Tim O'Reilly has a strong post on free and paid content bringing some common sense and economic calculus to the fore. The comments to this post are rewarding as well.
"I (O'Reilly) remember in Dune, Frank Herbert talked about the ecological "law of the minimum," that growth is limited by that necessary nutrient that is in shortest supply. Sometimes its awareness, sometimes it's conversion to paying customers.
A lot has to do with the ratio of possible consumers of the free product who might be converted to paying customers to the total market size. If I have awareness with .01% of the target market, giving copies away to raise awareness to 10% of the market, where 10% of those might convert (1% total) is a good deal. But if I have awareness with 60% of the target market, and give my product away, with a 10% conversion rate, I've lost a great deal.
That's why I said piracy was progressive taxation. If you have high awareness, my experience (from a number of experiments that I've reported on over the years) is that making copies available for free can reduce your market, but that if you start out with low awareness, it can enhance them.
Open source software is a great example. Projects start small, and use viral marketing to get sampled. Companies (say Red Hat with Linux) ride that wave of awareness and then introduce new products that monetize more limited access.""