Just because they are cheaply priced does not mean that they are bad, I am not saying all are good, just all are not bad. The following information on running a server and selling hosting is based on information that I have directly recieved. I do not sell hosting I was wondering how it was done and what the cost to run one was so I did a little research.
Dual Pentium III 1 Ghz
1 GB RAM
60 GB RAID 1 Hard Drive
Dual 10/100 Ethernet
Co-location Monthly Fee: $290.00
IP Addresses Monthly Fee: $0.63
Bandwidth per Mbps: $230.00
So you spread the cost of the server out over 12 months of fees and break it down into account as follows;
Diskspace: 150 MB
Bandwidth: 5 GB
With all the goodies (ie. IP Addresses)
You can fit 350 of these on the server and still have serveral GB's to spare. So on adding it all up that is 52,500 MB of Diskspace, 350 IP Address and if everyone uses the max allotted Bandwidth, 1,750 GB of Bandwidth (6 Mbps). Total cost of this to the hosting company would be around $2,085 or $5.96 per account.
Of course if you lowered you cost if all the customers used only 3 GB of Bandwidth per month that would lower the per cost of site to $4.64. The cost per GB when buying Mbps gets better the more you buy. For example;
1 Mbps (70% load) = $1.04 per GB
5 Mbps (4 Mbps 100%, 5th 70%) = $0.77 per GB
I also realize that 1 Mbps is $230 per month and that 5 Mbps is $1,150 per month, a little pricey so you hunt around do not take the first good deal to come along I have recieved information from on company that would sale me 50 GB for $25, yep that is $0.50 per GB.
So that is the long version of how I think that they can afford to do it and still maintain a profit.