruption by not investing in their future, but rather by listening to the Craig Moffetts of the world — such that the money that could be building a company for the future instead ends up in the hands of Moffett’s real clients: the short-term investors.
If we want to build a stronger economy that builds jobs and continues to innovate, we have to figure out a way to diminish the power of Wall Street’s short-term focus, and how to incentivize companies to understand what investing for the long run means.
Filed Under: cable, craig moffett, doj, dsl, infrastructure, wall street
Companies: comcast, hulu, netflix, time warner
Comments on “The Short-Sightedness Of Wall Street When It Comes To Broadband Infrastructure Investment”
Wall Street showed all too well in 2008 that short term thinking for short term profit is all they want, regardless of the consequences.
Look at WaMu, the largest bank ever to go bankrupt. You know why it went bankrupt? The bank paid their employees big bonuses to give out lots of big loans to people, regardless of if those loans were a good/safe investment. So the employees each gave out thousands of loans to people who they knew had next to zero chance of ever paying them off, simply because they got paid to do it.
Wall Street pays well for success, and doesn’t punish you for failure. Heck, some wall street companies even create failure companies on purpose just to profit from it.
I heard of one company recently that a wall street firm invested in and made a 2,000% return on it’s investment in just a few years while the company went bankrupt, and creditors got just $0.002 for every dollar they were owed. The wall street firm made the company load themselves up with as much debt as they possibly could, then buy back their own stock at a massively overinflated price.
Re: Re:
“I heard of one company recently that a wall street firm invested in and made a 2,000% return on it’s investment in just a few years while the company went bankrupt, and creditors got just $0.002 for every dollar they were owed. The wall street firm made the company load themselves up with as much debt as they possibly could, then buy back their own stock at a massively overinflated price.”
The company wasn’t named “Bain”, was it?
Re: Re: Re:
Yes, bring on the innuendo. By all means, let’s do everything we can to ensure that the current president and vice president–the ones who have been directly involved in every copyright abuse bill in the last three years, the president who illegally signed ACTA and is doing everything he can to avoid having to send it to the Senate where the Constitution requires it be dealt with, the president who stocked the DOJ with entertainment industry lawyers–we simply must ensure that they come back for another term!
more like dont want to invest in the future and then have something to complain about and blame when the rest of the world leaps ahead. some seem to think it’s better to have as much money as possible now and nothing later than to share it out a bit
Re: Re:
It’s not that they don’t want to, it’s that they can’t. Any publicly-traded company is required by law to maximize shareholder value (read: short-term profits) as their highest priority. If they invest in long-term plans that diminish short-term profits too much, the shareholders have legal standing to sue them over it.
Until we get *that* changed, the rest of it’s never going to improve.
Re: Re: Re:
I’d draw a distinction between “providing a good return” and burning the joint down to get every last nickel out. I know several Fortune 500 firms which produce consistent, long-term returns regarded as “good”, not “f-ing outrageous, baby”, and a certain class of investors… institutional included… really favor them. And they reinvest money for innovation, and don’t treat people badly, either. Rogues goin’ rogue, no matter what; but there are straight-ahead firms, too.
Re: Re: Re:
“It’s not that they don’t want to, it’s that they can’t. Any publicly-traded company is required by law to maximize shareholder value (read: short-term profits) as their highest priority. If they invest in long-term plans that diminish short-term profits too much, the shareholders have legal standing to sue them over it.”
Only if the shareholders are total idiots.
BTW, could you quote me the “law” that “requires them to maximize short-term profits to the detriment of long-term survival?
Re: Re: Re:
They are required by convention to maximize shareholder value though I’m not aware of any laws that say they have to or that the result of that is short term profits over long term performance. It is an obligation and a convention which may even be a term of listing on major exchanges.
Shareholders, particularly institutional ones, don’t care a whit about short or long term plans by a publicly traded firm. What influences institutional and other investors is the stock price over the short term.
The likes of Moffett have delayed telco build out in North America to the point where the replacement of twisted pair with fibre is more expensive that it would have been 5 years ago. As the article notes only Verizon broke out of that trend in the United States. That work is being done now simply because it has to be.
Just how is that protecting shareholder value? Maintenance and updating of telco outside plant is done more inexpensively over the long term than the short term not to mention that fibre to the house beats the speeds and capacity of cable many times over increasing their competitive position vs. cable.
In short it doesn’t protect or increase shareholder value in telcos no matter what nonsense Moffett may want to spew.
We should create cable start ups! Please!
Winners and losers
we have to figure out a way to diminish the power of Wall Street’s short-term focus, and how to incentivize companies to understand what investing for the long run means.
The “average” investor needs to speak up. Those of us with 401k plans, IRAs, and pensions – which is nearly everyone these days. We are the majority of the market. Yet we’re not heard from, because that kind of investing isn’t “sexy” – it doesn’t make headlines and it doesn’t make instant millionaires.
The stock market has become divorced from its original purpose – a source for capital for companies, and steady wealth building for everyone else. Instead we have high-frequency and algorithmic trading – computers doing battle with other computers. We have day traders gambling on short term pops. We have stock “analysts” with hidden agendas. Instead of the markets being a cooperative rivalry, they are cut-throat bloodbaths where only the most skilled or ruthless operators come out with more than they put in.
Re: Winners and losers
You aren’t an investor; you’re a sucker who’s getting the end of line shaft on the giant ponzi-scheme that is the majority of the market these days.
Re: Re: Winners and losers
Harsh, but fair. Having a 401K, IRA, or pension plan does not make you an investor. You have a stake, but no control. This indeed does make you a sucker, as harsh as that sounds.
Investing isn’t that hard, really. Picking places to put your money that will gain value and pay dividends for 20-30 years is not hard. Daytrading and not losing your shorts is hard.
Re: Re: Re: Winners and losers
Hmm….now why does that sound familiar…?
Oh. Right. Artists.
Re: Re: Re: Winners and losers
Having a 401K, IRA, or pension plan does not make you an investor.
Incorrect.
If all you own is mutual funds, then I agree that you have no decision making ability. And yes, the majority of my own investments is mutual funds in my 401k. I don’t get proxies for that.
But I have individual shares of specific companies in my self-directed Roth IRA. I get yearly/quarterly proxies and I do exercise my ability to vote on issues. My portfolio is not particularly impressive now, but I do have over a 20% rate of return for the 4 years I’ve had the account. Saying I don’t have control of that portion of my investment is uninformed, at best.
Picking places to put your money that will gain value and pay dividends for 20-30 years is not hard.
It is not difficult to pick companies based on their fundamentals and market conditions that will appreciate in value. However, it is rigged.
Re: Winners and losers
Make the american government cooperate with EU and you will end up with a Turbin tax designed to at least limit the shortest term traders.
The problem is, however, a lot more fundamental and a lot harder to solve. It is a question of limited informations, covering the worst abuses. The problem is the information investors think they have compared to reality. As long as new derivatives of derivatives of derivatives enter the stock market, it will end closer to a crash. Derivatives are ensurances of a companys stock and when they do well, people think the company is doing well and disregard the main stocks etc. When the company crashes, the derivatives and its derivatives are made worthless too and that is a huge problem since the buyers of the furthest away derivatives have had absolutely no information about the foundation of its value. Some stock traders are more degenerate gamblers than poker players. The more gamblers with insufficient information in a market, the higher risk of bubbles and the higher risk of crashes.
the money that could be building a company for the future instead ends up in the hands of Moffett’s real clients: the short-term investors.
Perhaps we’re supposed to infer the point, but let’s be direct:
The real customer of any company that issues stock is the investor. Lowly shills like the one you mentioned just skim money off transactions.
Purchasers of goods peddled by any stock-issuing company are in fact suppliers of a commodity known as money which is used to pay off the real customers (i.e., the stockholders, as mentioned above).
The whole concept is fundamentally based on lies.
Cue room-temperature IQ voice
The stockholders wouldn’t like it.
Ford
The only U.S. car company that did not ask for a Gov handout was Ford.
The major holders of Ford stock is still the Ford Family. Basically their name is on the sign on the door.
They have a vested interest in the company doing well in the long term. Something Wall Street can not do. “Think beyond Three Months”
By the way the closest I have ever come to owning a Ford was buying a Mazda.
Re: Ford
now I miss my old ford ranger with an amazing mazda engine in it… ah, that was a nice truck.
Re: Ford
I recently got one of their trucks, used. I’ve enjoyed owning it so far. Owning a ford in the Los Angeles area is like owning an exotic car.
Re: Ford
Offhand, I’d say that in my observations Fords from the 90s needed more TLC than popular imports (E.G. Hondas, but probably also other well regarded brands) and were better built than the other US brands.
Probably the best thing that /could/ have happened (likely would not have anyway, but this is what could have happened) would be the other US car makers and companies being liquidated and rebuilt with a completely different, reliability, safety, and quality framework; instead of the truckzilla attitudes most have embodied. Though that might be a manifestation of various government regulations and subsidies distorting the market in ways the average elected congressperson would fail to understand even they had asked experts what the effects might be.
Re: Re: Ford
“Offhand, I’d say that in my observations Fords from the 90s needed more TLC than popular imports (E.G. Hondas, but probably also other well regarded brands) and were better built than the other US brands.”
While during this time frame you are likely accurate, Ford’s turn around started in the early 2000s time frame. They were able to use partnerships with other companies to redesign their brand image and reliability. With the redesigned Focus, the Fusion, and few others, Ford has been able to pull themselves up to a decent level of profitability. This was based on Long Term investments started around a decade ago.
This article sounded incredibly funny for me as Moffett sounds close to Morf?tico which is a Portuguese synonym for leprous.
Ahem. Linguistics apart, there is a really interesting case in Brazil. In the 90’s there was this leading Beer brand Brahma in Brazil with a good piece of market share. It had a huge customer base, specially within the ppl in their 50’s or something. Then the company that owned the brand started investing heavily in promoting another brand of beer, Skol, as something for young, cool ppl. Well, we can all imagine what happened over the years.
Old customers died and young customers got old. And infants became young customers. And the roles changed to the point Skol overcame Brahma.
While it might seem pretty obvious for us now it wasn’t for them at the time. They had a clear short-term goal which was to boost their cheap alternative to the youngsters but they couldn’t see the long-term impact it would have. The company is alive and strong and both brands still exist in the market with many claiming that Brahma is clearly superior and all this fermented beverage nonsense (I prefer vodka, srsly) but it left a good lesson: do not underestimate long-term impacts. It’s obvious that the company wasn’t particularly harmed by its choices because both brands belong to the same parent company and they have even more stuff in the market so they probably have more market share now than they had in the past but what if they were 2 different companies? The first one would be chasing at the second over their business model failure and the second would be blissfully laughing over how “lucky” they were and enjoying the profits. I will concede they might have had a long-term vision here but most ‘profits’ or ‘losses’ we see nowadays are both fruits of the same tree: lack of long-term strategy. The profits were just ppl being lucky.
This follows the same logic as ensuring massive increase in short term profits by laying off your entire R&D staff. As your quarterly profits soar for the next year, your future fades rapidly.
Heh, It worked for HP!!
Hypothetical Scenario
What would happen if Wall Street was destroyed? Literally.
Re: Hypothetical Scenario
The proportion of the wider population characterized by sociopathy would drop relative to wider population not characterized by sociopathy.
Re: Hypothetical Scenario
Its funny you should ask this question. I have recently been thinking about ‘Wallstreet’ and what it really offers for a couple of months now. I guess this subject really just burns me up, since it ended up being quite a bit longer than I intended. Oh well, its good to vent every now and then.
In answer to your question, I would say not much.
When you think about what it really means to invest, you quickly realize that investing in a company should have very little impact on the operation of the company. When you buy a share of stock, unless its an IPO (or unless the stock you are buying just happens to be actually held by the company, which is almost never true) then the company see exactly….none of the money.
So how is this ‘investing’ in a company? Its not, it giving money to someone else.
And how does that affect a company?s ability to operate? It doesn’t. If a large company, say Apple was to be de-listed tomorrow for some reason, this would not have any impact on the ability of the company to operate. Unless of coarse you count the disruption of the pissed off executives who now only have their salaries as compensation.
So the conclusion I reached is that investing is a scam to get people to give over their money. It doesn’t really help the company, just the people who already have the stock. It doesn’t give you any power (you have to pay close attention becuase there is a lot of ‘non-voting’ stock and for stock that is voting, typically you own so few shares out of a pool of hundreds of millions or billions that you can be safely ignored).
I’m sure at one point investing in a company meant something, but now its is state sponsored program to have you pay for the privilege of having the audacity to think you can too can live the ‘american dream’ by making money and then retire (i.e. 401k). I think it is interesting that we in America are essentially forced to partake in the whole mess; the markets would never have made the money it does without the average worker having been forced into the market. And of course it?s the average worker that losses the most money. Look at the whole Facebook fiasco of letting the ?big? clients know about the revised statements while keeping everyone else in the dark. Plus most retirment account transactions are only executed after the close of the markets oce per day. So any news you find out has already screwed you royally before you can do anything about it.
I think I will just stop there before I really get on the soapbox!
The benefits of the monopoly
If Verizon & others were in a true competitive market, then undoubtedly failing to invest in their network would spell their doom. Alas, at best it’s a duopoly. Verizon can charge what they like and dare members to quit. Even with 2 “competitors” (who are now teaming up on related initiatives), there is seldom true competition.
In a monopolistic market, why should Verizon spend money to upgrade their network when they can charge virtually the same amount of money to the same number of people either way? Especially if Comcast & the other cablecos follow suit. And since dozens of corrupt state legislatures have forbid municipal broadband, there are no further threats with the full barrel of regulatory capture.
So Moffett’s advice, if heeded, stands a fair chance of being more profitable for Verizon in the long run. With control of both the infrastructure and the government, Verizon and others have little incentive to improve their services. It’s a failure of government that we’ve allowed such a situation to pass.
Re: The benefits of the monopoly
The problem with Moffett’s “advice” is that it costs significantly more for a telco to place upgrades to outside plant on hold than it does to plan it out and just do it. Aging telco plant has an annoying habit of failing in large sections, say the better part of a 500 pair cable going bad, at least enough pairs in it that it has to be replaced immediately which means unplanned and in segments which isn’t cheap. Better and cheaper to plan the whole thing out and just do it than sit on it till the worst happens. More profitable, too.
I don’t know the competitive position of the duopoly where you are but where I live the telco and cableco are fierce competitors. I’m biased having worked for the telco for 35 years. In Canada “reasonable” traffic management is allowed to ensure the the quality of the network. Cable did want to try caps and overages and that went over like a lead balloon though it’s still with us in another form based on usage. Telco’s have the ability to do the same but it’s not been to the competitive advantage of of the company I retired from to do that.
From what you say we Canadians, at least, have the advantage of a single regulator covering telecommunications so we aren’t dealing with state by state, county by county differences, we’re all running under the same rules no matter where we are. Telecom falls under federal jurisdiction and the provinces have never disputed that. Which isn’t to say that the regulator hasn’t fallen under the spell of regulatory capture from time to time but we still know what the rules will be no matter where we’re installing plant and what we have to do, at minimum.
To repeat myself, however, for Verizon to respond to needed upgrades in the outside plant based on failures in the old plant is anything but profitable as it initially costs more and long term maintenance is considerably more.
A single regulator also makes collusion in delaying the introduction of new services more difficult though not completely impossible.
Re: Re: End Game (to: TtfnJohn, #33)
Well, I put up a piece on a related topic a couple of years ago.
http://www.techdirt.com/articles/20090713/1916365532.shtml#c105
http://www.techdirt.com/articles/20090713/1916365532.shtml#c324
One truth which has emerged is that a utility company cannot do a very good job of extracting revenue from high-end customers, because the high-end customers can just buy something which bypasses the utility company. The utility’s captive customers are the low-end ones, those who cannot go out and buy their own equipment. A service which is primarily oriented towards customers of modest means may make more sense as a government service.
If the end game of the telephone companies is to be nationalized, whether or not they are in a good state of repair may not matter too much in determining the price at which they are nationalized. The kinds of things which Verizon has been doing with Fairpoint and Frontier make sense in that context. Reverse Morris Trusts, and all that. The idea is to set the company up as a series of shell companies, so that each section of plant either makes profits and distributes them as dividends to the parent company, or the shareholders; or else it goes bankrupt without being about to call on resources from the parent company. Their ideal world is one in which legacy landlines are separated enough from the backhaul for cellular base stations that if the landline quits, they can just abandon it, leave it for the state government to deal with, and go on selling cellphone service.
Railroads have been in net decline for some time, the peak year of railroad network expansion being 1928, and all of these various scenarios have been played through before, in, shall we say, a different medium.
Short-Sighted pretty much defines a large chunk of Wall Street and large corporations now. If it doesn’t factor into a quarterly profit; then it’s not important.
Luckily, for some, the Short-Sightedness of Wall Street can prove to be profitable…
one way to deal with such short-sightedness...
Would just be to raise taxes on the rich (thinking here a cut-off of something like $1M/yr income) by a huge amount (like to 70-80%).
If you can’t get rich in a year or two (because you’re paying too much away in taxes), you need to take a longer-term view to business plans.
If you can make generational wealth in only a couple of years, why would you ever take a longer-term view?
Re: one way to deal with such short-sightedness...
The answer isn’t “tax the rich”, it’s tax the behavior that is damaging the economy. Essentially, you would need to alter the capital gains tax to a more drastic sliding scale, where any short-term investment was taxed at an obscenely high rate, and then gradually reduces the longer you hold the asset.
So, for example, for algorithmic traders that only hold positions for milliseconds, charge them a 90% tax rate. For folks who hold it a day or two, 75%. For people who hold up to six months, 50%, and if you hold it over a year or two, bring it down to the 25% that most middle-class people pay. These are just figures I threw out with no real thought to it, but the idea has merit.
You need to create real financial incentives for people to actually invest long-term, while penalizing the short-term speculation that is the vast majority of the market traffic today.
Re: Re: one way to deal with such short-sightedness...
That would help with one part of the problem. The part I was looking at was the executives who run the large corporations. They aren’t looking long-term because they can earn many times more than enough money to live on for the rest of their life (even living a quite-lavish lifestyle) in only a few years.
Google's non-voting shares
Denying any influence to Wall Street suddenly makes more sense now.