Everyone else learns to differentiate — why can’t those who produce infinite goods do the same?
The answer is that they already do — even if they don’t realize it. Why do movies still cost more than $0? Because there’s additional value bundled with the movie itself. People don’t buy “a movie.” They buy the experience of going to the theater. People like to go out to the movies. They like the experience. Or people buy the convenience of a DVD (which is another feature bundled with the movie). They like to buy DVDs (or rent them) in order to get the more convenient delivery mechanism and the extra features that come with DVDs. In other words, they like the differentiated value they can get from bundled goods and services that helps justify a price that’s more than $0. Just as people are willing to pay more than the marginal cost (in some cases a lot more) to get that car they want, they’re willing to pay more for a bundled good or service with content — if only the makers of that content would realize it.
So the next time someone says “you can’t compete with free” ask them why? Every company that’s in business today competes with those who aim to undercut the price of their product — and the situation is absolutely no different when it’s free. It’s just that people get blinded by the zero and forget that the absolute price is meaningless compared to the marginal cost.