The Shareholder Problem
This page was created 28/08/24
This page was last modified 24/02/26
Original article was written 28/08/24. Felt like uploading it here and improving a bit. Old version can be found here [INSERT LINK].
Recently, prices have begun spiralling out of control, with excuses such as "inflation" or "the war in Ukraine" being made. While these excuses are somewhat true (food prices were hit and inflation peaked at 15.5% for food), prices have increased beyond the rates of inflation and are steadily rising. But why have they continued rising, and who is behind this problem?
Netflix as an example
In 2015, Netflix began raising prices for its streaming service, and for good reason. Their operating costs were steadily rising due to the amount of new content they were acquiring to attract new customers. By 2017, the company's profits soared to almost $600 million, while their operating costs plateaued. However, despite the slowing of their operating costs, their prices continued skyrocketing: Their premium plan jumped from ~$12 to ~$25 between 2017 and 2023, doubling the cost.
Between the years 2017 and 2021, inflation was at an average of 2%, so if we add 2% for every year between 2017 and 2021, $12 becomes roughly $13. Then between 2022 and 2024 inflation rates are at an average of 8%, so our $12 ends up at roughly $15.25. But Netflix has increased their prices to $25 despite high profits and stagnant operating costs.
But why?
The problem here is the investor. Netflix, as a publicly traded company, is heavily influenced by its investors. These investors own a large part of the company's shares, giving them a say in its decisions. They are invested in companies for a single reason: to make as much money as possible - so they make decisions to grow the company as much as possible. One way of doing that is through increasing the user base, but that becomes exponentially more difficult the more subscribers you already have: There are only so many potential customers and there is competition from other platforms. Because of this, there is only one viable way to make more money: increasing the price of the product. So eventually, the greed of the investor leads to the loss of the consumer.
This pattern can be seen in all companies with investors looking to maximise profits. Unfortunately, this effect usually ends up being negative, with the rare exceptions, such as the case of video streaming, where the consumer discovers and enjoys the benefits of piracy.
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