This has nothing to do with free: it has to do with a failed product like any other, plain and simple. People don't see Google Reader as a failed product because they like it and "a lot of people use it". But that "a lot" is in absolute terms, not relative ones. The reality is that not enough people use RSS for it to matter at Google scale. Even if everyone currently using it were to start paying for it tomorrow, it would be a drop in the bucket of Google profits. Reader had it's chance, and it failed to get enough traction, period. The "free" part is just a distraction in this conversation, Reader makes no sense as a product for Google at any (reasonable) price. This story would have gone down exactly the same had Google offered reader at a price that matched the other competitors at the time: they probably still would have won, and still would have ended up shutting it down.
This is exactly the same as how having the Mac Pro line would be incredibly lucrative for you or me, but it just doesn't matter for Apple. The margins are through the roof on that thing, and in a lot of ways its quite possibly the perfect product: a 3 year old machine that commands the same price it did 3 years ago. But again, not enough people want it for it to matter at Apple scale. If Apple could double the price and maintain the same sale numbers of the Mac Pro, it still wouldn't be worth it for them.
If anything, we should see this as a really healthy market correction. Its good for Google to realize that this isn't worth their time so they can focus their resources on things only they can do (like cars that drive themselves and whatnot) and leave these tasks for the rest of us where these user numbers and profits are meaningful.