> 1. That the hardware was the competition.

Apple is a hardware company, that's what they see and compete on.

> 2. Google bought a software company to compete in hardware 3. HTC was not making touch screen phones before.

hardware and software go hand in hand. Google implemented a touchscreen core since the first public Android release and their base design (the N1) is fully touch-oriented. They clearly set up the Android platform aiming at the segment the iPhone also occupies, putting the platforms head to head. I don't see how you an claim otherwise.