The benefits of giving things away
Unless Christmas is approaching (like it is now), whenever you see something being given away, you should always ask yourself why it's being done. The free stuff that you get at trade shows, for example, is meant to make you feel good about the company whose name is on the free stuff. It's also meant to increase brand awareness. That can happen when your coworkers stop by your desk to try out the Yoyodyne Propulsion Systems-branded stress reducing toy that you brought back with you from that trade show in Las Vegas and end up noticing the Yoyodyne Propulsion Systems logo on it.
That's a cool toy, they might think, I'd better go buy a few million dollars of software from those guys, not realizing that Yoyodyne is really just a front for a group of Red Lectroids who all have "John" for their first name. Free t-shirts do the same thing.
So why does Baen books give away so many free ebooks? They're certainly not doing it to reduce their sales, are they? They've been doing it for a quite a while, so they must think that they're getting a good return on giving ebooks away.
It turns out that most books that are sold are sold in the first 90 days or so that a book is in print. After that, the sales taper off quickly. But Baen has found that by giving away free ebooks of the first book in a series, people who find that they like the book often go out and buy a printed copy of it. And then they often buy printed copies of the other books in the same series too, thereby increasing the sales of books that have been out a while from next to nothing to a significant level. The result has been a significant increase in their sales.
But Baen also puts CDs in some of their hardback books that contain freely-distributable, DRM-free copies of lots of their books. You can find copies of these CDs here, for example, and it's not easy to count how many books they've given away like that because they've given away so many of them. So why would they give away an entire series? Do they expect people to go out and buy printed copies of the whole series? Or is there another reason?
There are way too many books published these days for any one person to keep track of. Because of this, you need to find an easy way to reduce the number of books that you look at from the hundreds of thousands that are published down to a few that you might actually be interested in. Finding an author whose style you tend to like is a good way to do this, and I suspect that's why Baen gives away entire CDs of free ebooks: if you find that you like the work of a particular author, you're more likely to buy printed copies of that author's books the next time you're in a bookstore.
And by giving away free ebooks, Baen has definitely made lots of friends who would have only been customers otherwise. When I recently bought a Kindle I started looking at what sort of ebooks are available and soon came across the CDs of free ebooks that Baen gives away. I don't know how Baen accounts for the good will that giving those CDs away creates, but just based on my single data point (me), I'd guess that the good will that they gain is well worth the lost sales that the CDs cause.