Claudia Menashe needed pictures of sick people. A project director at the National Health Museum in Washington, DC, Menashe was putting together a series of interactive kiosks devoted to potential pandemics like the avian flu. An exhibition designer had created a plan for the kiosk itself, but now Menashe was looking for images to accompany the text. Rather than hire a photographer to take shots of people suffering from the flu, Menashe decided to use preexisting images – stock photography, as it’s known in the publishing industry.

In October 2004, she ran across a stock photo collection by Mark Harmel, a freelance photographer living in Manhattan Beach, California. Harmel, whose wife is a doctor, specializes in images related to the health care industry. “Claudia wanted people sneezing, getting immunized, that sort of thing,” recalls Harmel, a slight, soft-spoken 52-year-old.

The National Health Museum has grand plans to occupy a spot on the National Mall in Washington by 2012, but for now it’s a fledgling institution with little money. “They were on a tight budget, so I charged them my nonprofit rate,” says Harmel, who works out of a cozy but crowded office in the back of the house he shares with his wife and stepson. He offered the museum a generous discount: $100 to $150 per photograph. “That’s about half of what a corporate client would pay,” he says. Menashe was interested in about four shots, so for Harmel, this could be a sale worth $600.

After several weeks of back-and-forth, Menashe emailed Harmel to say that, regretfully, the deal was off. “I discovered a stock photo site called iStockphoto,” she wrote, “which has images at very affordable prices.” That was an understatement. The same day, Menashe licensed 56 pictures through iStockphoto – for about $1 each.

iStockphoto, which grew out of a free image-sharing exchange used by a group of graphic designers, had undercut Harmel by more than 99 percent. How? By creating a marketplace for the work of amateur photographers – homemakers, students, engineers, dancers. There are now about 22,000 contributors to the site, which charges between $1 and $5 per basic image. (Very large, high-resolution pictures can cost up to $40.) Unlike professionals, iStockers don’t need to clear $130,000 a year from their photos just to break even; an extra $130 does just fine. “I negotiate my rate all the time,” Harmel says. “But how can I compete with a dollar?”

A new crowdsourcing company, called Cambrian House, launched this week. The idea is pretty straightforward – open source software development minus the free labor. It's a little hard to evaluate whether Cambrian House can develop competitive applications in an increasingly crowded market, but I'm impressed with the degree to which they've thought out the model. I also like that they intend to put the crowd to work at three separate tasks: 1) originating the ideas; 2) evaluating the ideas; and 3) developing the code itself. A lot of the discussion in the media and the blogosphere since my original article came out has focused on the last of these functions -- I suppose because it's easiest to get one's head around--when in fact the crowd's ability to distinguish between fodder and folderol is, to my way of thinking anyway, the most fascinating and perhaps useful aspect of the crowdsourcing model (as well as being one of the only areas in which crowdsourcing does in fact overlap with peer production, in that the labor can only be performed by the collective.) It's also hard not to be won over by the egalitarian spirit that seems to animate Cambrian House, even if it's a little eerily reminiscent of the It's-Good-to-be-Good-Especially-if-We-Can-Make-Gobs-of-Cash-in-the-Process zeitgeist of the late '90s. At any rate, I look forward to following Cambrian House's development, and wish them the best of luck. One question guys: Will the source code created by the crowd remain open to the crowd after it's launched, or is that contingent on the client?