It's similar to MSFT vs. Borland, MSFT could undercut the compilers because they sold the OS. Compilers and developer tools are a complement to their core business. Smartphones are a complement to Google's search/adsense business.
To Google making sure that people have cheap smartphones increases their search revenue. It also ensures there will be a smart phone platform with Google defaults. On an Apple or RIM device MSFT might have enough dough or other leverage to change a search default. And on WinPhone7 you can be pretty sure the search default will be Bing.