As a previous windows mobile device owner I would have to say: the touchscreen devices needed a pen to dial properly (no-go), the keyboard-driven devices were painful to do email on and had tiny screens, and both classes had horrible browsers (roughly IE4-level before the release of the iphone).
They also suffered from being too early in the smartphone / tablet market, having to make hardware/software trade-offs that precluded bringing a proper (desktop-like) OS to the mobile devices. Apple as a late entrant could reuse OS X and have developer API's with good forwards compatibility. Microsoft's only option was to ditch the whole OS and start over based on a new architecture, and it took them too long to swallow that bitter pill.
I think it is a symptom of MS being a software company. They lived with the hardware they had and supported any old crap compaq wanted to put into an iPAQ. Since Apple controlled the hardware their low end hardware was much better than MS's lowest supported hardware. It allowed Apple to do more in software, and jump past where MS was. MS's big problem is that they let that kind of thing continue for far too long.
TLDR Embedded systems need tight integration between HW and SW MS doesn't have it because they only do the SW and let others do HW.
They key change they dragged their heels was creating a new UI toolkit centered around touch interaction. That created a huge third party software gap vs iOS and made their devices look hampered.
What were they missing?