Netflix Shows Facebook its Privates, Gets Slapped by SEC

I love the intersection of words and technology.  One phrase that seems to have caught on recently is
Images"humblebragging", that is the art of shedding crocodile tears, or exhibiting false modesty, generally via social media status updates (this NY Times article explains it well).

I also saw the news in the Times this week about how Netflix CEO Reed Hastings got into hot water with the SEC by doing more bragging than crying on Facebook. According to DealB%k:

In July, Mr. Hastings posted three lines stating that “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June.”

In doing so, he apparently violated Regulation FD (for Fair Disclosure, also known simply as Reg FD).  Most PR people as well as Wall Street types know that Reg FD specifies how news that can move stock prices is shared with the public. It aims to ensure a level playing field for investors, and avoid the situation where some people – e.g. journalists, or industry analysts – get a heads up on news before it is officially announced.

The whole thing was surprising to me because it seems that it was years ago that the SEC relented to modern times and agreed to let companies use their websites and even social media to release such news. Previously, companies had to use a newswire service (I wrote about some of these issues in this post from 2007).

But as it turns out, life is not at all so simple – Stephen Davidoff's DealB%k piece schooled me on a couple of things that I did not know.

First, I had assumed that Reg FD was generally a good thing, and was not aware of the potential unintended consequences that he reported:

It seems so simple. How can more disclosure be bad? But both public
companies and investment banks argued that the rule would actually
reduce the flow information, as companies, now forbidden from disclosing
only to analysts, would simply choose not to release the information…

Subsequent studies of Regulation FD’s effects have shown that the critics may have been right. One of the most-cited studies found
that analyst coverage of smaller companies dropped. And since there was
now less information in the market about these smaller companies,
investors subsequently demanded a bigger premium to invest, increasing
financing costs. Another study found that the introduction of Regulation FD increased market volatility because information was no longer informally spread.

Regarding the Netflix case, Davidoff discusses the updated Reg FD rules, and explains why they may not apply here:

Then there is the issue of whether this was privately disclosed information… Some
have seized on this requirement to claim that the S.E.C. is in essence
saying that Facebook is not a “public” Web site. This is laughable;
after all, Mr. Hastings is popular — he has more than 200,000
subscribers to his Facebook account. But the S.E.C.’s argument is likely to be more technical than saying Facebook is private. In a 2008 release on Web site disclosure,
the S.E.C. asserted that a Web site or a blog could be public for
Regulation FD purposes but only if it was a “recognized channel of
distribution of information. ”

In other words, a public disclosure
is not about being public but about being made where investors knew the
company regularly released investor information.

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