Google can lose money on hardware and still make money. Also, simply taking marketshare away from competitors reduces their profitability which – in the long run – limits their ability to innovate and/or tie you up in litigation.

Google is making a small profit at $199 & part prices are pretty well always on a downward trajectory. It isn’t that crazy to think Google could make a good (albeit not great) tablet for around ~$100 fairly soon and either break even or take a small loss.

The biggest problem I could see would be them sowing discontent amongst their various hardware manufacturers by pushing margins down so low. Google may not need to make money off hardware but Asus, Samsung, Sony etc. *do*.