Most copies of Windows are configured, tested, pre-installed, locked to a single PC (not transferrable), and supported by PC manufacturers. They get it at discounted rates, which typically range from $0 to about $45. That's cheap if you think of it as $1 per month over 4 years.

PC manufacturers typically add "crapware" to consumer PCs. These are programs that they get paid to distribute (much like websites that collect $1 if they foist Chrome or the Google Toolbar on you). With luck, they can get the cost of Windows down to $0. They can also get extra discounts or even cash support for advertising from Microsoft and/or Intel for making certain statements, eg recommending Windows or playing Intel's bongs in a TV advert.

In some cases -- for example, if enough users subscribe to the bundled AV software -- the charge for Windows turns negative, ie they make a profit. With a really efficient OEM, the consumer may pay less than $0 for the pre-installed copy of Windows (other costs being hidden).

Since you can buy Windows laptops for £150/$199, the suppliers are clearly not paying $120 or more for Windows.

In my country (Romania) the laptops with Windows are easily $70 more expensive than those without Windows. I know this because every time I'm looking to buy a laptop I'm doing my research and end up amazed by the difference, given all the crapware they come with, which as you are saying, should subsidize the price.

But I would have thought Acer and Asus would be competitive, because they're global suppliers....

Windows 8.1 with Bing has been free on devices with smaller than 10-inch screens

The actual deal was not free: you paid $10 for it, and then Microsoft gave you $10 for setting the default search engine to Bing.

So, according to Microsoft, it was not "free" it was "zero paid".