Steve Ballmer takes the threat from Android seriously and he hopes Windows 7 will counter this newer OS on netbooks. Here is the problem for Microsoft... It will be competing with Android with multiple operating systems, Windows Mobile and Windows 7. While these operating systems to date have been similar, they aren't as similar as a single OS.
And this could be the biggest problem for Microsoft going forward. Can you compete effectively if you have to get developers to write apps for the phone and PC separately? The answer is probably not as developers already have to contend with the Blackberry, iPhone, Mac and other platforms.
Microsoft really has to focus on bringing its disparate platforms together to compete effectively or developers will begin to gravitate more quickly to other platforms.
Rethink Wireless has some quick but important thoughts on the matter as well.