SEC’s notice to Netflix CEO Reed Hastings over a Facebook post!

Netflix CEO Reed Hastings Facebook update on December 6th, Thursday is interesting! He says,

SEC staff questions a Facebook post. Fascinating social media story.

We use blogging and social media, including Facebook, to communicate effectively with the public and our members.

In June we posted on our blog that our members were enjoying ?nearly a billion hours per month? of Netflix, and people wrote about this. We did not also issue a press release or 8-K filing about this.

In early July, I publicly posted on Facebook to the over 200,000 of you who subscribe to me that our members had enjoyed over 1 billion hours in June, highlighting how strong our content was. There was press coverage as there are many reporters and bloggers among you, my public followers. Some of you re-posted my post. Again, we did not also issue a press release or file an 8-K about this.

SEC staff informed us yesterday that they are recommending that the SEC bring a civil action against us for my July 1 billion hour public post, asserting we violated ?Reg FD?. This rule is designed to ensure that individual investors have equal access to information as large institutional investors, by prohibiting selective disclosure of material information. The SEC staff believes that I gave you all ?material? investor information in my post and that we needed to instead release the June viewing fact ?publicly? with an 8-K filing or press release.

I want to note a few things.

First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.

Second, while we think my public Facebook post is public, we don?t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not ?material? to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.

Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.

We remain optimistic this can be cleared up quickly through the SEC?s review process.

-Reed

Now, why is this interesting?

A post on June 4, 2012 on Netflix’s corporate blog titled, ‘Announcing the Netflix Open Connect Network‘ starts with this,

“Around the world, people are enjoying nearly a billion hours per month of movies and TV shows from Netflix. We?ve been delivering these petabytes of data exclusively through commercial content delivery networks.”

SEC’s Reg FD page goes thus,

On August 15, 2000, the SEC adopted Regulation FD to address the selective disclosure of information by publicly traded companies and other issuers. Regulation FD provides that when an issuer discloses material nonpublic information to certain individuals or entities?generally, securities market professionals, such as stock analysts, or holders of the issuer’s securities who may well trade on the basis of the information?the issuer must make public disclosure of that information. In this way, the new rule aims to promote the full and fair disclosure.

With these as background, let us revisit Reed’s explanation one by one.

“First, we think posting to over 200,000 people is very public, especially because many of my subscribers are reporters and bloggers.”

Then, why have an investors relations page in the first place? Netflix’s IR page is extensive, obviously given the regulations governing listed companies in the US. There are ‘recent announcements’, ’email alerts’ and many other ways investors may keep themselves updated with relevant news about Netflix as a publicly listed entity. If the CEO’s Facebook page is ‘very public’, why not use that for all kinds of communication? Is ‘public’ the same as’ investors as defined by SEC’?

“Second, while we think my public Facebook post is public, we don?t currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings. We think the fact of 1 billion hours of viewing in June was not ?material? to investors, and we had blogged a few weeks before that we were serving nearly 1 billion hours per month.”

I do not think SEC has an issue with the tools used to communicate, by Netflix – Facebook or the Blog. It is the content that was shared. Rather, it was the judgement call by Netflix in ascertaining what is material and what is not. So, let us not even go in the direction of debating where Facebook’s reach is ‘public’ or not – that is so beside the point.

“Finally, while our stock rose the day of my public post, the increase started well before my mid-morning post was out, likely driven by the positive Citigroup research report the evening before.”

Highly possible and I cannot comment on this at all – completely beyond the scope of this post.

That brings me to the scope of this post – let me number it for easy reading.

1. There’s an old joke where the surprised guy is told by his girlfriend, ‘Huh? What are you doing here? Didn’t you see the change in my Facebook relationship status?’. Or, take the painfully manipulative scene in quite a few films where a character leaves a note to another and the note doesn’t reach the intended party due to assorted reasons (mostly involving serendipity).

On a more serious note, if you are an adult and want to change your name in India, the first rule (PDF link) )goes, “Please advertise change of name in one of the daily local leading newspaper (note: emphasis mine) stating therein father?s/Husband?s name along with residential address and forward it in original to this Department”. You may assume that merely changing it on Facebook and Twitter would be more than adequate since it reaches people you think would need to know the name change, but there are others who would also need to know this information from other perspectives. Legal, for instance, and not necessarily social alone.

The point is this – there is a way and process to communicate to specific target audiences. The audiences has been clearly defined by SEC, but the content has not been. That is left at the discretion of companies and merely calls this, ‘material nonpublic information’.

2. That is the second point – who does Netflix have, to decide what is ‘material nonpublic information’ and what is not? I’m sure they have an evolved and experienced Investor Relations team, but are they in touch with the social media team that manages either the corporate blog or Reed himself, since he is a public figure with a strong following for his personal Facebook page? This is significant because we have information all around us and there is a stronger need currently to have the right people to decide on such things.

As PR folks, we decide a lot for the brands that we represent – if we have 3 key messages to be communicated via an announcement, how do we ensure that 3 different media gets something exclusive for themselves and make the news worthy for all three? Or, if there is something we need to divert attention, what other stronger fact do we use to highlight in the communication that can help achieve that effect? And so on – you get the drift? There is a stronger than ever need for communications professionals (across PR, employee communications and investor communications) to take the lead in guiding organizations not just in crafting communications, but also in helping them with the choice of mode of dissemination.

Take the June 3rd blog post by Netflix again, for example. It is titled, ‘Announcing the Netflix Open Connect Network’. The rest of the post, besides the opening paragraph, is largely technical for most consumer users. It is about ‘enabling ISPs to get Netflix video data from Open Connect, a single-purpose Netflix content delivery network’. The post doesn’t even explicitly mention the customer benefit of such a move, perhaps assuming that it is implied. The question is – if the membership number of Netflix (in US) is material enough to be used in the company’s press release boilerplate (PR-speak for the ‘About the company’ paragraph in most press releases) including every financial press release (in fact, you could notice how the number changes/improves with every release – 23 million in May, 29 million in October, and so on), why shouldn’t a number denoting ‘hours served per month’ be considered equally material?

3. Organizations need to be cognizant of the kinds of target audiences it deals with – general public, investors, stakeholders, employees, vendors, media, regulatory bodies and so on. And they need to be clear about the ways and means of communicating with each. This does not mean that they need to be communicating with all of these, all the time – that is a matter of priority on who it wants to reach out to and for what purpose… and when. But there is a need for a plan and consensus on what needs to be communicated, when and most importantly, how.

You cannot expect a status update on the company’s Facebook page to be the one-size-fits-all communication to all target groups. Can the company afford to share a crucial organizational change/update on the intranet alone? Perhaps it can, but only if it knows for sure that every employee has access to the intranet. If certain sections do not seem to have it, it needs to regard that seriously and ensure that they are kept updated in a way they can get the information.

But again, there may be a more nuanced and deeper way to analyze this fascinating (and path-breaking; this may change or improve SEC Reg FD guidelines for the better so that there is lesser room for misinterpretation) case than this PR’ish way. Do let me know what you think about this case, in the comments. I’d love to hear alternate perspectives and learn from them.

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  • 1) Most big banks block Facebook – so their analysts might not have seen the update
    2) Crawlers (linked to HFT algorithms) cannot access Facebook public posts in real-time – so, they missed the update as well
    3) Smaller investment firms don’t block anything – in this case, they had an advantage over their bigger counterparts
    4) Update was NOT through official Netflix FB page – but through the CEO’s FB page – unusual