Gossip suggests that the people in charge of the WP7 team were never happy with the Kin project existing at all. They always wanted it killed and absorbed into WP7 - the Kin's poor reception just convinced top management to finally grant them their wish.
I was nowhere near close to these decisions, but I was working on phone related projects when I was at Microsoft (I quit very recently). What you say is basically my understanding of the situation.
A few other rumors/half-truths:
1) Kin Studio, the client software was the one thing reviewers (what customers?) liked about Kin. It was largely developed by the Zune client team.
2) The Kin team was formed from remaining members of the SideKick team acquired with Danger.
3) Dislike of Microsoft tech and Windows Phone politics caused many SideKick engineers to leave post acquisition because they were forced to build Kin on the Windows Phone OS, which was very much like building the plane while flying it. Those who left tended to be the talented ones who could get other jobs.
4) Many designers didn't share the Windows-hate, so the resulting team was very designer heavy.
5) The talented folks left on the Kin team were poached quite greedily by the Windows Phone 7 initiative.
6) Some bigwig was in charge of Kin and Microsoft lets CVPs piss away tons of money to keep them from going to competitors. I've never seen this strategy work out.
