While the argument could be made that the $400 flagship is growing, there is still a strong desire for a no frills, no compromise flagship one that both Samsung and Apple have shown will sell. The Galaxy S7 is an astonishing good device, it has all the chops to go toe to toe with the iPhone now, and the iPhone to come. But in 4 months when Google is releasing Android N there are going to be at least 10 million S7 owners who may wonder when they might see an update. It’s time for Google to lead Android with an uber-premium Pixel branded flagship that follows Apple’s lead by not compromising on features or experience and timely delivering the latest in security and software updates.
I think it actually make sense with a high end "Pixel Phone" from Google. Then they would have the Nexus phones for the mid and lower end market, and the Pixel phone for the high end market, directly competing with both Apple and Samsung.
There will always be a problem with third-party manufacturers releasing phones that almost never get updated afterwards. So having the Android user market growing as much as it still does, also means that millions of users will never ever run the latest version of Android, year after year. That is a problem for Google because they want to move forward with developing Android, and it's also a problem because users blame Google when their device won't get the latest update. They don't realize that it's actually the manufacturers fault. So it's bad marketing for Google.
So having its own Nexus and Pixel device series would solve that problem. Then they could be more like Apple. Having theirs own flagship phone with the Pixel phone that is optimized for the software. And having a cheaper Nexus phone for the rest of the users.
Basically that would mean that Google and Android doesn't need third-party manufacturers anymore. Users that want a high end phone with the best Android user experience possible, could buy the Pixel phone, and people that still want to have a clean Android experience but don’t need the best specs possible, could still choose the Nexus phone.