I don't think missing the Internet revolution was their biggest mistake. If you look at Apple they focused on hardware. What Microsoft could have done too. Instead, they just tried to continue this Windows monopoly and overlooked everything else.
My point was they didn't miss the Internet revolution. In fact, they picked up on it faster than most of the '80's tech companies and radically shifted strategy because billg knew that by, say, 1997, it might have been too late.
I agree that trying to remake the PC space in the PDA and phone worlds was a strategic blunder for Microsoft. OEMs competing to build low-margin devices for a common OS worked for Google because they could afford to give Android away for free and the carriers and handset makers were terrified of Apple.
On hardware, Microsoft had a model to follow: XBox. Imagine if they'd built an "XPhone" in 2005 instead of playing me-too to Apple with the Zune.
