I guess what it comes down to is whether the airline wishes to 'devalue' their products by way of giving away free upgrades. Whilst it doesn't necessarily 'cost' the airline to upgrade someone, one way of looking at it is that that passenger is less likely to ever purchase a premium seat, if their expectation is that they will score a free upgrade. When a lot of customers come to this way of thinking, and not prepared to pay for premium seats, it begins to hurt the airline's bottom line significantly.

It depends how much the airline wishes to protect it's key premium assets. Qantas, for example, have been known for many years to willingly let premium seats fly empty rather than allow people to use their miles to upgrade. Given the current economic climate, they may have to rethink this, but generally speaking, they have traditionally been fiercely protective of their premium offerings, which I guess is entirely their choice.