Frankly, Microsoft has done a bad job with branding, and I still think most people don't even know that Live is Micrsoft's search engine. What happened to MSN being the brand?
To be fair, there were some cool people in the group who knew the time of day -- one (very senior) fellow asked me point blank to enumerate the problems in Microsoft's online products, and was very intent on making sure that I defended my criticisms. We ended up having a really nice, long conversation about things like the shutdown of the IE team, and other blunders (such as the choice of "live.com" branding).
I think the closest thing I got to an answer, was that the decision came down from on high. There's something like 11 levels of management at Microsoft today; based on what I've seen and heard, the politics of that structure can overwhelm good taste.
I don't know why they dropped the "Windows" part from the name though.