If their goal was to put out a free app and not try to make a living off of it, then fine. I take it back. You don't need to know anything about business or making money to give shit away. If this is the case, don't complain and be very thankful that people around you are kind enough to support you financially and beyond.
If, on the other hand, their goal was to offer a free product with IAP in order to earn money and make a living, well, their decision making reveals their level of business ignorance.
Why is it that the competitors they refer to have such intense IAP approaches? Could it be because that's a pretty solid way to monetize your app? If my goal was to make money in that segment I'd certainly stop all coding and look at what others are doing in detail. I would not hold myself back due to ideological nonsense. If it is a business, it is about making money. If it is a hobby, it is not. So, yes, I would copy, borrow and mutate ideas from others who, before me, trenched the territory and became successful.
The only exception to this is if you truly have in your hands one of these edge-cases that will succeed because it is so unique, entertaining and, yes, addictive.
This also demonstrates a reality of FOSS (even though this was not OSS): In order to provide FOSS someone has to be earning a living somehow or the equation is never balanced. That's why FOSS is never really free (as in cost) because the development costs are being banked by someone. Linux, as an example, is probably the most expensive piece of code ever developed.
This case was a simple failure to make the right business decisions and nothing more.
That's how you end-up on the street and broke.