I can share my experiences from the situation in the Swedish market, which I think look the same in many countries outside the US.
WP didnt get support for Swedish and the MS services didnt work here until WP7.5.
iPhone and Android had almost half of the market each here, so the WP-phones had to be something special. The first HTC and Samsung devices wasnt. Both the hardware and WP7.5-software got mediocre reviews and wasnt enough to make people switch and try something new.
And here we have never heard of Zune before. And I think Zune offers much more services in US compared to other countries. Here we cant buy music in Zune for an example. So the whole Zune software thing doesnt make much sense here.
And why should you even have to connect it to your computer to sync photos? iPhone and Android can auto upload them to your Dropbox in original size. WP can not. You can not even select multiple photos or "all" photos for manual uploading to Skydrive. Talking about basic functionality.
It is not about comparing to iPhone or Android specificly. Its about that people nowdays knows what a smartphone is and what you can expect from it. And as a new contender (at least here in Sweden) MS can not settle with "the same functions in a different way". They have to have something, if not sensational, at least spectacular that makes people think it is worth offering the functionality the are used to.
I think WP is great in its design and smooth UI. Except from that I cant see a reason why an iPhone or Android user would switch, the loss of functions would be so much bigger then the gain. Of course there is users like me that switched just out of curiosity and because we believe in the MS eco-system, but we are very few here.
When the Nokia Lumia 800 and the HTC Titan was released here, WP got quite a lot of attention. The phones was the first WPs to get some really good reviews, but i had mainly to do with the hardware and the design. And obviously the Lumia 800 sold pretty much thanks to the massive ad campaigns.
But sadly enough (and this is true) I have never seen a single phone being sold in such huge amounts on the second hand market just weeks after its release.
So apparently WP has a problem to attract people in the first place, and even to attract current users enough to stay with the device.
I think WP would have the best chance to compete with iPhone, where probably many users needs are quite basic. They want a fast phone with social network functionality. WP would fit perfect. But these users also want the latest Angry Birds, they want the banking apps, they want the agencies apps, they want the sharp screen from the iPhone. They want to have a phone that is future safe regarding apps/games/functions.
And for the same price as the flag ship WP Titan or Lumia 800, you can get an Android phone with big true HD display, super fast camera, 1080p video recording, HDMI connection, Flash support and fully a customizable OS. So the choice for hard core/power users and nerds isnt hard either.
I dont know about US market but the Androids here are not having severe problems with reboots or buggy software. I know of some really, really cheap ones that were slow and had low res displays but generally the Androids are as stable as iPhone and WP in the same price class.
I see now that I could have written a book instead, sorry, but it is an interesting thread and I wanted to share my thoughts.