MS has been making terrible phone operating systems for over a decade...?
Yes I know that, I used to use (and still have in the cupboard somewhere) a Windows Mobile Smartphone.
They were late to the Capacitive Multi-touch iPhone-esque simple yet powerful UX paradigm smartphone. It was widely acknowledged that MS was "caught sleeping at the wheel" in the smartphone space. They tacked on phone call and SMS functionality on the PocketPC OS and thought that ought to do it.
And RIM were all about the physical keyboard and most other copied that.
Google were the only ones flexible enough to take the work done on Android and make corrections to match the Apple iPhone experience. But even that took a while. I remember the first post iPhone Mobile World Congress that was 8 months after the release of the first iPhone and 13 months after the original announcement at MacWorld 2007. I expected to see a slew of copycat attempts and there was nothing. It wasn't until later in 2008 (October) that the G1 was released, and let's not fool ourselves, the G1 was nowhere near the iPhone 3G that was released a few months earlier.
Windows Phone Series 7 was Microsoft's true entry into this new smartphone world which came late and didn't have the features, but it showed a lot of promise and it had a giant behind it, something Blackberry lacks. Windows Phone 8 is an improvement showing that Microsoft want to be in this space even if it means being No. 3.
Microsoft can do it too. They have enough money that they don't have to make profits until Windows Phone 9 comes out. These games are played over many years and one has to have the funds and stamina to stay in. Just like with the first Xbox; Three years of losses for the 7 years of profits from Xbox 360.