What $1,000 worth of equipment? The "free" tier only comes with a network box, and it has a $300 "construction fee". $300 should pretty easily pay for what looks like a wireless router.

That doesn't include (at least transparently): actually running the fiber to your house, getting permits to run the fiber through various properties along the way, installing and maintaining switches routers amplifiers etc to give you the service, etc.

It would seem like that is subsidized by the paying users.

Google's total revenue from advertising in Q2 2012 was 10.5 Billion dollars. so yes, those ads can definitely pay for a couple thousand dollars worth of equipment.

Don't forget the sales Google will get from all the movies and media people will buy from Google Play.