Suppose you have a webpage somewhere. And the deal is:
We host it for free, but we will put ads on your pages so that we will earn money from your content.
For some people it is obviously a good deal — since they invest nothing and get the service for free. It is especially good if you need the service quickly.
This is exactly how Wikidot started 2 years ago. I wanted to go into exactly the same business as e.g. PBWiki or WikiSpaces. If someone wants to get rid of ads, he/she needs to pay a monthly fee ($5/mo) for a package of features that also include "ad-free" website.
At the moment many people commented that it should not work like that. If Wikidot was ever to succeed, we thought we had to think about a different model. At least a model where Wikidot shares revenue from ads with users in an opt-in system — we did not want to force anyone to display ads. It would be somehow evil.
I think this is a problem of many free websites that host user-generated content. If the service is paid, the situation is clear from the beginning. A user pays for the service and gets it. The problem arises when its free — as in "Web 2.0". But the service eventually needs to earn some money. Valuation based on traffic and number of users is nice if someone can utilize it and Web 2.0 bubble can drive such projects quite far.
There are several ways free services can earn money, most common is through advertising. With high traffic and average CPM it can be a way.