i think the issue with 'free' revolves around marginal cost as well as competition. gmail is something that has substantial value to google as a company intern

i think the issue with 'free' revolves around marginal cost as well as competition. gmail is something that has substantial value to google as a company internally (hence you sink money into it) and it is trivial given their resources to give it away. use email as a beachhead to a suite of products and presto - you get people aware of and already used to google's business apps which i definitely pay for. a 'free' service is equivalent to advertising - the only difference is that it is borrowing your eyeballs by providing a benefit rather than a bikini-clad model.