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 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.

Filed Under: long term, short term, strategy, wall street
Companies: netflix

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  1. identicon
    Sagar Balan, 5 Jun 2008 @ 2:22am

    Re: Re: Perspectives

    Yeah, thats right. You gotta bet to make money. So, when an investor has put his money into your business, he will not relax till his risk is covered. And, what better barometer for him than quarterly targets.

    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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