From a long time, I have been wondering how do services which are free or based on freemium models operate? Open source free softwares like Firefox, VLC player (if you are aware of it) or other free web services like twitter, wikipedia and many more, how do they make money, to survive, make ends meet and improve with various versions, every now and then.
[Ok, i kind of know about twitter but an expert comment would help for sure :)]
Many business operate on a "get customers now, worry about income later" model. Many have a business plan which involves getting purchased by a large company for the customer base.
Big business like Google use things like gmail, reader, youtube, and news to drive traffic to their primary search property, which is ad supported. The other services also display ads, but the overall traffic is of value even if any given services doesn't break even on ad revenue.
Freemium business models can afford to give away their free services because they make enough from their premium models to support the non-paying users. Don't forget that the free users aren't just freeloaders. They also help you to spread your service via word-of-mouth, and they offer valuable feedback.
Twitter currently has no way of making money. They are running on VC money and plan to add a revenue source later on. A popular theory is that they will add upgraded accounts that come with a monthly fee. These accounts will have more features that are valuable to brands.
FireFox makes money through the search field in the top right. Whenever someone uses Firefox's built in search it (by default) takes them to Google. If the user then clicks on one of Google's Ads, Firefox cuts a cut.
WikiPedia is run on donations.
I'm pretty sure VLC does not make money. They are an open source project that is maintained by voluteers.
Everything said by Paul and Vindexus is correct. I'll just add that another revenue model for freemium/OSS is to give away their product but offer high-end support, customization, integration solutions, etc. at a price.