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

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