Netflix and Risk Disclosure As Sony Movies No Longer Stream Online

| About: Netflix, Inc. (NFLX)
This article is now exclusive for PRO subscribers.

Kindly take a second and watch the video contained within this link, courtesy of Bloomberg TV.

"Who knew this was a problem ... what Netflix never warned people was that Sony could pull out of its deal with Starz ..."

Netflix "has known all along."

This reaction, of course, comes in relation to what happened to Netflix (NASDAQ:NFLX) over the weekend. Citing a "temporary contract issue" between Sony (NYSE:SNE) and Starz (LSTZA), Netflix downplayed the removal of Sony movies under the Starz deal from its online streaming service, noting that it only had to do with "differences" between its "two valued partners." As the Associated Press added, the conflict actually involved a clause in Netflix's deal with Starz that triggers once Netflix reaches an unknown subscriber threshold. Several other sources have since confirmed the AP report.

As the Bloomberg reporters note, did Netflix have a responsibility to warn investors and the public that this could happen? Of course, they had to be aware of the possibility. You can safely assume that Starz spelled out this possibility - apparently somehow tied to subscriber growth - in its deal with Netflix.

Have a look at the "Risk Factors" Netflix lists in its most recent annual report. I hope that, from this moment on, I am never again accused of not being fair to Netflix, despite my bearishness on the stock and concerns over transparency, accounting and corporate governance at the company. Netflix clearly states risk that obviously associates itself with the loss of the Sony streaming films.

Click to enlarge

Here's the key portion of that excerpt (although I encourage you to read the entire paragraph as well as all of the risk factors listed in the official filing):

As such, we are completely dependent on the studio or other content distributor to license us content in order to access and stream content. Many of the licenses provide for the studios or other content distributor to withdraw content from our service relatively quickly. Because of these provisions as well as other actions we may take, content available through our service can be withdrawn on short notice (emphasis added).

I respect Bloomberg as a news organization, but the reporters in the video should probably take a closer look at SEC filings prior to speaking to an audience that likely considers them influential.

That said, the above-mentioned risk factor, and most others, tend not to be too specific. That said, Netflix does mention specific names later in the same paragraph. This leads me to what I think is really the important question to come out of this, outside of the obvious problems the Sony news presents for Netflix's business going forward.

Should Netflix have to disclose the specific terms contained in the content deals it enters into? Is generically outlining risk enough? Or do investors deserve to know what could happen, down to the last detail?

While I believe the wheels are falling off at Netflix, I have to defend them on this one. I do think disclosing their content contracts as exhibits in quarterly or annual filings makes sense and would provide a great service to current and prospective shareholders. However, tens, if not hundreds, of specific clauses likely exist in its many content acquisition agreements. Short of making the actual contracts public, I do not think anybody should expect the company to cover ever contingency. The risk factor included in Netflix's annual report covers what happened with Sony sufficiently.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.