Freemium at first blush doesn't seem like a bad idea. Players get to try out a game for free, and generally can keep playing for free, but if they're really into then they can pay more for some game extra. This results in cheap games, which make money by servicing their most die-hard fans, with continuous development and, above all, more games. On the surface this sounds like a huge improvement over the flat fee model of trying to sucker as many people as possible into buying a game they only play a few times. The problem comes in with the psychology of players, and it's one rooted deeply in the human psyche which I don't have any good solutions to.
There are essentially two kinds of game players - those who view achievement at a game as validation of their skills, commitment, and endurance, and those who see game achievement as an end in and of itself. The first kind will not on principle ever pay any money to get a leg up in a game, because that would permanently cheapen whatever success they might later have. It would be, to use a vulgar term, cheating. Players who are just interested in progressing, on the other hand, are perfectly happy to do that, and hence are much easier to monetize - just offer them in-game gold for a few real bucks, and on a day when they're feeling frustrated, they'll happily fork it over.
The people who design games, and most of the hard-core gamers, are from the skill camp, and instinctively fight the pay to cheat model, sometimes to a ludicrous degree. When Ultima Online first experienced a large market for in-game items, a phenomenon which had never been seen before, the designers banned the practice of selling items and with to great lengths to stamp out the aftermarket, rather than simply selling in-game items themselves, which would have resulting in them making a lot more money and their players being a lot happier. I personally was very excited when the game Bloons Tower Defense 4 came out, because I'd made it through all the levels of Bloons Tower Defense 3 and greatly enjoyed them. I happily played through most of the levels of 4 on the hardest setting, until I got to the fifth one. That level is so ridiculously difficult that it's clearly just there to get people to pay for power-ups, a form of monetization which simply wasn't there for 3. After banging my head against it for a while, I simply stopped playing. The whole franchise feels tainted to me now, a cheap form of grabbing money rather than a legitimate intellectual pursuit. I realize how silly this is, especially for a game whose pinnacle of weaponry is a Super Monkey Storm, but it's fundamental to my motivation for game playing - if the reward for succeeding has lost it's meaning, then I don't get a positive pavlovian response to it, and I lose my interest.
Once a game starts to do freemium monetization, the natural tendency is to simply abandon aspects of gameplay which require greater cognitive skills altogether. The people who are attracted to such things will on principle never pay any money, and the ones who remain - the ones who really just care about getting ahead in the game by any means, will find anything which absolutely requires developing skills overly frustrating, and will likely just get scared off by it. Gameplay descends into repeatedly clicking next, with enough cute animations and just enough having to move around of the mouse between clicks to keep the user entertained, and the monetization scheme is that if you pay a buck you can skip ahead a few thousand clicks.
I don't have a good solution to this problem. Freemium is a much more compelling games business model than anything else anybody's come up with, and absent any real alternative, the phenomenon of dumbing down of gameplay will continue.