I think you are confusing two different approaches here under the ‘Freemium’ label. Offering a service with/without advertising is not the same as offering a set of limited functionality, or full functionality for a limited time. (excuse the below if it is too obvious, but I’m exploring as much as ‘explaining’)

Commerical radio stations have an advertising based business model – the value they can put on advertising spots depends on the listener base they can build (size and demographics) – they don’t have a ‘subcriber’ model. Many people listen to commercial radio, and are happy with the adverts. On this basis it seems a reasonable assumption that a service like Spotify has the potential to run on a similar basis, paid for entirely by advertising.

Some people however don’t like to listen to commercial radio, and so will go to the BBC (in the UK at any rate) to avoid the adverts.

This is where Spotify has a huge advantage over traditional radio – it can mix the model. You can subscribe and avoid the adverts, or not subscribe and have the adverts – either way Spotify makes money.

If Spotify has its sums right (and of course, can build the right audience) there seems to be no reason in theory why it can’t make money whether people subscribe or not. I think you assume that the ad model doesn’t work because you don’t mind the ads, and you don’t feel you make purchasing decisions based on them – you could well be right, but it doesn’t matter as long as the advertisers believe they are getting value out of the arrangement.

There are some other web services that work in a similar way – ning.com allows a payment to remove ads from your ning site. However, the Spotify model seems sligthly more viable to me, as it is essentially a linear medium, so avoiding the ads takes more effort on your part, and you probably won’t do it. I find it pretty easy to ignore the adverts on web pages, and I can even remove them completely with a browser plugin. Again, it is easy to make the assumption that the ad model can never work because I ignore them – but presumably Google simply wouldn’t the beast it is today if we all ignored the adverts it is used to serve up on huge numbers of websites?

Thinking about the BBC for a moment, recent discussions about the license fee renewal in 2012 suggest that the current model might not survive. I wonder whether by moving delivery online the BBC could support a dual revenue model – one with adverts for those who choose not to pay a ‘license’ (or subscription) and an ad-free stream for those with a valid license? It certainly raises some interesting possibilities in my mind. It has also been suggested recently that ITV will move to showing more ads more frequently (moving towards the US TV experience) – and again, an online approach like Spotify’s might offer a way of balancing subs against ads – the more sub you pay, the lower the rate of ads?

Of course, there could be some problems with the sub/ad dual revenue model. Presumably the demographics that the advertisers will pay the most to reach are also the most likely to buy the sub (being able to afford it), so your ad model suffers the more people take out subs (at least, up to a point).