That was quick! Barely had my NYT op-ed on the decline of public stock exchanges hit the web this evening than Ira Stoll was ready with a trenchant reply.
Stoll is sanguine about the fact that the number of companies listed on U.S. exchanges has declined from 7,000 in 1997 to 4,000 today. “Suppose that the number went to 4,000 from 7,000 because many of the 7,000 companies merged with each other to become even larger and more dominant,” he writes, “and that the current 4,000 listed companies have three times the sales and three times the market capitalization they did in 1997.”
Actually, let’s not suppose that and instead let’s look at some numbers. I don’t have sales numbers, but I do have market capitalization numbers, from the World Federation of Exchanges. At the end of 1997, U.S. exchanges had a total market capitalization of $13 trillion; by the end of 2010, that had risen by about 24% to $17 trillion. Which in real terms actually works out as a slight decline in market cap. Meanwhile, GDP grew from $8.3 trillion in 1997 to $14.7 trillion in 2010 — that’s an increase of 76% in nominal terms, three times the rate of growth of U.S. stock market capitalization.
But more broadly, Stoll is making my point for me — that the U.S. stock market is increasingly made up of enormous and dominant companies and features ever fewer of the smaller, fast-growing companies which really drive the economy. When public companies are acquired or delisted or go bankrupt, there’s not nearly enough in the IPO pipeline to replace them. The result is a market of dinosaurs.
I also claim that the market is doing a bad job at allocating capital efficiently — after all, the market hasn’t allocated any capital to Apple since 1981. I don’t for a minute think I have a better idea than Steve Jobs what to do with Apple’s cash pile and in fact have said quite explicitly that it shouldn’t be paid out in dividends. But when investors buy Apple stock, their money doesn’t go to Apple, but rather to the other investors that they’re buying the stock from. The stock market becomes a money-go-round for speculators, rather than a way of directing capital at companies.
Finally, the “ultra-rich elite” I’m talking about is not the broad universe of people who are considered accredited investors by the SEC, but rather the tiny group of individuals who are given the opportunity to invest in private companies. If you’re well connected in Silicon Valley — if your name is Ron Conway or Vinod Khosla — then you have loads of such opportunities. But the rest of us don’t, whether we’re formally accredited investors or not.
I’m not making any policy recommendations in this piece — I don’t think that the rules about accredited investors should be weakened further, or that all Americans have some kind of automatic right to be able to buy a piece of Facebook. But I do think that the public stock market is less important now than it was in the past and that its decline is going to continue in future decades just as it has done since 1997.
Is There a Traffic Bubble, Or Does The New York Times Have an Inefficient Capital Structure?
As I hope my family can attest, I made a great point over dinner a couple of weeks ago about how the New York Times is clearly undervalued vis-a-vis various internet stocks. The NYT’s not an “internet company” but it does run one of the world’s most popular websites. Then I forgot all about it. But via Ezra Klein, I have a chance to revisit the point via Frédéric Filloux contention that we’re experiencing a web traffic bubble:
About 35% of the HuffPo’s users come form Google. They land on cleverly optimized content: stories borrowed from other (and consenting) medias that mostly generate blogging and comments. This is the machine that drove 28m unique visitors in January, which makes the HuffPo close to the New York Times/Herald Tribune audience of 30m UV. With one key difference: each viewer of the NYT websites yields an ARPU of $11, ten times more than the Arianna thing. Based on the HuffPo’s valuation, the NYT Digital would be worth billions. That’s a consolation.
You can think of some rational reasons for Huffington Post to get a premium over the NYT, related to HuffPo’s more favorable labor cost structure. You can also assume they’re getting a certain AOL desperation premium.
But is the basic thesis that the NYT should be worth a ton of money really so absurd? It’s an iconic global brand whose main competition as an iconic serious English-language global media brand is owned by the UK government. The New York Times Company currently has a market capitalization of about $1.5 billion and if their P/E ratio were at the S&P 500 average, it would in fact be worth “billions” right now. So why isn’t it? If I’m so smart why don’t the markets agree? Well, it’s a family controlled company with a two-tier stock structure. There’s got to be some reason most firms aren’t organized this way, and presumably the reason is that you pay a penalty in terms of the price of your equity. That’s a price the Sulzberger family has historically been willing to pay in order to preserve the family’s control over the iconic brand in question—they’ve viewed staying involved and maintaining their vision of the paper’s mission as important enough to weigh against some more narrowly commercial considerations. That seems like a sensible view to me, but it’s also sensible for investors to penalize them for it.
Recall that when Carlos Slim was given the opportunity to make an unorthodox investment in the NYT he wound up making a bunch of money.
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