First, I certainly don't think that paying for content decreases quality in any way. Every argument I've heard against paying authors is incredibly nebulous, and it's generally accepted that statistically you'll get better work (in any field of human endeavor) when you economically incentivize people.
Second, this quote was very interesting to me:
“So far online self-publishing has been the preserve of fan fiction and erotica but it can’t be long before high-quality fiction starts to emerge.”
After thinking about the entire ecosystem for a bit, my conclusion is that the above quote is probably completely wrong. The main issue is that there is SO MUCH bad writing produced compared to good writing. I receive 300-400 submissions a month for my magazine and most of them are not publishable (and my editor friends tell me that these numbers are low). Because of this hugely skewed ratio, it is very unlikely that "high-quality fiction" will "start to emerge", mainly because readers on the internet are unwilling to sift through all the chaff. For great writing to 'emerge', it requires both someone to read it, and for that someone to have enough influence over their friends for their friends to read it. I'm not sure that those two conditions will ever be satisfied well enough to be an effective screening system. It will be interesting to see how the ecosystem evolves, though.