Old-ish thread but I'll reply anyway just to give some more detailed info based on my experiences. There are five main ways that I know of to make money from a web game:
1. Advertisements, of course. When you post a game on Kongregate, Newgrounds, or a few other places, they'll share the advertising revenue with you. Kongregate for example gives you up to 50% of the profits (or 35% if the game isn't exclusively available on Kongregate...or 25% if you don't implement their achievements system). A quick off-the-cuff calculation tells me that I make about a bit less than a tenth of a penny per play on my most popular Kong game -- so Kingdom Rush, with 12 million plays, will have made about $10,000 from Kong ads -- which alone is probably not that much for such a big game, but still. =P
2. Microtransactions -- I haven't worked with these at all, but presumably those are a big factor in making it worthwhile for the devs to keep working on a game after the initial wave of popularity.
3. Embedded Ads -- these are the silly ads that are built into the program and pop up in between levels and stuff (MochiAds, CPMStar, etc). If your game is picked up and becomes weirdly popular by random Brazilian games portals (like one of mine was, I've no idea why
) and you're lucky enough to have them use the version where the game hasn't been hacked and the ads stripped out yet, you can get a fairly good result with these too, at the cost of making your game super annoying (which is why I always include a link back to a place you can play it without being interrupted by ads).
4. "Primary Sponsorships" -- this is where a flash game publisher (like Armor Games) pays you to put their logo and branding all over the game before releasing it to The Internet at large. Usually they will make a deal whereby the game is available exclusively from their site for about a week, and afterwards is spread to as many outlets as possible, carrying their logo. This can provide a big chunk of initial money if you can get such a sponsorship (or like, $100 for a little game nobody cares about =P). In most cases, the developers are still the ones who collect advertisement money (from Kongregate and embedded ads...not from ads on the sponsor's site) -- the sponsor just pays to have thousands or millions of people watch their splash screen. ^_^
5. "Secondary Sponsorships" aka "Sitelocks" -- this is where a flash portal site will pay you for a version of your game that has all the embedded ads removed, and which contains their branding, but purely for the right to host it on THEIR website -- so they don't get their logo on the version you spread all over the internet. Usually, Primary Sponsorships will include a clause saying that you can still override that branding to sell Secondary Sponsorships. (So like, I sold a sitelocked version of my game to "Hairy Games" once...they could have bought that from me even the main version of the game had someone else's logo on it).
The way to max out all of these, of course, is to try and get a Primary Sponsorship first of all, and then your game is so awesome that lots of portals want to host a their-site branded version and so pay you for sitelocks (so they can have a pure and uncontaminated copy), while a lot of people also inexplicably play the advertisement-laden version that has seeped into the cracks of the world wide web as well. Plus microtransactions maybe.
On the other hand, I've only made tiny games and only successfully secured one secondary sponsorship and no primary ones. So all of this is probably subject to change if you are a popular developer or are dealing with a weird/innovative sponsor, or if you make some kind of agreement to have all future games sponsored by a particular site (not sure how often that happens). And there might be other sinister money-making plots I'm not aware of, too.
