As someone who has owned various Windows Phones in the last few years - they just need to end it. As wonderful as the OS is to use, without the apps, it's not going anywhere. As a customer, it's also been fairly insulting that Microsoft's own apps get new features, or generally run better, on iOS and Android.
I think at this point, releasing a Surface branded phone (running WP) will do unnecessary damage to a brand that they've put a huge amount of effort in turning around.
It's so frustrating, WP8 was so full of promise that was gradually (well, quickly) eroded over the years.
EDIT: FYI, I'm on a Nexus 6P now and the experience has been absolutely fantastic.