Monetizing free webhosting
The majority of the the hosting companies use free hosting to introduce their services, and as an entry point to their more expensive offerings. Generally they recoup their costs in one of two ways:
Advertising - Selling online advertising on the customer sites is generally considered a fair trade - the reasoning is that high traffic sites are more expensive to host, but the additional traffic allows for additional ad impressions therefore covering the cost. For the web master, it can be a good trade if the advertising is of good quality and non-competitive. This is one of the main reasons that businesses do not use free hosting for their website. The majority of free hosting companies use this method.
Referrals - Using a simple form of viral marketing, these providers rely on the users to spread the offer. The ratio of free to paid accounts is known, and by having each free user refer a number of friends, the hosting provider is able to get enough paid accounts to cover the cost.
Resell Hosting - This is where someone starts up a hosting company, attracts lots of visitors, then sells the hosting company to someone else once it can no longer support itself. Once sold, this individual uses the money to start up multiple hosting ventures and sells each in turn.
Some hosting companies are using hybrid approaches that mix both tactics.