My startup was rooted in Barack Obama’s 2008 presidential campaign. My partners and I had observed how the Obama team had orchestrated relationships between voters who didn’t know each other but had a lot in common. Our idea was that such a pattern could be replicated in many different situations: finding a job (a conversation with a former job seeker could help) or purchasing a product (maybe a customer who already purchased it and who resembles you has some useful insight). We did many things wrong, including constantly hesitating between addressing users directly or simply selling the software to merchants. But this period made me very sensitive to the idea that the age of ubiquitous computing and networks was all about interactions between individuals (and this was before Facebook became so important in so many people's daily lives, driving the point home for all of us).
Near the end of my stint as an entrepreneur, my friend Henri Verdier (now the chief information officer of the French government) and I wrote a book together: L’ge de la multitude[177]. We designed it as both a testimonial of what the startup world was all about and a wake-up call for the old world of elected officials, civil servants, and corporate executives. The message was very simple: “You need to take entrepreneurs seriously. The startups they’re building in their garage just might end up becoming the largest corporations in the world.”
Henri had long worked in the publishing industry, so he knew a thing or two about marketing a book. What he said was pretty straightforward: “Every successful book is built around a strong thesis”. It’s not enough to thoroughly cover a given field. You need to convey a strong and polarizing message. And so at first we had to work on what we called “the single law that explains the digital economy”. We were looking for a polarizing view of what technology was all about.
We came up with the following: “The key to understanding the digital economy is that it redistributes power from the inside to the outside of organizations”. A corollary to this law is that the businesses that succeed in the digital economy are the ones that realize how power has been redistributed outside of their organizations and learn to harness it anyway to fuel growth and generate profits.
But what exactly is the nature of that outside power? This question is the reason why we decided to use the concept of the multitude, which we borrowed from the Italian post-Marxist philosopher Antonio Negri[178]. For Henri and I, the multitude is defined as the billions of individuals that are now equipped with increasingly powerful computing devices and connected with one another through wide networks.
In that unprecedented state of connectedness, individuals change their behaviors and their relationships with organizations. In the past, they formed a mass, with organizations addressing them mainly through mass-oriented channels such as broadcasting, brands, and retail space. Now they form a multitude, in which individuals exchange and create their own information through networks. As a result, the entire field of business needs to be redesigned[179]. And the best place to start this effort is to reconsider the corporate world in an economy now dominated by the multitude.
My view is that the corporation is a legal fiction embodying a contract between several different parties that have conflicting interests: shareholders, employees, and customers. One of the factors that explains the balance of power between a company’s many stakeholders is the competitive pressure on its end market. On certain markets, such as the food and grocery market, competition is so intense that it brings prices down at the expense of employees. Hence the infamous “Wal-Mart Effect”[180], under which affordability for consumers coincides with adverse conditions for workers[181] and suppliers (which are often small and medium businesses). On other markets, such as real estate or telecommunications, barriers to entry prevent newcomers from exerting competitive pressure on the incumbents. As a result, companies can focus on maximizing the producer’s surplus at the expense of their customers.
Another factor that determines the balance in what I call the “corporate contract” is the surrounding institutional landscape. Institutions embody the social order and nudge corporations in terms of how they distribute the value they create and capture. The balance of power depends on the particular regulations that apply in the industry and the structure of its value chain. It changes from one country to another, because the rules and the business culture are different in the US, Germany, France, Japan, and China. And it shifts from one period to another, because institutions change with forces that are as potent as the market itself, among them war, politics, and culture. In many ways, the history of corporations can otherwise be told as the history of social and economic institutions.
Yet another determinant of the “corporate contract” is technology. In the age of the automobile and mass production, success depended on making workers more loyal and more productive. Hence trade unions succeeded at negotiating higher wages and better working conditions for their members, and technology was ultimately used in a way that was empowering for workers.
The Dark Ages of financialization, in turn, favored shareholders, who forced corporations to switch their focus from producing better goods and services to maximizing shareholder value—thus often using technology at the expense of stressed employees and frustrated customers. The more a corporation was dedicated to paying large, stable dividends to its shareholders, the more pressure there was on employees and the more value was extracted from entrapped customers thanks to technology.
Today, as we enter the Entrepreneurial Age, the contract between shareholders, employees, and customers must once again be rearranged. As they become the multitude, the customers—long the quiet party at the corporate table—are finally rising. After decades of silence and resignation due to their lack of bargaining power, consumers can finally obtain products of a higher quality at a cheaper price. And entrepreneurs are the ones that are now able to provide them with higher quality at scale.
Tech companies offer many signs corroborating this trend. Shareholders, for one, have to give up short-term gains as most tech companies don’t make profits, let alone pay dividends[182]. Employees have to work under more duress, in some cases renouncing a steady job in favor of contracting[183].
Another even clearer sign is the behavior and discourses of tech executives, who are more obsessed with providing their customers with an exceptional experience than bonding with their employees or maximizing shareholder value. And this is notable, since as the most opportunistic player in the corporate equation, executives help reveal who among the corporate parties at the table has the most bargaining power. Indeed, to find where power lies in the corporate world, it suffices to check to see whose back corporates executives are protecting: the shareholders’, the employees’, or the customers’?
For most of the age of the automobile and mass production, corporate executives were former engineers, salespersons, and managers who had risen through the ranks of their companies. They shared a common practical culture with their employees. Sure they had to bargain with unions—and they disagreed with them more often than not. But executives mostly dealt with employees while all but taking shareholders and customers for granted.
Then in the Dark Ages of financialization, executives switched alliances. Instead of dealing mostly with employees and their unions, they primarily backed the interests of the company’s shareholders[184]. CEOs started to emerge from a different background. Most were no longer engineers but rather MBAs with perfect credentials in corporate strategy and finance. Often they were promoted from the finance department, ascending from positions in which they had learned to master the subtle art of interacting with financial markets. They got used to being rewarded for their opportunistic repositioning with bonuses, stock options and other financial incentives. An upgraded vision of corporate governance contributed to consolidating this new version of the corporate contract and sealing the unprecedented alignment between shareholders and corporate executives[185].
There were exceptions, of course. In companies such as Walmart, which someh
ow kept the mindset of a family business even after it went public, a culture of relatively kind paternalism long contributed to preserving a strong bond between employees and management[186].
Particular countries also distinguished themselves by preserving a corporate contract decidedly less favorable to shareholders. This is the case in my home country of France, with the frequent involvement of the state in the business of large companies and the rise of a singular business elite initially trained within the government.
This is also the case in Germany, a country in which legendary hedge fund manager Julian Robertson was astonished to discover in 1989 that German managers “were running the companies for the sake of the employees rather than the shareholders” and that they “could not care less about returns on equity”[187]. The German indifference to short-term shareholder interest is a legacy of Ludwig Erhard’s fateful decision in 1948 to bail out German business assets while wiping out paper money for private savers: it contributed to much of German industry still being owned by families rather than investment funds and other institutional investors[188]. And to this day, the German economy continues to stand out in this regard. Due to the large German banks’ shareholding interest in corporations and the unique role of trade unions and industry associations, it keeps on imposing a long-term view of corporate management that goes against the short-term view that prevailed in the Anglo-Saxon world during the Dark Ages[189].
In the Entrepreneurial Age, it’s now becoming common practice for corporate executives to insist on their dedication to customers. When Facebook did its initial public offering in 2012, Mark Zuckerberg wrote that “we don’t build services to make money; we make money to build better services”[190]. In 2014, Uber CEO Travis Kalanick mentioned “the ability to find things that people want and to use your creativity to target those”[191]. Alibaba chief Jack Ma once famously declared that it was “customers first, employees second, and investors third”[192]. And of course, the playbook that all those executives follow started being written by Amazon’s Jeff Bezos in 1997, when he boldly informed the public that Amazon was “all about the long term” and that he and his team would “continue to focus relentlessly on (their) customers”[193]. With all those words, tech companies seem to validate Roger L. Martin’s idea of our entering the “age of customer capitalism”[194].
But do tech CEOs actually deliver? Many people see hypocrisy in those forceful declarations by Silicon Valley-style entrepreneurs. They point out that for decades many companies, however bad their customer service, have been touting taking care of their customers as the highest priority. Even worse, duplicity when it comes to serving the customers is especially evident at companies that, like tech companies, have been enjoying increasing returns to scale. Telecommunications companies and large banks, all blessed with powerful network effects, have a well-earned reputation for mistreating their customers and being hated by them in return[195].
Yet the situation is different for today’s tech companies[196]. As the multitude, individuals can access a wider range of information, interact in real time[197], and really exert more bargaining power. Above all, the very nature of software makes it easier for corporations to enlist their customers in creating value[198]. It’s true for early-stage startups, for which the support of their earliest customers is critical to success[199]. It’s also true at a larger scale, when the more active role taken by customers makes them indispensable not only to the company’s revenue but also to the sustainability of its supply chain. Customers taking such a great part in the supply chain is what makes the multitude so different from the faceless, nameless consumers of the past age of the automobile and mass production.
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Production and consumption are increasingly blurred
In the twentieth-century economy, the individual lived in two distinct, parallel worlds. On the one hand, there was the world of production where the majority of individuals worked in exchange for a salary—the form of employment most adapted to the age of the automobile and mass production. On the other hand, there was the world of consumption where a number of institutions (all encompassed in the Great Safety Net[200]) provided households with the economic security and income stability that were necessary to sustain consumer demand.
Salaried labor was the link between the two worlds, the cornerstone that helped balance the economy. In exchange for the security it provided individuals, corporations could count on a reliable and loyal workforce. And because individuals could count on their monthly salaries, they were able to consume with the regularity necessary for corporations to plan production years in advance.
In the Entrepreneurial Age, the boundaries between production and consumption become blurred and eventually fade. Individuals are not workers in one world and consumers in the other. Rather they create value in their daily use of connected applications. Individuals will gladly lend a helping hand to those corporations who serve them well. They will freely share their advice on hotels and restaurants on TripAdvisor and they will let Google store their search requests in order to train PageRank and improve the experience of other users. They can even produce goods or services as amateurs and make the many resources they own available for trade—becoming hotel managers with Airbnb, drivers with BlaBlaCar, bankers with Lending Club, or energy producers with SolarCity[201].
Value creation by customers obviously did not wait for the Entrepreneurial Age. The economics of advertising is based in part on enrolling individuals in the value chain. Media corporations provide content in exchange for attention that they can in turn sell to advertisers. In service sectors, you can find situations when customers take charge of certain tasks in exchange for a cheaper price—such as when they serve themselves from supermarket shelves or when they set up their own Ikea furniture. There were also cases in which some customers participated in serving other customers, like with the Tupperware party business model for marketing and selling.
But today, customers take an even greater part in value creation. The Entrepreneurial Age provides individuals with terminals and connected objects previously reserved for businesses. It also makes it possible to secure transactions between parties that do not know each other thanks to authentication of the parties, adaptive design, reputation management, the installation of trust and the traceability of every aspect of user activity[202]. As a result, to quote Nilofer Merchant, “across industries and worldwide markets, buyers are not parked at the end of a value chain, but often in the middle of its flow”[203].
This is why the rise of the multitude changes the game of business. In the past, corporations saw customers as a mass of passive agents eager to consume standardized products without demanding a better experience. In the Entrepreneurial Age, the masses have turned into networks of connected users that consume while also being the essential resource that makes tech companies thrive. This is why the corporate contract has radically changed. The main balance of power is no longer between the shareholders and the employees, with the executives as an arbiter and the buyers as passive spectators[204]. The multitude has now become the strongest and most active party in the economy.
This paradigm shift was revealed as early as the 1990s. Craigslist and eBay were the first tech companies with a model based on interactions between users. This was theorized for the first time in a visionary text, 1999’s Cluetrain Manifesto. It famously stated in its opening line that “a powerful global conversation has begun. Through the Internet, people are discovering and inventing new ways to share relevant knowledge with blinding speed. As a direct result, markets are getting smarter—and getting smarter faster than most companies”[205]. Its authors Rick Levine, Christopher Locke, Doc Searls and David Weinberger had realized that the deployment of ubiquitous computing and networks would give individuals more power than organizations.
Since then, interactions between individuals have been multiplied and amplified through increased connectivity and ever-larger social networks. They shift the center o
f gravity of value creation. More often than not, firms are now simply the operators of applications allowing individuals to actively interact with each other, exchanging and sharing opinions, ideas, goods, services, capital.
This new approach to creating value has become a widespread phenomenon. Many individuals and organizations dedicate their time and resources to better understanding and promoting it. Its growth creates a tremendous amount of value for all their stakeholders: those who have resources to contribute; those who wish to use these resources; those who orchestrate the interactions between supply and demand and capture a part of the created value.
The Fordist economy was born thanks to the abundance of cheap oil. This led to the birth of the car industry, the improvement of mass production through assembly lines, and the building of the Great Safety Net of the past. Oil made urban sprawl possible, as it was needed to drive from the workplace to suburban areas and to perform critical features such as heating suburban homes. Oil also played a key role in many industries’ supply chains and contributed to lengthening trade routes. We all realized the importance of abundant, cheap oil when it suddenly became scarce and expensive following the consecutive oil shocks in the 1970s. The economy was already faltering with the exhaustion of the mass production paradigm. Many of the main industries were reaching maturity, facing market saturation and a ceiling on productivity. The oil shocks did nothing but deepen the long and painful period of economic stagnation and mass unemployment that marked the 1980s.
In the following Dark Ages of financialization, oil still mattered but the essential resource became cheap labor, both in less developed locations where it became easier to outsource operations and in developed countries where a less favorable balance of power forced workers to renounce high wages, social benefits and overall economic security.
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