Free and open are concepts which have become normal in entrepreneurial or internet businesses. Consider “free” software, “open” source software and “open” innovation. How each works commercially is worth investigating for  internet entrepreneurs and businesses seeking fresh approaches. They are alternatives to “paid and closed” business practices.

Wikipedia is our case study for this investigation. How did Wikipedia arrive at its combination of free (content) and open (Wiki)? Which lightbulb moments turned it from an investment drain to a viable, funded operation?

Jimmy Wales co-founded Wikipedia. Born in 1966, he grew up in Huntsville, Alabama in a family that appreciated the World Book Encyclopaedia and learning. Under the direction of his mother and grandmother, Wales enrolled at Auburn University at the age of 16 and studied finance. He obtained a masters and entered the Ph.D finance program while also teaching university students. In 1994 he applied this academic background in finance by taking up a position as an employee in a Chicago futures and options firm.

Internet business, not so good

Inspired by the initial public offering of Netscape, in 1996 Wales decided to become an internet entrepreneur by co-founded Bomis with Larry Sanger.

Web portals were a type of website popular at the time. In those pre-Google days the logic of portal sites was to build a big fat site, like Yahoo!, with lots of content to attract traffic. This would then be used to attract advertising.

Bomis adopted this financial model. Its site had magazine-style content for men, including very popular content labelled “babe” and “adult”.

But Bomis struggled to make money.

Even more failure

Wales and his team had a passion to create an online encyclopaedia. They went with their passion in 2000, starting Nupedia.

Nupedia’s operations were those of traditional encyclopaedia publishing, except for at least three elements. It was digital, online, and did not require users to pay. From the late 1980s the encyclopaedia market became very dynamic resulting in shifts in financial models as discussed at length in Encyclopaedia content licensing and contracts.

Despite the newish combination of those three elements, the fate of Nupedia depended on traditional publishing workflows. This begins with encyclopaedia and book publishers producing quality content by firstly establishing an organisational structure capable of generating new and updated content from employed or contracted subject matter expert writers.

Despite those three elements, Nupedia and its traditional publishing competitors added value to manuscripts, images and other raw content by applying funds to sustain the content development workflow of a hierarchy of editors, graphic designers, copy proofing staff, marketing personnel and other managers. For Nupedia Sanger was the editor-in-chief of this hierarchy.

The three elements adopted for Nupedia saved some costs such as printing, paper or CD-ROM duplication, and physical distribution. These cost savings were not enough. It struggled to generate sufficient content. In its first year Nupedia was an investment drain.

A technology lightbulb moment

In early 2001 Sanger stumbled onto Wiki software developed from 1994 by U.S. programmer, Ward Cunningham. It was a free and open programming system. The company decided to try Wiki.

In contrast to Nupedia’s previous traditional publishing model, Wiki facilitated collaborative computing for content development. It allowed multiple users (who were neither employees nor commissioned authors) to write and edit text, either individually or collaboratively, online, at any time or place.

Another building block, use of non-experts

At the same time as adopting Wiki, Nupedia made the decision to permit non-experts to be engaged in writing and editing.

The positive results were immediate from the combination of Wiki and non-expert authors and editors. Within weeks Nupedia on a Wiki platform had more content than Nupedia had developed in a year.

Slow content development was replaced by exponential growth across multiple languages and countries. Use of Wiki helped speed Nupedia’s traditional publishing workflow and helped dramatically increase the number of writers, editors and other contributors. This is discussed in a book by Andrew Lih, The Wikipedia Revolution: How a Bunch of Nobodies Created the World’s Greatest Encyclopaedia (Aurum Press Ltd, London, 2009). As underlined in Andrew Lih’s book, the community at Slashdot were important early adopters, writers and evangelists of the Nupedia project.

Nupedia made an accidental discovery that online the combination of Wiki and non-experts could speed and grow encyclopaedia production workflow.

There were additional surprising discoveries on Wikipedia’s commercialisation path. The bet on non-experts paid off, quality standards were generally maintained as the site came to employ the wisdom of the crowd and the network effect. Today Wikipedia is regularly quoted in court decisions, as one of many indications of the respect people have for its content quality standards.

Community builder – avoidance of advertising

Another remarkable fact is that the strict ban on advertising built a community of loyalty and passionate contributors. Early on, even raising the possibility of advertising being permitted as a revenue generator led to a project fork (creation of a separate site) by the Spanish language group.

Tax deduction status builds the financial model

Nupedia in 2001 became Wikipedia.

In 2002 Sanger left the venture and Wales continued on. In 2003 the Wikipedia Foundation was formed, replacing the role of Bromis. In 2005 donations to it became tax deductible for U.S. federal income tax purposes. By 2006 it was clear Wikipedia was a leader in the Web-wide phenomenon then known as Web 2.0.

Adaptive entrepreneurship

Wikipedia has a context in the broad sweep of free and open software history. On adopting Wiki software and applying it to open content development the Wikipedia project moved into line with several parallel and increasingly adopted developments which had grown since the early 1990s, early 1980s or earlier depending on where you draw the line.

Wikipedia had its antecedents. Cunningham invented Wiki software and claimed no intellectual property in it. Giving it away put him in line with earlier programmers who had invented a technique to use copyright and contract law to supplied their software on terms, two of which might be – free of charge and with open access to its source code. This included Richard Stallman and the Free Software Foundation formed in 1983. Tim Berners-Lee, inventor of the World Wide Web in 1989. It also included the open source movement, most prominently championed by Linus Torvalds who grew Linux software as chief architect of the Linux kernel.

Each of these Wikipedia’s antecedents, however minimally, used a combination of copyright law and contract law (ie an copyright licence agreement) to set the terms and regulate software code and content copying, adaptation and use. Critically, the application of these legal terms helped build a common pool and overcome the tragedy of the commons. This is the genius of how free and open works. A comparable commons building use of copyright and contract law is discussed in this case study – Creative Commons licences are useful but oversold.

Thus new software platforms, online collaboration, copyright law, and contract law have been repeatedly used to build free and open work for business. So in some elements law built Wikipedia. However, a qualification. Unlike many open source projects, Wikipedia does not impose copyright restrictions on use. It permits free use of its content for commercial purposes with no requirement to add new content back into Wikipedia. This is perhaps due to differences between open source code and open content. For example code tends to be more functional and more reusable with a lower level of customisation.

Wikipedia’s commercialisation is a case study in adaptive entrepreneurship. It leveraged on the shoulders of many giants. The story illustrates how free and open can be applied within a mix of decisions to create a viable business model for internet entrepreneurs and others in business.

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Noric Dilanchian