Windows Live is a nuisance
Microsoft's upper management seems to be expending too much thought on nursing their pet Windows Live services, to the detriment of their core customer base.
At its heart Windows is a business operating system. Microsoft seem to have forgotten that their grassroots users are the business Windows 'n' Office crowd - anyone who thinks corporates will be moving en masse to the cloud any time soon has badly lost touch with day-to-day life on the ground level.
Time to take a step back and a deep breath. Time to start concentrating more on bringing genuine innovation to Windows itself - despite the continuing lack of real, revelatory innovation coming from their competitors, including Linux (sorry, lads). If they're dreaming of a Windows Live empire, no matter whether it works out or not, the foundations could do with care and attention.
The Win32 API is ubiquitous, but it's also horrendously out-of-date. How about a new, modern native API alongside Win32 that's built with security in mind from the ground up? Y'know, where applications can no longer assume that they can interfere with each other or with OS files and services (the woefully inadequate sticking plaster of Windows File Protection notwithstanding) without specific user or policy authorisation? Where the OS has complete control over software installation so that applications can finally be audited and uninstalled cleanly and completely? On the server side, how about a networking model that moves away from the old fashioned, finicky shackles of Active Directory and onto something cleaner, more freeform (but still programmable), more comfortably scalable and more user- and administrator-friendly?
Just a few examples off the top of my head, not intended to be comprehensive. Huge amounts of work in what I've suggested, of course, for both Microsoft and other software vendors, but things that Microsoft could achieve if they would only put the effort in and get excited about Windows itself again. Not to mention that they're things that would secure the future of the Windows platform and bring customers in their droves to new versions on solid, technical terms rather than endless marketing-driven spit and shine.