It’s not just a hobby — some small sites are making big money. Here’s how to turn your passion into an online empire.

The rapid march into the blogosphere isn’t limited to entrepreneurs and advertisers: Investors are moving in too, including some with lofty pedigrees. Alan Patricof, a highly regarded VC who early on bankrolled the likes of Apple (Charts), AOL, and New York magazine, recently invested in ContentNext, the publisher of PaidContent.org and other blogs run by journalist Rafat Ali. Ali’s blogs are logging about 5 million pageviews a month, and he’s on pace to generate revenue of more than $1 million this year. And VC firm Softbank Capital just invested $4 million in Arianna Huffington’s political and news blog, the Huffington Post, a site also backed by $1 million from Patricof’s firm. 

Despite all the ferment a critical question remains unanswered: Do blog ads work? Sure, readers can click on ads and view an advertiser’s website, potentially even making a purchase, but that rarely happens. Intel’s Campbell says the industry standard is a click-through rate of less than 1 percent. 

But major advertisers aren’t just looking for click-throughs; they’re looking to get in front of the right audiences. “Blogs are very targeted, so one would project that ROI is very good,” says Publicis & Hal Riney’s Francis. “But it’s still early. What may get ad dollars today may not get them tomorrow.” 

Any downturn in the economy and ad market will, of course, hurt bloggers. The sheer numbers of blogging-for-dollars artists charging into the game could also muddy the market and put pressure on ad rates. And profitable blogging is hard work; a solo act like Dooce’s Armstrong must post constantly to keep her traffic and ad revenue up. “There are days when I panic,” she says. 

Still, in some ways the lean, do-it-yourself ethos of blog businesses makes them ideally equipped to deal with business cycle blows. It’s far easier to weather a downturn when your costs are next to nothing. Plus, many players are diversifying, even within the blogosphere. “I know that I’m riding the Web 2.0 wave,” says Arrington, who points out that he turns down frequent VC offers, some in the $5 million range, because he doesn’t want to give up editorial control. Now he’s preparing for a day when the wave crests. 

He just launched a gadget site and staffed it with a former writer for Gizmodo, which is part of Denton’s network and is packed with big-name advertisers such as Nokia and Sprint. He has plans for a gaming site and a site devoted exclusively to analyzing heavy-duty enterprise software. Even as he expands, however, he expects to keep his expenses–now about 12 percent of revenue–at no more than 30 percent. 

And occasionally there are bonuses. With little effort, Arrington got dozens of sponsors, mostly Web 2.0 startups and VCs, to bankroll the party he held at August Capital. So after a night of revelry, Arrington had pocketed an extra $50,000. Now that’s something to blog about.