Paul Smalera

The startup had millions of users, but, from the beginning, just one customer.

The predominant way of interpreting Facebook’s billion-dollar purchase of Instagram, in light of the social-networking giant's forthcoming IPO, is that Mark Zuckerberg had to pick up the photo-sharing app to boost his company’s mobile engagement. That would allow him to guard the mobile flank against incursions from Google, Twitter, and whatever other social-media tools might next arise.

That may be true – and it may even be the way Zuck thought about the deal when he swallowed hard and ponied up the purchase price. But that way of analyzing Facebook’s pickup, and the pickup of dozens of other startups, not just by Facebook but by Google, Twitter, LinkedIn and others, is probably not telling the whole story. Here’s a different theory, one that better describes the tech world that we, the users of the Internet, now inhabit: Instagram may have had millions of us as its users, but it was really built for just one customer: Facebook.

Silicon Valley, for too long, has confused the issue of what it means to be a user of a website, service or app, and what it means to be a customer of the app. Intuitively, you’d think they would be one and the same: The person using the app is the person consuming the app. But increasingly, apps are being made to grab the attention of the hegemonic companies in tech. Whatever it takes to get bought.

Sure, startup CEOs are careful to refer to their user bases as just that – users – but even when money changes hands, those users are cattle to be herded toward a cell on a venture capitalist’s spreadsheet, to help the VC decide whether to fund another pivot, engineering acquisition, rack of servers, whatever. Users are just another dart, basically, that startups have to hurl at the bull's-eye and ensure success.

A colleague of mine tells a story: You can tell when a tractor was made to be purchased by a farmer, and you can tell when a tractor was made to be purchased by a corporation to be used by its employees. Tractors whose users are also the customers come equipped with every convenience, from a satellite radio to Wi-Fi to all the cupholders a farmer could dream of. They drive well, and their controls are intuitive, because that’s what the average tractor driver wants, and what the tractor competition provides. Tractors bought by companies, for earthmoving, rock breaking and the like, come equipped with nothing but a hard seat and a prayer. Employees – mere users – don’t get any say on the amenities, or lack thereof.

Those in the tech world who gawked at Instagram’s spartan app suite – no Android app (until recently), a barebones website, all of its focus deployed toward speed and social – were, in retrospect, mistaken in believing the company's goals were to grow as fast as possible, period. Instagram was only after one thing: to grow as fast as possible on mobile. The iPhone, more than any other platform, owns the mobile app universe. And so rather than waste its energy, Instagram aimed at the beating heart of the mobile world and hit it right between the arteries, with its incredibly popular iPhone app.

Facebook, as Paul Ford recently argued in New York magazine, has something like a gigantic, impossible video camera recording what everyone is doing on the Web every moment of the day, every day. It could likely see, with its magic data video camera, more and more and more and more Instagram usage showing up across the Internet, on iPhones. Then Instagram released its Android app, getting 5 million downloads in six days. Instagram was for real, and no company was in a better position to know that faster than Facebook. What Instagram was selling, in other words, was a huge amount of Facebook engagement. That’s basically valuable to just one customer in the entire world. Yep. Zuck.

It's easy to believe that Facebook can stay in control of the Web in perpetuity by acquiring tech's prettiest young things. But remember that a decade ago, Google looked like the substrate of the Internet. Nearly everything about the way we surfed flowed through Google. Now, not so much. While Google is far from toppled, a tectonic shift has created new land masses in the ocean, where previously there was only misty horizon. Where Ford sees Facebook’s dominance, I wonder if the same kind of shift might not undermine Zuck’s company in a decade’s time, and whether it will come from some competitor that does not yet exist – or at least not in the way that Facebook would perceive as a threat.

This company will probably emulate Google’s promise to “do no evil” and fulfill Mark Zuckerberg’s pledge to make Facebook not just a company but “a mission.” We keep making the “end of history” mistake on the Internet – that everything today is the last thing of its kind that will ever be invented or even needed. It’s a strange affliction, given that the Internet is basically creative destruction writ large. The next bedrock of the Internet might indeed be a startup brewing in some college kid’s mind right now, but if I had to pick one company that was doing all of these things right now, it would be Apple.

When Apple disrupts an industry, as it did with music, and is poised to do with television, it’s with the intent of bringing its customers new value and making new customers out of people who want to use its products. When Apple made a product, at least during the Steve Jobs era, it was with the intent of giving customers something they would want and use. Apple didn’t have much trouble identifying either its ideal user or its intended customer – both were the turtlenecked guy in the CEO seat, who would gladly let everyone in the company know if they had failed to live up to the expectations that come from either of those overlapping roles.

The way social-media companies conduct themselves today has little to do with value creation for the millions of people who sign into their products every day – because those people are not the customers. They’re just part of the product. That has been the strength on which startups make their billions, but when startups don’t bother to make their users into customers, that strength can quickly become a weakness as competition and innovation give users options to change habits. See, for example, the Yahoo to Google to Facebook example, or the AOL to Hotmail to Gmail example.

Next time a new app has the tech ecosystem all aflutter and you, the user, find yourself inevitably presented with a pop-up prompt to authorize or deny access to your account (as with the newspaper social reader apps that took Facebook by storm but are now tanking, thanks to their creepy behavior), it might be worth taking a second to figure out if you-the-user are also you-the-customer, before you click either one of those buttons.

PHOTO: A photo illustration shows the applications Facebook and Instagram on the screen of an iPhone in Zagreb, April 9, 2012. REUTERS/Antonio Bronic

Lately Internet users in the U.S. have been worried about censorship, copyright legalities and data privacy. Between Twitter’s new censorship policy, the global protests over SOPA/PIPA and ACTA and the outrage over Apple’s iOS allowing apps like Path to access the address book without prior approval, these fears have certainly seemed warranted. But we should also remember that Internet users around the world face far more insidious limitations and intrusions on their Internet usage — practices, in fact, that would horrify the average American.

Sadly, most of the rest of the world has come to accept censorship as a necessary evil. Although I recently argued that Twitter’s censorship policy at least had the benefit of transparency, it’s still an unfortunate cost of doing global business for a company born and bred with the freedoms of the United States, and founded by tech pioneers whose opportunities and creativity stem directly from our Constitution. Yet by the standards of dictatorial regimes, Internet users in countries like China, Syria and Iran should consider themselves lucky if Twitter’s relatively modest censorship program actually keeps those countries’ governments from shutting down the service. As we are seeing around the world, chances are, unfortunately, it won’t.

Consider the freedoms — or lack thereof — Internet users have in Iran. Since this past week, some 30 million Iranian users have been without Internet service thanks to that country’s blocking of the SSL protocol, right at the time of its parliamentary elections. SSL is what turns “http” — the basic way we access the Web — into “https”, which Gmail, your bank, your credit card company and thousands of other services use to secure data. SSL provides data encryption so that only each end point — your browser and the Web server you’re logging into — can decrypt and access the data contained therein.

By blocking SSL, Iran has crippled Tor, a program that enables Internet users to anonymize not just their content but their physical location as well. Tor is a very common workaround for users in totalitarian regimes to access Twitter, Gmail, Facebook and other services. It’s hard to come up with an apt analogy for Iran’s unprecedented blockage — it’s not just that the letters you send are read by the Post Office and photocopied for their records, it’s that the Post Roads themselves have been closed off, so you can’t even send a letter in the first place. That’s the net effect of blocking SSL in Iran.

The hacking group Anonymous has brought down all kinds of websites in protest, mostly over copyright, in the U.S. and Europe. I don’t advocate their targeting any country’s servers for retribution, but where is the outrage or public demonstration or media attention over the denials of Iranians’ basic freedoms to communicate, via the Internet?

Unfortunately, it’s still too easy for Internet companies and even the Internet’s founding fathers to dismiss the importance of the tools they created in fostering free and open public dialogue, especially in places like Iran. Recently, legendary engineer and Google Vice-President Vint Cerf published a New York Times op-ed entitled “Internet Access is Not a Human Right,” where he wrote: “Internet access is always just a tool for obtaining something else more important.” How wrong he is. Cerf’s line of thinking eviscerates the Internet — the wonder of the modern world he helped build. Cerf argues that humans have the right to “lead healthy, meaningful lives,” including having “freedom from torture or freedom of conscience.” Yet, we live in the 21st century: It’s hard to see how, among people whose economies are developed enough to afford them communication devices, Cerf would excuse governments that curtail their citizens’ freedom and right to use the ultimate communications tool — the global network of the Internet. In fact, in underdeveloped parts of the world, the cost to have a cell phone that connects to the Web can be quite affordable.

I’m not arguing semantics here — if our society excludes the Internet from the fundamental rights of human communication, we also excuse totalitarian regimes like Iran’s from any repercussions when it comes to blocking that avenue of human contact. It’s a dangerous compromise to make in a world that only gets more digital with each passing day. And it also conveniently excuses the free world from having to do much of anything about it. We wouldn’t forgive Iran if it threw 30 million citizens into solitary confinement — so why would we ignore it when the Iranian government effectively cuts the entire population off from the outside world, to stifle their voices during a critical electoral cycle?

The U.S. and the free world have often engaged in global humanitarian missions in cases of genocide, famine and natural disaster. At what point will the deprivation of freedom of communication warrant such an intervention? The U.S. is already on guard itself against hacking attempts from Russia and China — intrusions by both rogue and government-sponsored actors — so how long will we tolerate countries’ depriving their citizens of Internet access?

It’s a tricky question, with no easy answer. However, contemplating it may prepare us for the possibility that the world’s first cyber-war could be fought not to cut off a country’s Internet hookup, but to restore it. After all, the Obama administration’s State Department petitioned Twitter to stay online during one recent Iranian uprising and has used the service to communicate with citizens there during another. Iran has now essentially shut down Twitter with its SSL blocking. Will the U.S. respond? If we do, we will set a precedent that calls into question the rights of any government to silence its citizens on a global communications network, putting us into thorny conflicts with China and other 21st century frenemies. But if we don’t, we are condoning the silencing of dissent and turning our backs on a century-long pledge to foster democracy wherever it might flourish — even if it’s online.

Photo: Technicians monitor data flow in the control room of an internet service provider in Tehran. Picture taken February 15, 2011. REUTERS/Caren Firouz

Online privacy doesn’t exist. It was lost years ago. And not only was it taken, we’ve all already gotten used to it. Loss of privacy is a fundamental tradeoff at the very core of social networking. Our privacy has been taken in service of the social tools we so crave and suddenly cannot live without. If not for the piracy of privacy, Facebook wouldn’t exist. Nor would Twitter. Nor even would Gmail, Foursquare, Groupon, Zynga, etc.

And yet people keep fretting about losing what’s already gone. This week, like most others of the past decade, has brought fresh new outrages for privacy advocates. Google, which a few weeks ago changed its privacy policy to allow the company to share your personal data across as many as 60 of its products, was again castigated this week for the changes. Except this time, the shouts came in the form of a lawsuit. The Electronic Privacy Information Center sued the FTC to compel it to block Google’s changes, saying they violated a privacy agreement Google signed less than a year ago.

Elsewhere, social photography app Path was caught storing users’ entire iPhone address books on their servers and have issued a red-faced apology. (The lesser-known app Hipster committed the same sin and also offered a mea culpa.) And Facebook’s IPO has brought fresh concerns that Mark Zuckerberg will find creative new ways to leverage user data into ever more desirable revenue-generating products.

This is the way we’re private now. It’s ludicrous for anyone who loves the Internet to expect otherwise. How else are these services supposed to exist — let alone make any money? Theft or misuse of private user data is a crime, certainly. But no social web app — not one — can work without intense analytics performed on the huge data sets that users provide to them voluntarily (you did read the terms of service agreement…right?).

And the issue compounds when people connect one site to another. By linking their Twitter to their Facebook to their Google+ to their Foursquare to their Zynga to their Instagram to their iOS, users are consolidating their lives, and in the process making them more attractive to marketers. While Facebook, Twitter and other services have made attempts to warn users about hitting the “connect” button, many of us hit that button with reckless abandon, without a thought of who’s slavering on the other side.

The reason social media and digital information companies want that data is because of what we refuse to give them: money. No one wants to pay for the privilege of chatting with their friends or using a coupon, and to this day, no one has to: Go ahead, ring their doorbell or pick up the free coupon book from your front stoop. But if you want to chat using Facebook or Gmail, or you want to buy a groupon for an 80 percent-off Botox service, you will have to tell those companies who you are. And those companies will use that information to tailor their offerings to you, increasing your value as a user and a customer. They will slice their data sets into a million different pieces and show those pieces to people — advertisers — who will pay them money for the privilege of using their service. They’ll use it to get to you.

This is an update on an old media model. Magazines and newspapers for decades could only guess at the readership of their product and the demographic of their customers. But now social and new media demand to — and can — know exactly who you are before they agree to let you use their free services. Even email newsletter services like the increasingly hot Thrillist – which might innocuously start you on their service by asking only for your simple email address — deploy click trackers, pixel trackers and other online data-gathering techniques to start to put together a picture of you as a user, both individually and in aggregate. A deceased magazine like Spy could only dream of that kind of intel.

Without such strategies, social web companies like these couldn’t exist. Every user has a choice when it comes to privacy, sure. But the second people sign up for Gmail, Facebook, Mint or Gilt Group, they have reaffirmed their willingness to be a mouse that the cats will chase. And these cats need mice. Otherwise they will starve. So they do their best to hide their intentions. Indeed, as a longtime and well-known advocate for the transformative power of technology recently told me, true believers like Mark Zuckerberg actively stake out radical positions on privacy, then talk about them as if they were natural or normal. It’s not too much different from the political process, where the best way to effect a shift in society is to present it as if it were a fait accompli and then expend energy actually moving the levers of power toward the shift rather than wasting time arguing with people about the implications.

That’s what the last five years have been about. Mark Zuckerberg, for example, wanted a collection of all our Facebook actions called an Open Graph to be part of our lives. Now, lo and behold, it is.

Today, we straddle two extremes — the offline and the online. Each comes with its own expectations and realities of what privacy is. Offline, your thoughts and actions are your own. Online, sharing one thing leads to a spiral effect where you are soon sharing everything. Offline gives us privacy, that near-mystical quality of ownership that we covet. Online gives us the extreme power of social tools, allowing us to glide around the formerly linear data of our existence. Want your private Rolodex? Fine. Want your location-aware, instant-coupon, friend-tagging iPhone app? That’s fine too. But on the Internet, you don’t get to have both. There is no longer any middle ground. As in politics, the Internet has become a place for extremists.

Photo: People wear masks during the “Freiheit Statt Angst” (Freedom instead of Fear) protest calling for the protection of digital data privacy in Berlin, September 10, 2011. The masks were handed out by the organizers who asked participants of the rally to wear them for the media to symbolise what call the individual’s right to remain anonymous on the internet. REUTERS/Thomas Peter

Facebook shouldn’t pay its users. Its users should pay to own Facebook.

“Facebook was not originally created to be a company,” founder Mark Zuckerberg wrote in his letter to investors announcing the IPO of his already hugely successful and profitable company. “It was built to accomplish a social mission — to make the world more open and connected.”

Facebook has succeeded wildly, despite internal admonitions that its “journey” is only 1 percent finished. Journalists have latched onto Zuckerberg’s statement that Facebook wants to “rewire” the way the world works. In a world of thousands of self-anointed “social media experts,” only Zuckerberg can claim to have basically invented what the world thinks of as social media. He has etched himself into the timeline of human innovation.

Pity then, that Zuckerberg hasn’t turned his talents or attention toward Facebook’s financial underpinnings. After all, an IPO? How ho-hum can he get? If Mark really wants to accomplish his social mission with Facebook, he should share the company’s ownership with the people who helped him create it. Not just his Harvard contemporaries. Not just the programmers. Not even just the venture capitalists.

I’m talking about us. All of us. The users. Facebook should be a user-owned, user-managed company, run for the benefit of users. For the Facebook, by the Facebook. The company should be a cooperative.

Before I explain further, let me lay out the case in four simple points:

1. Facebook won’t necessarily get rich as a public company. LinkedIn, the grown-up social network, IPO’d last year, but is now down from its initial price after having had a big pop on its first days of trading. Zynga and Groupon, meanwhile, lost ground on their IPO prices as soon as they hit the markets. Tech journalism might work itself into a froth over a company’s earnings potential, but the broader market is still confused as to how to price these companies.

2. Distractions. Every story from now on is going to be less and less about Facebook’s incredible technology and more about how its stock is doing. Facebook’s social mission will be obscured by its profit motive.

3. Who’s being rewarded here? The whole point of an initial public offering is for a company to raise money by selling shares in the open market. An important secondary point is that the IPO provides liquidity to existing shareholders, making it far easier for them to trade and take profits (and losses) on what they own. Big banks underwrite IPOs — they go get the high-rolling, qualified investors and get them to commit millions of dollars to buy into the offering, collecting copious fees for themselves in the process, not to mention getting first crack at shares for their own products and funds. In short, everyone in an IPO process gets their beak wet except for the people who give the company its profits — its users. That might be fine for a car company, an iPhone company, or even a search engine company, but social media exists to connect users to companies and each other in unprecedented and previously impossible ways. Shouldn’t finance be one of them? That leads to…

4. Why not share the company itself? It’s fine to talk about technology’s power to change the world if you’re the one who’s going to profit from it. But this isn’t really a change: In fact it looks like a highly conventional way to run what everyone says is supposed to be a very transformative company. Facebook needed a gestation period, and its incredible growth in that period made it very special. The moment its IPO is over, it becomes one of a herd.

That’s why it should become a nearly one-of-a-kind company for the technology sector: a co-op. Invented in England in the 1840s, the co-op is a company organizational structure where membership is voluntary but members have democratic control and economic participation and in turn are supposed to act with concern for their community — in this case Facebook. Businesses of all kinds — for-profit and otherwise — are run through the co-op model, or variations of it.

• There is the Park Slope Food Coop, a crunchy place where 16,000 members (disclosure: I am one of them) buy groceries at just enough of a markup over wholesale to cover expenses (about 17 percent, making many items far cheaper than in other stores). They also run and staff the store, with the help of just a few paid employees.
• There is the San Remo, one of the most luxurious apartment buildings in Manhattan, where prices are in the tens of millions for a single apartment, and as in thousands of other co-op buildings, residents share the cost of maintenance and retain control over key property decisions.
• Then there is banking and insurance company USAA and mutual fund firm Vanguard, models for highly sophisticated financial services businesses that are run according to co-op principles and are highly successful and respected businesses.

But all of the businesses above use the co-op model’s social nature as secondary to their main business. For Facebook, social is the business.

Facebook wouldn’t be forgoing its fundraising if it abandoned its IPO and became a co-op. When I joined the Park Slope Coop, I had to pay a $25 membership fee and a $100 investment, the latter of which is refundable should I ever leave. In Facebook’s virtual community, its 845 million users could easily pay a small sum — say $5 in the U.S. and some locally adjusted equivalent in other countries — to become an owner. Some of that money would be used to buy out existing stock owners and set up the new management model — it would still have Zuckerberg as CEO with a management team, but with the same one vote that every other member has. Over time, if Facebook’s owners keep the cost of becoming a member as low as possible without in any way starving the site for cash, Facebook could even become the world’s first trillion-dollar company — just in a way no one has ever previously imagined.

Users who invested would earn the right to help govern the company. If it sounds unwieldy to let hundreds of millions of users govern a site, well, it may be at first. But as Zuckerberg himself will attest, his engineers are hard at work helping users connect to each other in ways previously impossible. Facebook already offers voting tools, organization pages, recommendation links, polling, etc. With the help of a management team and committee structure, it would be pretty easy to let members assign themselves to committees and shape Facebook into the community they want it to be. Besides, if there’s one person in the world not allowed to use the excuse that this undertaking would be too technically complex, it’s Mark Zuckerberg.

Zuckerberg may chafe at the idea that hundreds of millions of users are suddenly in control of his company, but think of a sample proposal. Say a user wants Facebook to give 10 percent of its income to charity.

1. She creates a new page and persuades her friends to follow it. The page holds the pro and con discussions of the proposal.
2. After hitting a certain threshold of followers, the page makes the Revenue Committee agenda, where a subcommittee is assigned to study its feasibility and write a summary about the proposal’s impact on Facebook, including how it would affect the bottom line.
3. The committee then votes on the summary — if it’s approved, it goes into a general Facebook meeting, where the entire user base gets to vote. The beauty of this is twofold. First, only the best ideas percolate to the top; propose anything crazy, and it’s simply going to languish. Second, with Facebook’s technology, there need not be a formal meeting time — the proposal exists just like any new Facebook alert. If a user feels strongly about a proposal, he can even buy a targeted demographic ad!

As the site’s leader, the famously controlling Zuckerberg would still retain quite a large chunk of control in that he’d have to implement the strategy and actually make it work, and one would think that if he explained why a given proposal wasn’t a great idea, his words would carry great weight.

But ultimately the site would belong to the users, not a tiny management team. When Zuckerberg eventually decides to hang up his keyboard and retire, the company would not face the cult of personality problems that Apple did during Steve Jobs’s protracted illness — it would simply persevere.

In the meantime, Facebook would have plenty of capital to pay its engineers, thanks to its owners’ contributions. In good years, it could return dividends to members or explain to them that it was better to bank the money for future investment or rainy-day funds. In tough times, it could first ask members for low-interest loans before turning to the capital markets, perhaps using a Kickstarter-like platform to fund specific initiatives in the company. In other words, this is a model compatible with capitalism and competition, not a replacement for those things. The whole system fits almost perfectly with Zuckerberg’s investor letter saying that Facebook doesn’t “build services to make money; [it makes] money to build better services.”

Facebook will probably never be governed this way. Too many early investors simply stand to get too rich. But if Facebook is not to be a co-op, that means social networking — and all of the truly incredible tools, culture, community and change that its visionaries claim will change the way the world is wired — will really just reinforce the highly stratified and imperfect way the world works today.

Mark, put your money where your mouth is; after all, you already have more of it than you will ever need. If Facebook was truly built to change the way people relate to their world, that change should begin with how people relate to Facebook.

PHOTO: An employee works on a computer at the new headquarters of Facebook in Menlo Park, California, January 11, 2012. REUTERS/Robert Galbraith