Android pays for itself, in lots of different ways, among them and by far most importantly: Being the default search provider on 550k additional phones/day. That's worth a billion $ to Google any day.
I don't think it's just about search. I think sometimes Google does things Because They Can and then try to figure out how to make money later. Android's most realistic reason for existence, IMHO, is to ensure that Google users can take their data with them. If there was no Google phone, then the world would stick with Exchange, and GMail is not Exchange.