Kyle Baxter has a great piece up explaining Google’s strategy of developing software and distributing services for free in order to attract more eyeballs and rake in as much of that advertising revenue as possible.
Everything Google does must be understood within this context. Google builds services like Google Maps, Gmail and Docs and gives them away for free not because they have a philosophical belief that web applications should be free, but rather because giving them away for free gives them a competitive advantage. Free services, running Google ads, are obviously advantageous because free means more people will use them than if they charged and thus they can realize greater advertising revenues.
There’s another reason they don’t charge for their services, though. Since Google’s business is advertising, shifting industries away from paying business models is in their interest. If people are willing to pay for email, mapping and documents, Google’s business model is limited. Thus, using the outsized revenues they make from advertising on search, Google gives away Gmail, Maps, Docs, navigation, translation, et cetera, so no one can compete in those areas—to make free the norm for these services. If Google is giving away a quite good service, it’s hard to compete with them in that area, and so the economics of that business shift away from paid services to advertising-supported. And if a business becomes dependent on advertising for revenue, that’s good for Google, because they’re better at it than everyone else.
The entire article is worth a read as Baxter tackles how the aforementioned strategy applies to the mobile space and Google’s big bet on Android.