Oh boy. This is a hard one for me to swallow. I’ve been eagerly waiting for the SEC to modernize its guidance about how social media can be leveraged to enhance disclosures to investors. The latest guidance is from ’08, well before the golden age of social media. I know the SEC purposely didn’t mention the terms “Twitter” or “Facebook” in the ’08 guidance in an effort to accommodate new technologies – but it sorely needs to be updated (the guidance also didn’t mention “search engine optimization” but that’s another story). Since the guidance was issued, the SEC has had its hands full with a financial crisis and two major Acts of Congress. So I can understand why there has been no progress in this area.
Anyways, we now have this – news that the SEC’s Enforcement Staff has issued a Wells notice to Netflix and its CEO Reed Hastings over a Facebook post about the aggregate number of hours people were viewing content from the company. This has the potential to set back the use of social media to give investors more information about investment opportunities by a factor of five. And since more disclosure is better for the marketplace, it’s truly a sad thing. Getting more information available via social media already was an uphill battle, as legions of lawyers have been telling clients “no” without bothering to figure out what “Twitter” and other social media channels really are. Many of the lawyers I have talked to about this also blame a lack of clarity in the SEC’s guidance.
I’m not a fan of the SEC using enforcement for policy-making purposes by going after high profile companies or executives to make a point in the disclosure area. And here is the kicker: Netflix is one of the only high profile companies that is friendly to retail investors. They accept retail investor questions on their conference calls via email and make the analysts wait on the call until all the emailed questions are dealt with.
Should the SEC Chase Netflix for an Alleged Regulation FD Violation Over a Facebook Post?
Of course not. And not just for the reasons set forth above about the big picture of what this means for the world of disclosure. When I asked for folks to email me their thoughts on this Bloomberg article entitled “Netflix CEO Hastings Faces SEC Action Over Facebook Post,” the overwhelming response was that the SEC was out of bounds. Many reactions were along the lines of this blog by Darrick Mix of Duane Morris regarding questions of materiality and sufficient public disclosure.
On the materiality issue, one member noted: “It is debatable that hours viewed is remotely material because you can’t draw a line between how many hours people watch Netflix to how much money Netflix brings in. The Netflix subscription fee is fixed regardless of how much subscribers use the service. Hours viewed is a measure of customer engagement in the service. If anything, more hours viewed increases Netflix’s costs slightly. Netflix explained this in their Q4 ’11 conference call in January 2012.”
Another member mused whether the old ubiquitous McDonald’s signs – “over 99 billion served” – would have been actionable for the SEC if Reg FD had existed then, noting that catch-phrase arguably contained more material information. More hamburgers means more revenue and more profit, unlike Netflix’s flat fee structure.
Steps Netflix Could Have Taken to Possibly Fix This…
Let me start this analysis by asking if you were surprised to see that 8% of respondents to NIRI’s latest “use of corporate websites” survey planned to use their site as a recognized channel of distribution? NIRI’s press release characterized this result as “just 8%” – but I was shocked it was that high. I am only aware of Google and Microsoft having announced that they use their sites as recognized channels. Is anyone aware of other companies already doing so?
Netflix has never taken that crucial step of issuing a short press release telling investors to look to Hastings’ Facebook account for important investor information. If I correctly understand what Netflix is saying in the wake of the SEC’s action, they still say that they don’t use Facebook for that purpose – even though they also seem to say that they could if they wanted to because Hastings’ Facebook posts provide broad, non-exclusionary distribution (ie. his FB account is well followed by the media and they report what he posts quickly). I’d agree that Hastings generates more media coverage with his Facebook posts than the average company does with their news releases – but that it’s still unclear under the SEC’s ’08 guidance what that means for the company.
Anyways, here is more food for thought:
1. Hastings is using the “subscription” option that Facebook offers. That allows anyone on Facebook to subscribe to his public status updates and receive them in real time – in theory. In practice, his updates don’t come through in real time to public subscribers who are not also his friends, which is something Facebook can fix.
2. You don’t need a Facebook account to view Hastings’ public Facebook updates, but this is not handled as well as it could be by Facebook. If you go to his Facebook page without being logged into Facebook, you won’t see the previous post.
3. Netflix has done a poor job of making investors aware of its CEO’s Facebook account. There should be a link to it in his bio and on the IR homepage (this kind of thing is true for almost all companies). Ironically, the Wells Notice has now made the account very public through an SEC filing.
4. Hastings’ Facebook posts generate a lot of media publicity. There are many journalists and bloggers who are both friends and subscribers. He has 240k subscribers, more than I’m sure subscribe to the SEC’s NFLX feed on Edgar or that view the NFLX Yahoo Finance page on a daily basis. He has a pattern of posting things like hours viewed, commenting on competitors like HBO and even noting subscriber number milestones. Many investors subscribe to his public updates because they’re interesting and help them understand the company.
The Bottom Line: The SEC Needs to Regulate IR Web Pages (And More)
The state of affairs for IR web pages for many companies is atrocious. And I argue that this is where the SEC should spend its resources rather than chase a CEO who likes to inform investors. For starters, there needs to be bare minimums about how companies display information – and what they post.
When I interviewed a number of in-house folks to put together this checklist about making the social media business case for investor & analyst engagement, it was shocking how little they knew about what was happening on their IR web pages. One Fortune 100 company had Facebook and Twitter links on the bottom of their IR web page – but when you clicked on them, they were dead. What does that tell investors?
Too many companies still blindly outsource their IR web pages to third-party providers – without realizing what those third-parties are doing. Did you know that one of these major providers use robots so that the Wayback Machine can’t archive what the IR web pages look like over time? This could be problematic if a company wanted to prove it made a disclosure on its IR web page on a certain date. Conversely, it could hurt the SEC if it wanted to prove that the disclosure wasn’t there. Given that the Wayback Machine is essentially the “Edgar” of online disclosures, should companies be permitted to “shred” their records like this?
This is just one of many examples illustrating how it’s still the Wild West on the Internet – and the fix isn’t to pretend that things on the Internet should be the same as it was before. It’s simply not and there are grand opportunities to better educate investors about a company’s prospects. The SEC needs to evolve and regulate more broadly. Get away from the hyperfocus on the disclosures it forces to be filed on Edgar. Focus more on what investors actually bother to read. Don’t punish the companies that want to reach investors in the manner that today’s investors consume information. Rather, lead the way so that companies can get on the social media bandwagon and stop hiding behind the excuse of Reg FD.
– Broc Romanek