At the time Windows had a >90% market share and there weren't mobile Internet devices so it should be held to a different standard.
That being said, I do think governments rush to action on tech issues where it's completely unnecessary.
I do agree the agree the government suit did play a role in browser tech languishing at MS. I honestly believe they didn't think they were doing anything wrong. After all, this was part of MS's "embrace, extend, extinguish" MO. They tried the same thing with Java. So after that it felt to me (as an observer) that MS didn't really know what to do.
That wasn’t a response to government but a strategy to tie the web to Windows as the only platform which could run real IE6.
They could bundle a browser with macOS or Linux but it was much use if it wouldn’t work with your bank, corporate or government sites.
They used the same strategy to have Office files be memory dumps of the programs that created them and formidably hard to support by 3rd parties.
Well, let's also remember that the governments of the the United States and the European Union came in and intervened with Microsoft's use of Internet Explorer. With the benefit of hindsight, we can see this is an aberration -- every other major consumer OS (macOS, iOS, Android) has a bundled web browser that has significant market share among that OS's user base. No government seems to have gotten involved in these operating systems.
Microsoft's decision to stop investing so much in IE can be contextualized by noting that major world governments intervened to insist that Microsoft's marketshare in web browsers was reduced. It's not a shocker that organizations respond to their incentives, and Microsoft's incentives to spend a lot of money on IE were reduced by government involvement.