The ray of hope here is that Microsoft has delivered the required security before, so it should know how to do so again.
Technology miss: Its Office apps are shockingly bad
[Updated 11/198/10]Formatting in Word and OneNote is essentially limited to jotting down some characters and adding formatting such as color, boldface, italic, and highlight background. The Excel app is slightly more capable, but not much. On a Samsung Focus, I could select only one word at a time; I could not get the drag-select method to select more text. Originally, I thought this was a limitation in mobile Office, but later testing on an HTC Surround showed that text selection beyond a single word does work in mobile Office. It's not clear what the issue was in the Focus, though it could be the touchscreen's sensitivity is the issue, as I had intermittent issues in getting it to recognize taps
More irony: Sure, Office for Windows Phone 7 can connect to SharePoint servers -- assuming that you let your security guard down, of course. And when connected to SharePoint, there's little you can actually do with the documents you have access to. What's the point?
If any company should have been able to adapt Office to the mobile environment, it's Microsoft. What it delivers is less overall capable than a $15 app from a company no one ever heard of such as Quickoffice (available for iPhone, Android, BlackBerry, and WebOS) or DataViz's Documents to Go. If you want Office on your smartphone, you'll need one of those apps running someone else's smartphone. (Mobile Office does have the niuce ability of letting you initatiate a voice recording or take a photo within the app, not switch to another app as is the case on other smartphones.)
Microsoft should be ashamed that its mobile Office app is so poor. It should kill it and rely on third parties or make a serious revision effort. Either way, in the meantime it should rename its current mobile Office offering to some Office-less name so as not to further damage that brand. (That's what software updates are for.)
Technology mismatch: A really good interface not backed up under the hood
I like the Windows Phone 7 user interface -- it's clean, simple, and intuitive. Even though it made a positive first impression on me, my Vista- and Office-fueled doubts about Microsoft's UI abilities led me to expect the worst in the final version, and I saw signs of Microsoft gumming it up in July. I was wrong in those fears. What it has now is elegant. It reminds me very much of Steve Jobs' NeXT computer and OS: spare but attractive. It's not quite as flexible and nuanced as Apple's iOS, which allows complex functionality in usually intuitive ways, but it's a much better UI than Google's Android, RIM's BlackBerry, or Hewlett-Packard's WebOS.
The problem is that under that pretty, toned exterior lies a couch potato of an operating system, one that seems unwilling and perhaps unable to hoist itself off the couch. It's not so much lipstick on a pig as it is lipstick on a sloth.
Fix the OS and its apps, and stay true to the UI.
Strategy miss: Abandonment of the full Microsoft customer base
One of the biggest problems with Windows Phone 7 is that the assumption behind its focus is flawed. Microsoft has created a consumer smartphone meant to compete at the low end of the market with the bazillion feature phones that come and go, not one designed to meet the needs of the business market. It certainly doesn't compete with the iPhone's or BlackBerry's "use it for personal and business as you like" market, which is the one of growth.
In fall 2008, Microsoft was working on the successor to the poorly received Windows Mobile 6.5. Apple's iOS had truly changed the picture in mobile, and Google's then-new Android looked to be playing that new game. Microsoft chose to enter the realm as well by starting from scratch, dropping the Windows Mobile platform, and developing an all-new modern smartphone OS in what Microsofties call The Reset. It was the right strategy.
But where Microsoft went wrong was also deciding to develop a smartphone OS only for consumer users, following an odd preoccupation with teenagers and 20-somethings. I can see the argument for a consumer-only strategy may have made some sense in fall 2008 -- Apple's iPhone didn't yet have strong business functionality, which Microsoft and others ironically criticized it for -- and the "bring your own device" phenomenon had not yet taken root in business. But wasn't that the point of the ill-fated Kin?