If you were right this wouldn’t be a store page:

https://www.microsoft.com/en-us/store/b/windows

Windows 10 Home starts at $130, Pro is $200, and the business licenses start at $300. Given how much of Windows market share comes from business use, it’d be surprising they weren’t making a lot of money there. Since they’re a public company it’s easy to confirm that, yes, selling the most popular operating system in the world is profitable:

https://www.microsoft.com/en-us/Investor/earnings/FY-2020-Q2...

I would imagine they make a fair chunk of change from OEM Windows licenses?

This was pretty much always true. I remember the old versions just needed a serial. A single serial number that could be used any number of times worked just fine. Here in Iran, retailers sold Windows CDs with the same serial number printed on the covers.

Even when Windows detected that the license was fake, it basically didn't do anything. Some occasional messaging and a black background was the worst of it. I figure Microsoft understood that pressure on not-rich home users would just beef up its competition.

Non-activated Windows is limited. You cannot even enter the appearance features in the settings application when in such a state.

You can use it, sure. But between the watermark that is always on top and lack of being able to customize the OS I wouldn't want to use "free windows".