How Wall Street's Short Term Thinking Can Destroy Tech Businesses

from the gotta-look-to-the-long-term dept

Tue, Jun 3rd 2008 9:01pm — Mike Masnick

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.

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

14 Comments

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Brad Fregger, 3 Jun 2008 @ 10:08pm

Short-term thinking
The only company that consistently wins by waiting until the technology is proven is Microsoft. Most .... as the article states ... get left behind.

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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Sagar Balan, 3 Jun 2008 @ 11:00pm

Perspectives
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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Mr Obvious Man, 3 Jun 2008 @ 11:24pm

The problem is...
IMHO The problem is actually the lack of understanding of long term planning (and profit) is essentially killing American publicly held businesses.

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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Junkyard, 4 Jun 2008 @ 12:24am

Even microsoft doesn't get it right.
#1 Microsoft's share price has gone nowhere for the last 5 years.

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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Anonymous Coward, 4 Jun 2008 @ 4:34am

Re: Perspectives
Perhaps if your an investor investing in businesses with design/product cycles lasting over a quarter, you should educate yourself about the industry. Too often, if you develop a revolutionary product all the while halving operating expenses and doubling profit margins, you've met expectation. Investors are investing to make money, but you have to spend money to make money.
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Anonymous Coward, 4 Jun 2008 @ 5:04am

All investors are not alike.
All investors are not alike. There are long term investors, who expect the company to do well in the long term, and forsake short term gain. There are short term investors who want a quick return. Short term investor credo is: get in, get out and to the devil with the long term consequences. Some investors are both, long in some areas, long in others. The long term and short term investors have largely opposite interests. Currently, Wall Street appears controlled by the short term investors. Thus, anything that doesn't maximize short term gain, even if it sabotages long term gain, is publicly decried. Worse, a long term gain strategy is even sued over. Look at the Microsoft/Yahoo thing. The law suit is strictly a short term investor complaint. Short term investors jumped on Yahoo when the deal was whispered about, and are now suing because the deal didn't profit as they expected. Currently, it is a bad time to be a long term investor, even with the 401K monies.
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Mike Hartwell, 4 Jun 2008 @ 5:10am

Re: Perspectives
Then the investor would not have put his money on Orville and Wilbur Wright, Henry Ford, or Philo T. Farnsworth!

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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freddy bee, 4 Jun 2008 @ 6:06am

Re: Even microsoft doesn't get it right.
i don't think linux is a threat today to msft. at all. there was a time where this OS was the rage and press articles were written daily about the threat to windows... now it would seem that it's a threat to SOlaris, HPUX, AIX, but that while this has been going on, MSFT has continued to win share versus Unix/Linux...
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Nick, 4 Jun 2008 @ 6:53am

Re: Re: Even microsoft doesn't get it right.
@freddy bee: you don't hear about it anymore, because it's been going on for so many years it is no longer news. Both MS and Linux are taking server market share from the old proprietary Unix installations, but Linux is taking more of it than MS. MS is having to keep XP alive purely to avoid surrendering entire new market segments (ultra portables and ultra low-cost desktop computers) to Linux, since Vista is too resource hungry to compete in those areas. Linux is making much greater inroads into the embedded device market than Windows CE is.

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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Franssu, 4 Jun 2008 @ 8:27am

Re: The problem is...
I couldn't agree more with you. Wall Street short-term thinking is not just destroying tech businesses, it's destroying the entire western economy. When you're demanding short-term revenue, you always end up sacrificing long-term survival, and it the end it costs society a lot when it could have brought benefit.
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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Anonymous Coward, 4 Jun 2008 @ 8:52am

Re: Re: The problem is...
Short term thinking is the biggest threat to the country in this age. The rich are getting richer by following their creed and not worring about the future. However, the majority of the population are losing their long term savings while the cost of living is increasing. As we have begun to see, foreign companies are interested in buying out American companies while the dollar is so depressed. Is this our only hope for rational investors?
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Anonymous Coward, 4 Jun 2008 @ 10:35am

Netflix's watch instantly program is awesome, even if they have limited titles and no high res. It's included for FREE with any of the unlimited plans (those start dirt cheap) and it just plain works. Why has it taken so long for somebody, anybody, to do this? Definitely not a question of technology.
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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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Sagar Balan, 5 Jun 2008 @ 11:45pm

Re: Re: Re: Perspectives
Here's some more analysis. Take a look at http://muddledclarity.blogspot.com/2008/06/innovation-investors.html
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