Well, with bandwidth costs falling by some 19% last year, it’s fairly cheap for Google to be this generous. In addition, something like 98% of Google's revenue comes from advertising. In order for Google to grow, it needs to expand its billable ad space. Gmail is the perfect ground for such ads.
Sure, email ads are going to have a low click-through rate. It's not the same as ads on other popular search portals like InfoSpace (Nasdaq: INSP) or Time Warner's (NYSE: TWX) AOL.com, where folks are there with the intention of being sent elsewhere. That's fine. Google is aiming for incremental ad revenue. Its lack of any email services to upsell -- like Yahoo! and Hotmail do -- means that it can focus on driving as much traffic as possible to serve up as many relevant ads as it can produce.