I think it's not hype, just an idea blown out of proportion without real numbers behind it. It's a catchy idea that people have latched on to when denigrating Android. That's not to say that compatibility isn't an issue, it's just that this issue hasn't been properly quantified.

But I always cede to the cold, hard numbers. If we could determine the number of applications at a particular API level, we could use the OS distribution to determine how many apps are compatible with each release and determine the relevance of a handset.

Kangal raises a good point. The Android Market could better shield users from this incompatibility.