It is subsidized -- the development costs were largely born (I think, but at minimum partially born) by the public ad supported version. It's perfectly possible that it would not be profitable to run it solely as an ad-free business, but once you've already built it the profit is largely incremental. Don't ignore their strategic reasons for building it either, ie cutting the legs out from under microsoft's most profitable product office: it's quite possible google apps is not particularly profitable and the value is largely strategic.