My guess: it's the price at which they make more money than if they rent the TPUs to other companies.
The Gemini team has had trouble securing enough TPUs for their user's needs. They struggle with load and their rate limits are really bad. Maybe at a higher price, they have a better chance at getting more TPUs assigned?
Just because you are vertically integrated doesn't mean you get to discount the one business units products to the other. Doing so discounts the opportunity cost you pay and is just bad accounting.
You have free local models for most tasks, $20 subscriptions for near-frontier intelligence, and API per token costs for frontier intelligence.
Flash seems to be targeting the near-frontier category.
I think frontier models will be invaluable for scientific research, defense, financial analysis and such. But the average person probably would be reasonably well-served with a local model.
If you're in sales, customer service, product management and such - the leading open models at the 30B mark are already good enough.
Open-source model inference providers (who do not have to bear the cost of training) seem able to do it at much lower prices.
https://www.together.ai/pricing
https://fireworks.ai/pricing#serverless-pricing (scroll down to headline models)
Of course, it's possible that they are burning through investor cash as well, and apples-to-apples comparisons are not possible because AFAIK Google does not mention the size/paramcount for 3.5 Flash.
But if the prevailing wisdom is true, I think it's actually encouraging. It suggests that OpenAI and Anthropic could perhaps, if they need to, achieve profitability if they slow down model development and focus on tooling etc. instead. If true that's probably good news for everybody w.r.t. preventing a bursting of this economic bubble.
...my opinions here are of course, conjecture built on top of conjecture....
I think you're right that releasing models at a slower cadence would bring down costs to some degree, but it's not clear how much. All of these companies could significantly reduce their opex but at the risk of falling behind in terms of being at the frontier.
The economic value increases non-linearly as models get more intelligent: being 10% more capable unlocks way more than 10% in downstream value.
That's trouble because the non-linear component means at some point their margins will stop primarily defined by the cost of compute, and start being dominated by how intelligent the model is.
At that point you can expect compute prices to skyrocket and free capacity to plummet, so even if you have a model that's "good enough", you can't afford to deploy it at scale.
(and in terms of timing, I think they're all well under the curve for pricing by economic value. Everyone is talking about Uber spending millions on tokens, but how much payroll did they pay while devs scrolled their phones and waited for CC to do their job?)