No, even stallman approves of selling source code. Free software and open source have never been about price, it's about being able to get the source:
> Commercial software is software being developed by a business which aims to make money from the use of the software. “Commercial” and “proprietary” are not the same thing! Most commercial software is proprietary, but there is commercial free software, and there is noncommercial nonfree software.
Google is doing something bad, but it is not against the license.
"Open Source" was specifically intended to sell a similar idea to corporations, and less idealistic programmers, mostly by dropping that key requirement. I'm surprised you've not noticed the last 20 years of GPL vs. BSD flame wars which should have made this obvious.
Google went out of their way to drop "free software" from the top of their stack in Android, ironically, because the manufacturers and carriers wouldn't play ball without it. At this point, the Businessweek story (well, the few bits that haven't been entirely refuted as false) sounds similar to record labels that demanded Apple add DRM to their music, then wondered why Apple suddenly had such great lock-in power over the market.
Except... nothing about even GPL'd Free Software compels you to release the source until after you ship to consumers. Even then you could add a few months delay by forcing people to buy the product then write you a letter then post it in the least helpful form you think you could get away with. Absolutely nothing would prevent you from signing corporate agreements and giving sneak peeks to your favored manufacturing partners. Basically, if you're writing the code, you have power. You have the power to write what you want, mostly under the licence you want, with whatever priorities you have. This applies as much to a Linux dev who decides to quit and become a monk as it does to Ubuntu ditching Gnome 3 to try their Unity stuff. It might suit you if they did something else, but people making petulant demands on developers is only commonly associated with open source, not actually part of the definition.
What's weird is that I thought I was fairly extreme on the "Free Software" side of things by most standards, and especially HN standards. However, it appears if you dare to use the word "open" in your advertising (and to be frank, I thought they were talking about smartphone stuff, like being able to install software of your choice) the tech hivemind will crucify you if you're not more extreme than RMS, someone who wouldn't use the phrase "open source" never mind the more wishy-washy "open" which basically could mean anything. Bit of strange double-standard there which I think basically reflects Google offering too much competition for Apple.
"However, if I purchase a Xoom with Honeycomb, I have been given a copy of the Android software, and I will not be given a copy of the source code if I request it. That is the issue here [...] you are surely aware that free software is about the user of the software being able to access the source code, modify it, and redistribute it. None of these freedoms (which are also part of the open source definition) are currently given to purchasers of Honeycomb tablets."
I think it's clear here that your ignoring the key difference between GPL and Apache software like Android. If Android was GPL (and written at least partly by someone other than Google) then Motorola would need to release the source alongside any product containing it including any changes or improvements they made, as they are required to do for the Linux portion.
But Android isn't GPL, so they don't have to release the code they use. Google have released the code at roughly that time in the past, and it's that release, not the timing, which makes Android in general "Open Source". They say they'll do so with Honeycomb once they've finished the phone parts, and at that point Honeycomb will be Open Source too.
Feel free to say that the diff between Froyo and Honeycomb isn't Open Source until they release it. That's technically correct (the best kind of correct), but it is just plain wrong to bring the timing of the Xoom launch into things, or complain that Android as a whole suddenly stops being open source because more recent changes haven't been published yet.
Neither of those issues are covered by the term Open Source. You might have better luck comparing against a benchmark for open governance as proposed by Simon Phipps, but any issues for Android under those rubrics have been there all along:
http://opensource.com/life/11/2/open-rule-governance-benchma...
So why is the timing of the hardware release relevant? I thought you were getting confused with the GPL, in which case it would be relevant. Now that we've cleared up that you know Android isn't GPL I have no idea why you think the timing of the binary release matters. I'd hazard a guess that you think people should act like the GPL applies to their Apache licensed code in order to be considered sufficiently "Open Source" by your definition, which differs from the standard meaning of simply releasing the code under an Open Source licence, which applies to the vast majority of Android code, and will soon apply to the Honeycomb code.
At which point they'll start work on the next version (Jelly?), and presumably you'll once again believe that Android isn't Open Source since having any code in development and not yet released fails your test. Or do they only fail your Open Source test if they ship a Jelly-powered device first? What if they ship a Jelly SDK image to run in a VM? Does your idea of when they have to have released source follow the GPL exactly, or does it differ in any important ways?