Rumor has it that Google's soon to be released OS will be free. I was thinking about why they would give out a very valuable product to users at no cost; surely they could price Microsoft out of some market share without going to zero?

A couple thoughts:

80% of online ad spending goes to Google
The vast majority of ad spend still happens offline
Cheaper operating systems will result in cheaper PCs
Cheaper PCs will result in more computer/internet use
More internet use leads to more attention online
More attention online leads to more ad spending online
80% of online ad spending goes to Google

That's why Chrome will be free; it's an investment that will shift attention online faster than the current pace.