"Google builds services like Google Maps, Gmail and Docs and gives them away for free"...
...because they entered a market where maps, email, and "docs" were free. Google didn't blaze a trail of free services, but they were bound to continue it.
Nonetheless, they've managed to get lots of businesses to subscribe to the pay services though.
"This is important for Google because while Google isn’t licensing Android"
Aside from the fact that while the core Android image -- which is GPLd btw -- is free, Google's premium applications are not. Note that many low end devices don't have Google's applications. Google is also trying to monetize their leading edge advantage with the Nexus One originally, and now the Nexus S.
"And Google conveniently owns one of the largest mobile advertising providers, Admob. "
Yeah, so does Apple. How do you like them Apples? Apple is very heavily invested and involved in the advertising and the media sales market. Any illusion that Apple is a pure player just trying to honestly sell an electronic device and that's the conclusion of the transaction should be demolished the moment you hook it up to iTunes. The original purchase is merely the first of many monetizations of the customer.
"Google is building Android not so they can make great mobile devices"
Oh well if you say so.
"For example, Android’s market may not be terrible in comparison to Apple’s App Store for paid applications just because Google hasn’t yet finished it; rather, discouraging paid applications on the Android platform is in Google’s interest. "
Conspiracy theory. Google is simply really bad at some things. See Google Checkout -- which was actually a major contributor to the Market's problems -- and Google's retail efforts with the Nexus One. The Android Market is not great, but neither is it particularly terrible, and it has been rapidly improving.
"This would squeeze out space for Apple in the mass market, forcing them into the high-end of the market, where people are willing to pay higher prices for a better device and experience."
This is my favorite bit. Apple is a mass consumer electronics company, with products at every price point, usually representing the value option. This sort of casual allusion that it is the premium option is utter bunk, and instantly reveals the bias of the speaker. If Android succeeds, via competition, in putting price pressure on smartphones, you can be certain that Apple will be pushing down to the lower options just as quickly. Anyone who thinks otherwise has absolutely no business sense.
Android is really a story about Linux. When people miss the Linux part of the equation -- and the decisions that are bound by it -- they instantly lose focus on some of the givens of the platform.