The economics behind this phenomena is actually interesting, and Fernando Herrera-Gonzalez over at the Mises Institute I think explains it incredibly well. The following is where it clicked for me:
Google offers us free use of their search engine and other web applications. Why? Because that is how Google attracts our attention to its advertisements. Google doesn't sell its online services to us; it sells an audience to its actual costumers, the advertisers. Google is buying our time and selling it wholesale. As time is a scarce resource, and time (and attention) demand is increasing as a result of fierce competition on the Internet, Google has to pay us ever more, according to the law of diminishing returns. This payment is made not in terms of money, but as storage and process capacity. That's why Google keeps increasing its "free" offering to us, its providers, in terms of, e.g., storage capacity for e-mail accounts.You see, we are not Google's customers. Google pays us for our eyeballs with free disk space and applications so that they can attract their true customers - advertisers.
Now Microsoft is actually making this even more blatant. They plan on paying cash to users who purchase goods found using their Live Search engine.
The interesting thing is that is this is not new. Broadcast television has operated on this model for over fifty years - they pay for your eyeballs with entertainment so that they can attract their true customers.