There's no incentive for any one artist to go shorter.
Not necessarily. Take 2112 by Rush for example, a 20 minute song. It would make sense to break it up into its scenes (Overture, The Temples of Syrinx, etc.) for more money. (Thankfully that they haven't as the poor shuffle only free Spotify accounts would suck even more.)
An album may also have more numerous shorter tracks and get more money per full listen.
The big record labels get money regardless of which of their artists gets played. It's a good chance that the next thing you play is under the same label.
Ad supported streaming services that I have seen simply display ads on the screen in the player not interrupt the music.
Spotify free accounts inject audio ads between tracks after some timeout is exceeded, usually between 1 to 3 tracks depending on track length. You aren't looking at your phone screen when listening to music and your phone is in your pocket. I assume other free streaming services do similar.