Since they don't sell Android to consumers, that billion was made of licensing fees from Hardware makers + ads + Android market revenue. These will bring in revenue even if SMS doesn't work and SMS is not essential for them.

I'm not sure I see your point. While this bug alone will not be enough to hurt Android adoption, enough quality issues stacked up certainly will.

The buffer that they are given because of manufacturer QA and patching will only go so far.

Did they support that with anything in terms of how they'd arrived at that number?

I'm guessing it's based on additional ad revenue driven by mobile searches but there are a lot of variables in there which would be open to debate and I'd be really interested in seeing their working.