Fred Wilson (with Union Square Ventures investor in Twitter, Delicious before its sale to Yahoo, Tumblr, Zynga, Etsy and others) on free main components in business models:
Wikipedia, Craigslist, YouTube, Flickr, Instagram, Facebook, Twitter, Tumblr, WordPress, etc, etc. There is no value to any of these platforms if the users don’t create the content. The users create the service, curate it, and make it what it is. I do not believe it makes sense to charge users to create the value. We’ve seen folks try this model. Typepad (where this blog is hosted) charges to host a blog. How well did they do? Phanfare charged to host photos. How well did they do? The list could go on and on but I don’t want to focus on failed services.
When scale matters, when network effects matter, when your users are creating the content and the value, free is the business model of choice. And I don’t think anything has changed to make that less true today. If anything, it is more true.
And Luke Chamberlin in a comment on that posting:
The “free” model could also be called the “marginal cost of distribution” model and it’s been with us for a long time.
The difference today is that through the internet, the marginal cost of distribution is essentially zero, so they don’t have to sell subscriptions anymore to offset the distribution cost. The other difference is that they have better information about who you are, because they track your behavior online through browser cookies.
People are entitled to the opinion that free, and therefor ad-based, media is bad, but they need to be reminded that it’s not a new model, and has in fact been the dominant model all along.