Exactly. The free-with-contract market is real, and wants smartphone features. If "Google Android" doesn't want that market (which isn't insane, iOS doesn't want it) then something else will fill the niche, and "AOSP Android" is the most likely candidate.
The grandparent's desire is isomorphic to wanting Google to force users to spend more on their phones so she has to spend less on her software. That's not a good business tactic.
What I've suggested in the past is that Google introduce a new brand like "Android Platinum" for the high end. For manufacturers to be allowed to use the brand, they'd have to meet requirements on minimum specs and commit to timely OS updates for some period.
The grandparent's desire is isomorphic to wanting Google to force users to spend more on their phones so she has to spend less on her software. That's not a good business tactic.