The most important company you know nothing about

August 15, 2012: 11:08 AM ET

Something is badly broken in the business models of social companies like Facebook, Twitter and Groupon. App.net wants to fix that.

app.netFORTUNE -- These days, the company making the biggest waves in social media isn't likely one you've heard much about. It's App.net, the brainchild of serial entrepreneur Dalton Caldwell. Facebook and Twitter are currently trying to find ways to push more ads to users. In contrast, App.net, a Twitter-like service, relies on annual subscriptions. That fundamental difference in business model -- not to mention Caldwell's call to arms -- caused buzz in the tech world about the current state of social networking. The big question: Can a social site prioritize users' needs while still driving revenues?

Here's a primer on what App.net is and why it matters.

What it is: Still in the early stages, App.net is like Twitter. It lets users post updates with up to 256 characters, more than Twitter's 140, and the experience is totally ad-free. "We're building a real-time social service where users and developers come first, not advertisers," crows the Web site. The service is completely open so third-party developers are free to build new services on top of it. In the long-term, App.net could become something more: a widespread, democratized social standard where developers can use users' updates for what ever they see fit.

Caldwell, who previously founded the defunct music site iMeem and Instagram competitor Picplz, first pitched his idealistic social network in a blog post criticizing Twitter for supposedly coming after third-party developers, trying to control the content, and for the ads that come in the form of sponsored tweets. Then, earlier this month, he lobbed a letter to Zuckerberg after Facebook (FB) allegedly tried to acquire his company in effort to squash competition.

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Who it's for: For now, just the avant-garde techies and early adopters willing to spend at least $50 a year on an unproven service, albeit one without ads. Caldwell was funding App.net with a Kickstarter-like donations page with plans of raising $500,000 by Aug. 15, but donations topped $803,000. Many of the donations and public endorsements appear to come from Silicon Valley. "Thanks for trying awesome," Tweeted John Gruber, author of the influential Apple-centric blog Daring Fireball.

Why it matters: When Facebook first launched, it seemed entirely altruistic. In the early years, Zuckerberg was keen on emphasizing the service as a "social utility."  Since then, its userbase has ballooned to over 845 million users and it's gone public. Facebook isn't just a "social utility," anymore. It's a business, with shareholders to answer to and sales to drive. That kind of intense pressure, Caldwell would argue, has pushed Facebook to put users and developers in the backseat. "The reason why I'm so optimistic about a paid opportunity is that it aligns our incentives economically with users and developers," Caldwell said. "If we're selling a service, our customers are our users, and our job is to make our users happy. If we have a free, ad-supported service, our customers are advertisers and our job is to make advertisers happy."

Odds of success: Depends who you ask. While the general consensus is that Caldwell is doing a noble thing -- return the user experience of the social network back to the users -- people seem somewhat less optimistic about its future. The $803,000 is a good start, but that's just a small fraction of the $1.18 billion in revenues Facebook raked in last quarter. And given its pay-to-play-type business model, it remains to be seen whether it can compete in a space already dominated by Facebook and Twitter.

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Brian Blau, Research Director at Gartner, thinks it's a long shot for App.net. "It just seems like there has to be a perfect storm where this company can be positioned to make a difference," he says. With companies like Facebook and Twitter already long-established and deeply entrenched in the social space, backed by growing revenues, getting a critical mass of users could be a big challenge for Caldwell's effort this late in the game. But if anything, he may have already accomplished something very important. He's made a point.

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About This Author
JP Mangalindan
JP Mangalindan
Writer, Fortune

JP Mangalindan is a San Francisco-based writer at Fortune, covering Silicon Valley. Since joining in 2010, he has written on a wide array of topics, from the turnaround of eBay to the evolution of net neutrality. A graduate of Fordham University, Mangalindan has also written for GQ, Popular Science, and Entertainment Weekly.

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