A discussion on the FISPA listserv was about the pricing of DSL. Pricing is one of the hardest things a business does. If there is already a market for the service - like DSL - and a market leader - like AT&T - then how do you price your service relative to the leader?
A lot of it comes down to the story you tell, the value you provide, and the brand you develop.
Tech Dirt has an article titled "Saying You Can't Compete With Free Is Saying You Can't Compete Period". Most software is freemium. Most products have competitors. "The zero is blinding everyone."
Peter Drucker said that a business has only 2 duties: Innovation and Marketing. Most tech companies only work on the tech part. You need to be more like Dropbox or even Salesforce. Salesforce was a struggling ASP for years before it pivoted its story and the market caught up to their service.
It is only about price IF you don't explain your value. I will say that if free was the end all, Skype and NetZero would have won.
Gary Kim has college level article about competing with free.