I think it's that whole sticker shock issue. $500 for a phone? Thats just a non starter for most people in the US, because they are so used to paying next to nothing for the device. Very few people actually think it through to realize their service for the phone is going to cost way more over two years then the hardware. And it doesn't help that even if you do bring your own phone, you still pay the same monthly bill that Joe did when he got his "free" phone. At least my cable company lets me shave a few dollars off my monthly bill because I brought my own cable modem with me.

The other big issue is the inability to just make one phone that works on all the providers. It is technically possible to have some hybrid device that works on AT&T, T-Mobile, Sprint and Verizon, but then a lot of extra cost is being built in. Google instead brought out the Nexus One for T-Mobile. Then eventually AT&T. Plans for the Sprint and Verizon ones fell apart, 5-6 months after the device was new, and people were eyeing other phones in the same android space.

I think Google was just too early with this experiment. Once LTE comes into play, and assuming all the carriers pick similar frequencies, then people will be able to just buy a phone then go to a carrier.