I have been thinking about the psychologically of making money out of free online services largely as a result of having developed some services which have attained healthy traffic, yet failed - like many others to make any profits.

Using free!

Using free as a business model is easily one of the fastest ways to gain traction, However, if the solution provided is too efficient, no new pain will be created and thus there will be no opportunity to make any profits.

Unintended Consequences.

Rarely there are unintended consequences which arise out of new solutions. These ultimately manifest as a new pain for the users and oddly, it is precisely these events which need to be carefully considered during the planning stages of the new concept if it is going to be successful!

Intended Consequences

When providing considerable value to users and thus gaining traction with a free service, I argue the intended consequence should be to crate a new pain! Then one simply charges for the resolution of this new pain.

Interesting Case Studies:

Company : MegaVideo

Value : provides great value with reliable video streaming, a large library of content and good image quality.

Pain: limit of 1 hour free viewing, demanding payment (20 euros = 3 months access) to watch the last part of a film!

Company: Plenty of Fish

Value: provides free online dating networking service.

Pain: creates pain for competitors who then pay to advertise.

Company: Wordpress

Value: provides free blogging software.

Pain: spam, users invest considerable energy into the platform, then suffer huge comment spam issues, resolved with the askima plugin (cost 49 euros).

Summery

Each of the above are interesting examples of companies who have intentionally or unintentionally created services which have gained considerable traction out of free, which has then resulted in a new pain being experienced by either their competition or their users, many of whom have payed for that pain to be resolved.

Is it ethical and does this matter!

Maybe or maybe not (depending on the variables), but what matters more IMO is the resolution of problems and the advancement of technology. I'm sure some will cry foul and accuse thee of simply looking for ways to exploit others pain which is true, but before you can exploit the new pain you have to solve another problem and/or provide considerable value to the target which is the the primary hook, so the end justifies the means and as long as there is added value then most people should be happy...

Update

After being put on death watch about 6 months ago, my own site Doc-Film-Net has again been given notice by the content delivery network who kindly stepped in (after the previous one stepped out) to offer free bandwidth (1Tb per month for this baby), and again the site has been given 7 days notice before the lights will go out unless it pays its own way (fair enough really). Hence, I have just spent the weekend building a Megavideo style payment system, (i.e. you get to watch 30 minutes free per day but are asked to pay for unlimited access) and have just implemented this on Doc-Film-Net. It will be interesting to see how this experiment works out...