GNU software is not necessarily free of cost. You can charge whatever you want for software under the GPL. So can anyone else who has a copy of it. In fact RMS himself made a living off of selling Emacs for many years.

The fact that you can't restrict redistribution means that it is is hard to keep the price high after you have distributed it once. It will tend to zero [0]. The consequence of that is that you have to charge for new work rather than copies of old work. Many people now make a good living doing that, though relatively few companies have figured out how to build a business model around it.

The reason competitors and innovation are not stifled in this model is that there is a market for new work. Organizations are willing to pay for new functionality -- or even new solutions altogether. You can see the kind of benefit that a company can get from developing free software when you see companies like Facebook being able to recruit new staff that are already trained in their internal tools (React).

Whether or not you could replicate this kind of success in another field is questionable. People are willing to pay for "upgrades" for free to play games. Are there people willing to pay to be the first to read the next chapter of the Harry Potter series, even if they could read it for free a week later? I suspect so, but I doubt you would maximise profits this way.

[0] I know of a few obscure GPLed products that are able to sell their source code because nobody is motivated to distribute it for free. It's rare, but it happens.

GPLv3 has, as there are companies that won't adopt it.

If GNU dumped the LGPL and GPL and re-licensed everything under AGPLv3 then I could see a lot of GNU stuff being dropped in favour of more business friendly licenses.

In reality it increased competition. No business wants to touch GPL'd code so they simply write their own code. The only thing the GPL ensures is duplicated work and effort.