I'm not sure what's going wrong with Microsoft. It seems they only ever really copied other people and their product ranges today seem to follow the same pattern - maybe the pace of change is the problem, thank to the Internet (which Gates and Ballmer completely misread) releasing a me-too product a year after Apple/Google/etc just doesn't cut it any more.
They had innovations, their internal culture murdered them though. Look at their mobile/tablet efforts dating back over a decade. Almost all of their early issues were design related, battery tech was secondary as smartphones have proven people will put up with shitty battery life for functionality. They just kind of gave up on it until Apple arrived and set the stage. It's been rumored Ballmer himself has kiboshed a few promising products because he was playing politics with people aspiring to his job.
I think the bigger problem is the sheer size of Microsoft at this point. Former employees have ranted publicly about how stodgy and slow their infrastructure is. Constant meetings and too much middle management are also common complaints. Getting ahead in the company means satisfying managers individually instead of serving greater goals in the company.