Companies face important tradeoffs when thinking about how much information to disclose about their business. Investors, of course, want a great deal of information about the nuts and bolts of a business. They want detailed segment information for diversified firms. They would like to see more detailed operating metrics about performance that might serve as leading indicators of financial performance in upcoming quarters. They want to understand customer satisfaction, product pipelines, etc. Companies face a delicate balancing act though. The more they disclose to investors, the more that they are also disclosing to competitors. For instance, many diversified firms provide frustratingly little segment information in their 10K reports. Of course, they can get away with this limited disclosure as long as they are performing well overall. When the numbers decline, investors begin to wonder if the whole is worth less than the sum of the parts. To complete that analysis, investors push for more detailed information about segment performance. The diversified company may resist such calls though, not simply because they wish to rebuff activist investors. They also may not want to offer critical data to competitors.
The Wall Street Journal's Heard on the Street column demonstrated this conundrum that firms face when describing the situation at Netflix these days. Investors would like to know how many people are viewing the company's original content. They are, after all, used to seeing ratings information for broadcast andcable networks. On the other hand, Netflix may have good reason to resist investors' push for more disclosure. In fact, investors should understand that less disclosure may be very good for the bottom line. Here's an excerpt from this week's Heard on the Street column;
As much as Netflix’s investors might also want to know that, there is an important strategic advantage for the company in keeping everyone in the dark. Not only does having all the data allow Netflix to continue to tout the success of its originals, it also means more leverage over media companies in licensing negotiations. If the companies don’t know how many people are watching their shows on Netflix, they don’t know how much to charge for it.