I didn't expect them to, but then I assumed that Google would stay clear of the hardware market. Now that they're essentially shipping phones at very low margins, they're a direct competitor to Samsung. Why buy an S3 when you can get a NX4 for hundreds of dollars cheaper, and get essentially better hardware (modulo LTE)?
To respond to this will require care. They can go with the razor-margins approach, and have their margins eaten away to virtually 0 (i.e. Dell etc). However, this only props up an ecosystem that benefits Google. They could, I suppose, find a way to out-build the entire rest of the market and get decent margins at the very low end of price (but I find that unlikely). Alternatively, they find a way to differentiate, which is most cheaply done at the software level.
Anyone picking path #1 is basically going to have to own the market to make any money in the long term, but will keep decent balance sheets in the short until commoditisation is completed. Anyone picking path #2 has more risk in the short term, but a lot more to gain in the long (e.g. as Apple has).
The Nexus phone is a single phone that comes out each year and it designed to progress the ecosystem. It isn't about pushing the boundaries or picking up sales, it's about setting the benchmark for the ecosystem. Hence why it's called a development phone. I think you're overestimating its importance.
The majority of Samsung's customers are Samsung customers. They've bought into the brand. They're not about to jump ship to LG.