It takes a village to make a mall.
— Kevin Kelly
The Internet changes the dynamics of business by relocating the marketplace squarely back in the middle of the town commons. Conversations flow from customer to customer, from vendor to customer. Some are about the weather, others are about the businesses hawking their wares in the surrounding stalls. Conversations also happen between the stalls, with competing vendors sharing stories, shooting the shit and sometimes offering a hand. It’s this buzz of discussion and laughter that feeds the marketplace. It’s about social flux and people connecting, and as such, it makes the commons a pleasant place to do business.
The commons is a microcosm of the village, the setting for all the connections that make daily life bearable as well as possible. It takes a village to create The WELL, Red Hat, eBay, Salon or any kind of business where people linked to each other. As we’ve said throughout this book, building a business in commonspace requires connections between people and information. But it also requires the collective spirit that the village commons represents. And hopefully, it requires a business vision that looks more like the marketplace in the town commons than the food court in the mall.
The question is, what do businesses in commonspace look like? Can you actually make a living and pay the bills with the work you are doing in commonspace?
Of course you can. You can make a good living in commonspace. Making money online doesn’t just have to be about fantasy-IPO-overheated-stock-market money. There is money to be made running small online businesses from basements. There is money to be made through online advertising, from marketing products built of bits or atoms, and from offering services ranging from file downloads to grocery delivery. This doesn’t change the fact that entirely too many companies are gleefully burning their way through hayracks of VC money, or that not every Internet CEO will one day be a billionaire. But some commonspace businesses are succeeding on their own terms and are doing so because they speak the language of the village.
As it is with the village, not everyone makes their living in the same way. There are some businesses that make their living solely from commonspace – connecting, aggregating, collaborating and collectivizing. But there are also businesses that draw on the collective power of the virtual village to support their real-world work. By drawing on the group mind, they improve the ways they produce goods and offer services to individuals. Whatever the case, solid business opportunities exist for those who understand the importance of the village, and those who are willing to engage in the conversation of the marketplace on its own terms.
Yes, Virginia, there are real business models in commonspace. Just look …
Pay at the Door
How did the first online communities pay the bills? By charging admission.
Throughout the 1980s, online communities were popping up all over the place. The megasized commercial online services – CompuServe, The Source, Prodigy, AOL – were thriving. Every North American city had dozens of homegrown Bulletin Board Systems (BBSes). The WELL was in its heyday. Smaller, niche-focused online communities like Web Networks in Canada and IGC in the US were thriving. While they were tiny by the standards of today’s Internet, these early online communities were the digital boomtowns of their time.
Almost without exception, these pioneering communities paid the bills by charging users a monthly membership fee. Yes, there were volunteer-run BBSes and city-wide ‘Freenets,’ and people with Internet accounts at universities could access USENET and mailing lists as part of their tuition package. But all of the communities that had to find money to support themselves ‘charged at the door’. The users paid for connection time, e-mail and access to community forums. In exchange, the online services provided the tools and spaces that people needed to connect with each other.
The user fees weren’t peanuts either. In the late 80s/early 90s, our old alma mater Web Networks was charging about $30.00 per month. This included about two hours of connect time. Additional connect time was $6.00/hour. In addition, e-mail to some external systems was charged on a per-kilobyte basis. Around the same time, The WELL was charging $8 per month plus $2/hour, and CompuServe was charging $11.75/hour (in 1988, with 250,000 subscribers and 500 forums, it was the biggest online service in the US).
From today’s perspective, the idea of charging for access to an online community seems ludicrous – especially at almost $12/hour. But from the perspective of the time, it was the perfect business model. Services were scarce, and people were willing to pay for the privilege of connecting to their peers. It was also a ‘fair’ business model: the people who used the system and benefited from it also paid for it. It was a very simple economic equation.
Technology limited the Internet’s accessibility as well. With almost all of the early online services, you had to dial in directly to that service to access the community. If you wanted to connect to the AOL community, you dialed into AOL’s modems. If you wanted to access your friends using Web Networks discussion groups, you dialed into Web Networks’ modems. (Although, if you were one of the lucky few with a university account, you could Telnet into the WELL and avoid long distance charges – Darren did.) There was a direct, almost physical link between connectivity and community. As a result, it was easy to create ‘gated communities’ where only the people who paid for connect time had access. This was not an elitist gesture; at the time it seemed like the most sensible option. Running modem banks all over the country and providing technical support was an expensive business. In that context, it was hard to imagine a world of online communities without high monthly user fees.
Bum-Rush the Show
So why is it now common wisdom that access to online communities needs to be free in all but the most exceptional of circumstances? What happened?
The Internet happened.
The Internet explosion and the emergence of the Web severed the link between connectivity and community that had seemed so necessary before 1993. Throughout the 1980s, the Internet was one of the best-kept secrets of the hallowed halls of academia. But in the early 1990s, small commercial ISPs started appearing. All of a sudden, you could get an Internet connection and e-mail account from any mom, pop, tom, dick, harry or teenage hacker on the block. In other words, it became easy and cheap to get a generic connection to the online world, one that would take you anywhere. The necessity of dialing in directly to locate online community or content was gone forever.
For traditional online services, this turn of events presented several new problems. Many users started dumping their expensive Compuserve and AOL accounts for service with a local ISP. At the same time, the users started demanding access to their old gated-community homes via the public Internet. This came with the expectation that monthly fees would drop dramatically or even disappear. Users weren’t connecting through these communities any more, so why should they keep paying for the privilege?
At the same time, new types of free communities and content sources were appearing on the Web. Generic Internet connections were providing a whole new wave of users with access to USENET and public mailing lists. For many users of traditional online services, the community horizons expanded massively, and the price of membership plummeted.
By the late 1990s, traditional online services had stopped bucking the trend, and large-scale examples of the ‘pay at the door’ business model had pretty much disappeared. A lot of large, formerly profitable companies disappeared too. The Source is dead. Delphi is dead too, although there is now an online forum company called Delphi. CompuServe was rolled into AOL. Many of the older niche communities have died or been eaten alive by large conglomerates. For example, Web Network’s sister networks, Alternex in Brazil and Pegasus in Australia, were bought up by private competitors looking for already-established pools of ISP customers. In the process, the online communities run by these organizations were demolished.
Some of the pioneers survived by morphing and adapting with the times. For example, AOL was once a two-way gated community where users could neither come in from other providers nor go out to the Internet. Just in the nick of time, AOL switched gears and became the world’s largest ISP. Sure, you can still get AOL-only content, but for most people AOL is the only way they know to get onto the Internet. It’s a cheap, easy, ubiquitous and (mostly) reliable ISP.
Other survivors radically switched business models, opening up their content for free or turning to the provision of alternate services. For example, the Motley Fool moved outside the walls of the AOL forum where it had been founded and built a huge business providing investment advice on the Web, all paid for by advertising. Web Networks has also tried to switch-hit by becoming an Application Service Provider (ASP) and content aggregator.
And then there were a few cases, such as the WELL, where communities were able to survive on a scaled-back, paid-membership model. The WELL’s fame as the mother of all online communities allows it to continue as a paid service. But its rates haven’t changed all that much, ($10/month), and it no longer offers any kind of direct dial-in service. As to profitability, it’s hard to tell whether the community is sustaining itself or living off of stock-market money from Salon (which exists on a shoestring itself). Whatever the case, The Well’s continued success as a paid online community probably has more to do with the mythology that’s accrued around it than anything else.
Collective Eyeballs: Advertising in Commonspace
With paid membership in its death throes, the majority of existing online communities began frantically looking around for a new way to make a living. Meanwhile, the expansion of the Web was also feeding a related explosion in new online communities and other types of commonspace content services, and all of them were free to their users. The most obvious business model for such services was advertising. For better or for worse, advertising replaced paid membership as the way most community and content sites pay the bills.
The attraction of advertising is obvious. Not only is advertising a proven way of paying for content, but commonspace delivers something that advertisers have been searching for since the first adman hung the first red light over the first brothel door – niche, focus and targeting. New online communities and content services were so specialized that they lent themselves perfectly to the advertiser’s desire to deliver a message to exactly the right demographic. Many structural features of the Internet, especially the aggregating effects of commonspace, make it ridiculously easy to target not only broad audiences, but also individual users, based on their past preferences. Advances in user tracking technology soon made it possible to evaluate whether or not an ad actually caught the users’ attentions (i.e. did they click on it?).
The promise of quantifiable success fuelled a tsunami of online advertising. In 1999, global spending on Internet banner ads was over $4.2 billion, with an expected growth to $7 billion in 2000. Depending on whose figures you believe, online ad sales will reach between $22 billion (Jupiter Communications) and $33 billion (Forrester Research) by 2004 . At that point, online advertising will have surpassed magazine advertising in market size.
The advertising-driven online communities that exist today are certainly a different beast from their prehistoric cousins. The services they offer are much more diverse, going beyond discussion forums to include expert opinions, original content, aggregated user data and other nifty stuff. And of course there are also all kinds of ‘commonspace sites’ that aren’t communities at all, at least in the traditional sense: consumer rating sites like Deja.com and ePinions.com, and ‘consumer ASPs’ like eGroups and Blogger. File-sharing networks like Hotline include banner ads in the client software itself (a model that the venerable e-mail program Eudora has also adopted).
Most of these changes stem from the emergence of the Web itself. But some changes are driven by advertising itself, or at least by the traditional media culture of which advertising is a part. Many commercial online ‘communities’ place a stronger emphasis on one-way, broadcast-style content than on people-to-people connections. This may be because it’s what ‘we,’ the passive web-surfing audience, really want from Web sites. But it’s just as likely that this shift is driven by the need to sell ads. Ad buyers understand one-way media and feel comfortable with it because the site owners are in full control of the content. There is virtually no chance of their ad appearing next to some unmoderated yob ranting about how the world is flat and controlled by the Masons, or next to some activist’s claim that the advertiser at the top of the page is an unethical slavedriver who employs child labourers in India.
Take iVillage.com for example. The site is the digital equivalent of a supermarket check-out magazine. Most of the content is from columnists and experts writing about astrology, beauty tips and fad diets. And as we saw in a previous chapters, iVillage’s discussion forums are just as open to abuse and hacker humour as they are to constructive community building. The ads on the site (which provide 75% of iVillage’s revenue ) definitely fit the traditional media bill as well. The last time we visited the site, the first thing we saw looked like a banner version of a weight-loss fantasy ad from the National Enquirer – ‘I dropped 27 pounds! I feel great! Lose 27 pounds in by September 17! Click here!’ And then there was the Clinique ‘Zits Happen! But they don’t have to happen to you!’ ad. Jesus wept.
There is no question that this kind of one-way niche content with a little bit of commonspace sprinkled on top brings in traditional advertisers. The revenue is there. But is it an online media model that will last?
One-way media isn’t going to disappear. In fact, we will always need professional journalism and entertainment as a part of our overall media mix. But the space available to one-way media is already shrinking. Statistics show that people are spending more time communicating with each other online than they are sitting in front of the TV. So online companies that want to survive as leaders in the one-way space will also need to strengthen their many-to-many components – and to do a better job of it than iVillage.
Death of a Salesman
The perils of setting up shop with a smug ‘I-don’t-need-no-stinkin’-commonspace’ attitude are well demonstrated by the story of Time Warner’s Pathfinder site. Pathfinder was supposed to be a one-stop umbrella brand for Time Warner’s magazines, and a source of new subscription revenues. But the site fell prey to the usual problems encountered by sites that don’t take the Web’s strengths and weaknesses into consideration. As a gateway, it failed miserably: 98% of the people who used the site at all went directly to the individual magazines instead of passing through the home page. Pathfinder was also criticized for presenting content recycled from its print magazines rather than new or simultaneous content. From its creation in 1994 until its demise in the spring of 1999, Time Warner spent over $15 million annually on the poorly designed, bug-ridden site, but has been too embarrassed to divulge its final losses. From the beginning, many of the people immersed in Internet culture had predicted this turn of events. ‘What you are doing is expensive and doesn’t work online,’ they had insisted. Time didn’t listen and failed.
Increasingly, it’s become obvious that companies focussed on one-way media with a little bit of community jerry-rigged on the side are struggling to stay afloat. In June 2000, Salon laid off 13 employees and cut editorial costs by 20%, and its stock has been hovering around a miserable $2 for months. Similar stories fill dot com death watch sections of sites like Fucked Company and The Industry Standard.
Our bet is that the smart advertisers (and investors) will move to sites more deeply immersed in commonspace. In other words, they will move to places like Slashdot that connect users to each other around a core of serious, rich, focused content , and connect advertisers with a smart, loyal, gadget-buying audience. Such sites are incredibly sticky: users stay loyal to them for a long time, and they come back regularly. More importantly, these sites have the respect of their users. When you visit a site like Slashdot or Blue’s News or Ultima Online, you aren’t just supporting a company that provides media; you are also supporting a community about which people feel collective ownership and involvement. A company that chooses to advertise on such a site may find themselves on the receiving end of some of this respect as well.
There is no question that advertising is one of the major revenue streams for online media. The hanging question really is, which sites will get the lion’s share of the considerable – but still finite – supply of ad dollars? Jupiter Communications predicts that people will receive in excess of 950 Internet-based marketing messages per dayby 2004. In this environment, what will we pay attention to – well-conceived messages from people who are a part of the communities we build and believe in, or vapid banners sitting next to the weather report and the horoscope?
Become a Tool Merchant
If membership and advertising are the models supporting the majority of online communities, selling tools and services are the driving energy behind much of the rest of commonspace. There is huge money in simply being the platform of choice for a given sector.
The obvious example is eBay. eBay doesn’t sell anything. . In fact, eBay doesn’t even provide transaction-processing services. Users have to find these themselves (which explains the rise of PayPal, rapidly emerging as the platform for small financial transactions). Rather, eBay is the infrastructure for the Internet bazaar that brings buyers and sellers together. The spaces it creates for tens of thousands of other people to sell are much more than sterile slots in a mall. eBay is providing the social glue that holds the bazaar together – ratings systems, discussion forums, and a loose police force. It is this social connection that pulls both buyers and sellers to eBay, as it is the most important component of the bazaar.
Providing the platform and the social glue for commonspace commerce is incredibly lucrative. For every auction, eBay takes between 1.25 and 5 percent of the sale price. Almost $3 billion in goods were sold in eBay auctions in 1999, with eBay taking a cut of every dollar .
It’s exactly this kind of opportunity that spurred the recent huge expansion of vertical B2B marketplaces. Companies like VerticalNet and Covisant are essentially eBays for industry. They provide the social and technological infrastructure that enables the bazaar, and that has the potential to turn markets back into conversations. The expected market of B2B is expected to be $6.3 trillion by 2004 . However, a lot of players have their eyes on this very, very tall pile of money. As the rise of industry-backed exchanges has demonstrated, everyone suddenly wants to be a B2B marketplace. Only some will survive.
No ASP is an Island
The market for commonspace tools and services goes well beyond the world of trading and transactions. People need intranets, discussion forums, databases and other kinds of other applications to support their online activities. These tools are the raw material of commonspace infrastructure: everyone has to have them in some fashion or other.
Increasingly, these services are being provided by Application Service Providers (ASPs), companies that ‘rent’ software, doing all of the hosting and technical work for you. The problem with early ASPs was that most of their solutions were siloed. For example, if you set up a team workspace on a site like HotOffice, Lotus Instant Teamroom or Instinctive eRoom, you were limited to working within that space. These tools were useful if everyone in the team was working only on one project and didn’t already have their own intranet. But for people working across projects and companies, these services can be a real nightmare. They don’t talk to other tools very easily, which means that individuals need to be working within a variety of different spaces at once. This goes against the diversity and interoperability principles of commonspace: people want their information flexible, and they want it in the environments they use every day.
Thankfully, some companies (such as b2bScene) are starting to realize that ‘no ASP is an island’, and are creating more flexible tools and infrastructures in response. At one level, an ASP is just another rentable intranet company providing the same project management and workflow tools as others in this market. But an ASP also recognizes that the two-way flow of information between diverse systems is essential if you want to keep the attention of your users. People with b2bScene accounts can not only collaborate across multiple projects, but they can also pull in information from external intranets and the Internet using XML. Likewise, people with their own existing intranets can join B2Bscene projects using an XML bridge.
In practice, these changes are providing people in collaborative projects with flexibility to spare. One person on a project might have a b2bScene account. Their b2bScene login screen could include the tasks and progress reports for the project in question, as well as the weather, a Slashdot news summary, and information on five other projects. Other people on the same project may never even log in to b2bScene, but the tasks for the project will show up in their existing intranet accounts all the same. The result is a degree of fluidity that people need as they work with increasingly diverse and complex information, often across the boundaries of companies.
The revenue models for ASP services are often similar to those used by online communities, because they’re based on advertising or monthly fees. On the advertising-driven side, ‘consumer ASPs’ like eGroups.com tack ads not only onto the onsite collaboration tools, but also onto the top of every piece of e-mail that list members post (unless you pay them to stop the ads, a process that seems to be deliberately difficult). This model is likely to endure for the same reasons that advertising works on sites like Slashdot: the users are ultra-loyal, and the spaces ultra-targeted.
Free ASPs tend to appeal more to community groups and very small businesses than to larger groups of business users. Most people don’t want to be bombarded with advertising in their private workplaces. In addition, people often worry about the security of semi-public sites like eGroups, because collaboration and commonspace often deals with subjects you don’t want circulating in the broader world.
As a result, the monthly membership fee is alive and well in the ASP market. People will pay for their tools if they are efficient and trustworthy. Of course, interoperability is key, since people want the convenience of a single solution, and they do not want the hassle of paying a different fee to a different provider every month. Opening applications to the outside world is the best strategy for businesses trying to meet this need.
Pull it Together: Emerging Models for Content Aggregators
Another spin on the ASP model is the connection of online tools to some sort of data or traffic aggregation service: ad servers plus market knowledge; Web publishing tools plus online marketing; development tools plus a community of developers. These kinds of connections between tools and people can be an amazing way to build your business in commonspace.
Consider DoubleClick. On the surface, it’s just a way for advertisers to get their banners on a large number of sites quickly, and for sites to avoid dealing with advertisers directly. DoubleClick is an ASP for ad delivery, providing ad servers that spit out banners onto hundred of sites. It’s also an ad space broker, marketing these sites in its network to a pool of over 3000 advertisers.
What’s most impressive about DoubleClick is its ability to aggregate user data and connect it back to its ad serving services. For every site in its network, DoubleClick tracks user information such as time of day, geographic location, and repeat visits to a site. It then pools this information together and uses it to target ads not only by site, but by user, on all 11,500+ sites in the network. For example, if a person who has recently visited two gardening sites in the DoubleClick network shows up at the New York Times site, the ad server would send a gardening-related banner. From an advertiser’s perspective, this aggregation-based targeting is a wet dream come true. It means ad dollars are spent much efficiently on pre-qualified consumers. In DoubleClick speak, they’re ‘getting the right ad to the right person.’
Not surprisingly, what turns on advertisers scares the shit out of privacy advocates and plain old Internet users. In July 2000, DoubleClick purchased Abacus Direct Corporation, a direct-marketing company that maintains a database of the names, addresses, and shopping habits of 90% of American households. With this merger, it was suddenly possible for DoubleClick (in cooperation with partner sites which can positively identify users’ names from their e-mail addresses) to correlate real-world names with the habits of heretofore ‘anonymous’ surfers. This practice, called ‘profiling’, incensed all manner of privacy advocates, from Junkbusters to the Federal Trade Commission. The result was an intense P.R. nightmare. There was a lawsuit from California and another from Michigan. AltaVista and other partners publicly pulled out of their agreements to help DoubleClick positively identify users. Dizzy from the public uproar, the company reversed tracks and announced it will wait for the government and industry to establish privacy standards before proceeding further with profiling attempts.
Assuming that DoubleClick can make good on their promise to protect people’s privacy and gain their trust, they have a commonspace business model that is destined to succeed. Used well and used honestly, DoubleClick’s services might actually contribute to the conversation that makes up markets. They have the potential to give us ad information about things we want to know about, or at least about things that are mildly more interesting than the run of the mill banner schlock. But if DoubleClick uses its position poorly, they’ll be doomed. Another huge backlash like the one early in 2000 could alienate Internet users and scare away advertisers for good.
Gimme One Constellation to Go
The ‘constellation provider’ is another possible tools-plus-aggregation approach. As we said earlier, aggregation of information across a constellation can give a big advantage to small online players by allowing them to scale up to compete with much bigger competitors. While it may be an exaggeration to claim that a consortium of community newspapers could create a ‘meta-community newspaper’ that could compete with the New York Times, it’s not that far off from the truth.
As this kind of collaboration among sites grows, companies that provide the publishing tools and people connections will have a real opportunity. At Web Networks, we had to teach ourselves to see the opportunities when the old-style community membership model had started to decline. With the Action Applications, we began providing people with the Web publishing tools they wanted to maintain their sites. At the same time, we equipped them with the means to gather their information together into constellations. This made it possible for local unions swap information with the national federation, and for employment training groups to swap course and events listings across town – all through automated constellation channels. Of course, much of this information also fed back into the main Web Networks portal site. Thus both the main site and the constellations were able to act as traffic aggregators.
Combining tools with aggregated content and traffic seems to be working at Web Networks. In the first two quarters of 2000, revenues shifted dramatically from ISP services to ASP-style hosting packages that include Action Applications bundled into the mix. There is also a great deal of revenue still flowing from low-cost monthly ‘community’ accounts; but the mix of services in these accounts has switched away from gated discussion forums to scaled-back, generic versions of the Action Applications only available to Web Networks members. While Web Networks is still in the middle of a tough transition out the world of ISPs (with all the legacy systems and left over offerings that this entails), the ASP idea is clearly a money-maker.
Aggregated People Power
It’s aggregated people power that makes companies like DoubleClick and Web Networks different from their competitors. There are plenty of companies that offer ad banner servers and Web-publishing tools. While the competition in these markets is fierce, most of the companies in the game focus primarily on technical services. But this isn’t where the action is. Sure, everyone needs technical services. But the real purpose of these technical services is to connect people. If you can aggregate people-power up front, your tools are instantly more valuable than run-of-the-mill technical service. In DoubleClick’s case, ad servers and aggregated people information are being offered to make ad targeting easier. In Web Networks’ case, a basic publishing tool is being offered, combined with an existing pool of traffic , to people who are willing to share content. In both cases, the companies are both selling technical services and people connections bundled together. This kind of bundling will be essential for successful ASPs.
Seamless integration is an essential ingredient in this market. Successful ASP services will need to blend themselves into the look, feel and structure of existing customer Web sites. Blogger, a free webloggingservice that plugs into existing Web sites, does this well. With Blogger added to your site, anyone can interact and comment on your site (à la Slashdot). The logs look like a part of the local site, but they are actually generated from Blogger’s central servers. Blogger takes advantage of the ‘self-interest plus common good’ principle of commonspace by building content from local Blogs fed into its central ‘Blog’ portal, and gaining a huge number of advertising channels (on user sites) in return. On the other side, users gain a high-quality weblog that appears as a tightly integrated part of their site. There is no conflict between the information appearing in two places at once. In fact, it’s essential to the success of the product.
In the end, it’s these two factors – aggregated people power and seamless integration – that will make the biggest difference in the ASP market in the coming years. Surviving in commonspace will be about more than just providing technical services (even if these services are the platform for commonspace). It will be about people, and the common good.
Join the Collective: The Business of Open Source
And then there is open source.
Open source sits at the center of many debates about commonspace and business. Even though it’s undeniable that the open source movement can produce mind-blowing software, many people are still skeptical of the business opportunities that the model offers. How can you build hugely a successful business out of something that, in effect, everyone owns? Where’s the money when the software is free? Sure, there’s the gift economy and all that nice theory, but where is it happening in reality? What concrete steps are people taking to generate revenue from open source?
In The Magic Cauldron, Eric Raymond outlines a number of concrete business models being used to support open source development. He divides these models into two basic categories:
- Use Value — This category covers instances where the software isn’t being created for sale, but rather to meet some sort of internal need for the creator
- Indirect Sale Value — This category covers instances where you make money selling something related to the software.
We could also add open source applications to ASPs to make a third category, since some enterprising businesses have found a way to make a profit from them as well.
With use value applications, revenue isn’t the issue because the people making the software aren’t in the software business. They are in the hardware business, the car business, the gardening business, or any other kind of business. They just happen to be writing or contributing to software because they need it to run the business that generates their income. In this scenario, there is no money to be lost from software sales and everything to be gained from a broader community of users.
The example Raymond provides is the Apache Web server. If you want a Web server, he argues, you have three choices :
- Buy one and accept the features and programming hooks provided by the vendor (closed source)
- Write your own from scratch (your source)
- Join the Apache group (open source)
By joining the Apache group, you instantly gain all the advantages of ‘rolling your own server’ as well as the advantages of a huge development community. For people on the techie side of the Internet, this double advantage is essential. You need a solid server as well as access to the source code to modify the Web applications that will run your business. With Netscape or Microsoft IIS, this access is limited. With Apache, you just open the hood and get greasy.
The popularity of Apache is a testament to its value. It is the number one Web server on the Internet, with a 61% (and growing) market share. This is over three times Microsoft’s market share and almost 10 times bigger than the share of the market held by Netscape. More importantly, the people who maintain and grow the software are the people who use it. They do this because it helps them in their day-to-day work, which in turn helps them make money.
But Apache is by no means the only example. In fact, the bulk of open source software falls into this use-value category: tools written for webmasters; drivers and other software that people are unlikely to pay for separately; loss-leaders for other products; and accessories for bigger offerings. All of these applications feed open source because the useful software they produce isn’t necessarily valuable to the people who produced it.
‘Aha!’ you might say, ‘then there really isn’t any business value in open source.’ Wrong. Useful and solid open source software is incredibly valuable to the businesses that create it and use it. In some cases, this value comes in the form of tools that drive the important business processes that make a company money. For example, Yahoo – and even Microsoft’s HotMail service – run their businesses servers on open source tools. These tools are the foundation of their business. As a result, programmers in companies like these contribute back to the pool of open source software they have drawn from. In other cases, open source tools add value to a company’s core offerings, which drives up sales.
Indirect Sale Value
There are also businesses that tie all of their revenue directly to their work in open source. This category includes companies like Red Hat, Caldera, Corel, VALinux, and Penguin Computing. None of them sell the open source software itself – this doesn’t work well in open source culture. But they do sell a lot of hardware and software right around the edges of the software, which is why Raymond put these businesses in the ‘indirect sale value’ category.
Burning Linux onto a CD, putting it in a box, and offering support is the most obvious example. This is what Red Hat, Caldera and Corel do. Each of these companies has developed their own flavour of Linux, which both draws on and feeds back into other people’s releases. This source diversity helps keep the software clean and bug-free (remember Linus’ Law).
On the flip side, these companies provide users with services that help them ‘trust’ Linux – quality assurance and technical support. The price of this helpfulness ranges widely. A boxed copy of Linux with a couple of weeks of install support costs about $20. Twenty calls to the Caldera support desk costs around $1500 . And Red Hat’s Enterprise Edition with a year of incredibly specialized support and special hooks for Oracle8i runs around $2500 . Support is where the gravy starts to flow.
In the end, what you are buying with your support dollar is software expertise. But this expertise doesn’t drop out of the blue. More often than not, it comes from being at the core of developing and sharing a piece of open source software. Such involvement is what makes businesses like Red Hat possible.
The example that Raymond provides to illustrate this is a web development house called Digital Creations. In order to get venture capital, Digital Creations started peddling an object publishing tool it had developed and called Zope. The VC they ended up getting took one look at Zope and recommended that it be released as open source. Raymond writes:
By traditional software-industry standards, this looks like an absolutely crazy move. Conventional business-school wisdom has it that core intellectual property like Zope is a company’s crown jewels, never under any circumstances to be given away. But the VC had two related insights. One is that Zope’s true core asset is actually the brains and skills of its people. The second is that Zope is likely to generate more value as a market-builder than as a secret tool.
Releasing Zope as open source has transformed it from an interesting piece of code in a private Web shop to software that hundreds of companies around the world are using to run their online business. In turn, Digital Creations has become a world expert in a good-sized consulting niche. The whole process took place in less than 18 months. Creating a consulting business of this size using a traditional marketing approach would have taken much, much longer.
Open Source ASPs
Open source is the perfect match for ASPs, as they are not selling software, they are renting it. More precisely, they are selling the hosting, maintenance and support services for a specific set of applications. Whether or not the software is open source doesn’t really make a difference to the service provided, since signing up with an ASP is more like buying a service than purchasing a software license. If the service works well, that’s what matters.
Hence the Association for Progressive Communications’ open source release of the Action Application platform. Like Web Networks, all of the APC’s members are essentially ASPs providing services to non-profits and charities. To help its Internet provider members develop new offerings, the APC asked Web Networks if it would be possible to redevelop its applications as open source. There are a number of advantages to this approach. APC members can offer useful ASP services to their non-profit customers while at the same time giving back to the open source community. In addition, open source developers may pick up the code and add to it. If this happens, APC members benefit not only from improved code, but also from a bigger installed base of organizations to swap content with.
Open Source Success
The benefits of giving your software away for free – and being part of a larger community sharing this software – are clear: increased reliability, faster response time, and better customer service. But where is the business in it? Microsoft charges hundreds or even thousands of dollars for its products. Red Hat charges zilch if you want to download their version of Linux from their Web site. How can an open source company survive, no matter how low the overhead it is?
The answer: Don’t charge for what you’re hoarding (actually, don’t hoard at all). Charge for what you know, and for the ways that you can use that knowledge to help others.
It may seem like a contradiction to sell software and give it away at the same time. But the Linux community has no problem with such unorthodox notions, especially while they’re making profits. Analyst Prakesh Patel of WR Hambrecht predicts the Linux market will grow to $4.3 billion by 2003. At the time we wrote this book, Red Hat, a company which tripled its value during its IPO, experienced a 292% sales growth over the last year, with $42.4 million in sales for the year. VA Linux did $17 million in business last year, experienced 218% growth, and made the Fortune list of ‘cool’ companies (Microsoft was notable in its absence ). Scores of small companies are appearing around the world to sell open source consulting wisdom and set up open source-based systems.
But more important than the numbers is the success of open source in creating incredibly valuable, innovative and (admit it) downright cool applications. You can use Linux on your PalmPilot and other handheld computers. IBM is developing a Linux wristwatch. You can even use it to power little robots built out of Lego MindStorms. Much of this coding comes from tiny companies or ‘amateurs’ bitten by the open source bug. Even the projects that seem worthless or of little commercial value (such as Linux-based textmode Quake, which wins hands-down in the ‘too much spare time’ category) can act as a sort of apprenticeship, training their coders.
It can’t be stressed enough that the collective model is a dramatic a change from the previous norm. In many areas, collective work is producing tools better, faster and more enjoyably than closed corporate campuses. Furthermore, open source is attracting the loyalty of the brightest technical minds we have. Looking at open source, it is hard to imagine anything stopping the collective juggernaut.
Success Comes From the Strangest Places
The fundamental elements of commonspace business are the same as those of any other business: clear, reliable revenue; vision and leadership (which may well be distributed leadership); and good customer relationships. You need all these fundamentals to create a product or service that people will want and pay for.
But commonspace businesses are different because relationships and value follow different rules in the Internet world. The result is that it’s not always easy to see where the revenue is going to come from. The best business opportunities don’t always fit our traditional frameworks. In fact, they often sneak up and sideswipe us. Financial success in commonspace can just as easily come from a hobby, or an interest, or a passion that you are driven by as it can from a ‘big business idea’. The path to the best business model of all may be to follow your heart – or your fetish.
The story of Yahoo and Netscape is now a classic fable illustrating this point. Once upon a time, two Stanford University students started Yahoo as a part-time hobby. They posted links and aggregated content as a friendly way to help others get around the Web. There was no real business plan, no real idea of how to make money. At about the same time, Jim Clark was founding Netscape as part of his obsessive quest to build The Next Big Thing in the computer business. To be fair, Clark and his technical compadre Marc Andressen did make The Next Big Thing. In spades. And once they built it, they moved quickly onto the traditional path for generating revenue in the computer world: selling software (servers) and consulting services.
In the early days, Netscape looked like the ‘real business’ and Yahoo looked like Amateur Hour. Netscape had significant revenue flowing in from the sale of its products and from big custom jobs with the likes of MCI. Yahoo, on the other hand, had a measly trickle of advertising revenue. Netscape had the chance to buy Yahoo a number of times. They could have easily have plugged Yahoo in as the default home page for millions of Netscape users. As Andressen tells it, ‘We could have been Yahoo! If Netscape was to become a $100 billion company, that would have been how to do it. There was a point in time when that could have been done. ‘ But Netscape didn’t regard the revenue streams from Yahoo as worth the effort. ‘Stick to what you know: sell software,’ Netscape’s logic went.
‘Doh!’ as Homer Simpson would say.
Today, Yahoo is the real commonspace success story. It aggregates information about millions of Web sites and attracting the traffic of millions of people trying to find these sites. In August 2000, it had a market capitalization of over $70 billion . Netscape, on the other hand, has virtually disappeared. After being sucked into the AOL monolith, its ability to innovate (and the interest of the innovators) virtually came to a halt. It has since been relegated to the roles of in-house software developer (at AOL) and minor player in the Web server market (iPlanet).
Given the fact that success comes from the strangest places in commonspace, one should not discount the emergence of new, unpredicted business models. Sure, hugely successful phenomena like Napster are spinning around out in cyberspace with no clear revenue streams. But you can count on the fact that those revenues will emerge eventually, and probably in ways we don’t expect. Who knows, maybe The Next Big Thing is lurking in the TAZ with the anarchists and the weirdos, in some musty basement full of gamers or, as is often the case, in some existing business just turning itself on to the power of the collective.