Free music is more about freedom to create, copy and distribute. For instance, I'm about to release my 2nd demo-cd, Bulky Material. Just like with my first demo-cd, all the tracks are freely available on my web site. But this doesn't stop me from selling the cd version. Similarly, distribution of mp3s is not free.
Someone has to pay for the web space and the net bandwidth.
But this is not necessarily a problem, because when more people start downloading music from the net, mp3 distribution sites will attract more advertisers. And of course, mp3-sites will then be interested in talented artists and will even pay money for them. So whatever happens, money will always be involved. And if you are good, you'll get your money, one way or another.