“He didn’t like the user interface, because it didn’t look like Windows,” says Vanity Fair's source, programmer involved in its development.
Another former MS geek indicated that it was the lack of a keyboard that did the device in; MS reportedly had a bias against touchscreens because all of their software products had been built to work with a keyboard, not a stylus or finger. Given that this is a couple years after the release of Windows CE, Microsoft's touchscreen friendly mobile OS, that argument doesn't make much sense.
But for whatever the reason this ereader died, I cannot say that the death was a bad thing.
As you probably know, Microsoft developed their own ebook format, which debuted in the year 2000 (and is scheduled to die this year). This ereader was likely intended to work with the MSReader format.
That ereader format depended on an app which required a fairly hefty set of mobile hardware (for y2k, that is). An ereader built to run the app would likely have been terribly expensive. It wouldn't surprise me if it cost $500, and a thousand dollar device wouldn't have been out of the question. What's more, the market for ebooks simply wasn't there in y2k, nor was the tech to make ebooks.
If this ereader had been released it would likely have been doomed to a lingering death. It would at best be a minor footnote like the Rocketbook, and at worst it might have doomed the entire industry before it got started ("if MS cannot pull it off then it can't be done").
And its death probably let MS focus attention on Windows CE (which BTW did look like Windows). Several reading apps were released for this mobile OS, including MS Reader, Mobipocket, and eReader. Windows CE ended up running on quite a few mobile devices and it spawned a number of different versions.
The open nature of Windows CE (and other mobile OSes) probably enabled ebooks to sputter along for the next decade until Amazon launched the Kindle in 2007 (when the ebook market finally took of).
So I can't say that I regret never seeing the Microsoft ereader.