Why Is Netflix Disclosing Less About Its Business?


A gangbusters earnings report from Netflix Inc. is no surprise, which makes the video rental giant's decision to disclose less about its operations puzzling.

Net income at the Los Gatos, Calif-based company rose 26 percent to $38 million, or 70 cents a share, versus $31 million, or 52 cents, a year ago, thanks to the strength of its video streaming operations. Revenue grew 31 percent to $533.2 million while the number of total subscribers rose 52 percent to 16.93 million. CEO Reed Hastings, who founded the company because he got annoyed at the service he received at his local Blockbuster, couldn't have been more pleased.

"We are very proud to announce that by every measure we are now a streaming company, which also offers DVD-by-mail," he says in a management commentary filed with the SEC. "In Q4, we'll spend more on streaming content than DVD content, and we'll deliver many more hours of entertainment via streaming than on DVD. .... In terms of the economics of this evolution, our revenue in Q3 grew about 30% but our disc shipments only grew about 10%, which has allowed us to take up our streaming spend. We plan to continue to drive this trend with more streaming content spend, consistent with our operating margins goals."

Hastings no doubt is right about how his business is evolving. One look at Blockuster's recent bankruptcy proves that point. According to Netflix, 66 percent of subscribers instantly watched more than 15 minutes of a movie or a TV episode in the third quarter compared with 31 percent in the year-ago period and 61 percent in the second quarter. This underscores the company's transition from DVD rentals to streaming video. Though these numbers tell a compelling story, Netflix has decided to no longer release them, which is odd.

Whenever companies want to brag to investors about its success, they bombard them with every scrap of information no matter how trivial it may seem. For Netflix, whose shares are up 178 percent this year, the move is even stranger because it gives short-sellers who question whether the company's growth is sustainable more ammunition to drive the stock lower. It seems doubtful that the percentage of subscribers who stream video will change that much between now and the end of the year given the slow pace of the economic recovery. A total change will take years, if it ever happens. Remember, there are still millions of people who use landline telephones, dial-up modems and read hardcover books.

For his part, Hastings continues to talk up the growth prospects of Netflix. He plans to aggressively expand outside the U.S.

"Going into next year, we will be growing subscribers by over 50% year-over-year, and we'll work hard to keep that extraordinary momentum going through 2011," he says.

Ambitious goals for sure, but investors have to wonder what else he is not going to disclose as he tries to reach them.

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Douglas A. McIntyre and Michael B. Sauter are editors of 24/7 Wall St., a Delaware-based financial news and opinion operation that produces content for sites including MarketWatch, DailyFinance, Yahoo! Finance, and TheStreet.com.

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