Social networks: a financial instrument for companies?

The example of Netflix in 2012

Netflix is a company proposing movies in continuous flow on the Internet as well as rent of movies by mail in the United States and in Canada. This company was created in 1997 by two persons: Marc Randolph and Reed Hastings. In 2009, it offered a collection of 100 000 titles and exceeded the 10 million subscribers. In 2011, it counts more than 25 million subscribers.
In 2012, the company was accused by the Securities and Exchange Commission because of one “blunder” of one of these creators, Reed Hastings. (Is it really a voluntary mistake?)
At the beginning of the problem, 43 words posted on Facebook in July 2012 by him in a harmless way to congratulate the employees of Netflix who had just exceeded the billion consulting hours of video content on the website. This message was accessible to the more than 240 000 subscribers to the page.

 

 

The stock exchange appreciated this communication, the posting was widely reported and Netflix stock rose 13% the day of the posting. This announcement in preview of the positive benefits of the company had good consequences for the stock exchange activity and Reed Hastings was not the first one to have used this way. But the companies little appreciated this tool since now. For example, in March 2012, Gene Morphis, the financial director of Francesca, an American distributor of women’s fashion, wanted to things too quickly by tweeting during a board meeting : “Good figures = Joyful meeting”.  His employer did not appreciate and asked him to go to tweet somewhere else. Another company more careful: In February 2012, the manufacturer of soft drinks, Pepsi, published his profits on his official website before saying some of that on Twitter.

Why the SEC analyzed this case?

Immediately, the debate swelled: Are the social networks means of communication as the others to give messages to the market? The SEC decided to analyze the case of Netflix and to clarify this ambiguous situation. In December 2012, Hastings disclosed that the company was targeted by the SEC and he received a Wells Notice from the securities regulators.

 

 

The SEC did not like this using of Facebook and wondered if the use of Facebook or Twitter to speak big money creates or not a distortion in term of access to the information between the investors. The SEC claim to the full commission pursue either a cease-and-desist action and/or a civil injunction against Netflix and Hastings for violating public disclosure rules.
Indeed, according to them and a law adopted in 2000, it is mandatory for public companies to make public information that is considered "material" to shareholders. Typically, companies have to do it but they are also allowed to avoid it by posting information on their websites for example.
Reed Hastings did not understand the reaction of the SEC and used several arguments to demonstrate his good faith. Indeed, he considers that using social media is a public thing for his company because a lot of the subscribers use the Internet and are bloggers for example. He also said that he did not believe the fact of 1 billion hours of viewing in June was "material" information. Finally, according to him, the company always respected the law by giving first the material information to the investors thanks to letters, press releases or SEC filings.

 

 

Consequences for social media and for companies

Although social media can be considered as public by most of people, there is not yet a law allowing to assess it. The decision of the US was expected with impatience to define clearly a frame. When the SEC wrote these laws about financial disclosures, she totally did not think about these tools like Facebook or Twitter. The emergence of new means of communication more and more fast forced her to define new limits.
After several months of reflection, the SEC settled the question in April 2013: there is no problem to communicate financial information on the social networks only if their access is not restricted and the investors know about which account or about which page they can find them. Consequently, to tweet or to post can be a part of financial communication if these conditions are respected.
This decision is going to engender several changes in the way to communicate for companies. Before the statement of the SEC, a lot of communication specialists said that every company had to define individually the behavior of the employees on social networks and each person had to do the same.
Furthermore, because of the growing place of the social networks, this decision is enormously going to complicate the financial communication: the number of firms on social networks risks exploding and so the opportunities to slip.

This case is interesting in order to study the more and more important influence of the communication of the companies, especially during the current economic crisis. A good financial news is always good to say to the customers and the increase of the available ways to give it forced the regulation authorities to take decisions in order to avoid the skids. I think that the decision of the SEC will not be the last one in this field and in the next years, the authorities will have to take always more measures about the creation of new means of communication. The more technology will be innovative, the more the law will have to be fast to set up.

Anthony CARNOY