My hypothesis is that they were afraid of an antitrust lawsuit. If they had chosen to compete, Microsoft would have been broken up. I really liked the idea of Continuum[0] and I know that Microsoft makes $5-$15 per Android phone[1] but I think they still should have competed.
[0]: https://www.microsoft.com/en-us/windows/continuum
[1]: https://www.howtogeek.com/183766/why-microsoft-makes-5-to-15-from-every-android-device-sold/
