BOSTON (TheStreet) -- You know the news by now: Netflix customers are running for the movie-theater exits as content costs are skyrocketing and expansion plans overseas will lead to losses in the first half of 2012. It's Netflix's worst quarter. And it all blew apart in three months.I read through the investor letter from Chief Executive Officer Reed Hastings and David Wells, the finance chief. My first thought: I wish all companies provided this sort of transparency and explanations. It had to be done, though, because of damage control following the Qwikster repricing/renaming mess.
While Tilson ended up missing the boat on Netflix (he covered his short position earlier this year), he was right in pointing out that the content accounting at Netflix is complex and unusual. Netflix even offers a slideshow presentation on its Web site that details how it accounts for streaming content. Tilson never said Netflix was a fraud, noting that the "rules governing how intangible assets are amortized are complex and rely on various assumptions, so there can be a lag between when cash is actually paid out and when the amortization expense is recognized and appears on the income statement." Nevertheless, if you are an investor in Netflix, it makes sense to understand its accounting rules. Because the company is posting solid earnings results despite the fact that expenses are escalating.