In this talk at UC Berkeley, Google's Sergey Brin confesses (at minute 1:27) that he thought Wikipedia couldn't work. Most people wouldn't contribute, he rightly assumed, and it would never reach critical mass.
He was in good company. In the classic "free rider" problem, you imagine an elementary school class with 20 students. If only two parents (10%) agree to volunteer to help out as room parents and drive on field trips, the whole system breaks down: there aren't enough helpers and the two parents get angry at the others for not joining in. And that's exactly what Brin assumed would happen with Wikipedia.
But he was wrong, he says, because he--even he!--had underestimated the way scale can change the game. Sure, the experts say only 1% of Wikipedia's users actually contribute to making it better. Indeed, if you do the math, it's even worse than that: probably closer to 0.01% (today, Wikipedia has 75,000 active contributors out of 684 million visitors). But that 0.01% have created 10 million articles.
Most people don't contribute, just as Brin had feared, but it doesn't matter because the tiny fraction that do are a tiny fraction of an absolutely whopping number.
The lesson is that more is different. The Internet, by giving everybody access to a market of hundreds of millions of people, can work at participation rates that would be a disaster in the traditional world of non-zero marginal costs. YouTube works with just 0.1% of users uploading their own videos. Spammers can make a fortune with response rates of 0.00001%. (To give you some context, in my business of magazines, response rates of less than 2% on direct-mail subscription offers are considered a failure.)
This is the underlying logic of the Freemium business model, which uses the near-zero marginal cost of online distribution to reach the maximum possible audience, converting just a tiny fraction of them to paid users.
That's impossible for traditional products, which usually have non-zero marginal costs. You can't mail a brownie to everyone in the world on the hopes that a tiny fraction of them will come back for more. But on the Internet, it's not only possible, it's the smartest strategy.
That's why Freemium is so new (it was waiting for a zero-cost distribution method), and so counterintuitive to many people. Freemium doesn't work with the small numbers we're used to in daily life. Getting 5% of 100 people to pay for your software is no business, and in the traditional world it takes expensive marketing to reach more people than that. But getting 5% of 100,000 people to pay for your software is a very nice business indeed, and online it costs virtually nothing to reach that many potential customers.
This is the point that everyone seems to miss: Free is not a business--it's zero-cost marketing for a business. And it works best at the largest scale: a small percentage of a big number is a big number.