Farhad Manjoo at Slate Technology also asks almost all of the above questions:
http://www.slate.com/articles/technology/technology/2012/06/... (don't be misled by the title)
To quote:
"But there’s one big problem with Google’s small tablet: It lacks a business model. As Amazon did with its Fire, Google is selling the Nexus 7 at cost. Amazon could afford to do so because the Fire is a gateway to its online store. After you get the Fire, you’ll buy a lot of books and movies from Amazon, and you might even become a subscriber to Prime, Amazon’s highly profitable subscription service.
But Google, unlike Amazon, doesn’t sell physical stuff, so it can’t justify the low price of the Nexus 7 on the expectation of huge e-commerce sales. Sure, the search company does sell media—you can buy books, music, and subscribe to magazines from the Nexus, but the selection is thin compared with what’s available in Amazon or Apple’s media stores. If you get a Nexus 7, you’re better off relying on other sources for media. For books, install the Kindle app and buy from Amazon. For movies, use the Netflix app. For music, use Spotify.
Well, what about advertising? Google makes most of its money from ads, and boosting advertising revenue is the central goal behind Android. The more Android devices Google sells, the more people use its services, and thus, the more people see its ads. So if Google sells a lot of Nexus 7s, couldn’t it make a lot more money from ads?
Not really. Google makes only about $4 per year in ad revenue from every Android device, according to an analysis by Asymco’s Horace Dediu. So if Google sells 10 million Nexus 7s—far more than anyone expects—it would make $40 million a year from the device. For a company that made nearly $12 billion in profits last year, that’s nothing to crow about. (What’s more, two-thirds of Google’s mobile advertising revenue comes through Apple devices. If people choose the Nexus 7 over the iPad, Google might not be making any more money than it would have anyway.)
Google’s real goal with the Nexus 7 can’t be to make money. Instead, the tablet is a marketing device. Google wants to hop on the tablet train before it’s too late. It’s been two years since the iPad was released, and so far no one has managed to create a plausible alternative. The Nexus 7 is an effort to get people to believe that Android tablets aren’t terrible. It’s good enough to be usable for most people, and just cheap enough to get a lot of folks to give it a try. And if you get the Nexus 7 and find that it isn’t so bad, maybe one day you’ll be willing to give other, not-so-cheap Android tablets a try.
It’s a circuitous plan, and it could well fail. In the meantime, though, you might as well enjoy Google’s pretty good, cheap tablet."