mozilla-foundation_small.pngBelow is our story, to run in tomorrow’s Mercury News, about this interesting new development at the Mozilla Project. Even after talking to several people, including Mitchell Baker twice, we’re still not entirely sure what to make of this. At least one person has told us that this is not a big deal, that this was done primarily for tax reasons. Baker, though, sees it as an important re-organization that is crucial to promoting Mozilla products and open standards. Regardless, we’ll be curious to see how the developer community reacts. And we sure wish the Mozilla Foundation would file its tax returns for last year….

The not-for-profit group that distributes the popular Firefox Web browser is shifting the creation and marketing of its products to a new for-profit corporation. The Mozilla Foundation of Mountain View, established two ago years with funding from America Online, created the Mozilla Corporation this week to help focus the group’s work and build more polished products.

Mozilla’s offerings — its three Web browsers, Thunderbird email client and calendar software — will continue to be distributed freely and created under an open source license.

“It’s goal is not return on investment,” Mozilla Foundation President Mitchell Baker told us. “It can generate revenue, but it’s primary purpose is to promote the Mozilla Project, to continue to ship great, free open-source software….It’s not set up to maximize revenue.”

people-mitchell-baker.jpgBaker becomes president of the new corporation. She said the foundation would continue to exist as the “center of the Mozilla Project,” with the taxable subsidiary serving “the non-profit, public benefit goal of its parent.”

The Mozilla Project was born in Netscape Communications, which decided in 1998 to open up the source code of its browser to outside developers. AOL acquired Netscape later that year, and spun out the Mozilla Project into a separate foundation in 2003 with seed funding.

The project is managed by a core team of about 40 employees. But thousands of outside developers have contributed code to the various applications.

In the past year, the project’s Firefox browser has emerged as its flagship product, making inroads into the dominance of Microsoft’s Internet Explorer browser. In the U.S., Firefox usage reached nearly 7 percent by the end of the April, according to tracking company
WebSideStory. Baker said usage may now be approaching 10 percent, with more than 75 million downloads.

“As Firefox has gained market share and become noticeable on the Web, it’s become a valuable asset,” Baker said. “In order to keep the project healthy, the right thing to do is to recognize it has economic value and to have an organization set up to recognize that value and manage it � but still do it for the non-profit goals.”

Baker said there are no plans to move to a “pay-for-software model.” But, she added, “Let’s have an organization capable of doing business-like things if that turns out to be
necessary.”

Although some open-source projects, such as the MySQL database server, are partly commercial, observers said that Mozilla’s new organizational structure, involving a foundation and for-profit corporation, appeared unique.

“My take is the Mozilla Foundation took a look at this and its reliance on the community and saw a willingness to create a commercial model, and they saw it as the most sustainable way to move forward,” said Michael Goulde, an analyst with Forrester Research. “It’s a way to kick-start adoption of their technologies.”

The Mozilla Foundation has several sources of revenue, including donations and the seed money from its original backers.

The foundation has also crafted business partnerships. In a deal with Google, for example, the Firefox browser ships with Google as its home page. And the default search engine in its search box is set to Google. Baker would not say how much that deal is worth, but speculation has placed Mozilla’s annual income from this in the tens of millions of dollars.

The Mozilla Foundation has not yet filed its 2004 tax returns, so its income is not public.

The Mozilla reorganization partly has to do with staying on the right side of U.S. tax laws. One Mozilla insider told us the foundation has realized that some of its business partnerships should be taxed.

Baker acknowledged that the tax issue was an “important impetus,” noting that non-profit laws are ambiguous as to how software corporations are taxed.

“Avoiding the uncertainty of that has been a factor,” Baker said.

As part of the changes, the foundation is adding venture capitalist Joi Ito to its five-member board. The new corporation’s board will consist of Baker, Chris Blizzard of Red Hat and Reid Hoffman, CEO of LinkedIn.

UPDATE: Here’s Mozilla’s FAQ on the change.