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It's technically still possible to do single-player games but with a significant online component that could work using the free-to-play. Diablo 3 (OK, not the best example as you 1. pay for it and 2. has a whole host of problems) can be played single player but with a constant online connection. Another example would be Age of Empires Online (which is F2P), which again can be played single-player with story based scenarios.

Money is made from micro-transactions. I remember reading somewhere that with most F2P games, only 10% of the user actually spend any money, but that's usually enough to turn over a healthy profit.