"Free dining" which isn't really free is designed to fill empty hotel rooms at full price. DVC doesn't have a problem filling rooms so dining will never be "free".
However, you will get a "Members Perks" booklet with your check in packet. It lists various discounts at restuarants. We have used the 20% at House of Blues, a discount at ESPN, and so on.
Nope -- if you're staying on points. As a DVC member you can book a free dining package just like anyone else and pay rack rate for your room and purchase a ticket for everyone in your room. We sometimes will book the free ddp for 3 days, get the one day ticket and apply it to our AP renewal. Given that information, we find ourselves not even wanting to be in WDW during free dining anymore. Unfortunately we choose Aug. 16-21 for our summer vacation knowing that free dining is normally the end of August. Looks like we'll be the only ones paying for our meals that week. (Well maybe a few of my DVC friends who are not buying the ddp will be too.)
We realized the same thing. We would try to travel to WDW whenever they had great offers like the free dining and 4/3 deal. Now that we've purchased DVC, we're planning to avoid the typical free dining dates. For us, we would rather pay a few more points and be able to book restaurants.
OP, the strategy we plan to use with DVC is to plan two week long trips within 12 months time. This allows us to purchase an AP to cover two trips. We will also purchase the TIW card to get discounts on dining with the bonus perk that TIW even includes discounts on alcohol (comes in handy for a couple glasses of wine). For us, TIW gives us more flexibility. The TIW card is also valid for 12 months, so this covers two trips. Also, by not traveling during free dining, we have a better chance of getting reservations.
Before purchasing TIW, make sure it's worth it for you and your family. I believe the break even point is spending $375 worth of meals at TIW locations.