People ask me all the time "How come all this stuff is free?" Well, Time Magazine just published an article that tries to explain it. Here is an excerpt (link to full article below):
"One of the most interesting issues that Varney will have to face is Google's use of free. This is not 20th Century "free," as in "buy one, get one free" or "free gift inside." Instead, it's really Free (let's dignify it with a capital F), something that's only possible in the digital age, where costs are close to zero.
Like many Web companies, Google gives away most of what it does. Its searches are free, as are its e-mail, maps, online word processor and spreadsheet, and nearly 300 other products, from directory assistance (GOOG411) to Google Earth.
This use of Free is part of its "max strategy" -- it uses Free to get its products in the hands of the greatest number of users, and then figures out some way to get money from them (mostly with ads, but sometimes with "pro" versions of the services, in which users can pay for more storage or features, using the "freemium" business model).
Google can give away so much because the incremental cost of serving one more Web page to one more user is almost nothing -- and falling as technology gets cheaper. This is the difference between the "bits economy" and the "atoms economy." The marginal cost of production for digital things is so low that Free becomes not just a marketing gimmick but the default price in most markets, driven by economic forces as real online as gravity is in the real world.
But companies still have to make money, so there are limits to how much they can provide free. Not a problem for Google. Its core advertising business is so powerful, dominant and profitable that it can subsidize almost everything else the company does, using Free to get customers in new markets."