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Don't forget the Zune. Maybe they have such happy memories of the Zune's sucess that they want to revisit it. Sorry, it's Monday, or as I like to call it "Snarkday".
It's a risky decision, in my opinion, for MS to start making hardware that directly competes with its long established partners. That is one big difference between MS manufacturing smartphones/tablets and the XBox - there weren't already partners manufacturing MS gaming consoles when MS went into the console business. I'm also not sure that the hardware or the software is the problem for Windows phones (I've used one of the Lumina 900 smartphones, and thought it was a pretty even competitor to a current iPhone or Samsung Galaxy.
I think the problem is like trying to conquer with Portugal as your starting point - you have a small beachhead and a long path ahead. Microsoft is starting so far behind at this point that it almost doesn't matter that their hardware and OS is as good as the competition. Over 50% of the cell phone market is now smartphones, so they have to convince those people that the iPhones and Androids that they are already using and familiar with are not as good of a choice as a Windows device. The other 45% of the market that are still using feature phones have to be convinced that a Windows Phone is easier to use or has superior features to the other choices. One problem with going after that portion of the market is that it is likely to be more sensitive to price point than the "early adopters" and Windows phones are not particularly cheap unless heavily subsidized.
Perhaps that last point is the reason that Microsoft is risking the alienation of its partners; Microsoft is able to subsidize its own hardware much more easily, and by offering a high-end device at a mid-level price, perhaps the company can establish a growing presence where the product stands on its own merits. The risk is that companies may be reluctant to partner with MS in the future because of the risk to their own company -cough, cough Nokia.