Lack of imagination
Lack of imagination was the problem. It seems that people in charge at Microsoft are not forward thinkers, they don't seem to have any imagination when it comes creating something new. They are happy to clone other ideas and put their own spin on it once the competition has made a move.
When the tablet PC was being worked on there wasn't anything else to compare it with. So when key people (head of MS Office for example) at Microsoft were asked to adapt software to work with the new tablet input method they refused. It's almost like they can't see the merit of doing something unless someone else is bringing in cash for a similar product.
But this time there is a product they can refer to, they can made things happen as there's plenty of alternatives that are raking in cash.