From what I can gather from Google's official blog and related posts, Google isn't paying the difference on the 10-cent apps, but has "teamed up with" developers to offer the dirt-cheap apps. On most days of sale (with 3 days left, according to the Market banner), the assortment leans heavily toward games. Many of them are great games, and a good number were previously exclusive to the Apple App Store. I imagine that most people have had the same reaction I did after reading about the nearly-free apps: hop into the Market, pluck out a useful app or game or two, install them, then mentally put them aside for the next plane delay or waiting room.
That's great for me. That doesn't do a lot for the developer who took a chance on a paid app in the Android Market, who now has to figure out a different app, or at least a different premium packaging, to extract any more money from me. And it's not that helpful to the person next to me in the waiting room or airport terminal, who might want to grab the app I'm playing for their own Sony Ericsson Magic Incredible or whatever. I'll tell them the name, they'll search through the dense thicket of apps in the Market, and if they don't have a credit card set up in Google Checkout, they'll probably put their phone away and shrug.
All that is to say that I think this is no time for Android to take faith in raw numbers of phone activations, or even bulk downloads of apps, the vast majority of which are likely of free apps. The Android Market could be a lot friendlier to non-geeks looking to search and browse the most popular and highest-rated apps. It could make entering a credit card for app purchases an easy step in the setup process. And leaving aside the well-covered malware and fragmentation concerns, the biggest concern for the overall health of Android might be the perceptions of a young generation of developers who write in agile web languages, take full advantage of smartphone and social capabilities, and see a lot of evidence of the App Store's profitability.
It seems less like a sign of strength that one can convince developers to give away their apps for just 10 cents than a sign that maybe those developers are just happy to get a clear spotlight shone on them.