Free-mium is a very precocious model. It is very difficult to get the balance right in service terms, namely how do you decide what to put in the premium service and not in the free one. The free-mium model has never taken traction in other industries, as normally for something to be commercially viable, the free service should be good enough for people to pay for it. Think of Shakespeare's theatre - people were prepared to pay for even the crappest places in the audience because the product itself was good. I think tiered, subscription based business models will be the most likely development, especially in a recession when the main barrier to going down the subscription path - that a competitor could come along and offer the same service for free - is becoming less relevant given the VCs are becoming less willing to subsidise such practices.
Pricing is always a challenge, freemium just introduces a "free trial" tier that can be temporary or permanent.
Other industries have variations: e.g. semiconductor companies give away complex datasheets and simulation models to give prospective users an idea of what the part can do. Especially when you are offering a distinct or new experience you need to give you prospects some way to appreciate what they can accomplish with your offering.
Its interesting that Rosenberg focuses on the self-funded model only for what he calls "ecosystem" startups. I disagree that the issue is risk in that way that he describes -- i.e. that Facebook or Apple could theoretically crush these companies quickly. Instead, I think the issue is more that the platform itself is unstable. Particularly with a limited platform like Facebook, nobody really knows if these apps will be profitable in 5 years, and even then, what the growth of an "app within an app" will be. Since VC's are generally interested in the big payouts, it always seemed to me like funding Facebook app companies was largely outside the VC domain.
That said, I generally agree with the big picture about self-funding -- its pretty much in line with what PG said in the recent essay about VCs in this recession.
I wonder how many people actually use the "free" side of the freemium model in practice. I know I signed up for a ton of apps but never actually used them.
