touche dude 
The fact that FreeHosts are still there inspite of all prediction means something. Among other things it means that they are evolving.. I personally know that the margins are narrowing but if we take what Equinox said in the first post - prices of BW and other stuff are dropping so its also cheaper to run FreeHosts - especially of its a big one and can bargain prices down.
It is said that having your own server makes more money - well, it is probably true but it requires initial "investment". Some people don't want to risk that.
But - I guess making money without spending any is smart enough.