Categories like this tend to support just two or three brands at the top of consumer mineshare. Think coke vs pepsi or BMW vs mercedes. The problem with android is it's not really a choice for a consumer. By picking android they really need to make a much more complex choice of which actual phone to get. The real choice the consumer is making is iPhone vs droid incredible or some other specific phone. In the end all the manufacturers under the android umbrella are competing with each other as well as the iPhone for mindshare.
I definitely agree that android will have more units out there than iPhone eventually, but I think the iPhone will easily be the brand with the much stronger mindshare in the category. Normal consumers will still see it as iPhone vs all those other phones. Apple will also have the biggest profit in the smart phone category as a result.
Remember, google is selling eyeballs to advertisers, not phones to consumers. They're playing a different game than apple.