Well, I would just want you to compare this with your cable connection (non paid channels). How do they make money if you are watching all entertainment programs without paying anything to them? Yes, you are 100% correct – Advertisements. Let us see how google does the advertisements and how it earns from them.
1. Google Adsense : This is a google advertisement program. It takes ads from different sources and displays them on their and other websites. The bloggers and website owners are the most beneficiaries of this program along with google (you can see some ads in this blog’s right corner). Every time a visitor clicks on those ads, the google and the blog owners makes money.
The basis of successful revenue from this program is number game. Not everyone clicks the ads. But, they have a generic equation on how many visitors click on those ads, gets registered and buys from that.
If you own a website or a blog, you can apply for google adsense by clicking here.
2. Sponsored Results : Every time when you do a search on google, you can also find couple of extra relevant links either on top or on the right side of your actual results. Those are sponsored results. Google charges money from websites owners and display their (relevant) results at those places. This gives better chances of visitors to click on those links and hence more profit for the web owners.
So, how much google earns from Adwords?
Google allows all the advertisers to put their adverts with relevant keywords. It then analyses all the quotes, the popularity/competition for those keywords and then gives a quote.
3. Google Image Searches : As discussed above, google image searches also displays sponsored image links with your actual image results. Every time you go and visit those links, google makes money from it.
4. Gmail & Youtube: Gmail is the most popular application from google. You can see ad links in your email box every time you are using it. Every time you click on these links, google gets paid. These sponsored ads are relevant to the keywords containing in your mails/messages.
You can see some sponsored banner links every time you are using these websites. Clicks gives Money. Registering and Buying through these links gives even more money.
5. Android : Well, this looks like a game. Google may give you Android operation system for free. But they sell the some licenses of the Android applications and makes money from them. Applications like Google Search, Android Market, Gmail etc come as GAPPS (Google Applications). Google is very much interested in the Android Market. They make money for all the apps sold through the market.
Link for Adroid Wiki Page