I have a Zune HD, and it's OK for a media player, its a good interface for an appliance, something like what you'd expect your TV to have, for example. But I don't think it's a good mobile computing interface. It's too constrained, it forces you to interact with it in a certain way, like they have a flowchart for how you need to be using it. Smartphones are becoming a computing platform, and they need to be flexible enough to accommodate various ways people use their computing devices, and I don't think it is.
Secondly I don't see the point of it. Seems like MS is trying to show they are hip and involved in mobile OS. OK, but to what end? They are trying to sell an OS into a market where their entrenched competitor, Google, is giving it away. Even if they are successful, they will never make back the money invested in R&D. What they should be doing is selling apps and Bing search to go with other mobile platforms like Android and iOS. They can partner with Apple against Google, and Android is an open source platform, so Google can't stop MS from monetizing it the same way Google is planning to monetize it, which is with search, apps, and mobile advertising. Any device manufacturer can take Android, take out Google search and ads and put Bing there instead, so MS will be taking the money that Google developed Android to make. So instead of wasting money to build a new turf, MS is free to compete with Google to monetize its own Android turf, while Google is paying to maintain it.
So my advice to MS is take Android, hijack and extend it. Make an Android version with your own UI, internet explorer, and services like Bing and ZunePass integrated to replace Google's, open your own app marketplace, take over all the money making parts of Android while leaving Google to pay for R&D of the underlying OS. Google is late with music store for Android, can you imagine if instead of wasting time and money on WP7, MS has invested that energy in modifying Android to integrate ZunePass? They could have had the dominant music store for Android now by simply showing up. Or if instead of wasting money on WP7, they sold a business version of Android to businesses with tight integration of MS business apps, exchange and Office tools? They could be cleaning RIM's clock. Instead, they have wasted effort, money, and most importantly time to try to re-create something that has no hope of making money, ever, and failed at it several times.