MS was, and is still, in a very ugly position in regards to mobiles. They sat and watched Apple move in not only on music players, but phones, and later tablets. MS's offerings were all milquetoast desktop and laptop offerings and its migration from its old Windows Mobile product to Windows Phone took forever with the early versions being pretty uncompetitive.
MS saw what Google's relationships with its OEMs was like (reskinning, not doing updates, in-fighting, threats to move to tizen/sailfish, endless compromises, bloatware, etc) and wanted nothing of that. They thought if they had a tried and true phone hardware division with a known brand that they could leapfrog into the market. Well, it didn't happen, even though the Nokia Windows phones were fairly well received, especially if you're price sensitive. They entered the market pretty late and by then both the Android and Apple store were chock-full of apps. That's on top of MS having a stodgy business image that consumers find unappealing. To be fair, MS sells millions of these things per quarter, so they're not exactly failures. They're just a distant third. (8.6 million last quarter according to windowscentral.com).
My guess is that the US market just isn't price sensitive, so a good but cheap phone was largely unappreciated. The two year contract carrier deals hide the price of the phone, so its "easy" to get the hottest iphone or android. I think WP is a lot more popular in the EU where you usually buy your phone outright. Things like the Xiaomi lineup, the Moto G/E, and Android One were very much an attack on MS's focus on the low-end, and I think greatly hurt MS's low-end sales. Without those sales this acquisition wasn't going to pay off.
Yeah, but quality at the low end had to be a trend they saw coming. Apple and Samsung commoditized high-end manufacturing -- you need a lot of expensive equipment to build iPhones and Galaxy phones, but that equipment is a lot less expensive when it's being sold off to make room for newer, more expensive equipment. So low-end manufacturers can buy it and start churning out high quality, low cost phones.
And I don't doubt that Microsoft can be #3 in the phone market; I just don't think it's a worthwhile thing for them to aspire to do as a company. They will be perpetually fighting for market share, and that will tempt them to leverage their other products in ways that forego other potentially more profitable strategies for those other products. The phone market is a distraction for them at this point; and I wouldn't be shocked at all if they spin off the entire consumer electronics division (including Xbox) in the next 5 years.
MS saw what Google's relationships with its OEMs was like (reskinning, not doing updates, in-fighting, threats to move to tizen/sailfish, endless compromises, bloatware, etc) and wanted nothing of that. They thought if they had a tried and true phone hardware division with a known brand that they could leapfrog into the market. Well, it didn't happen, even though the Nokia Windows phones were fairly well received, especially if you're price sensitive. They entered the market pretty late and by then both the Android and Apple store were chock-full of apps. That's on top of MS having a stodgy business image that consumers find unappealing. To be fair, MS sells millions of these things per quarter, so they're not exactly failures. They're just a distant third. (8.6 million last quarter according to windowscentral.com).
My guess is that the US market just isn't price sensitive, so a good but cheap phone was largely unappreciated. The two year contract carrier deals hide the price of the phone, so its "easy" to get the hottest iphone or android. I think WP is a lot more popular in the EU where you usually buy your phone outright. Things like the Xiaomi lineup, the Moto G/E, and Android One were very much an attack on MS's focus on the low-end, and I think greatly hurt MS's low-end sales. Without those sales this acquisition wasn't going to pay off.