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

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