This article has been batted around the Twittersphere. It's entitled Freemium and freeconomics.

Venture capitalist Fred Wilson made the following observations:

... In March 2006, I wrote a post called My Favorite Business Model in which I outlined the freemium concept and I asked the readers to help me give it an easy handle. The word Freemium was not coined by me. It came from Jarid Lukin, who at the time was working for Alacra, a company I am on the board of. Fortunately, we've got Wikipedia which has got the story straight.

Now let's talk about freeconomics. I don't believe everything will be free on the Internet. There will be plenty of paid business models. For example, if you want to watch Major League Baseball games live over the Internet, you'll pay for that. If you want to use services like the FT and the WSJ frequently (more than 10x per month), you'll pay for that. If you want to watch HBO over the Internet, you'll pay for that. If you want a Twitter desktop or mobile client, you might pay for that too.

But we also must recognize that the cost of delivering many services over the Internet has decreased significantly from what it cost to deliver them in the analog world. The marginal cost of delivering a piece of content is approaching zero. But the total cost of delivering content on the Internet is far from zero. My partner Albert wrote a great post about this last week. He said:

The price of watching a stream on Youtube is zero.   With marginal cost zero and marginal benefit zero, from a perspective of maximizing total social (net) benefit, free is the right price because it does not preclude any video that could possibly have benefit from being viewed.  That does not mean that free is sustainable because it obviously doesn’t help cover the total cost.

And, as Albert recognizes at the end of his post, this debate is not entirely about economics. It is about the value of various participants in the content ecosystem. ...

Facebook is a perfect example of freeconomics at work. A woman who works for a major media company was in my office recently. She quoted her CEO as saying "why doesn't Facebook just charge a monthly subscription fee, they'd be making money hand over fist?". Well I believe that if Facebook did that, they'd be vulnerable to other networks offering a free service. And certainly not every one of those 200mm+ users are going to cough up a monthly subscription. But by offering a friction free service, they have built a powerful and growing network that they are now starting to monetize in various ways and that they will monetize even further in additional ways. And they are super hard to compete with because they are free.

I like to keep my posts short, so I'll end here with the observation that the Internet allows an entrrepreneur to enter a market with a free offering because the costs of doing so are not astronomical. And most entrpreneurs who take this approach will maintain an attractive free offering of their basic service forever. But that doesn't mean that everything they offer will be free. That's the whole point of freemium. Free gets you to a place where you can ask to get paid. But if you don't start with free on the Internet, most companies will never get paid.