Can free software transition to the web services world?

Etherpad is being released as open source software because the team is moving onto Google Wave. As an open source web hosted project, without a company behind it, it is unlikely to succeed.

Back when I used to talk about the business reasons for open sourcing code, "end-of-life" was always one of my first examples. People think, "oh, I have this project that I no longer want to work on but people still want to use it, so I'll open source it!" They have the (often mistaken) idea that somebody out there will just start working on it.

This is exactly what Etherpad is doing:

Our goal with this release is to let the world run their own
etherpad servers so that the functionality can live on even after we
shut down etherpad.com.

They are likely to lose a lot of users immediately as hosted software is very hard for end users to use without hosting.

There is a real need for hosting of open source web services.

Open source web service projects that have been successful like WordPress and Drupal have companies that can host it for end users. Without hosting, I think it's unlikely that projects like Etherpad will be widely successful. And we should now ask what happens to the companies behind WordPress and Drupal when they get acquired?

The other type of successful open source web service are projects started by companies and open sourced as part of the business strategy for creating community or
encouraging developers to help them out. In these cases the code is
often written entirely by company employees. And the hosting is done by the company as part of that same business strategy. Projects like SugarCRM and
Alfresco are successful open source web services but if the companies
went away (or were acquired), the projects would have a hard time
living on in the open source ecosystem.

Hosting for free and open source software projects is hard.

While it's virtually free (other than labor) to start a free software project, hosting a web service costs money, especially if it becomes popular. And consumers are used to free web services. (Web service companies often make money off of advertising (on the free version) or by charging for a supported version or a version with more features or by hoping to be acquired some day.)

So if it takes a business model right now for web hosted projects to be successful, how do free software projects transition to the web services world? How does a project start as a free and open source software project and transition to a hosted web service without becoming a company?

I don't think it's enough to just make the hosted version available for people to install and use on their own. I think we have to figure out a way to also host the software. If you require people to host the web services piece themselves, you are confining your market to technical people or companies with IT staff. The project might become successful but it's unlikely to be used by the average end consumer as part of their daily life.

So how do free software projects develop and host web services? Do they use business models like advertising to be self sustaining? Do they start foundations like the GNOME Foundation that will run as a nonprofit but make enough money of the hosted version to at least cover expenses? Or will all hosted services be essentially startup companies done by free software developers hoping to create a successful company?

Can we have self sustaining web service free software projects?