I must emphasize that these details are speculation at this point, unconfirmed by Google (other than a validating post that Google gave out this model of phone to a number of employees). Nevertheless, it's worth considering the implications of this, should it prove true. The most important question is:

The full retail scenario isn't very interesting, especially in the U.S. A number of phone makers have attempted this route, with varying success. Apple looks like the greatest success but it's highly doubtful that the iPhone would enjoy more than a fraction of its success to date were it still selling for $599, as the original iPhone was when first on offer. Nokia has made its flagship devices, beginning with the N95, available through its limited direct distribution channels but these sales are lost in the rounding of their massive volumes. No, phones under this model appeal only to the most well-heeled geek chic crowd, and Google would be looking for mass market success.

Google opting to subsidize the phone would represent a significant disruption because:

• They would be counting on advertising revenue to repay the cost. Mobile operators can subsidize phones because they repay the cost in service fees, locked in for one or two years by the accompanying contract commitment. Not being a service provider, Google would have to rely on revenue from advertisers to justify the subsidy. Considering that subscribers with high-end phones typically pay $70-$80 per month and that even after two years this doesn't pay off the subsidy (according to a letter from Verizon Wireless to All Things D), that's a lot of ad revenue even if Google's operating costs are lower than the operators'.
• This model would upend carriers' current modus operandi and 'loyalty' model. While carriers express mixed feelings about subsidies, phones are their primary tool for attracting and retaining subscribers, and service contracts are how they initially secure customer loyalty (or, at least, commitment). If subscribers can get a cutting-edge handset from Google, shop for the best plan, and take that handset to another provider as soon as a better service offer comes out, carriers will have to re-think what loyalty means.

Such disruptions would clearly be good for customers, since few actually want to make a long term contract commitment and more choice in service will promote competition and more price options. This will be even more true in the long term as operators converge to a single network technology (LTE).

But we also think it would be good for operators, who have long recognized the need to expand their business model beyond direct customer subscriptions. They have begun to expand their revenue sources with content sales, and new devices such as eReaders have given them additional options such as wholesale capacity and content-based pricing. They have talked up ad-based models, especially as triple play providers with gobs of behavioral data across phones, broadband, and TV, and pressure from Google will likely force them to realize those plans more quickly.

Of course, that's just if there's a subsidized Google phone coming down the pike.

How would you feel about someone else footing the bill for your mobile service -- are you willing to accept ads in exchange?