I don't think that's quite the case.
They went free because they saw a lot of profitable apps using the free + In-App-Purchase model.
The problem is they didn't think through what their own IAP model should be. They just focused on not being exploitative (the part that makes many of those free apps so profitable), when they should have been thinking about how much they needed to charge to be profitable, given the single IAP they had to work with.
They also might have gimped the free version a bit more to encourage people to buy the IAP.