What? 100,000 people decided it was worthwhile paying for this product, but you feel guilty about taking their money, so now it's free? This is one of the most bizarre things I've read recently!
There are a few clues in the text like "I've made a net loss running you for the last two years" and "At some point in the future, I may need to offer complimentary software products to Ad Muncher user" hinting that he thinks that bulding a bigger userbase by being free and then bundling ads into it would make more money, as paid users were no longer paying the bills.
Bundling ads may be the wrong business model for the target audience... doubt that that's the plan.
It may be unreasonable, but I think it is pretty common. I always feel a little guilty about billing clients when I take on contract work. There are personality types that are always going to find that kind of self assertion difficult. That said, in the American business environment (and anything resembling it), it is absolutely necessary. If his reasons are what he says they are, I think he is making the wrong decision.