1) the target audience is the people who use hotmail , yahoo mail, msn mail, there are millions of them, people who can't figure out how to get their own domain, or pay for the hosting.
2) spam usually fills up the mail box fast, it allows people to exchange pictures without bouncing them, and of course it's also a marketing thing
3) again, geeks know how to use outlook, this is for people who want to be able to i.e. email while at work or on the road and such.
4) no catch, it's google, their interface is as clean, if not cleaner than the google search engine.