New
#110
They pay for it by getting most of their users onto the same platform, which allows them to get more 3rd party vendors to write apps that target Windows 8.x and 10 (both universal apps and win32 apps that conform to LUA security standards). This in turn convinces more people to buy/use Windows 10 devices, because the apps they want are available there. This potentially drives more sales of Windows 10 devices, which OEMs then pay Microsoft to ship Windows 10 on thus driving the first side of major Windows revenue. Enterprises start moving to Windows 10 because consumers have largely taken it up (this is precisely how Windows 98, XP, and Windows 7 took hold quickly in business environments too), which drives the other side of major Windows revenue.
Microsoft makes most of it's money in OS sales from enterprises and OEMs, not consumers. Giving it away free to people who already have a PC running a consumer version of Windows 7 or 8.1 doesn't cost Microsoft much of anything, because only a fraction of a percentage of those people would ever have purchased a new OS without also getting it with a new PC anyway.
TL'DR: It's already almost free, so giving it away to consumers as part of the "get as many people on Windows 10 to drive upgrades and enterprise licensing, and coerce devs to write new code for the platform" isn't necessarily a bad idea, nor one that costs Microsoft very much to do anyway.
I dunno. Ad generated revenue is very lucrative. They can sell a subscription service to any who want to opt out of adware to ice their cake too.
Advertising would be the biggest put off for any OS out there and would be corporate suicide for MS. Cluberti has already described the situation perfectly.