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The U.S. Securities and Exchange Commission has tried hard to force Alphabet Inc. and Amazon.com Inc. to disclose more information about their fast-growing businesses, but the tech giants aren't playing along.
The SEC is apparently as curious as MarketWatch is about Google's YouTube revenue (http://www.marketwatch.com/story/the-sec-wants-to-know-why-google-doesnt-report-youtube-revenue-2018-02-26), Amazon's allocation of R&D spending and a few other matters related to the vast amounts of money coming and going from Big Tech's corporate giants. Along with a back-and-forth with Microsoft Corp. (MSFT) that mostly involved that company's early adoption of revenue-recognition rules (http://www.marketwatch.com/story/microsoft-earnings-massive-changes-are-ahead-2017-07-19), the SEC has disclosed correspondence with three of the world's largest tech companies so far this year.
While the correspondence was only disclosed this year, it has actually been occurring for a while, as these tech companies became some of the most valuable and important in the world (http://www.marketwatch.com/story/techs-500-billion-club-has-tripled-and-it-dominates-the-market-as-earnings-storm-approaches-2018-01-30). The SEC engaged in lengthy correspondence with both Alphabet Inc. (GOOGL) and Amazon.com Inc. (AMZN)(AMZN) in what ultimately turned out to be futile efforts to get more specifics from each company about certain items in their financial statements.
Specifically, the SEC seemed interested in parts of these companies that have grown into massive companies on their own, such as YouTube , Amazon Web Services and the Alexa line of intelligent speakers. Both Alphabet and Amazon avoid disclosing much about the performance or costs of those businesses, lumping them in to large buckets of money instead of fully breaking them out as segments of their much larger businesses.
"The SEC is always interested in segment reporting," said Tom Selling, a former SEC accountant who consults with public companies on accounting standards and SEC compliance. "In general, they are trying to get companies to comply with the segment rules."
It is possible that the SEC correspondence is part of a regular check-in, which tends to happen about every three years, but it certainly seized that opportunity to try to ferret out more info about underreported business segments. (https://www.sec.gov/Archives/edgar/data/1652044/000000000017026686/filename1.pdf)
"Segment disclosures continue to be a frequent area of emphasis in SEC staff comment letters," officials at EY, formerly known as Ernst & Young, wrote in an advisory to clients last year. "In these reviews, the SEC staff often challenges companies' determination of the chief operating decision maker and companies' conclusions on identifying and aggregating operating segments. Companies also are frequently challenged about the adequacy of their entity-wide disclosures with respect to products and services."
The SEC started its correspondence with Alphabet last July (https://www.sec.gov/Archives/edgar/data/1652044/000000000017026686/filename1.pdf), in which it asked the company many questions about its segment reporting, revenue recognition and asked for more information about Google's fast-growing YouTube video streaming business, which it bought in 2006 for $1.65 billion (http://www.marketwatch.com/story/google-to-buy-video-site-youtube-for-165-billion) and is folded into Google's overall search and advertising business.
Don't miss: The YouTube and Instagram secret that Google and Facebook don't want you to know (http://www.marketwatch.com/story/the-youtube-and-instagram-secret-that-google-and-facebook-dont-want-you-to-know-2018-01-26)
Alphabet basically told the SEC nothing, despite repeated attempts. The Google parent company claimed that Chief Executive Larry Page does not make decisions about YouTube nor regularly view breakouts of that segment's performance, a key part of rules for disclosure.
(

The SEC published a bunch of communications with Alphabet on how it reports revenue, and they are a true treasure.

Please allow me to translate from accountant speak.

— Jeremy C. Owens (@jowens510) February 27, 2018

)
Even though some analysts now estimate that revenue from ads on YouTube will reach about $13 billion this year, Alphabet bundles its financial performance with all of its other advertising businesses. A Google spokeswoman had no comments about its correspondence with the SEC .
(http://www.marketwatch.com/story/the-sec-wants-to-know-why-google-doesnt-report-youtube-revenue-2018-02-26)"; Google is our only reportable segment," the company said in one response in December (https://www.sec.gov/Archives/edgar/data/1652044/000165204417000048/filename1.htm). "None of our other operating segments meet the quantitative thresholds to qualify as reportable segments."
Read more about the SEC and Alphabet (http://www.marketwatch.com/story/the-sec-wants-to-know-why-google-doesnt-report-youtube-revenue-2018-02-26)
Amazon's fight with the SEC lasted much longer. The SEC wrote its first letter in mid-2016, after the e-commerce giant filed its 10-K annual report. In its initial four page letter (https://www.sec.gov/Archives/edgar/data/1018724/000000000016082612/filename1.pdf), the SEC seems concerned about fast-growing businesses for which Amazon supplied few or no numbers--presumably the AWS, Kindle and Alexa businesses.
It asked Amazon for the specific drivers of its electronics and other general merchandise category and to break out its research and development expenses by project, at time specifically mentioning spending on AWS. It also tried to get information on Amazon Prime, based on the 51% growth of its Amazon Prime membership, and its spending on content for that service's streaming-media component.
See also: Amazon Prime has more members than Costco, Jeff Bezos reveals (http://www.marketwatch.com/story/amazon-prime-has-more-members-than-costco-bezos-discloses-2018-04-18)
Amazon , like Alphabet, was loquacious while actually disclosing very little.
"Growth in overall unit sales has been the primary driver of net sales across the many and expanding products and services sold through our website, and we have not identified individual drivers within Media or EGM (electronics and general merchandise)," the company said (https://www.sec.gov/Archives/edgar/data/1018724/000101872417000133/filename1.htm) in a letter last October.
"With regard to the nature of the costs that we incur by project, activity, magnitude, or direction, the sheer volume and diversity of our innovations and other activities does not lend itself well to any further refinement of technology and content expenses," Amazon said.
Don't miss: Amazon is worth so much because its cloud business is tech's true unicorn (http://www.marketwatch.com/story/amazon-is-worth-so-much-because-aws-is-techs-true-unicorn-2017-04-27)
Basically, that is Amazon saying that it sells so many things and invests in so many categories that no one category demands to be highlighted. An Amazon spokeswoman declined to comment on the correspondence with the SEC .
In the end, both companies received letters from the SEC stating that they have reviewed their filings, with the added warning that the company is responsible for the accuracy and adequacy of its disclosures. Amazon and Alphabet did agree to slightly edit some standard disclaimers in their SEC filings, and Amazon added capitalization figures for prior years and that its technology and content costs included infrastructure costs for Amazon Web Services and other efforts.
Selling said that the correspondence shows the difficult dance going on between the SEC , which is looking out for investors, and these tech giants, which are trying to keep some information from their competitors.
"We have this tension going on," he said.
See also: SEC's new code of conduct rules may eclipse fiduciary standard initiatives (http://www.marketwatch.com/story/secs-new-code-of-conduct-rules-may-eclipse-fiduciary-standard-initiatives-2018-04-17)
That tension is only going to grow. YouTube and AWS are two of the biggest reasons investors are putting their money into Alphabet and Amazon , and other tech companies are likewise cloaking the results of large and important businesses. Facebook Inc. (FB) has never disclosed the performance of Instagram, while Microsoft's constantly changing reporting structure does not include a full breakout of its AWS rival, Azure. While Apple Inc. (AAPL) breaks out sales of specific products like the iPhone and iPad, it bundles sales of some products, like the Apple Watch (http://www.marketwatch.com/story/apple-hurts-itself-by-hiding-apple-watch-sales-2015-07-21), as well as lumping all of its software and services together (http://www.marketwatch.com/story/apple-services-likely-to-top-7-billion-this-quarter-2017-04-26).
At times, Apple , Alphabet, Amazon , Microsoft and Facebook have been the five most valuable companies in the world over the past year. All have grown at more than twice the rate of the S&P 500 index over the last five years, even without factoring in dividend payments.
Investors and the public deserve to know exactly why these tech giants are so valuable, and providing the performance of large components of the businesses is crucial to meet that end. Hopefully, the SEC will continue with its quest to find out more, and stop taking no for an answer.