Sunday, September 09, 2007

Short-termism in stock markets

Tim Berry makes a good point about the myopic reaction of the stock market to news of the iPhone price cut. That stock markets have a myopic short term view is hardly news, but if you are in the stock for the long haul you are not going to react to a short term price blip anyway.

From a strategy point of view it makes perfect sense for Apple to drop the price of its phone. But considering the $200 price drop to come entirely from Apple's pocket is ridiculous. AT&T now know that their two year exclusive deal with Apple has demonstrated potential to cause customers to switch networks. Those additional customers do not require a substantial increase in infrastructure investment, the additional revenues go straight to their bottom line. AT&T are certainly helping Apple drop the price.

Apple's costs per unit are unknown but certainly much less than their cost of manufacture. If sales of the iPhone had slowed to a trickle after the initial rush it would be because it is a niche product and the best strategy would be a high price. Apple's move looks to be tactical, dropping the price ahead of the Christmas and not merely a long term strategic move out of marketing to a high end niche.

Stock markets are notorious for their short termism. But how to fix it? The usual approach is to assign disproportionate voting rights to one class of share. This creates more problems than it solves, the management installed by the holders of the priority shares only needs to respond to their interests, not the actual owners of the company.

So how about this, the voting rights of shares depend on the length of time the shares are held. Every share gets at least one vote but a share that has been held for a year gets an additional vote, shares held for three years two additional votes and shares held for five years three additional votes. Long term shareholders have a greater say in the running of the business but no class of share is permanently disenfranchised.

1 comment:

1000myths said...

Certainly, the "short-termism" of the markets is legendary and the Trader's obsession with trees is as old as the markets themselves. However, I am happy to see that somone has commented on the latest blunder.