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The first (less critical) reason is that Microsoft has never wanted want to tread on the toes of other companies who make software for the Windows platform.
Ah. So that explains why we have so many commercial web browsers, compilers, word processors, spreadsheets, and various other things out there.
Microsoft cared about them. :-)
It was Microsoft's polite way of saying "We didn't want to step on their little toes... [because we had one team with a knife in the back and the other team with the howitzer in the front]."
Microsoft cannot make Office better because Microsoft is bereft of imagination. That is it, in a nutshell.