America Online's stock price dropped more than six points yesterday. In itself, this is of course hardly stop-the-presses news. In fact, given the volatility of Internet stocks, it's more like the proverbial dog-bites-man story. But the drop in AOL's price was noteworthy because it seems to have been provoked almost entirely by a negative item on the company that appeared in Barron's over the weekend.
The item was the centerpiece of the weekly column by Alan Abelson, as bearish a commentator on Wall Street as exists today and a man who bears a special enmity toward Internet stocks, all of which--as far as I can tell--he thinks are grossly overvalued. In essence, Abelson gave a short-seller with a significant short position in AOL--meaning that he's betting that the company's stock price will drop--the opportunity to blast the company and explain why AOL's future is so bleak.
Now, there's nothing wrong with quoting short-sellers on companies, even when they stand to make a great deal of money if their comments knock those companies' stock prices down. Short sellers are often founts of useful information, and a certain kind of institutionalized skepticism seems to make them adept at sniffing out fraud and deception, particularly in corporate accounting. Certainly the financial press is full of more than enough fund managers touting the stocks they love for there to be plenty of room for short-sellers attacking the stocks they hate.
What was striking about the attack on AOL, though, was just how obvious and devoid of new information it was. We were informed that AOL's subscriber growth was slowing, that the company was facing increased competition and that the advent of free Internet services, especially abroad, would hurt it. We were also told that AOL was already suffering, and would suffer more in the future, from price cuts on the part of its American competitors, and that soon the company would have to rescind the price hike it was able to push through last year.
The last point is, of course, pure speculation, and it rests on two fundamental misconceptions. The first is the idea that AOL is just like any other Internet service provider. It's not, because even though it's considerably more integrated with the Internet than ever before, its proprietary services--including above all its chat rooms--continue to attract and keep consumers. There's no evidence that AOL users are price-sensitive. The second misconception is the idea that Net users are willing to abandon their e-mail addresses to save a few bucks. This is just wrong. E-mail is the killer app of the Internet, and it is a true source of customer stickiness. It may be easier to change your e-mail address than your street address, but for a lot of us, we'd probably have to tell more people about the former than the latter.
In any case, whether Abelson was right or wrong is not really as interesting as the fact that despite the familiarity of his critique, it was able to drive down AOL's stock price by almost 7 percent in a single day. No AOL investor who read that piece could have come away from it thinking, "Damn. I was just wrong about the business. I need to sell." In other words, there was no new information in the story that needed to be incorporated into the stock price.
Except, of course, that the existence of the story itself was information about AOL. It's not that what was in Abelson's column drove the stock down. The fact of Abelson's column hurt AOL, because investors assumed that the fact of Abelson's column would hurt AOL.
The real question is whether, in incorporating the reality of Abelson's column so quickly, the stock market was efficient or inefficient. Unfortunately, this is almost a metaphysical question. An efficient market is one that assimilates everything meaningful that can be known about a company into that company's stock price. In the long run, Abelson's critique of AOL is meaningless. But in the financial-news-saturated and twitchy market we live in, in the short run a piece blasting a stock is almost sure to move that stock, which would seem to make it meaningful. And so the snake ends up eating its own tail.
Illustration on Slate's Table of Contents by Mark Alan Stamaty.