(This post deals mainly with the Kindle ebook market, as I'm an avid Kindle user.)
While thinking about this reading response I realized that I've actually "purchased" a number of free O'Reilly ebooks in the past. From the standpoint of a consumer, I think this seems like a fairly solid marketing strategy. I know that as a Kindle customer, I am more inclined to purchase books from authors/publishers that I'm familiar with. Offering free books is one way to break through an overly-saturated market and make your name/brand more recognizable to the consumer. For a small publishing company or a new author, this could be a great way to boost sales when you don't have the marketing resources of a large publishing house.
For a large publishing company, this is a great way to "reprint" older titles that you aren't making money off of anyway and drum up support for some of your authors. A number of free Kindle titles are actually books that were published 10-15 years ago.
One potential issue I see with this is that the free book market itself is becoming incredibly saturated. How do you distinguish yourself from the glut of titles already available on the Kindle marketplace? How do you make sure consumers notice your book instead of the other (probably trashier) free books available? Will your book even be taken seriously in a list that contains titles such as The Boat-Builder's Bed and The Teacher's Billionaire?