Why didn't they choose Android?
With stock Android as a starting point and, well, a clue, Nokia can easily overtake Samsung, Moto, and HTC. Just by keeping good time with Google's own updates, and developing a customized Android UI that doesn't suck, Nokia can pull ahead.
That being said, I think the WP7 choice isn't a bad one. At MS Nokia would be customer #1. At Google Nokia would be just another OEM.
WP7 has the advantage of having Apple-style end-to-end integration, giving them a very natural place to issue non-OTA updates.