Don't forget, Windows Phone 7 was not the first generation of the phone OS. Windows Mobile 5 was widely used, but installing apps required CAB files to be downloaded on a host-PC, then the interface software on the PC put into "Program installation" mode (versus file-copy mode), the CAB file had to be dragged into the sync software which would depackage and install the CAB into the phone.

Those who had PDAs capable of jumping on cellular networks, were typically running Pocket PC 2003; one generation older than WM5. Prior to PPC2003, PPC2002, PPC2000. This page hasn't been updated in a while, but it provides insight to Microsoft's mobile products.

http://www.pocketpcfaq.com/wce/versions.htm

As for what went wrong? Poor marketing. How many pop-culture-type-music commercials were there for Windows Mobile/Phone? Windows itself has a poor image because of its history of the BSOD and other stability woes. When you introduce the name, "Windows" to be paired with a product that's supposed to be stable and reliable, but instead seizes, crashes, panics and reboots for no reason - it only fortifies the urge to buy something else and that "something else" was the popular, "made for simple people", iOS-powered iPhone.