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Because free apps can't earn $1K, there is no additional incentive to port free apps as they'd never receive this $10K prize.

Exactly. For a moment I considered porting one of my client's app for free but then I read the details. No go.

I skimmed the article, but it sounds like free apps that make money through in-app purchases are still eligible.

You are correct. I do not, however, consider an app whose primary functionality is only available via IAP to be a free app.