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I was quite stumped when someone asked me this question and of course the first answer that came to my head was advertising, but i wasnt quite convinced with my own answer. So i did a little digging around. And i was quite surprised with what i found.
Most of these sites (twitter,facebook) dont even have a decent revenue model. In fact Twitter hired their first business development employee just last December. And there is even a competition on for twitter's business model. Most of these startups follow the model about generating a huge critical mass(read user base) and then worry about making money. So where do they get the money for cost of operations?? Well these are the major sources of revenue for these startups. Well here's the answer
1. VC Money : Well yeah venture capitalist money is the major source of money for all these startups.
2. Advertising : Well the usual suspect is also another major source of income. Google's horse for all courses Adwords is used in Orkut and facebook also primarily depends on ads.
3. A giant doing a deal with you : Case in point Facebook.
Well that covers the most conventional ways of raising money for these sites.
Now the problem is its not working. The more number of users is translating into more operating costs and not more revenue because of the cost of holding all that data and setting up servers in countries outside U.S. and most of these increasing number of users come from Asia and South America where online advertising is not that hot and hence not generating that much revenue. Everyone from facebook to myspace to twitter is looking for that killer revenue model.
Well a problem equals an opportunity. Maybe there's another adsense/adword lurking around the corner.
By the way, this is what i know. Let me know if there are more sources of revenues for the social networking sites.
P.S.: Another question that had baffled me was How do ipl franchisees make money. Here's how.
