You can do free sustainably if your costs are low and if you have something a tier up you can sell. That's freemium and it can work for some things. But if your costs are high or if a paid tier does not materialize... Now you have a big problem. You own a liability, one purchased via massive investment and employing many people. You must find a way to make it pay, so you start looking at what you have a little differently. Your users... Now there's a product.
South Park parodied the grow-first-monetize-later gambit in the "underpants gnomes" episode:
1) collect underpants
2) ...?
3) profit!
Nobody knew the second step back then. Of course now companies like Facebook have shown us what step two is. It's:
2) sniff underpants
:)
However, it is legal for a non-monopoly to price below cost. The assumption is that this behavior is self-regulating, because the company will eventually go out of business if it can't make a profit.
If otherwise-viable competitors are driven out of business in the meantime, that's simply collateral damage. The current thinking about antitrust laws is that they should protect competition, not competitors. Eventually, new companies will spring from the nuclear wasteland. (Google Reader and RSS comes to mind.)