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Netflix in trouble over Facebook post — feds show poor grasp of social media

In July, Netflix CEO Reed Hastings shared good news on Facebook(s fb) that people had watched more than one billion hours of the company’s video in the previous month. Investors cheered the news and Netflix stock had its best day of the year. But not everyone was impressed.

The Securities and Exchange Commission responded by telling Netflix(s nflx) and its CEO that they are in hot water for violating rules about corporate disclosure. The company said this week that it has received a Wells Notice, meaning Netflix and Hasting are under investigation by the SEC.

So what exactly did Netflix and Hastings do to trigger a federal securities probe? The answer is that they used a Facebook page with more than 200,000 fans to share the news instead of a more traditional method like a press release. In theory, this means that they didn’t give everyone a fair chance to react to a “material event” that affected the share price.

This is silly, of course. As Mike Isaac of All Things D notes, if you want to spread news then the world’s largest social network is a pretty good way to do so. And given the viral nature of the internet, the news will spread far beyond Facebook almost instantly. This should easily meet the legal requirement that companies use a well-read news or wire service or “any other non-exclusionary method.”

What has happened here is that the SEC has gotten caught up in technicalities rather than looking at why we have the rule in the first place. That rule, by the way, is a good one — every investor, and not just insiders, deserve to know when something important happens at a public company. And, in this case, Netflix and Hastings respected the spirit of the rule.

In the bigger picture, the Netflix incident shows how regulators can fail to grasp the massive changes in our communications and transportation infrastructure. Just as mid-20th century taxi laws are ill-suited for the age of car services like Uber, it doesn’t make sense for the SEC to pretend we’re still in the age of the fax machine. As Bloomberg notes, companies like Tesla are using everything from Twitter to company blogs to communicate with investors. The SEC will only lose credibility if it keeps trying to stuff this digital genie back in the bottle.

(Image by DM7 via Shutterstock)

10 Responses to “Netflix in trouble over Facebook post — feds show poor grasp of social media”

  1. eutorics

    Facebook should definitely be one the channels by which companies publish their news, but it can’t be the only one. As others have said, however huge Facebook is, it is a closed system and not equivalent to the Internet.

    The SEC also can’t allow companies to rely on the viral nature of social media posts to spread the news. They are legally bound to publish themselves to established news sources, rather than relying on word of mouth propagation.

  2. I totally agree with the SEC. Making an announcement on a closed system is not making an announcement. Facebook is not the internet, and is not the public – it’s just a modern AOL walled garden.

    • I don’t know the year that this SEC rule originated. But, prior to the Internet in its current form, newspapers would seem to be an even more closed system. After all, a fee is required for access. Television, even 15 or 20 years ago, would likewise probably not be able to do justice to minor announcements such as this.

    • Thanks all for your comments. A writer at Fortune makes a strong argument that the SEC was right since investors shouldn’t have to look all over the internet to find info:

      But I stand by original position b/c I don’t think people are going to find a press release any quicker, and, in any case, Facebook posts like this are so viral that any time delay for a broader audience is negligible

  3. The SEC did the right thing. Facebook has NOT been established as a “well-read news or wire service or “any other non-exclusionary method.” ”

    If Netflix wants to use Facebook in this manner, Netflix or Facebook should have gotten SEC to preclear BEFORE the announcement.

    Furthermore, Netflix could have also done a more traditional press release in addition to the Facebook announcement.