Hey Jeff,
I'm late to chime in on this. My working theory is that free samples sell. Why else do grocery stores set up Sunday afternoons with ladies in aprons?
But - and I know there are several on the board that may disagree wtih me. There's a fine line between free for sample and free for use. There are some authors/readers who suffer from a bit of entitlement syndrome. If they are given something for free, they expect more for free. Some actually seek out freebies (darknet or otherwise.)
I like Smashword's distribution model of free samples. Try and buy. I think that's the way it should be if you want to go for that sort of model. You may have made a mistake with offering the first three books up for free, and then the fourth up for free. Have you talked to Brandon to see how the sales of War Breaker went?
I'm in a minority where I've purchased numerous copies of the same work. I have hardcover, paperback, and digital copies of a lot of my books. All bought first hand from the author or their distributor.
If your tip jar is turning you a profit, that's good. But, I don't know how many people would be apt to picking up a hardcover copy of a book unless they are collectors. Especially if they already read it for free.
With Target/Walmart and the supermarkets cutting down on the MMPB supplies, MMPB is in the crapper all across the board. Which, as you mentioned, is probably a big reason why your softcover books are down.
I've never really been into the paperback market, though. I know there's a lot of people that buy them for throwaway beach reads, which horrifies me. My girlfriend's mother actually gave me the latest Lee Child PB because she finished it and was going to throw it out. I was horrified and took it for safe keeping
I prefer hardcovers and digital books to paperback. But, that's me.
I think the proper digital distribution for the series is to offer book 1 and maybe one or two backlist titles for free as samplers. But never offer your newest work for free if your writing is your living.
I think it may end bad.
As for Cory Doctorow's success story, I think his street cred in the blogosphere helps his sales tremendously (same with Scalzi)