That is the windows mobile method and it failed. It didn't fail in sales per se, but it did fail to become a standard and something people wanted. Android will have the same fortune/misfortune. It will sell well, but most of those sales will be low end phones that don't really do much for the brand or users.
Microsoft wants to be like Apple here and have the developers creating apps for their phone first and to have them work reliably on all the phones.
Fact is the market is plenty large and there is room for several big players. As WP7 integrates with the cloud you'll buy a phone for its cloud integration and not for the phone itself.
Why do you think Android will be all low end phones? There are several high-end Android phones, currently on the market, that are equal to and in some ways superior to the iPhone and are superior to the WP7 launches. (HTC Incredible and EVO, Motorola Droid, Samsung Galaxy S series).
Do you think these manufacturers are suddenly going to stop producing very successfuly, high-end phones, simply because WP7 has arrived?