Walk with me for a moment and consider the following...
Imagine you are a person interested in HD Radio radio (a bit far fetched, I know, but stick with me). You have heard stations in your area talk about their great digital quality on HD Radio and their additional programming choices on HD2 and HD3, and you want to hear it. So you go into Best Buy and head to the car audio section. You see a nice HD Radio receiver and take it over to the counter. The person scans it and says, "$99 plus tax please." "$99? What a deal!"
You also happen to have an iPhone. You visit the app store and see two Internet radio players. One is free but uses old codecs (or pirated open-source codecs) and won't stream anything but the most rudamentary formats. The other costs a few bucks but has professional grade audio quality and supports the wide variety of content formats out there. Which one do you choose? The free one, of course! Because Internet radio should be free, right? Even if it sounds crappy, it is better to be free and crappy than cost a couple bucks and sound good.
What is wrong with this picture? The person is willing to pay for a limited piece of hardware that gives them access to only 30 new low-quality broadcasts that may not even come in clearly where they live, but they are not willing to pay a couple of bucks to get a well crafted piece of software that gives them quality access to 100s and 1000s of stations across the Web.
Let us walk some more and consider this next scenario..
You are the GM of a major broadcast radio station. Your boss at headquarters is all excited about HD Radio, so you spend hundreds of thousands of dollars to convert your station to HD even though you know there are more transmitters than radios in the market. People want choice, people want digital quality, so even though HD Radio gives you neither, you do it because HD is the "salvation of broadcast radio." During this process, you scream at your engineers because unless they tweak the HD signal just right, it impacts the quality of your analog FM. And if you have learned only one thing in your career, its that quality is critical.
Soon after, some funny thingamajig called an iPhone comes out. In a short time, nearly 50 million people have this iPhone or its slightly deprived younger brother, the iPod touch. Your boss hears the buzz again and says "get us on the iPhone." You call up the professionals and they say "you should use the modern MPEG-4 HE AAC v2 codec over Flash Media Server or 3GPP. That way you can have high-fidelity sound and reliable delivery to all those iPhone listeners." But after seeing their relatively modest price quote for the encoder or the iPhone software, you say "no way!" The Internet is cheap and the Internet is free. Why should I spend money to stream on the Web and to iPhones? It's not as important as my broadcast signal, so I can cut corners. So to save a couple thousand bucks, you use "free" streaming tools and low fidelity codecs to stream to the iPhone, giving your listeners ear fatigue and and continuous drop outs.
What is wrong with this picture? This GM is willing to spend a huge sum of money to chase the HD Radio wild goose and flames his engineers over FM quality issues but is unwilling to spend a couple thousand bucks to give his listeners a high-quality experience over what is the future of his station - the 500M streaming-ready mobile phones already in the market.
The moral of the story.
The free culture of the Internet is going to kill itself eventually. People get what they pay for. Radio Paradise and SomaFM are only here because their listeners love them enough to pay and support them. Ad supported Internet radio is only here because people listen to and act on the advertising. Adobe Flash CS4 is only around because enough people pay for it.
The irony is that many times people pay for stuff that is crappy and snub paying for stuff that is good, just because they think that everything on the Internet should be free. I am using HD Radio as an example, just because it is easy to knock, but the same faulty logic is being applied to any physical vs. virtual purchase. People are willing to pay $8 for a latte and a muffin, but they gripe at an $8 iPhone app. What's up with that?
Bottom line: if nobody pays, then nothing will get produced.
As the Internet evolves, I hope that quality cheap trumps crappy free because people are willing to pay a little for quality. The world will be a much sweeter sounding place.