The Android Market Developer Distribution Agreement says this:
3.3 You may also choose to distribute Products for free. If the Product is free, you will not be charged a Transaction Fee. You may not collect future charges from users for copies of the Products that those users were initially allowed to download for free. This is not intended to prevent distribution of free trial versions of the Product with an “upsell” option to obtain the full version of the Product: Such free trials for Products are encouraged. However, if you want to collect fees after the free trial expires, you must collect all fees for the full version of the Product through the Payment Processor on the Market. In this Agreement, “free” means there are no charges or fees of any kind for use of the Product. All fees received by Developers for Products distributed via the Market must be processed by the Market’s Payment Processor.
Note that "upsells" are encouraged.
Having demo versions or timed out versions for free download but requiring purchase to get all features or continue all features is a very normal way to sell and buy software. I agree that the Market should make this clearer like a website would but there is no rip off in selling software this way.
There will be lots of software on Android and a lot of it will cost money. Most developers need to sell software or services in order to buy food and put their kids through school. I am very excited about the entire Android environment, in particular the completely OPEN nature of the application software. Historically, open software has also become the norm and I have high hopes that even Verizon will be forced to open up.
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