What if the Zune's OS became a launchpad to a phone OS, and they had used their existing PDA experience from Windows CE to make a really good product and stuck with it, even if sales were initially slow, but they kept improving it?
But this is what they did and are doing. While Zune wasn't the direct antecedent of Windows Phone, the Metro UI was first developed for the Zune and refined for WP. And regardless of one's opinion of Microsoft, few can deny WP is generally considered a really good product, with high customer satisfaction and plenty of plaudits from tech blogs and reviewers. Sales were and are slow, but they keep improving it (though granted, Nokia has been improving WP at a faster clip). Currently, Microsoft looks to be in it for the long term; Windows 9 and Windows Phone 9 are expected to be a convergence of platforms.