The main reason google does it is to make computing cheaper andmore accessible to the masses.

The vast majority of googles money comes from online advertising. To increase revenue here, they have two options - grow their market share, or increase the size of market.

Google chose the latter - they grow the market by making computing more affordable to everyone. produce free browsers, produce free word processor tools etc. Overall it drives down the price of a new PC, making it more accessible to the masses, and therefore delivering more eyeballs to the web.

It's also why google is such a heavy investor in web technologies - make the internet easier to use and more people will use it.

Premium versions of the products are just a bonus.