Hi netmaestro.
Motivation - sometimes not financial. But usually is.
Consider the financial angles in this scenario (ad free on the hosted site) - also think of loss leaders:
Hosting coy who sells hosting has X disk space and Y bandwidth, and has maxed up on these to get the best rates for themselves.
Coy divides this up into packages, and does not oversell despite knowing that the vast majority of clients will use less than their allocation of X and especially of Y. This is a reality - many sites are postage stamps sitting on sheep stations, many others are extremely low traffic presence sites for small businesses.
Coy then gives away X and Y, in downgraded (less feature rich) free hosting packages, using the expected difference between actual usage and the amounts sold to the paid client. Knowing that chunks of the free allocations are also likely to be unused. Coy may also throttle back on bandwidth to give slightly slower performance on free sites.
Coy now has Z non-paying clients, at no cost to self. Coy can employ any or all of many angles from here on in, getting small or larger revenues. For example:
Offer domain names, some might take it up when they sign on (small profit).
Offer upgrade incentives from free to base knowing that some will take it to get the extra features (might not be extra diskspace/bandwidth - could be forums, could be WYSIWYG editor, etc.)
Redirect missing URL's to an ad site (404 traffic).
Although the site itself is ad-free, maybe place ads in the free client admin area may carry ads, and on the support forums for free clients.
Make sure support tickets are paying clients first, but offer priority support at a fee (if needed, almost certain to get an upgrade as the hosting cost -v- support fee would come out on the side of hosting).
Utilise small returns from free hosting to purchase extra bandwidth and thus get better pricing across the board. Use this to do more of the same.
Etc.
Edit: Sometimes the means employed is a little dirty, attempting to installing spyware and etc. either on client or client's visitors. Bet you know some of these and avoid sites when you know they are on one of these.
