IE is actually not so bad at the web. At least not for the end user (argument about stifling development and innovation aside). As a user of IE, I actually have a better experience with IE than I do with Chrome w/ the sole exception being performance. I'm sure there are sites that don't work on IE, but honestly the only ones I've ever seen are those posted here on HN :-)

With that said, everything I've heard from people in MS (and some who work on IE) is that this is the first time in MS's history where their goal is to actually make IE the best web browsers against the standards. They are targeting to be able to legitimately say that the best platform for HTML5 apps is IE. Only time will tell on that.

But I do think it is naive to think a phone will fail because it is based on the worlds most popular web browsing engine. Any more than a phone might fail because it has no physical keyboard, no 3G support, no Flash, and no native apps.