Blitz is often necessary because of the possibilities of draws in chess and the use of an odd numbered format (like best of 7) is unfair to the player with the black pieces in the last game. Endlessly playing classical games just isn't plausible and blitz is both faster and more likely to lead to a decisive result. If the blitz games are drawn, then the last step is Armageddon, where one player gets white plus a time edge and the other player gets black but is credited with a win if the game is a draw.
To answer some of your questions: first, I think prize money is usually shared if there is a tie even if there is a blitz playoff. Some prizes can't be split, like a place in next year's event, or a place in the World Championship Match, or World Cup Winner, or so on. It would bad for chess if every event was shared several ways. Gibraltar was a 7 way tie. Imagine if the Candidates was a 5 way tie. Any kind of Classical playoff would take forever and it would be difficult to format with an odd number.
The idea of the champion retaining the WC title in the event of a tie was the norm for many years. You can look this up on Wikipedia. It seems plausible, but it's actually a really big advantage. It's also unlike any other sport/competition. The champ essentially gets a free half point to start the event.
I agree that players will be encouraged to play blitz, but these GMs can already play blitz very well. Some are certainly specialists and some are perhaps weaker than their classical rating would suggest, but I don't see it as a problem. At the junior level, nothing is decided by blitz tiebreaks. I play a lot of OTB, including state championships and other events with GMs, and I've never seen or been part of a blitz tiebreak. It really only happens at top level events like the one you discussed. Even most GMs will probably never be in a blitz tiebreak, except maybe at the World Cup, and those tiebreaks start with 25 min rapid before getting down to 10 min and 5 min. Plus, young kids already play blitz anyway. I think playing blitz is fine and helps with pattern recognition. I went from a beginner to about 1500 by playing blitz against stronger players and having them explain my basic mistakes and recognizing patterns. You also see new opening ideas that you can research, analyze, or save for later.
To answer your last question, I like blitz tiebreaks as they're more fun and exciting than just mathematical tiebreaks. I don't see any other way to break ties. Classical tiebreaks would be impossible. They take forever and if there's a large number or odd number of players it doesn't work. Sharing the prize and title is also fine, but why not have a bit of excitement and give the title to whoever can win in blitz?
I just happened to watch the Gibraltar Playoff Final between Levon Aronian and Maxime Vachier Lagrave. It went down to the wire in a tense blitz playoff game. Very exciting!
Then I remembered that Magnus won his Wijk An Zee in a 5 minute playoff blitz against Giri. Then the World Cup in 2017 was again won by Levon in a blitz playoff.
And then Magnus retained his World Championship against Karjakin in 2016 in a blitz or rapid format after the classical games were tied.
Now a prior thread/comment someone thought that Giri was at a disadvantage at having to beat Magnus at Blitz. Now Kramnik (and many others) thinks that Rapid/Blitz is a rather different game than Classical Chess. And after all, there are 3 different world titles in those time controls!
So summing up, Rapid/Blitz playoffs are tremendously exciting!! There is so much drama, so much tension. Time pressure vastly increases the chances of the most horrific blunders!! (Eg., I saw the Great Magnus overlook getting mated in one by Grischuk in a blitz game. The Great Magnus!)
With excitement, drama, and tension, this is great viewing and entertainment for chess fans, and casual chess fans.
BUT at what cost? What are the downsides? Should very important tournaments, Candidate tournaments, World Championship Matches be decided by sudden death Blitz Playoff games that are arguably a different animal than Classical Chess?
What's a proffered alternative? How about this? For tournaments: Sharing the title and the money. Put all the players names on the trophy, lol!
For Candidates playoffs between all the tied players: A Classical Game for the 1st time control, and a one hour sudden death for the second time control.
For the World Championship Match: If it's a tie after so many games, then the Champion retains the title.
My last observation is this: There is a trickle-down effect. If so many important games/tournaments are being decided by blitz playoff games, then it behooves players (and I'm primarily thinking of junior scholastic players) to spend time, at least some time, practicing blitz/rapid play!! Because if you don't, you're going to be at a significant disadvantage if and when you are in a blitz playoff against an experienced Blitz player!
Now here's the thing, I have heard quite often from my betters to not play blitz, or at best, to limit my blitz play. Why? Because it's going to hurt my long game. But if titles and tournaments are decided by blitz, it behooves the tournament player to have solid experience at Blitz, yes?
What say the chess.com community about the Chess Pro game being decided by Blitz playoffs?