The ads are embedded in free apps (just like they are now). But now the ads are more targeted and don't take you out of the app. Two things that make free apps better. Don't like the ads? Pay for the upgraded version of the app and there won't be ads.
The majority of the advertising dollars go to the app developer, just like the the app cost itself.
< Sarcasm >
OMG Tom's Hardware has targeted google ads .... lets throw on our tin foil hats and complain.