But there's another market to consider here, as well: Android can be a free OS overseas because it's freely downloadable and the source can be quickly ported to a random device made in a random Chinese factory, which Microsoft will probably never see or care about (and hence never demand patent licensing fees for).
This is a market niche that shouldn't be underestimated - ever looked at the "Phones" section on DealExtreme or had a friend come back from China with some kind of weird dual-SIM concoction? These are immensely popular in China and India, and now instead of paying contractors to write horrid proprietary dumbphone OSes, their manufacturers can pay contractors to quickly bake together an Android port (often with hacked Market access).