Is this a sign of Zoto's immanent demise? Possibly, but in a world with lots of niche photo sharing sites, there may be no meta-lessons to learn here. At the very least, there's some very nice photo sharing software now available for use on your site.
In a 2006 comparison of photo sharing sites, our own Alex Iskold called Zoto "very well designed, [with] the most social web features." To be fair, the site's aesthetics could be improved, but perhaps you can do that now on your own server. It really is quite feature-rich.
In these "everything must be free" times, it's interesting that no one but the CEO has written about Zoto's latest move. It's move to a paid model was heavily criticized. Pete Cashmore, for example, wrote about it in a February 2007 post titled "How to Lose Your Users and Kill Your Web 2.0 Company: Zoto."
Open sourcing your software, asking for paid commercial use and offering users only paid accounts sounds like a reasonable business plan to me. Those steps alone are certainly not enough to kill a company. A lack of follow-through, marketing and community management could do that - and there are indications that Zoto is guilty of all three of those shortcomings. Maybe one of you brilliant cynics out there can do a better job with it on your own server.