It is worse than that Bob. Microsoft was in the cell phone market with Windows Mobile OS. It spent hundreds of millions of dollars to get it established. Alas, no one in the company cared about them. Nokia and feature phones ruled the world then. And the OS that Microsoft had designed was a copy of Windows with start menu and such. My last role there was being a sister division to that. No one cared what they did. If anything, it was thought to be a bad idea because Windows Mobile OS royalties was well below Windows on PCs so even if they succeeded, there was a school of thought that said that was a bad idea.
Then Apple came with ipod. My group got intelligence over and over again that they were going into mobile phone business. Everything we (I) brought that up we were rediculed as to it being an impossibility. That no way Apple had the resources to build phones. It was so bad that I was instructed to not bring it up anymore. So I didn't and left the company instead (for that and other reasons).
It was clear to me that music was going to be a feature of phones not a stand-alone business. And that it was a natural progression to go there.
Both Apple and Google did so many things right. Apple's best move was to build new, simple OS for phones rather than dumping MacOS in there. It allowed them to make it small, fast, and optimized for the hardware. Google's best move was to repurpose Linux and put their interface on top. They did not need to invent the OS, they invented the experience. And gave it away with no royalties -- something Microsoft did not even dream about.
I think biggest problem here was Bill Gates retiring from Microsoft to run his Charity. He was the only visionary at the time to make large moves as he did by fending off the threat of Internet, Linux, etc. There was no replacement for him and once he left, groups fended for themselves. Windows Mobile was under the Xbox division and which could care less what they did. It was mistakenly put there thinking it is "hardware business" so it belongs where Xbox was.
By the time they decided they had to do something, it was too late. Android had gotten a foothold and that was that.
BTW, Android came about because Apple and Jobs made one critical mistake: the initial roll out of iPhone was exclusive with AT&T. Verizon -- despite being the #1 cell phone provided at the time -- was left in the cold. Windows Mobile was not competitive with iPhone but Android barely was. They and other carriers likely left out put their weight behind Android and the rest is history. This was the opportunity for Microsoft but they were still sleep at the helm there, and could not think of a strategy of giving away the OS as Google did.