Every time an economic bubble develops, many will tell you how “this time it's different," how "this time the rules have changed." The lie of the Web 2.0 bubble is that free is the way to succeed in the new economy. That's not true. The rules of economics have not changed. The best way to make money in the new economy, in the Web 2.0 economy, comes down to the same fundamental business model that has always existed: create something of value for people who will pay for it.
However, the reason there's a huge gap between people paying you nothing and people paying you something is because that's where you go from hobby to business. Between zero revenue and positive revenue lies your business model. Going from zero pay to a penny is where you've discovered how to make money–and that's what businesses are about. The penny gap separates the winners from the losers, economically speaking."Free is a great way to make money. You just have to know how you are going to get paid for being free."
That's the key to having a business: getting paid, not whether you offer free samples in the morning newspaper to convince people your shampoo smells really great.
Free is a great tactic towards getting paid in other ways: through advertising, or by premium services, or maybe even through being acquired by a company with a large wallet. Free is only a tactic, though, NOT a business model.