Often touted as Metcalfe’s law, the mantra holds that the usefulness or value of a communication system is the square of the number of users of the system (N^2). For example, if only you and your friend are the only people who have fax machines, then the fax machine’s value is 4 or 2^2. If 100 people have fax machines, the value increases (100^2). This is because each new member of the network creates another opportunity for you to send a fax. Of course, the network could eventually become congested, but, up till then, each new member adds value. Wikipedia, which is, ironically a network-dependent encyclopedia, has a great article on Metcalfe’s law (Interestingly enough, Robert Metcalfe invented the ethernet.)
This is a big departure from traditional supply and demand. Normally, if you produce more of something (like widgets), the increased supply will cause price to fall.
So, in the early days of a network, it could make sense to give away a service — until you hit a critical mass of users that creates enough value to warrant fees. Even though fees might make some users quit using your service, the critical mass should ensure many users stick around.
I just wish someone had thought of that back when I wanted a laser tag gun.