That is definitely a very valid argument in case of Search/Advertising. And to a certain extent, in case of Android, too.

But is that a good enough reason to sell hardware at cost? Why not give it away for free, then? That will attract a lot more users.

I guess my point is, when you are selling hardware, maybe you need to have a tangible revenue stream rather than just potential ad revenue.

I guess it's an economic calculation. Moreover, it would be foolish to assume that consumers are rational agents: I expect that the perceived value and user's attachment to a free tablet would be much lower (again, another study would find the "sweet price". Maybe they found it?).

I'm sure there is a reason; Google doesn't seem to be selling all hardware at cost. Nexus Q at $299 suggests so.

Just trying to understand what economic reasoning led Google to decide to sell Nexus 7 at cost. I don't get it from where I stand.

This is the single biggest difference between Google and Apple. Apple designs very elegant software (and hardware) so that they can sell hardware at a high premium. Google views all monetization through search optimization. Search, Maps etc. Now maybe there will be commerce streams (Play, Wallet?) too soon which makes having a direct relationship very key.

So somewhere Google has a stat that says "A regular user is worth $22 a year to us" or something (more sophisticated) but like that. If those users buy an Apple device it's less and less clear they'll have a path to Google services now.

If they can acquire that consumer "for free" (sell them a device that hooks them into the platform at a wash) then it's a good deal. If they gave it away for free then it would take x number of years to break even on that person. So that $200 or whatever does matter. And Google has a very good idea about what an Android/Google services tablet user is worth to them.