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Why Aren't There More Open Data Startups?

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It's a question I'm seeing asked more and more: by press, by Gov 2.0 advocates, and by the online public. Those of us excited by the possibilities of open data have promised great things. So why is BrightScope the only government data startup that anyone seems to talk about?

I think it's important that those of us who value open data be ready with an answer to this question. But part of that answer needs to address the misperceptions built into the query itself.

There Are Lots of Open Data Businesses

BrightScope is a wonderful example of a business that sells services built in part on publicly available data. They've gotten a lot of attention because they started up after the Open Government Directive, after data.gov -- after Gov 2.0 in general -- and can therefore be pointed to as a validation of that movement.

But if we want to validate the idea of public sector information (PSI) being useful foundations for businesses in general, we can expand our scope considerably. And if we do, it's easy to find companies that are built on government data: there are databases of legal decisions, databases of patent information, medicare data, resellers of weather data, business intelligence services that rely in part on SEC data, GIS products derived from Census data, and many others.

Some of these should probably be free, open, and much less profitable than they currently are*. But all of them are examples of how genuinely possible it is to make money off of government data. It's not all that surprising that many of the most profitable uses of PSI emerged before anyone started talking about open data's business potential. That's just the magic of capitalism! This stuff was useful, and so people found it and commercialized it. The profit motive meant that nobody had to wait around for people like me to start talking about open formats and APIs. There are no doubt still efficiencies to be gained in improving and opening these systems, but let's not be shocked if a lot of the low-hanging commercial fruit turns out to have already been picked.

Still, surely there are more opportunities out there. A lot of new government data is being opened up. Some of it must be valuable... right?

Government Does What The Market Won't

Well, sure. Much of it is extremely valuable. But it may not be valuable to entrepreneurs. To understand why, we need to get a little philosophical. What does government do? It provides public goods: things of value that the market is not able adequately supply on its own. A standing army and public schools and well-policed streets and clean water are all things that are useful to society as a whole, but which the market can't be relied upon to provide automatically. So we organize government as a structure that can provide those kinds of things, and which will make sure that everyone can benefit from them in a way that's fair.

These are not ideal conditions under which to start a business: the fact that the government is the one collecting a particular type of data may mean that no one is interested in buying it -- a natural market for the data doesn't exist in the way that it does for, say, sports scores or stats about television viewership. And even if you create a business that takes advantage of the subsidy represented by government involvement (data collected at taxpayer expense, resold at low, low prices!), your long-term prospects may still be poor since there's no way to deny competitors access to the same subsidy**. Someone else can come along and undercut you, and there's nothing you can do about it except be better and cheaper. That's great for the consumer, but not so great for people hoping to start a lucrative business. (Those who think BrightScope is a counterexample should have a closer look at their about page: they utilize a mix of public data, data that they laboriously capture themselves, and data bought from subscription services.)

Data's Real Value Can Be Hard To Measure

I'll be glad to see more open data startups -- and to be clear, I think we will see more. But the open data movement will be important regardless of whether any IPOs come out of it.

There are lots of types of value that are difficult to measure. If the IRS puts forms online, taxpayers have to spend less time waiting in line at the post office. If Census data reveals where a retailer's new store should go, it can mean profits for shareholders and more jobs for the community. If scientific data's openness allows more researchers to engage with a question, it can lead to better conclusions, better policies and better outcomes. If regulatory data about companies is public, it can give firms an incentive to self-police and help markets price things correctly.

All of these are real benefits, but they can be difficult or impossible to calculate -- and tough for a startup to monetize. Still, this is where I think the really exciting benefits to open data are likely to be found. If government data helps entrepreneurs make money, that's great. If it makes our country work better, that's fantastic.

  • Historically, many gov data vendors have made money off of the data's artificial scarcity -- a legacy that we must unravel, even though doing so will be politically difficult: openness's benefits to the public will probably mean less revenue for the vendors.

** There shouldn't be, anyway -- in practice, public/private partnerships often fall short of this goal.