Microsoft couldn't get over the hurdle that US phone carriers refused to sell a 3rd option
at all, no matter how much money or time they threw at that problem. They could invest in physical retail Microsoft Stores all they want, but they were locked out of the stores US consumers actually buy that hardware form factor from,
and in many cases they couldn't even get SIM cards for most of the US networks even if they did manage to convince people to buy their next phone from a Microsoft Store.
Against that kind of gatekeeping, of course there is no third option in today's market! It's harder to sell three things than it is to sell two things, and AT&T/Verizon/et al decided that they didn't want to sell three things.
(Sure, Microsoft could have trundled on in other markets than the US. They had such a sizeable India marketshare against the troubles in the US, for instance. But when you've already lost your "home" market, it's hard to keep people's confidence. Especially in that case where Microsoft got the biggest marketshare gains from cheap hardware from a variety of hardware partners, those thin margin partners are nothing but confidence driven.)