In your Gemfile Bundler requires you to tell it where to lookup for gems. For 99.99% of people that is going to be rubygems.org, but it doesn't have to be. There has been talk about making this the default and then allowing someone to turn it off.

edit: The RubyRouges podcast has a great episode with the maintainer of Bundler where a lot of the difficulties with Bundler are discussed in depth. That's the "talk" I was referring too.

actually I hate to say it but one of the early (2006? 2005?) blog posts about the diff between Python and Ruby was that in Python's console, if you hit "q" or escape or ctrl-C or something, you get an error message like the 'source :rubygems' error message, which says "hit ctrl-D to escape." the blog post was saying this is basically the diff between the two languages, that Python would correct you if it knew what you wanted but you asked it the wrong way, whereas Ruby would just either support the most obvious option, or support both the most obvious option and the 'correct' option as well.

the idea in Ruby, and especially in Rails, is that if you know what the default is which most people are going to expect or try, you should support it. to say "we know you thought source :rubygems was the default, but it's not, you have to type it explicitly" is a little un-Ruby and a whole bunch un-Rails.