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, 3 Jun 2008 @ 11:00pm


    Disclaimer : I'm no investor/trader. Technologists should appreciate the business perspective. Before you take on investors, assume that the company is yours. If the company is private, then you are the sole investor. Take risks and if your bet on technology wins, well, yeah. Now, you have asked another person to put his money into your company. And, lets say he doesnt believe in your idea. He could jolly well be right. So, work out an alternative strategy by placing your own bets. Do it as a separate venture - a JV or Special Purpose Vehicle or something of the kinds according to company law. This will insulate the 'other' person's money from your risk. And, if you indeed win, put your price for the win. Let the 'other person' ( investor ) pay a price for not taking part in it. So, dont expect the investor to be a sitting duck if his money is taken for a joyride. But yeah, innovation does take a back seat due to short-term perspectives. Agreed.

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