I've honestly considered the possibility of them folding up the console business, and while it's got a non-zero chance (and can even feel likely at times), I think it's also a very hard decision to make.
Canning a console business is a hard, hard decision, especially when things are digital, and consumers depend on your continued server availability to be able to use items they bought with their cold hard cash. Just look at the furore that happened when Sony wanted to sunset the PS3 store, a store that's now two gens old! Backcompat is great for customer retention, but it also makes this problem far greater too, because now you have to keep more games available for download, not to mention cloud saves etc.
It's also a very, very permanent decision. Like, theoretically, say that MSFT goes full 3rd party, and then later down the line decides to make a comeback (a luxury that doesn't exist for Sega or Neo Geo for example), it will be a very, very uphill task to convince customers to trust them again and rebuild ecosystems etc.
Now the weird thing is, a lot of those issues can be either mitigated or completely resolved because of Microsoft's current initiatives:
- Allowing people to play Xbox exclusives day 1 on PCs creates an incentive to go there permanently instead of buying an Xbox (mainly due to additional game selection, emulation, productivity boosts etc), so less consumers to disappoint.
- Gamepass is an excellent value, and it's increasingly incentivizing people to stop buying games on Xbox and wait for them to land on the service, which means that their ownership growth on the platform is actually slowing! Again, customers would be far less disappointed if you shuttered a service where they bought less games than when you let them buy more.
- Play anywhere means that even existing gamepass subscribers can be "shepherded" onto other platforms that have gamepass under the same subscription accounts. Like if they manage to get Gamepass on Sony or Nintendo devices, then you can just have users keep up their subs and just use other manufacturer's consoles (PS5/6, Switch 2 etc). The ActiBlizz acquisition feels like a very big move in that direction to me.
TL;DR: Shuttering a console biz isn't easy, and a lot of the recent Microsoft moves can be either seen as them increasing their investment in Xbox or as ways to slowly pivot out of it into more of a services and software type of gaming business, it's too early to tell tbh.