"Botellón" literally means "big bottle" in Spanish. A group of people, generally young, that basically get together to get drunk. Each person puts some money in towards the drinks, they buy the alcohol and go somewhere to drink, laugh, and have fun.
They can be any size, from a couple of people to huge city wide events.
Botellones first started because of the exhorbitant price of alcohol in bars and discos. It´s common to have a botellón before going out partying.
Sometimes, botellones are expanded, with money being put down for drinks, food and pot, for those who want it. These tend to be all day things, normally taking place in the "campo"(countryside, more or less) or the beach, usually to celebrate birthdays or fiestas.
In cities where there´s no country or beach, botellones normally take place in the parks.
Generally, the "botellonistas" don´t cause too many problems, especially if it's a prelude to partying, or if they're stuck somewhere in the middle of the country. The problems come (as always) with the idiots that don´t know how to drink and turn into raving lunatics that go round smashing things, or drink enough to put themselves in a coma.
If the botellón is really huge, like town or city wide, it's called a macrobotellón. These are the things you hear about on TV.
Lets say there are 15 people for the botellón, each person paying 6 euros, that's 90 euros which is enough money to buy alcohol to get everyone reasonably drunk, whereas if you went straight to a club you would pay 6 euros just for 1 drink.