Why doesn't Microsoft enter the ostensibly lucrative Anti-virus market? 
With the natural affinity between an operating system and the
anti-virus that surrounds it why isn't Microsoft in the AV market
space?

In fact, Microsoft has entered into the lucrative Anti-virus market.
Last year, Microsoft bought the Anti-Virus software company GeCAD

http://www.virusbtn.com/news/latest_news/msoftrav.xml


Until now, Microsoft hasn't entered into this market, for several
reasons. Firstly, they had their fingers burnt 11 years ago when they
included basic anti-virus software with Windows for Workgroups 3.1.
There was no facility to update the software, and it was quickly
obsolete. However, users had a false sense of assurance, and it was
believed that the including the basic anti-virus software had a worse
impact than not including any, and leaving this market to the
dedicated players.

Microsoft has had a good relationship with anti-virus software
vendors, and hasn't wanted to impact this relationship by competing
against the other vendors . However, security is such an important
issue now that Microsoft intends to provide a layered anti-virus/worm
architecture in future products, whereby the core operating system
will provide critical protection against new threats, via a
combination of the Windows update facility and anti-virus technology
recently purchased.

This will leave the current anti-virus vendors to provide enterprise
scale and full features solutions as per their current market.