I somewhat agree with his assessment of business models that hinge on freemium or entry-points priced at $0, but I think he (like other seed-stage investors) tend to overlook an ill-conceived strategy that I call the "platform play" common in today's early-stage company landscape.

Utilizing some form of the this strategy - building a multi-level rather than a singular product, i.e. a social network or blogging tool that caters to X, Y and Z demographics when it should focus on X or the intersection of XYZ demographics - is almost doomed to gain minimal viable traction. I may be wrong, but I think "quick riches" founders of startups look at the success of Google (a free business, with a targeted product from the start that later monetized) or Facebook (singular product starting with the Ivy League demographic, built around ads with an impressive $300-400 million revenue stage, minus hype) and think, "I can do the same."

I don't think so. Don't confuse the ecosystem these companies have built (contextual ads and social applications, respectively, worth hundreds of millions of dollars) with how they started. For some, free is an entry-point to using your product (perhaps content, bare features, etc) but for others, particularly e-commerce, free and "platform plays" are short sighted toward revenue and profit goals.

Smart founders and investors see "free" as an integrated component in their company's vision, when applicable.

"What they fail to realize is that once you start offering a valuable service for free it is very difficult to later charge for that same service."

Of course. That's why you never give away for free those parts of your service that you think you might charge for someday. If you lure people with free services to grow an audience and then start charging for those same services when you have an established userbase, do expect a serious backlash against this bait-and-switch. You can't give things away then claw them out of the hands of your users like that.

"And if that service happens to be the core value of what you have to offer, well, then you’ve just given it away. Yes, you can claim to use a “freemium” model in order to charge for added features or services over and above your core service, but, if you give away the most valuable part of your service, the uptake on the number of people who convert to the for-pay premium services is not going to be very high."

Well, don't do that either, then. It's not because you're using a freemium model that you have to give away the best parts and then charge for some mostly irrelevant gimmicks and hope people will make what amounts to a donation to your business.

The free parts of your service are a loss leader. You aren't merely not making money on the free parts, you're losing some. You have to justify those costs. Don't lose sight of that.

(It's 3am and I'm running on about 3 hours sleep from the night before, so my ability to argue effectively is diminished, instead I will just provide a specific example as a case FOR free.)

Many of you would probably have visited homestarrunner.com - it's a site that provides animated flash cartoons that is updated regularly. For all intensive purposes, the flash cartoons are just like online video.

Unlike most other online video sites, they haven't succumbed to needing to monetise with ads, nor do I think their model constitutes as freemium. Quite simply, they provide additional value to their fanbase on top of the value they already provide for free.

They monetise their site by selling tshirts and figurines and all sorts of various trinkets and curiousities.

The fact is, that without giving away content for free, they wouldn't have garnered favour with viewers, nor created a fanbase who would purchase their wares to support the sites costs.

Now while I don't know how much the guys are making, the site has been going for nearly 9 years without any external funding, so they probably are turning a profit.

Well, to his point, he is saying that you should never give away the core parts of your business for free, else you will never be able to charge for them.

In the example you cited, I would think of it as the videos being the marketing for the goodies, and goodies being the core business. If they ever started with giving away free t-shirts, they would never be able to charge for it, even though they would get a large user base from that model. Note that they wouldn't also be very successful at giving the basic t-shirt designs for free and charging for the better ones.

Not at all, the content has always been the core business - without the content, there wouldn't be a market for the merchandise.

Merchandise supported revenue isn't a new business model, I mean, that's how George Lucas made the majority of his money, merchandising from the Star Wars sagas.

Homestar Runner's business model is a version of the one used in classic cinema, the difference being they made the initial price point $0 - instead of the cost of a movie ticket, so that everyone could enjoy their content and they've helped to reduce the barrier to entry for enjoyment of that content.

When you consider marketing and distribution costs are one of the main costs associated with any film project (for example, Disney used to take a 50% cut of Pixar's films) Homestar Runner's costs in this arena have been essentially zero, given they've gotten by on word of mouth advertising.

And it's worked for them, they've even had other people borrow ideas to create new online video projects that have gone on to be big successes too. The Askaninja Ninja was inspired by Strongbad's Emails.