You're missing a step between "Try to monetize" and "Get outcompeted" - the "Service turns to user-abusing, steaming pile of hot garbage". This cycle does happen repeatedly (image sharing being a prime example), and services that die do so because their monetization strategies destroy almost all the good aspects.
I believe it's hard, but not impossible, to refrain from abusive monetization and stay afloat longer.
My point is that there is very little difference between "user abusing" and monetization. This is precisely because of this cycle.
Users expect these services to be free, because they are used to services being sold under-cost. The alternatives for 'platforms' that I know of are:
1) accept 10% of paying customers and 90% leaving, bad plan if you rely on the mass of present users
2) go for a tiered system, where certain features are gated by a pay-wall. This is very tricky, and asking for essential features will see free competitors come up. This can work if your sheer user-base is enough of a moat. (Reddit is still trying to make this one work)
3) sell user-data
3 is definitely seen as 'user-abusing' 2 tends to be as-well and 1 is not an option for any platform.
I can't think of a single platform that started of as 'free' and got profitable without being widely condemned for 'selling out users' except for YouTube (and I guess PornHub). The moat there is massive infrastructure needed for video and a huge, hard-to-move catalogue of content.
That is, it is too expensive for some start-up to grow and capture the market.
I'd love to hear of any other success stories. Especially one that could work for a medium / reddit / flicker kind of site.
Thanks for elaborating. I agree, but I wanted to see this point mentioned explicitly. It's not just the free competitors that are causing established business' downfall; the business itself usually engages in plenty of self-destructive action in a desperate attempt to monetize users who are used to free service.
I believe it's hard, but not impossible, to refrain from abusive monetization and stay afloat longer.