[jacquesm]

No, it means that if you give people items instead of a service that you will have to charge them for those items.

Free physical goods does not scale because you can't guarantee that a freely given physical good will not be put to uses that you did not envision.

The people that can do that are the mobile carriers which is why they will be able to offer you a 'subsidized' phone, they'll take it back over the time that you have the phone in your possession. It's the whole reason for all that sim-locking and jail-breaking that people do.

Offering a service and selling a piece of hardware are two fundamentally different things and have nothing to do with recouping development costs, it's just another way to make a profit and to ensure that it scales.

Have a look at the cuecat http://en.wikipedia.org/wiki/CueCat fiasco to see what could happen otherwise.