What flexibilty?
Buttons can disappear under certain circumstances
They can do that with capacative buttons.
No they can't. They can dim, but they can't totally, physically disappear. Open the YouTube app on the Galaxy Nexus, Nexus 4 or 7. Watch a video in landscape. The buttons completely go. You can't do that with any kind of physical or capacative buttons
Buttons can dim under certain circumstances
Same as above.
True, they can dim, as I indicated below. This isn't a mark against onscreen buttons, it's just that they can deliver the same functionality
Buttons can rotate under certain circumstaces
Doesn't really matter, because at the end of the day, you still have the same three buttons.
Actually from a usability perspective it does matter, especially on Tablets. Android is no longer just a phone OS. It's a small touch but a welcome one. There was an HTC device that did similar when you rotated the phone, I think the Incredible. It's much easier to achieve on software than hardware though
Buttons can appear under certain circumstances (legacy menu button)
Which is essentially stupid, because on capacative buttons, it would've had it's own button anyways. There's no real difference.
It's not stupid and it is different. Have you seen what happens on an HTC One X in an app that uses the old legacy menu button, such as Facebook? It's horrible. And If you don't understand why they got rid of the menu button just read up on that link to the Android developer site. In general, most users didn't like it, it wasn't consistent in how it behaved and developers were hiding things in it which should have been exposed
Button typography can change if required in UI updates to overall OS
It can, but you wouldn't need to change them with capacative buttons.
You are missing the point. What if Google want to change the feel of Android again to keep it fresh? We all know how stale iOS looks. Being able to quickly change the font, or even the look of buttons is a part of that and having that functionality is a plus, not a minus
Buttons can be added to/removed in custom roms (search button etc)
I'll give you that. But so far, non have really done that (there are some, I admit that).
Lots of custom roms give you the option, such as MoDaCo. You normally have to enable it under the settings. In his example you can get the search key back and have menu button on the left, or the right or both
Button color can be changed and highlighting effect for visual feedback of button press
Pretty useless imo.
It is fairly useless in terms of changing colour, though again some custom roms will allow you to that. The visual feedback though is a nice, playful touch which adds to Android. Again a plus, certainly not a minus
Button space can be used more intuitively for gestures (see Google Now, drag up anywhere from virtual buttons to launch).
To some extent I agree with you. This could easily be done with a hold of the home button. It's pretty much the same thing.
Long press is not as much fun as gestures. That's why swiping stuff is now prevalent in Android for deleting as opposed to long press. Again it's a small touch, but it's the combination of all the small touches which now makes Android the best phone OS on the market (imo)
The three dots are now the action overflow. You need to cast your mind back to the days of Gingerbread and Froyo, before the action bar came around, before there were design guidelines. The three dots are not a menu, they are an overflow. this link explains it
http://android-developers.blogspot.co.uk/2012/01/say-goodbye-to-menu-button.html
As for physical space, when we get to the point that a screen can literally be the entire front of a phone (bar speaker and front facing cameras) then physical buttons will be eating up space that could be used by a screen. Within 1-2 years it will happen and Android will be ready for that. Software buttons are a way of future proofing the android ecosystem and hardware design.
