WinMo 6.5 was MSFT's apogee in the handset market... there were several factors that all played into the slide from a 45% mobile smartphone marketshare to below 1%...
1) The introduction of the iPhone, which rode the momentum of the iPod and really introduced the notion of a mobile app ecosystem. This made 3rd part developers happy. The fact the the hardware and software came from a single source made the carriers happy because they were no longer dependent on 2 sources for OS updates, MSFT and the handset maker. And it was billed as a device that would "just work", which for the most part, it did live up to that expectation.
2) The introduction of Android, while fragmented and seemingly all over the map. It offered a far better licensing model for handset makers than MSFT was offering at the time. It's Linux roots gave it a very solid foundation from an OS development standpoint and resulted in there being more programmers able to work with the code to integrate,extend and update the OS for the handset makers.and for the carriers. The OS stagnation model of planned obsolescence was hurting carriers and handset makers. Reliance on MSFT for a bulk of the OS updates, having those updates filter down through the handset makers and finally through the carriers created a nice planned obsolescence path at first but it also bred a lot of customer dissatisfaction. The creation of the app ecosystem for the Android platform made it attractive to third party developers. The fact that it tied into Google's cloud strategy was also a key selling point.
3) Point 2 leads to the next point, the exodus of the enthusiast market segment. There was a perverse symbiotic relationship between MSFT, the handset makers and the enthusiast community by 2006. This is most evident if you look at one of the most important enthusiast sites of the time, XDA-Developers. Virtually all the work being done there at the time was focused on WinMo 5 and 6. By the time WinMo 6.5 came to light, There were scores of early WinMo devices languishing without any OS updates. Thanks to the dedication of the core of the XDA members, WinM0 6.5 landed on a lot of these devices, much to MSFT's and the handset maker's amazement. The fact that there appeared to be elements in both camps that were secretly supporting these efforts perplexed and scared them. I believe it was the ROM dump scandal at MWC that drove this point home. The fact that a demo phone had it's OS dumped and ported so easily seemed to lead some executives to believe that WinMo was slipping away from them and that they needed to do something radical to stop that. The fact it appeared as if there were insiders supporting these activities bothered them greatly. So they ditched WinMo and pushed to WinPhone to stop this... and enthusiasts fled to Android, where there were far fewer hurdles in place to hamper development. OnePlus and Cyanogen are just a couple of entities that grew out of this.
4) The mad rush to jump into the post-WIMP world led to the adoption of the Metro interface and a radical shift away from a UI that had grown slowly and incrementally of the years. It also marked the beginning of the end for the hardware keyboard/stylus based paradigm to a cheaper, touch only design.This was yet factor that slowed WP7 adoption and contributed to the market share decline. Those that didn't flee to iOS or Android clung on to WinMo and the devices running them, thereby stagnating the Windows Phone market.
5) The decline of Blackberry, this one does not necessarily seem to factor in at first. Because why would the decline of you only major competitor hurt you? The first part was the fact that those ditching BB devices were not fleeing to MSFT, they were fleeing to iOS and Android. These departures affected other elements of the MSFT business, the enterprise application market segment. RIM's dependence on Windows Server and Exchange was good for MSFT. Losing the customers that were leveraging these technologies to Apple and Google hurt them across multiple market segments. It hurt WP sales because it gave even more momentum to the newcomers to the game and sped up their adoption rates.
6) Abandoning the Enterprise... MSFT forgot that their core business strategy had always relied on their business customers to pay the bills and keep the lights on. It's ironic that neither of the newcomers has successfully capitalized upon this. Google has done a far better job than Apple but neither one did in the Aught's what MSFT did in the 90's to the likes of Novell and Lotus.
Looking forward, it could be said that MSFT's best play would be to embrace Android fully and roll it into their ecosystem, much the same way that Amazon did. Amazon gave MSFT a key lesson on how to build an Android distro divorced from Google and not subject to the MADA. Except what Amazon has done in the consumer space, MSFT could do the the enterprise market and probably do a whole lot better. They would also have been wise to embrace the only real player in the enterprise handset space, Blackberry. They could do with Research in Motion what they should have done with Nokia, become a player again in the enterprise. Just taking AOSP and baking a version of Android that fully leveraged all their business offerings would rock Google back on it's heels. It would also give them near immediate access to a thriving app ecosystem that will not require developers to jump through flaming hoops to bring apps to market. It would also entice a bunch of third party players to focus on developing apps that integrate with the MSFT enterprise offerings. And it would do so without the need to retrain and retool development around MSFT's unique mobile platform. MSFT would also be able to refocus their own developers that are simply writing code just to turn a damned phone on towards taking an OS that works and retooling it to their needs. They can let Google and the open source community do a bulk of the heavy lifting a reap the benefits from it. All the major SOC foundries are pumping out product that will work with AOSP. So MSFT doesn't need to redesign the wheel, just slap some hubcaps on them. It'll would be a mixed bag luring handset makers away though. Most of them may look at it as an attractive proposition, but nearly all of them are still locked into the Google MADA and would have to ride out the remaining time left on the agreement before they could shift to an MS driven Android fork. But even just compelling one or two players to do that could force Google's hand and cause them to revise the MADA's terms. Buying Blackberry, or working with them to fork Android, prior to RIM committing to the MADA would have been the wisest move ever by MSFT. But this didn't happen and yet another handset maker was lock into the 2 year period of being unable to develop and market a non-GMS integrated Android fork for their handsets.
Has this already begun? It sure would look like it, if you look at MSFT's app offerings on the Google Play store. Specifically a bulk of the stuff coming out of the Microsoft Garage. Nearly all of the key elements for a MS derived fork of Android like the one I suggested are there, with the exception of an app store and the enterprise integration. Installing most of these apps, the Arrow Launcher, Cortana, Outlook and Bing Search being the key ones, on top of AOSP. You end up with something that feels very much like a Proof Of Concept demo for such a distro. Rather than letting WP8 die a painful death, they attempted the doomed Astoria project, which was supposed to allow for interoperability of apps from iOS and Android to run on the WP platform. When that died, they were left with NOTHING.
All these MSFT built Android apps have been pushed out with little or no fanfare. The only time it came anywhere close to being a belligerent act was when Cortana for Android broke Google Now. For an opening salvo, it was covert and they quickly retreated from it. But it did show MSFT's hand and reveal that they have more than just a passing notion to embrace Android.
Simply knowing that Bill is running an Android phone is interesting. Knowing what the distro it's running looks like would be a far more compelling tale. It's states in the article that it's "an Android phone with a lot of Microsoft software"... So I'm probably not too far off the mark.