Fri, Nov 19, 2021|Whitney Tilson

The trade-off between profits and what's best for customers

1) Following up on Wednesday's e-mail about how PayPal (PYPL) scammed me – and, undoubtedly, countless other customers – by using deception to charge unnecessary fees, five articles today – four in the Wall Street Journal, two on the front page – have me thinking about the difficult trade-offs companies often must make between what's best for their profits versus their customers.

Sadly (yet totally predictably), most companies prioritize the former over the latter...

Here's example No. 1: Instagram's Effects on Children Are Being Investigated by Coalition of States. Excerpt:

A bipartisan coalition of state attorneys general said Thursday it is investigating how Instagram attracts and affects young people, amping up the pressure on parent company Meta Platforms (FB) over potential harms to its users.

Led by eight states, including Massachusetts and Nebraska, the coalition is focused on "the techniques utilized by Meta to increase the frequency and duration of engagement by young users and the resulting harms caused by such extended engagement."

The attorneys general said they are investigating whether the company, formerly known as Facebook, violated consumer protection laws and put the public at risk.

"When social media platforms treat our children as mere commodities to manipulate for longer screen time engagement and data extraction, it becomes imperative for state attorneys general to engage our investigative authority under our consumer protection laws," said Nebraska Attorney General Doug Peterson, a Republican...

The investigation comes after sustained scrutiny of the psychological effects of social media, and Instagram in particular, on teenagers. The Wall Street Journal reported in September that Instagram's internal research had determined that its product can engender "negative social comparison" in a wide swath of users and can exacerbate body image issues among those struggling with the issue, especially young women. Instagram's photo-heavy design and focus on appearance likely made it uniquely harmful, the research suggested.

The research often framed the issue in stark language. "We make body image issues worse for one in three teen girls," said one internal slide from 2019, summarizing research about teen girls who experience those issues.

Comment: Over the past month, I've written extensively about how Facebook CEO Mark Zuckerberg has, from the day the company was founded, prioritized growth and profits over the privacy, health, and safety of its users, as well as society as a whole, so I think intense external scrutiny by the media, regulators, and politicians is essential.

2) Example No. 2: Dominant Eye Surgery Chain LasikPlus Put Profits Over Patient Care, Some Doctors Say. Excerpt:

Since the laser surgery that can fix nearsightedness was approved in the 1990s, one firm, called LasikPlus, has grown into the U.S. industry's dominant force by using low prices as a draw and vacuuming up rival players.

Along with its growth, LasikPlus has accumulated critics, including some of its own doctors, current and former, who alleged in lawsuits and interviews that they were pressured by corporate management to follow practices that they felt put the company's profits over patient care.

Some said they were expected to perform so many procedures each day they worried they couldn't keep up. "It felt like we were in a war zone all the time," said Therese Alban, who quit LasikPlus two years ago after 15 years there, part of an exodus of about 20% of the chain's then 40 or so doctors to a rival firm or private practice.

Dr. Alban said she was comfortable operating on 28 patients a day but was pushed to do 40 to 50. She would agree to boost her volume, she said, only to sometimes find an extra four or five patients added to her schedule without her permission. Some days, she operated from early morning until 9 p.m., she said.

More than a dozen former and current LasikPlus doctors and employees echoed such concerns. Some former surgeons said they felt pressure to approve clients for whom the standard vision-correction procedure might not be suitable and said the company discouraged them from recommending surgical alternatives that could be better for the patient.

Comment: This is one of a million examples I could give in the health care field, in which patients are often overtreated to fatten the bottom lines of the providers. The problem is especially extreme in the bloated, dysfunctional U.S. health care system – so much so that one study estimated that the "cost of waste in the U.S. health care system ranged from $760 billion to $935 billion, accounting for approximately 25% of total health care spending."

The article above particularly resonated with me because I had Lasik done to both eyes two decades ago, as did my wife a few years after that, and we're both extremely happy with the outcome.

However, to make sure we were getting the best, unbiased advice, we went to see our longtime optometrist to be evaluated. He wouldn't make any extra money if we went ahead with the procedure, so we trusted his conclusion. As Warren Buffett often says, "Never ask a barber if you need a haircut!"

3) Example No. 3: It's Not Just You. Banks Really Are Sending Out More Credit-Card Offers. Excerpt:

Nearly every card issuer has the same goal: to find cardholders with good credit scores who will carry balances. These customers are among the most lucrative for banks, and their absence is keenly felt. Big banks' credit-card profitability fell last year to the lowest level since 2009, according to the Federal Reserve.

Credit card spending declined sharply in the early days of the pandemic when travel was off-limits, and restaurants were closed. Balances on general-purpose and store credit cards went in the same direction, falling by $166 billion from January 2020 through April 2021, according to credit-reporting firm Equifax. Many cardholders closed their accounts altogether. The total number of open credit cards in the U.S. fell 7% from January 2020 to March 2021.

Credit card spending has since rebounded to pre-pandemic levels. Balances have not...

A decline in credit card debt is, of course, a good thing for consumers. Smaller balances mean lower interest payments and less risk of credit-damaging defaults. Missed payments on credit cards remain near record-low levels.

Banks say many people have the ability to pay their card bills in full because of their higher-than-usual savings. They expect that to decline as stimulus money runs out and people revert to their pre-pandemic spending habits.

Banks, meanwhile, hope spending now will pay off in the future.

Comment: These two lines really say it all: "Nearly every card issuer has the same goal: to find cardholders with good credit scores who will carry balances." And: "A decline in credit card debt is, of course, a good thing for consumers."

I'm disgusted, though not the slightest bit surprised, that banks are ramping up their marketing spending in the hopes of persuading more and more Americans to get back on their financially destructive treadmill of endless fees and usurious interest rates. But my advice to you is not to get caught up in their evil web!

I've been seeing this up close for a while now, as a good friend was stuck with $10,000 of credit card debt he couldn't escape. So two years ago, I lent him the money, interest-free, to pay it off, on the condition he'd never again run a balance on his credit cards. He paid me back $500 per month. But then the expenses of a death in the family and replacing a car set him back in a $7,800 hole, so I just lent him $8,000.

4) Example No. 4: Judge Dismisses Meme-Stock Lawsuit Against Robinhood and Citadel Securities. Excerpt:

Robinhood Markets (HOOD) scored a victory as a federal judge dismissed a lawsuit accusing the brokerage of colluding with electronic trading firm Citadel Securities to stop investors from buying GameStop and other meme stocks in January.

The lawsuit had been filed on behalf of investors who lost money when Robinhood and other brokerages imposed trading restrictions in GameStop, AMC Entertainment, and several other stocks on Jan. 28.

Comment: I've written many times about how Robinhood's entire business model depends on encouraging its users to speculate madly by day-trading options and worthless garbage that I've nicknamed Doggycoin (DOGE) and GameStink (GME). No wonder investing legend Charlie Munger calls Robinhood a "gambling parlor" that is "beneath contempt."

5) Example No. 5: McKinsey Never Told the FDA It Was Working for Opioid Makers While Also Working for the Agency. Excerpt:

Since 2008, McKinsey & Company has regularly advised the Food and Drug Administration's drug-regulation division, according to agency records. The consulting giant has had its hand in a range of important FDA projects, from revamping drug-approval processes to implementing new tools for monitoring the pharmaceutical industry.

During that same decade-plus span, as emerged in 2019, McKinsey counted among its clients many of the country's biggest drug companies – not least those responsible for making, distributing and selling the opioids that have ravaged communities across the United States, such as Purdue Pharma and Johnson & Johnson. At times, McKinsey consultants helped those drug maker clients fend off costly FDA oversight – even as McKinsey colleagues assigned to the FDA were working to bolster the agency's regulation of the pharmaceutical market. In one instance, for example, McKinsey consultants helped Purdue and other opioid producers push the FDA to water down a proposed opioid-safety program. The opioid producer ultimately succeeded in weakening the program, even as overdose deaths mounted nationwide.

Yet McKinsey, which is famously secretive about its clientele, never disclosed its pharmaceutical company clients to the FDA, according to the agency.

Comment: Another sickening angle on the opioid crisis – and another black eye for McKinsey. Here are links to my past e-mails or articles I've sent out about how the consulting giant has lost its way:

6) In conclusion, there are important lessons here for both consumers and investors.

As a customer, you always need to be aware that most companies, ranging from the little store in your neighborhood to corporate giants, don't have your best interests at heart. For sure, there are many admirable businesses that are long-term greedy – who bend over backward to do right by their customers because this builds loyalty and, ultimately, higher profits. Retailing giant Costco Wholesale (COST) is the best example I can give of this.

But my observation is that such companies are the exception, not the rule, so act accordingly. Don't blindly follow the advice of a doctor who stands to profit if you get a procedure done. Get a second or third opinion. Avoid dangerous forms of debt like credit cards. Don't gamble away your savings – either at casinos or in the markets.

And if you think you've been treated badly by a company, raise a stink! As I wrote in my October 28 e-mail, when it took me more than an hour to check in at the Wynn Resort (WYNN) in Las Vegas last month, I sent a complaint letter not only to the customer service department but also to the senior management. Within an hour, they gave me a free upgrade to their fanciest Suite Salon on my next visit.

As an investor, look to invest in the rare companies (like Costco) that truly put customers first versus every other company that just pays lip service to this. It's just smart investing – check out Costco's 10-year stock chart:

Best regards,

Whitney

P.S. I welcome your feedback at WTDfeedback@empirefinancialresearch.com.