In this Web 2.0 world free services have been all the rage – from social networking to photo sharing to social bookmarking, all the sites seem to be free and ad funded.

I don’t doubt the relevance and current and even continuing successes of these sites. Contextually relevant text ads have proven extremely successful and even less lucrative ads types can be very profitable if you can aggregate enough traffic (e.g.; MySpace).

The point I am making is that there is a market for premium services. In certain markets, charging improves quality. Listing fees decrease the amount of «junk» items on eBay. By charging, Match eliminates all the people who think finding the right date is not worth $24.95 per month. More importantly, there are many markets where charging allows the sites to provide a much improved quality of service.

The market that provides the best example of this might be the photo and video hosting and backup space. The free market is divided into two types of players:

• Photo Printing sites such as Snapfish, Kodak Gallery and Shutterfly
• Photo Community Sites such as Flickr, Fotolog, Pbase and Fotki

In both categories the various sites work relatively well at their primary purpose. However, both have their flaws. In the photo printing sites, they downgrade the quality of your pictures, it’s difficult to upload thousands of pictures, they don’t support video, and worst of all they delete your pictures if you don’t print. The photo community sites offer limited storage, poor customer service, limited support for video, downgrade the quality of your pictures and pictures are shared with the community as opposed to being only for you, your friends and family.

In this market a number of premium services have emerged. The one that impressed me the most is Phanfare. They charge $6.95 per month or $54.95 per year or $299.95 for a lifetime membership and you get:

• Unlimited storage
• Video support
• Customer service that gets back to you within a day
• The ability to easily upload thousands of pictures
• Easy to use
• Multi-lingual support
• Dedicated site with a simple URL (yourname.phanfare.com)
• Great photo hosting for eBay and blogs
• No ads

It strikes me that at those prices – a little more than your daily price for a latte for a month of service – there should be a premium market for the service even when the competition is free. The hundred million dollar question is how big is the premium market? While we try to answer the question.

P.S. For full disclosure and because I put my money where my mouth is, I am a small investor in Phanfare.