Blame Ballmer and his arrogance for WP7's results (or lack thereof) today.
Microsoft had their chance to grab hold of the universal-licensing scheme that Google employs today with impunity, but when Ballmer and the world was shown in 2007 what was to come he just laughed it off, thought it was all a big joke:
http://www.youtube.com/watch?v=eywi0h_Y5_U
The result? More lousy WinMo iterations for the next three years.
Never mind being way too late in what is probably the most volatile market to have emerged over the last 10 years, WP7 is the very definition of waste and redundancy. MS has tried to position themselves somewhat away from the universal licensing model (which Android has already locked them out of) and toward the controlled, vertical model, but only halfway. Problem is, there is no unseating Apple from that position unless you can pull off another June 2007: namely, revolutionizing the segment entirely. MS hasn't even come close to doing that with WP7. It's a poor "me-too" effort somewhere on the level of the Zune/Zune HD.
There is absolutely no point for a company like MS, with THAT management, to try to beat Apple at the very game they have perfected utterly. Apple owns all the Platinum mindshare out there today, and does vertical integration like no one else.
Ballmer has painted MS into a corner, and will just pull Nokia in tow for the painful ride downward.
Further, with the amazing results Apple is experiencing in the tablet segment (being the de facto standard to beat) MS' late and rather questionable tablet efforts are also in doubt.