Google essentially gives Android for free. Just yesterday I saw Nexus S "free" (with 2-year contract) on main Google page!
You can argue that any kind of software is better off free. More people will use it sooner if it's free. But I don't think this model fits everyone. What if you don't want to get outside investors right away and don't have deep pockets?
I did not know about Android phones not tied to Google search. I understand that you can switch your default search engine to something other than Google, but most people use the defaults. Windows users could have also deleted IE and installed Netscape. But with free IE pre-installed and working, most did not bother. Netscape got killed.