The free online games business has both developers and publishers. A developer is a person or company that creates the games. A publisher is a website owner who would put the games on their site.
At the start of the free online games business, developers would place the games they created on their own website. The earliest business model was simply to use these games as a showcase for their work. Then occasionally, marketing companies would come along and ask the developers to create custom games to promote a product or new website.
After a while, the games at developer websites became popular enough that advertising on the website itself would bring in extra revenue. Soon these developer websites evolved into small arcades with many games by the same developer.
Next, publishers came along and would hire developers to create websites with games. Often, these publishers would higher multiple developers to create a variety of games. Sometimes, instead of hiring the developers to create custom games, they would simply license the games from the developers. So you may see the same game by the same developer at several different publisher's sites.
Some developers and publishers with websites would allow their games to place on blogs and personal home pages for free, as long as there was a link back to the original website. They would give the games away, in order to bring traffic back to their primary website.
At the same time, many small developers including students and hobbyists, or allowing their games replaced on any website anywhere. This allowed for publishers to arise who did not pay to license or develop any games at all. They would simply take games that were freely available, or games that were easy to obtain, and place them on a website in order to earn advertising revenue.
Some people even customized content management systems (CMS) to house a collection of games and provide high score functionality. So all a publisher had to do was grab one of these systems and upload it to a server to create a website of free online games.
The problem with many of these websites is that they contain material that violates intellectual property. Some of the games are on the sites without the developers permission. Other games contained copyrighted or trademarked materials, such as popular cartoon characters or characters used in other games.
It has become so easy to put up a website of free online games as the search engines are clogged with links to websites that contain virtually the same games, while legitimate developer and publisher websites are buried and hard-to-find.
The primary way that most free online game sites make money is to advertising revenue using networks such as Google's AdSense network. Others use banner ads and more intrusive advertising methods such as pop-ups, pop-unders and animated commercials.
Developers, meanwhile, earn money through ads on their own sites and through game licenses. Many developers also create advergames, game specifically designed to market a product or service.