September 28, 2010

"Mark Zuckerberg [...] has agreed to donate $100 million to improve the long troubled public schools in Newark", New Jersey, Richard Pérez-Peña reported (*). So few years out of college, the founder of Facebook has learnt from Bill Gates's example. To embrace ostentatious charitable giving, do not wait till one's company is branded a de facto monopoly. That this arrangement involves a "relationship between the governor [of New Jersey], a Republican, and the mayor [of Newark], a Democrat" also betrays a remarkable deftness in understanding how pronaocracy works.

Yet the future of Newark children does not depend on the purity of Mark Zuckerberg's intentions but on the practical deployment of his funds in the field. I may criticize him for exploiting his users' credulousness, I neither envy his fortune nor deny him the power it provides to do good.

The ultimate power today though is not so much to have money in the bank than to have the bank where the money is. And once again, Mark Zuckerberg shows he is a quick study. According to Miguel Helft, Facebook "is laying the groundwork for its second act: a virtual currency system that some day could turn into a multibillion dollar business" (**). This assessment is well worded.

With his "Credits", Mark Zuckerberg intends to capture the lion share of the money paid for "the vast majority of virtual goods sold on Facebook". To his credit, he is positioning his company to become "a system for micropayments [...] open to any application on Facebook" and "beyond [...] to sites across the Web using their Facebook identities".

Miguel Helft however used the conditional mood for a reason. Micropayments are the Holy Grail of the Web economy and "Facebook's ambitions might well run into the same obstacles that have thwarted Google and Amazon", leaving eBay's Paypal a clear leader but one still short of having made micropayments the default mode for online commerce.

Technology is not so much the issue with micropayments as the fact online commerce operates as a one-way street. Consumers need to pay suppliers for the goods and services they want to buy from them. As long as money must flow from the consumer's credit card to the supplier's merchant account, the recourse to a different payment system will always be an unwelcome addition, not matter how friendly and secure it is made.

Mark Zuckerberg should perhaps take Henry Ford as his next mentor. Here is an entrepreneur extraordinaire who thought of a radical strategy. To sell more cars, pay your wage earners high enough a salary they can all afford to buy one.

Facebook users are of course the equivalent today of Ford Motor wage earners. And they make even less than Henry Ford's employees before their employer changed his approach. They earn exactly nothing for their labor. Rather they are forced to share all they reveal about themselves for free with Facebook, which then packages and resells this information to its advertisers at a premium.

This virtual business model remains somewhat short on income but is so high on valuation Mark Zuckerberg can give away $100 millions. He may well dream of having some more of the same. Still true vision is restless. Henry Ford was already successful when he embarked on his revolution.

Were Facebook to pay his users due "Credits", they could exchange them against sizable amounts of real online goods and services. By making its system two-way, Facebook would turn the table on the credit card industry. For, assuming Facebook accepted "Credits" from its advertisers, its currency would start to circulate indefinitely between consumers and suppliers, the credit card industry left to handle trade imbalances.

I doubt Henry Ford at first found his new approach to weigh lightly, whether on his mind or on his pocketbook. For Mark Zuckerberg, it would mean taking less than his Gargantuan 30% cut on converting merchants' "Credits" back into real dollars. Such a take is a distributor's commission, not a banker's fee. Yet in the long run don't bankers prosper nowadays even in the hardest of times?

More difficult would be to find a practical way to give "Credits" to Facebook users. Under torture, one will say anything to satisfy the interrogator. Ironically handing over virtual money would have a similar inflationary effect on users' declarations. The most efficient method would be to have suppliers decide how much to pay users. TrialPay already "offers free Facebook Credits to people who buy certain products". The trick is to force all suppliers into the game, and not just for discounts on purchases but as a just compensation for the right to target user profiles.

In this perspective, rather than trying to maximize personal data sharing among users, Facebook would benefit from having its users maximize their "Credit" incomes from suppliers, the aggregated figure representing the size of its "Credit" economy. Lo and behold! Mark Zuckerberg would come to realize the value of eprivacy as the shield which protects and enhances the negotiating and recommending power of the user.

To the bold, these very difficulties create barriers to entry to competitors similar to those which turned Henry Ford into an unbeatable pioneer.

Indeed for a depressing depiction of current practices one may want to read Tanzina Vega. "Post-transaction marketing" relies on repurposing the credit card information previously given by consumers for a genuine transaction, a particularly nasty form of bundling (***). "Flash cookies" developed by Adobe, says a plaintiff, allowed "my information [to be] bartered like a product without my knowledge or understanding" (****).

"Consumer privacy actions have largely failed" declares Chris Jay Hoofnagle. I agree the FTC has shown the executive branch to be spineless but isn't the judiciary which bears his hopes also sensitive to pronoacratic pressure? Doesn't it operate in hindsight at a huge cost to the economy?

No, the solution must come from one with enough power to transform his own industry and enough vision to switch modes from Gates to Ford.

Philippe Coueignoux

• (*) ....... Facebook Founder Agrees to Donate $100 Million to Newark's School System, by Richard Pérez-Peña (New York Times) - September 23, 2010
• (**) ..... New Money, Online Only, by Miguel Helft (New York Times) - September 23, 2010
• (***) ... Online Marketer Settles With New York for $5.2 Million, by Tanzina Vega (New York Times) - September 22, 2010
• (****) . Code That Tracks Users' Browsing Prompts Lawsuits, by Tanzina Vega (New York Times) - September 21, 2010