People don't trust Microsoft. And they're selling it under the Windows brand. How cool is Windows? Not very. Who wants viruses and blue screens on their phone? Not many people. (note: it's irrelevant whether blue screens and viruses actually exist on WP7).
The XBox succeeded in part because it was sold off-brand.
Developers don't trust Microsoft. Who wants the OS vendor to make competition for their software? Not many developers. And Microsoft will if it can, because it has to grow.
The XBOX succeeded in part because competition in games is a non-exclusive agreement, a gamer that buys a racing title will probably buy another racing title.
A customer that buys MS Office will not buy another suite.
A customer that buys or downloads for free the MS app in his phone will not buy another app that does the same, even if it's better.
Isn't Apple an OS vendor, one with a history of not approving apps that compete with what Apple has already done, and of taking existing apps off the market when Apple rolls out their own version?
The XBox succeeded in part because it was sold off-brand.