Microsoft doesn't regard new graduates and industry experts interchangable. When I was hired, I had about 10 years of professional software development experience, especially in low-level areas (such as firewall software, data transfer protocol design, DOS-based GUI libraries, terminal emulation and so forth). I had good amount of operating system architecture knowledge too. I probably didn't have the fresh mind and well-formed education of a new graduate but I think I compensated that with the experience pretty much okay.

If you assume people are more or less fungible except for some "Q" (quality measure) sure, you probably wouldn't hire someone without a degree. You would sort your applicants by "Q" and drop everyone below a cutoff. I suppose I would call this the "human resources" view.

On the other hand if you have a team of domain experts who are passionate about subject "S", they don't actually care about "Q". They care whether you have deep interest, expertise and potential in their domain area. They want to know what you can bring to their team. Now, a lot of times a good candidate will be someone with a PhD in "S", but it's not about the qualification. It's about "S".

"No degree" hires usually don't come in the HR front door as a "fungible human resource". They usually get noticed or referred by someone passionate about "S", for a job doing "S".

I don't actually know if this was the OP's situation; there are other ways this can work. Good recruiters will try to hoover up talent by searching for people with relevant work experience (substituting that for a degree) and throw them into the funnel.

Presumably because this person was provably better than the other candidates.

A degree is valuable in some regards, but it is not a mark of quality of candidate. Similarly the lack of a degree is also not a mark against a candidate.

kernel/shmernel, why not? Ain't like a kernel is a mystical land in a far away galaxy. It's just another program. In DOS era every program was a kernel when was running. If you wanted to play nice with others you'd do a TSR program and make sure you did not freeze the PC. I know it's an oversimplification but the basis is the same. When you write for kernel you make sure to no tip over anything, just like with a TSR in DOS.