People outside the U.S. actually pay significant prices, but NOT in significant numbers. There are certain markets where the regulator has ruled that phones may not be tied to contracts. But these markets are the minority.
In most markets the "subsidy model" for post-paid contracts is reality. These markets are the most advanced markets, revenue-wise. Pre-paid markets are less advanced, hence people will spend less for phones. So, for expensive phones the mass market is typically the western hemisphere, and here post-paid rules.
The problem is that people are bound to their 24 months contracts and won't buy a phone in between (only rich geeks do). And when they do buy a new phone, they look for a phone that is subsidized. Unless Google goes in bed with the mobile operators, there is little chance that the Googlephone will be a success...
Google tries to be very disruptive, killing the mobile network operators. They could do this by:
1) Making the Google phone network-agnostic (unlocked) BUT make all the Google services mandatory. Think Chrome O/S on a mobile phone. All the Google services would be tied to the phone, Google account would be mandatory, Google start screen, etc etc.
2) Then Google would itself subsidize the phone. Instead of the, say, $500 the phone actually costs to build, promote, and ship, it would cost, say, $200. Google would spend $300 per subscriber but htey would get almost exclusive data about the user (see # 1).
So, Google would not become a mobile network operator, but they would become a virtual service provider. Let's see how the subsidy could work out, financially:
Google subsidizes each device with $300. Let's assume that Google plans to break even with each device within two years. That's $12.50 per month. If they are able to sell ads at a significantly higher CPC on the mobile than on fixed, say, $1 per click, then it needs just 13 clicks per month to break even. While this sounds a lot of clicks to me, it probably depends on the services and the ad integration. Google maps (navigation system) with ads could work very well. (Also, a Google application store might bring additional revenues.)
Yet I think it's still a risky move. Getting 10 million users signed up would cost the company $3,000,000,000. Yes, 3 billion US Dollars would buy them a significant market share (in the segment of "Advanced Internet Phones"). Then again, 10 million devices are a drop in the ocean of the entire mobile phone world.
Evil? Sure. I am not a friend of the mobile network operators, but I am even more concerned about Google becoming our internet-communication overlord who wiretaps everything we say and do on that phone. Not good.