It's throwing in the towel as far as console warring goes but i'd be willing to bet that in 10 years time Microsoft will be making more money than ever from gaming.
Selling to PS5/6, Switch 2/3 and PC, with a combined userbase in the hundreds of millions, is simply better business than selling to 30 million or so Xbox only holdouts. Forza Horizon 5 is one the highest charting games on PSN right now and it's a 3 year old game. Just think how the situation will look when future games like Halo or Gears drop day-and-date as true multiplatform titles (yes, it's going to happen). A dollar from a PS user and a dollar from an Xbox or Switch user are all still a dollar to MS.
There's some concern that it's the Xbox console keeping Game Pass afloat, and so if Xbox goes belly up then MS also lose Game Pass too, but I don't think that necessarily needs to happen. MS are probably doing the wise thing by releasing another generation of hybrid hardware to try to transition more users over to the Ultimate sub for PC, which supposedly grew by 30% in Q2 FY2025.
They can also attempt to get some cut down form of Game Pass onto PlayStation, much like Ubisoft+ or EA Play. At the end of the day though, Microsoft will likely need to face reality that Game Pass is going to make up a smaller chunk of the pie than they envisioned. They already massively missed their subscriber expectations for 2025 by about 23 million:
The financial bright side for Microsoft is that by selling premium hardware, they should no longer have any hardware losses to offset. They lost $200 on each $299 Series S and $100 on each Series X this gen, and unfortunately for them it was the S that outsold the X.
There is also the elephant in the room: they bought Activision. People still stupidly say this was a bad tactical move as it didn't end up benefitting Xbox in the console war. "Put COD on Game Pass exclusively", people said. Microsoft bought a money printer though - why stop the presses? Activision is a company that takes in a couple of billion dollars of revenue in a
quarter. MS basically secured their long-term existence in gaming by buying them.
Microsoft do not want to be the last Japanese soldier still fighting WW2 in the jungles, they want to be living in the Japanese economic miracle once the war is over.