Why does Natalie keep dropping out? Might want to fix that up soon.
Should Xbox Live be free? No. Why? Because money keeps them honest. Money from the customer is much MUCH more influental than the money of a sponsor. If the service messes up, the sponsors are not going to be hammering on Microsoft's door demanding it be fixed, at least not for a week or so. However Hell hath no fury like a cheated customer. I think the worldwide outrage of the Xbox community is proof of that. Sure it could be cheaper but we still have pay if only to keep microsoft honest and dedicated to keeping Live the great service it is right now.
On the issue of Home I really don't see it being the huge attack on Live that everyone is saying it is. For one it is just the PS3 version of Second Life. I can't see the Second Life demographic shelling out $400 for a dumbed down version of Second Life. Another factor is ease of use. On Xbox Live you can send messages, check on your friends, choose a game, all in just a few button presses. Home, from what I understand, requires to you walk to certain rooms or objects before you can do anything. One last point about Home that I believe will hinder the experience: Room. Xbox Live has millions of users. If Playstation hopes to compete they would also have to have a huge install base. But will all these people fit into that virtual room that we saw at GDC last year? Think about how cramped it will be on any given night.
Thats just my 2 cents.