All Microsoft had to do was implement a store in addition to the previously-open nature of Windows Mobile, clean up the GUI a bit (the GUI was always the weak point of PocketPC/Windows Mobile/Windows Phone) and they would have a serious contender. Instead, they took the most attractive features of Windows Mobile and threw it away, and turned it into yet another would-be iPhone contender: too much too little too late.
What you describe is exactly Windows Phone (formerly known as Windows Mobile) 6.5 and it has not done well in the market. Its main features were a massive cleanup (as opposed to complete redesign in the case of 7) of the UI to make it more "finger friendly", Windows Marketplace for Mobile (i.e., an app store) and My Phone for backup/restore/find my phone. The lackluster sales of 6.5 have really shown that Microsoft had little choice but to undertake the massive backwards incompatible rewrite that is WP7.
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