The author does just as you say (and even charges a pretty hefty $20 per copy). Admittedly it's a multi-player game and you can't get access to the main servers without paying, but you can easily run your own server.
I think the reality is that most people are perfectly fine with paying for software if you actually ask for money. The people that won't pay, often won't pay anyway. They only real downside to this is that you can't control competition who may decide to undercut you.
For example: https://play.google.com/store/apps/details?id=com.wereviz.ev...
In this case, the undercutting group have the complete support of the original author (who is uninteresting in building a mobile version). However, there is also nothing stopping someone from competing directly in his target market except that most people are decent. Eventually it is bound to happen, though, if it were popular/lucrative enough.
I think the main thing that the success of Red Hat shows is that you can still build a business with that kind of competition. The key, though, is that your business needs to be better than your competition. If you charge more, then there needs to be some value that drives people to your business rather than your competitors (or just getting it for free). How you find that value is how you build the viable business.
I've found that most business people are uninteresting in this kind of work. They would rather be sales oriented rather than solution oriented. They have a product. Nobody else has that product. They try to make sure you want the product and since they have complete control, they can get you to pay for it. Giving up that control gives up their most powerful tool and transforms their job into something they don't actually want to do.