I've yet to see an explanation for any way in which they can differentiate on WP7, that they couldn't do better and more easily on Android.
Say what you will about Open Source development, but when it comes to differentiation, there's simply no way to beat it...look at the variety of Linux distributions, for an example of differentiation gone wild.
That's only really a differentiator because no one wants Windows phones, so there aren't as many in the hands of users. I'm not sure that's the kind of difference Nokia needs right now. That's just lack of familiarity...not really a positive differentiation.
If WP7 is a success, then by the time Nokia ships (late 2011 at the earliest), they will be entrants in a crowded field --- and so far, Microsoft is requiring most WP7 phones to be near-lookalikes, to get consistency of user experience across the platform.
(Of course, part of the deal here may be that Nokia gets to differentiate their products in a way that nobody else does --- but if it is, then the other vendors may be ticked in a way that causes long-term problems for the platform as a whole. Contrast to Android, where vendors have complete freedom to reskin it right now.)
From what I can tell the negotiations with Google and Nokia went really poorly.
So ship stock Android, thus outsourcing OS development to Google. I agree with what SwellJoe says, haven't heard any credible explanation of how WP7 allows differentiation that Android wouldn't.