It came so close to being Android. In 2000, Microsoft previewed .NET Compact Framework for Windows CE devices. At the time I had an iPaq connected via Bluetooth to an Ericsson 2.5G phone, and I writing C# apps for it. My immediate impression was "THIS is what mobile software should be like!"
Seven years later, with NETCF an optional oddity on Windows Mobile, Android showed you could do a mobile OS using a Java-like managed language system for both system middleware and applications. Windows Phone is a bit closer, but it still isn't that.
Android was willing to be more revolutionary, replacing much of the Linux userland with managed language code. That was a big gamble, but that is what it took to succeed. If Microsoft were to take the Win 8 kernel and .NET, or successor technologies, and unleash their engineers to make something really new, they would be a fearsome competitor.
Dragging Windows onto tablets is a waste of talent.
MS has to come to the conclusion that it is not a consumer tend setter any longer. Consumers only use Windows because it came on their PC. And as more and more of the consumer market goes mobile, Windows becomes irrelevant. And (sadly for MS) they were too late to the mobile market so their devices (phone and tablet) are going nowhere. I got a friend who works at Best Buy who told me no one is buying the Windows phones. And few are buying the tablet. It's IOS and Android all the way.
MS should focus all it's eggs on enterprise. Plenty of cash to be made in that market.
While the front end flashy stuff isn't there compared in .net compared to the better Javascript libraries (I love d3!) MS have really progressed the non-sexy .net improvements e.g. C# evolution, F#, WebAPI.