There are laws in the US which require you to ship a product within a certain time or offer a refund. I agree that the 'sold out' buzz is a popular marketing technique, its one of the persuasion tools that works well, scarcity, but I think that is a side effect here.
So take a moment and imagine you are in the product manager's shoes at Google and you're tasked with forecasting how many Nexus 4's will be needed. If you guess 'high' you end up with HP's Touchpad fiasco, or Motorola's Xoom, too much product. Since you've probably borrowed the money to buy the parts to build the stuff and you have to pay it in 90 days, you need to get stuff, sell it, and then get the money to pay off the money you borrowed.
Building a million phones like this probably costs in the neighborhood of $200M - $250M. That is a pretty sizable chunk of cash to be hanging out there 'in the float' as it were. Sloshing around that much capital is like driving a fully loaded big rig truck on a wet highway, you don't want to enter any turn with too much speed, the 'bad' outcome is really bad.
So of the two options, "leaving money on the table" because someone who wanted to buy your gear couldn't, and "missing your wall street guidance" because you're carrying inventory for longer than you wanted, the former is the much better choice. At the limit its horrible but if you're going to err, and your error bars are large, you want to err on the negative side not the positive side. On the negative side you just don't make as much money as you might have wanted to, on the positive side you don't make the margins you need to make on the product.
Xoom and Touchpad were 'new' products (new to that brand) - Nexus isn't 'new' by any stretch. It's got a track record. They have customers they can survey. Hell, it's google - if they can't predict public and customer sentiment and willingness to buy, who can?
But now they have a lot of people bitching about how the phone doesn't have LTE so it's not like it was known it'd be a total slam dunk. I'm a T-Mobile customer in the US though so i don't worry about stuff like that. ;)
What do you use all that space for on a phone? My Android phone (HTC Evo 4G) has 512MB internal storage and the Android version it runs doesn't support moving most apps and their data to an SD card. I still have all the apps I want. I still listen to my entire multi-gigabyte music collection... by streaming it through Amazon MP3 for free. Everything's streaming or in the cloud these days. You don't need to carry duplicate copies in your pocket.
I am somewhat obsessed with music, and these days, 16 gigabytes isn't really that much. Yes, you can stream it with spotify and google play, but that always fails when you least want it to. I wouldn't buy a phone these days with less than 64 gigabytes.
I realize I'm also somewhat unusual in this respect.
You'd be surprised. Many games, these days, can take up to 1GB for program and data files. My iPhone 4 with 16GB was so maxed out, it'd often refuse to upgrade more than one app at a time because of insufficient space.
The 16GB is the cheapest option for a very fashionable phone. So no doubt it's popular. My wife has the 16 and I have the 32, figuring we'd never max out the memory in either case. Boy, were we wrong. She can't update more than a few apps at a time. I'm down to the last few GBs and even after purging videos and photos. Music isn't even a problem because we have iTunes Match so it purges things regularly.
The size of the retina apps is just insane. I compiled my first app (a small music app) around the time the 3GS came out and it was only 1MB. Now, even a simple game clocks in at 30MB.
Sadly I can't sell you a binding pre-order contract. (That would be where you couldn't cancel your order) And for things like the Nexus 4 (where you might engage in a bit of reselling) you will have people 'pre-order' to get a place in line, only to find when they start shipping that you can't sell them for much of a markup on ebay so they cancel their pre-order. Or like the great disk drive crisis of 2011 where people put multiple orders into multiple distributors only to cancel when one of them filled.
Another thing to consider (and this was true of the Nexus 4 and later updated in the article) the article said they 'sold out' but Google didn't. The authors interpreted not being able to get to a sales page as being 'sold out' but later discovered that there was some order rate management going on where the 'overflow' went to the 'coming soon' page and repeated attempts would eventually get you a page you could order from.
Logistics management is a tricky thing, if you are good at it you can pretty much name your own salary because its trivially easy to 'show' how much you are worth with basic accounting techniques. If the company has the volume you can literally say "If you hire me I'll save you $700,000 a year, I'll actually save you $1,000,000 a year but I'm going to keep $300,000 of it as salary."