I love Facebook’s new “partner website” strategy. It’s that thing where NYT etc. want you to log in through FB in order to do anything. It then tells you exactly what NYT or whomever wants in exchange for access to their site. B
oston.com, for example, wants to know who I am and how old I am, and it wants to send me emails. I get to say “no”, which I’m doing now, although I realize at some point this convention will become so dominant that I’ll want to play along.
It isn’t just having the choice that I like. I like what the transparency of dealings shows me. I have read that social media users must remember that they “are the product, not the client.” But what does that mean? Seeing it laid out helps drive it home. NYT is going to make its money by selling advertising to me; FB is going to make money by selling the information I have given it to NYTcom for this purpose. I am the commodity that FB sells, and NYT is their client. I appreciate being reminded of that.
Oh Mark, you’re such a gentleman! No-one’s ever sweet-talked me that way before!
It takes a minute to get used to this because it’s a reversal of how we like to think of enterprise. Enterprise benefits the owners by serving the public. Adam Smith and his bakers, and all that. Businesspeople move value toward the public, and they get rewarded for that. But fb’s business is different: the public is the raw material, and its service is to move value from us to others.
What’s interesting to me is that more and more of our economy is working this way, although nobody else is bothering to be so candid about it. Finance capitalism accomplishes the same reversal of interests : where serving clients was once the goal, and finance was a tool to help accomplish this, now managers are trained to see leveraging their finances as the way to make money, and their business line is just a nice source of cash flow to support their credit.
Take the whole sub-prime thing, for example. The existence of mortgages was merely something to put in the cash flow statement so that financial instruments could be created and sold. The product was the financial instrument, the clients were investors. The actual revenue from the mortgages — the fee for providing a service to the homeowners — was incidental. The homeowner was just the product.
We think of social media and the sub-prime fiasco as outliers in our economy, but the phenomenon is everywhere. In 2004 Costco got slammed by its investors, despite increasing profits, because it had used its profits to increase wages rather than increase dividends. The management defended this as good for the bottom line:
“Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees.”
But the shareholders were pissed. One analyst sniggered:
“At Costco, it’s better to be an employee or a customer than a shareholder.”
Why is this a criticism? Shouldn’t it be good to be a Costco customer? Would Adam Smith’s baker ever complain that his customers were too happy?
Another example. When, after the Gulf Spill, the US government said
that it would tighten regulations, Exxon said that this would result in higher prices at the pump. But Exxon, you’re posting the highest corporate profits ever, can’t you spare a bit of that for your customers? No, the profit margin won’t get touched. Costs will get passed on to the consumer because Exxon’s real clients, its investors, won’t tolerate taking second place to its customers. The ‘residual’ — the profit for providing a good service — is no longer what’s left over; it’s now the starting point, because the investors have become the real clients.
Shareholders should profit, of course, but they should profit as a reward for having served the interests of customers. That is the social good for which they get rewarded. But this attitude is the exception, not the rule, in contemporary corporate management. The product of a modern corporation is its debt and its equity; everything else, including the services it supplies to customers, is an input. There is something about the culture and the rules of our economy that has reversed the flow of value, and I don’t think it’s good for anyone.
There are some industries that have always commodified their consumers — in most news publications, for example, the attention of their readership is the commodity that they sell to their advertisers. But it’s worth noting that until recently most advertising-based publications were directly owned, not publicly traded. Some industries have traditionally been reserved for direct ownership — newspapers by custom, investment banks and law firms by rule. And they have avoided stock ownership for good reasons: there are already too many divergent interests to balance, without having a fiscal duty to maximize investor interests. It’s best if management internalizes the investment interest.
And, sure enough, as these traditionally private industries have shifted to public stock ownership, their behavior has changed. The consequences of floating investment bank stock have been felt and it has been regretted. Judge for yourself how the WSJ has fared. Amazingly, some law firms are going public also and I can’t imagine that this will be a good thing. The filing statement for the first law firm to go public states, in its “Key Risks” section:
“Lawyers have a primary duty to the courts and a secondary duty to their clients. These duties are paramount given the nature of the Company’s business as an Incorporated Legal Practice. There could be circumstances in which the lawyers of Slater & Gordon are required to act in accordance with these duties
and contrary to other corporate responsibilities and against the interests of Shareholders or the short-term profitability of the Company.”
This is highly reminiscent of AES’s attempts to formalize the interests of its stakeholders in its first public filing, and astute readers will remember that this conceit didn’t survive the first storm.
Adam Smith’s anecdote about the bakers is meant to show that the relationship between enterprise and the public is reciprocal. Is the public being served to benefit the baker, or is the baker being served to benefit the public? There is no difference, Smith said, they both gain, so stop fretting. But private ownership implies constraints on behavior that corporate ownership does not; or, in other words, public stock ownership changes the composition and relationship of stakeholders to the business. As corporations, Exxon and Costco and others have the opportunity to prioritize which stakeholders benefit, and when they prioritize investors over customers the relationship between owners and the public is no longer reciprocal. Look to the housing market crash, Wal-Mart’s social impact, and the distorted oil market for evidence of its consequences.
Of course, all this information is available in filing documents and licenses agreements and such. But it’s so ingrained in our economic culture that it’s easy to forget. So thanks, Facebook, for having the decency to break up with me to my face.
Previously, on Hard Consonant:
- Business is like basketball, true, except that you're not allowed to enjoy it
- PS: public corporations and other-than-profit motives
- Yar: Piracy at the seventh circuit
- Forced Freemarket Fun: duties in the free market, in life and otherwise
- I see your metaphysics and raise you: there's something interesting about law after all