The answer is most likely because people use git. Lots of people use git - particularly the crowd Microsoft is actively struggling to appeal to which is the entrepreneurial/startup crowd.
I've never used hg so I can't attest as to which is "better" but I really don't think that matters to most people. The only question is if it is "good enough" and git is.
I'd bet this is simply a case of the right hand not knowing what the left hand is doing. I had no idea Microsoft were sponsoring Mercurial--even that seems odd, spending money on an open source competitor to a product they also make.
I think your analysis is spot on.
That said, I have never met a single other person who uses hg. Not at work or hackathons. Most have never even seen an hg repository and some haven't even heard of it. Git definitely has "won" this "war".
For what it's worth, I've heard quite a lot of anecdotal evidence that Git is pretty contentious among many teams that adopt it. Git adoption is often driven by an aggressive few, against the wishes of their colleagues who can be quite unhappy about it. Case in point: Git has more "hates" on amplicate.com than Subversion and TFS put together -- and "hates" outnumber "loves" by something in the region of four to one. (http://amplicate.com/hate/git)
(For reference, Git and TFS have roughly similar market share in the enterprise at the moment, and Subversion is about twice as widely used as either of them. Source: itjobswatch.co.uk)