The API doesn't seem as massive as you think. From what I understand, it's just a read/write API to App.net. Users of these new apps that will be built on App.net will still need an App.net account to use them. App.net is going to be a service, not a protocol or platform. That's not to say that people can't build apps that use this API in interesting ways. Look at what bonfire.im has done on top of Twitter. I'm sure that lots of things can and will be built on App.net. But, at that point, the network just becomes another backend-as-a-service. Not only is that not groundbreaking, but it's going to serve it's purpose poorly, because the apps built on it are limited in scope to users who use App.net. If I wanted to build a service and were choosing a platform, why would I choose one that currently has 9,000 potential users in total?
It's true that App.net won't have to compete against itself, but it will have to compete against Twitter, which is free and already has the momentum.
The issue with a free service is if the free service is good enough like in the case of Twitter and Facebook even if you offer a premium paid service people aren't going to pay because free is better, free almost always wins. The great thing about App.net is that they're openly telling everyone they will be charging right from the beginning, so App.net won't have to compete with their own free offering which puts them in a great place.
My understanding is that App.net is incorrectly being touted as a Twitter clone, it's more-so a massive real-time API that is going to give developers amazing infrastructure and functionality to implement into their own ideas. Lets be honest if Facebook or Twitter completely opened up their API for $50 per year without any restrictions and a guarantee you won't be screwed over, a lot of people would buy but the problem is Twitter and Facebook are dependent on advertising revenue they wouldn't offer a fully-open API they couldn't make more than $50 a year off of with ads.
I was sceptical at the beginning App.net would be different, but now I am pretty excited at the possibilities of the service. The growth of the funding for this thing is crazy, I doubt App.net will struggle to succeed here. Everyone loves to hate on something instead of coming up with a great idea themselves.
Sounds to me like Dan doesn't know what he's on about here. What is he basing all of this assumptions off of? People gladly pay $99 a year for Apple's developer program, I see App.net being the same in that they offer a service that will help people build great apps they can self-monetise much like the Apple developer program only without restriction.