Amazon already sells their Kindle devices at a loss [1], it doesn't seem like a stretch to think that with an even lower cost device such as a phone that they might try to offer it for free to up their marketshare and ecosystem.
There's a difference between selling at a loss and giving something for free.
If you sell something at a loss, the consumer still had to put up some money and has a clear interest in using the product. That makes taking the loss upfront less of a risk since the consumer is more likely to use the product and eventually make a profit for you.
If you give it away for free, people will accept the product, whether they are interested in using it or not. That means a smaller percentage of people who take the product will actually be likely to use it. That makes recouping your loss much harder.
I can see free with contract (we have that already), but free without? Maybe they could do it if they focused on what I've wanted in a phone recently, a small phonebook and alarm capable device that tethers extremely well with good battery life, so I can just pair it with a small tablet when I want the extra smartphone features.
I don't imagine that costing too much, so it might fall within any acceptable loss they have built in to their products. Then again, it would have less capability to generate revenue for them, unless it changed data that passed through it (replacing adds, etc), which would be pretty horrendous.
It's not clear it'll be at a loss over the life of item from that link, it's based on a teardown at release, and it's very possible if not likely the cost will go down.
If you sell something at a loss, the consumer still had to put up some money and has a clear interest in using the product. That makes taking the loss upfront less of a risk since the consumer is more likely to use the product and eventually make a profit for you.
If you give it away for free, people will accept the product, whether they are interested in using it or not. That means a smaller percentage of people who take the product will actually be likely to use it. That makes recouping your loss much harder.