Assuming they're not simply using excess capacity they already have. While I don't think the cost is zero, I doubt their costs of providing the service are as high as you suspect. I would guess they're in the neighborhood of 5X-10X more efficient than other analytics vendors, simply because Google has lots and lots of expertise in delivering high availability, distributed services and 99% of what is required in delivering an analytics solution is likely already within their core competencies.
Agreed. This will come from street pressure. Google's only source of significant revenue is advertising, and the street is already telling them to diversify. GWT (organic) + Analytics (paid) + Voice (Grand Central) + Email (remains to be seen) will put most of the analytics market out of business over the next 4 years.
Interestingly, I think GA becoming "non-free" will put significant additional pressure on existing analytics vendors. The sales strategy of "it sucks because it's free" or "it's a basic tool to sell more advertising" that most enterprise analytics vendors are using right now simply won't work anymore. While sourcing a quote last week from an enterprise analytics vendor, that response got a pretty big chuckle from me. GA has many failings, but it is not bad because it is free, nor is it designed as a basic sales tool to sell more AdWords.