The Institutional Free:
As a class VI student I recollect an essay on Mother Teresa. She would accept broken biscuits from local bakery to feed the growing needs of her institution Missionaries of Charity. Charity missions have two important elements (a) champion visionary and (b) public private partnership to channelize spare/unused resources for the goodness of society.
In any given technology the hard part is to develop the tools and knowledge. It requires champion visionaries to build and enrich tools or knowledge. One can look up to institutions like universities to sustain this effort (BCD UNIX Project). GNU and Wikipedia are two examples which have been built on charity model. The principles used by GNU and Wikipedia developers are to keep software tools and knowledge above business greed. This philanthropy drive helped in getting the best people to contribute for noble cause. The time-management inefficiency in knowledge industry is being channelized for contribution towards building GNU and Wikipedia.
It is not that GNU and Wikipedia are allergic to Money. Every Wikipedia page carries the slogan “Wikipedia is sustained by people like you. Please donate today”. Likewise one can support Free Software Foundation through donations as well. Wikipedia has Alexa Ranking 7 and can easily switch to self-sustained Advertisement Model, but then I could lose my OpenId for spreading such blasphemy! The time saved by millions of people searching for right tools or information is good enough reason for well meaning people to contribute and make it available for “Free”. Though unlikely but if for some reason Wikipedia was to file for bankruptcy, UN will declare it as “World Heritage Site”! The power of “Free” cannot be undermined in a democratic society.
Disclaimer: there is a conspiracy theory that GNU and Wikipedia were created to check the monopoly of Microsoft, though I do not subscribe to it. These are just good examples of how to institutionalize “free” for a good social cause.
The Free Institutions:
All other free stuff on Internet has sound business plan. The business plan could be around “renting virtual shelf to distributers – Amazon”, “target advertising social networking platform - Facebook”, “viral or pyramid marketing tool - Twitter”, “Online publishing – Wordpress”, “Direct mailers – Hotmail” etc. There are times when web developers go awfully wrong with their business plan and they turn to selling their software for "Free" or as "Donationware". This usually doesn't work, they must join SAAS Therapy group to get out of their self-inflicted misery. We are in the early days of Enanomics, so let me start with supply and demand equations.
Uncontrolled Inelastic Supply: Web services are structured around creating seemingly infinite supply, e.g. “Unlimited Storage with email account”, “Unlimited connections in a social network”, “Unlimited Blogs”, “Long tail @ Online App Store, Music Store, Books Store, etc…” In reality the supply is never unlimited. There are sufficient checks to ensure that unlimited supply has limited shelf-space or shelf-life.
Example 1: Only 2% users of MSN Live visit skydrive (25GB free storage on MSN Live). MSN is fairly safe to take the bet that the doomsday of reaching the storage capacity of thousands of petabytes for its hundred million users, will never happen.
Example 2: Amazon has millions of items to sell. The way Amazon builds its inventory is by creating virtual shelf space on its website. The real world seller’s chances of making millions by selling “12mm washers” using Amazon platform is less than winning Australian Lotto. Amazon can charge a small fee for virtual space; Amazon gets rich by charging few cents for lending virtual shelves. It is the ability to create a platform which seemingly provides unlimited supply that differentiates web from real world. However when the rubber meets the road, FedEx wins! Think about it, typical IT cost for any enterprise is ~4% of its revenue, what is a better option, create your own online store or rent space on Amazon, you decide! Blockbuster realized this and was quick to respond with its own online store to fight back the Netflix onslaught. So it isn’t the perceived long-tail of inventory which gives Netflix the competitive advantage.
Controlled Elastic Demand: Theoretically, free-service generates infinite demand. However web service providers are protected/limited by total users with internet access, bandwidth price, network throttling of traffic and deadweight loss (marginal gain from “reading my free blog” vs. “completing your project on time”.) Dead weight loss is caused by “people who would have more marginal cost than marginal benefit are buying the product”. 
A Simple Supply-Demand curve of an Ad-Based Web Service
First Law of Enanomics: If everything in the micro-economic or macro-economic world remained constant, the web service provider revenue is a function of internet traffic.
The question that still remains to be answered is that why at zero prices there is no deadweight loss? Web service providers understand the value of “Time”. Any end-user who is not able to find an item on-line in two clicks (assuming average bounce rate of 45% for any given website) will lose the customer resulting in deadweight loss. The web tools like search engines, recommendation engines, folksonomy etc help in building a commercial model which can be tapped by industry. These web tools drive ecommerce and fall under the “Free Institution”, free to user billed to supplier.
Second Law of Enanomics: When the price of a service falls to zero, the demand is proportional to marginal benefit.
There are more laws to come!!
