"trying to cram the Windows desktop onto a tiny mobile screen"
While they could have designed it far better, they didn't have the multitouch capacitive screen technology which made the iPhone possible. Still, the PalmOS UI was less cluttered and easier to use.
As long as they only made the OS, without a direct involvement in hardware design, they had to adapt to what hardware companies made available.
That said, MS failed over and over to deliver the right UI for the right device - later it tried to expand the tile UI designed for small mobile screens to large desktop ones, showing they have real issues in understanding users needs, and putting their ideology about a single UI on multiple platform always first, despite the several failures.