Certainly it cheapens the product. They already lost their chance to win the Search Marketplace... Arrington talked about Yahoo doing a "scorched earth" tactic on the market. MS is doing the same thing by attempting to take away users while simultaneously cheapening the market.
At this point, is there anything Microsoft could do to beat Google at search? The only thing left is for someone to offer a completely free API.
IMHO they should concentrate on making a better product that people want to use without being paid to use it.