The idea is that you want to use the service for a long time, and your fees for the service subsidize the hardware. IOW - they want you to pay to play games, and they will use a portion of the profit covers the cost of the hardware. Free hardware is the "teaser"
It is ALMOST the same business model as the I-opener, and the Compaq IA-1 and pretty much every cellular carrier. The only difference is that they may be able to "sole source" some games or media - an advantage that ISP's really don't have, but that cell phone carriers do (for the most part) have. I suspect, however, that gamers are going to run away from this box like the plague. It does nothing a PC, Xbox, PS2, etc can't do for less. After all, how many months of game play before you have spent more on your subscription than you would have on the game itself?
There is also the fact that it is designed to run PC games, and we all know what a moving target a "gamer" configuration is. Console games, on the other hand, are always written to the same hardware - which is why consoles don't suffer nearly as badly in the upgrade cycle.
IOW - get 'em while they last. The price will shoot past $199 when they hit eBay...