I'm not completely familiar with the Steam Deck's features, but it's already been discussed in this thread that the ROG Ally seems to have more features and is more powerful, albeit at a higher cost. What features would Xbox have to match? Also, wouldn't Cloud capability already be a feature that Steam Deck currently doesn't have?
The Steam Deck is an open Linux platform running SteamOS. That means it has all the features of a Linux Desktop PC. Think of a feature, and it has it, or, can be altered to have it. For example, because it's a Linux Desktop, I can run any Desktop application including Winux. So, it can be my emulation machine - including running Switch games, but it can also be a Plex server, a NAS, run Steam games, run games from Epic, or GOG, or EA Play: anything. Cloud gaming, for example, is easily possible - presuming xCloud is accessible via a web browser. ROG Ally is a Windows Desktop in your hands, which is why it needs beefier specs, which is why it costs more. Steam Deck is relatively cheap for everything its putting in your hands - and it isn't locked down.
So, if Microsoft didn't follow suite, they would be entering that space with a locked down USD$1000 handheld gaming console. That's a death sentence. If Microsoft delivered Xbox Series X performance and visuals for USD$500.00 in the palm of your hand, that would be a different story - but no one can deliver that. So, something's gotta give. If Microsoft want it locked down, it needs to be cheap, which means performance suffers and folks would just buy a Switch 2. If they want better performance, they gotta up the cost, which means they'd compete with all the other open platform handhelds, like Steam Deck or the ROG Ally. At least, that's how I see it.