Bill Gurley weighed in recently with his thoughts on freemium. He argues that if a competitor can do what you do and offer it for free, then you have a problem. I think his argument follows naturally from Porter’s Competitive strategy and supports the notion that I hypothesized on in my freemium post, that Freemium does not make sense for the differentiated provider.
Looking at the question of freemium through the lens of Porter’s Competitive Strategy, if you are the lost cost provider, you defend your market position by being able to lower prices against any competitor. If a competitor can offer your product for zero and make money, then the assumption is that they now have a lower cost position. Basically, you are no longer the low cost provider.
The differentiated provider protects his position by having a product that is unique in the market place. Consumers pay a premium for that product because they can get it no where else. By definition, if a competitor can offer the identical product for free, then you are not the differentiated provider.
In the Phanfare case, nobody can offer to store your fullsize original images and videos for free and make money long term. Hence, free is not going to be the price of the product.