Hotmail, Yahoo, and every other free email provider with any kind of large userbase make a shitload on ads too. However, they don't provide 1gb of storage.
Yahoo and Hotmail have very distasteful ads in my opinion. The difference with Google is that they sell a larger quantity of ads, and only users who search (or email) relevant text will see those ads.
Yahoo and Hotmail sell few ads, but the ones they do are very prominent on the page (mostly big ugly banners) and cost alot more to buy. That's why you only see ads for Ford, Best Buy, movies, etc. Small businesses and organizations can't afford ads for Yahoo or MSN email.
Google actually lets smaller businesses adverstise and they don't bombard you with ugly pictures. That's why I prefer it, in addition to its innovative features.
[Not to mention Yahoo and MSN upgraded their accounts only AFTER Google announced Gmail, which means Yahoo and MSN could have provided better service much sooner. MSN is STILL trying to milk money out of their users to upgrade their accounts.]