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David Kirkpatrick

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Why Loyal3 May Point the Way to a Successful Facebook IPO, And More

Posted: 06/03/11 04:21 PM ET

One of the most interesting companies I've seen in a long time launched on Thursday. Loyal3's business is to enable companies to sell their own shares to customers, through something called a Customer Stock Ownership Plan (CSOP). This is an emblematic company for the new era of individual empowerment. And it could also help answer the question, which many are asking, of how Facebook -- the social phenomenon most reinforcing that empowerment of people -- might both go public and retain its independence and innovativeness, without being crushed by Wall Street's shortsighted pursuit of quarterly profit.

There's a fundamental injustice at the heart of modern consumerism -- the individual does not share in the value created by his or her buying behavior. Remember that quaint early 20th-century notion about the workers (read:consumers) owning the means of production? Maybe it wasn't so irrelevant after all. So now we have a company that subtly undermines the conventional notion of what a "company" is.

For details about how Loyal3 will operate and actually sell the stock read these articles at the New York Times, the Wall Street Journal, and Forbes. Customers will be able to buy fractions of shares with investments of as little as $10, paying no fees to buy or to sell (the company in which they are investing will pay Loyal3). Key to Loyal3's approach is sophisticated technology and newly-redefined SEC regulations to make the process of purchasing simple. Much of the buying will occur on Facebook itself. "As easy as buying a book on Amazon," as Loyal3's CEO Barry Schneider likes to say. (I spoke with him and other executives before the company's launch.)

Loyal3's pitch to companies is in my opinion insufficiently imaginative: owners, even those who own a tiny amount, feel proprietary about their investments and serve as advocates and loyal repeat customers. Therefore if you turn your customers into shareholders they will become even better customers. That owners are loyalists has been buttressed by many studies of consumer behavior. "Customers care more about things they own than things they don't," says Schneider.

However I see a more profound harmony emerging here. In the world of Facebook-mediated Internet behavior, companies already seek to increase the bandwidth of their communication with customers for more effective marketing. But the transformative power of the two-way pipeline that social media and Facebook create between companies and customers demands more than merely more effective "marketing." The real business opportunity presented by social media is to use that pipeline to make improved products. If you have better communication with customers why not let them help refine and iterate what you actually sell? (This, by the way, is implicit in the way Facebook or Google themselves already operate -- by constantly studying data they obsessively collect about users, they refine their products in real-time and correct mistakes quickly.) Says Chris Kelly, a Loyal3 investor and board member: "This allows incentives for customers and companies to become better aligned. Customers should get better products and companies should get better information."

So we are entering the age of co-creation. The companies that succeed will be those that recognize the power of customers. Rather than fight it, they will utilize it. And if customers are helping you design and build what you sell them, then why shouldn't they be owners themselves? It nicely completes the circle.

Loyal3's own first customer is the NASDAQ stock market. The exchange, itself a company, will shortly begin selling its own shares using Loyal3's system. But more importantly, it will also promote Loyal3 to its 3,500 member companies. Today only 18.5% of Americans own stock at all. This could help broaden participation in the stock market, increase individual savings, and maybe even increase popular understanding of the importance of business in society. After all, one of the most toxic facts in the modern economy is the fundamental suspicion ordinary people have of business and companies, even as business is how most value is created in society.

But if so many people dislike companies why would they want to buy stock in the first place, you might ask. Perhaps they wouldn't have to. Frontier Communications of Stamford, Connecticut, a regional phone company, plans this year to work with Loyal3 to start simply giving away stock to good customers. CEO Maggie Wilderotter says in an email that customers will " 'earn' shares based on dollars spent with Frontier and years of service... We want to see if that ownership changes customer longevity and loyalty." Frontier's focus groups so far indicate customers like the idea. Loyal3's Schneider says many consumer-products companies are similarly considering small-scale share giveaways where they might have in the past offered discounts. In addition, some companies are thinking of encouraging customers to purchase stock by offering special incentives and upgrades if they become shareholders. Another reason I like this approach for our obsessively consumerist society -- it turns investing into consumerism.

But what about that point about Facebook retaining independence after an IPO? As a student of the company, I am convinced a 2012 IPO is now inevitable, but that nonetheless Zuckerberg is resolute not to be swayed by Wall Street's short-term financial thinking. How better to insure Facebook remain focused on the best interests of its users -- which Zuckerberg incessantly says is how he wants the company to function -- than for Facebook itself to be substantially owned by them? A system like Loyal3's could be a way to literally capitalize on the extraordinary passion many have for Facebook. Loyal3's research on the behavior of customer-shareholders shows they tend to hold the stock rather than trade it frequently. So Facebook could get stability and a group of investors who share the long-term view -- or who would at least only revolt if it was the product that was faulty, not short-term financial results. Isn't it provocative that Chris Kelly, the Loyal3 investor and board member, was for years Facebook's head of policy and chief privacy officer?

This post was originally published here.