Very short sighted.
This project will allow them to license windows for handheld devices, instead of losing those sales to Linux.
It's MS interest that they focus on this option.
It's common sense, not short sightedness.
MS are not focusing on this option because it is not a big market and there is no good business plan with it. If they have no commercial interest in licensing an OS for
phones right now what makes people think they would start doing a commercial OS specifically for handheld gaming devices with such a tiny market?
If they have no interest in the VR markets and people are cheering it as a good business decision what makes people think selling an OS to an even smaller handful of portable gaming OEMs who happen to have free alternatives is good foresight?
There is nothing commercially viable about it currently. Steamdeck, one of the most popular PC handheld gaming devices is itself a small market and has a pre-installed OS already. only a fraction of those would seek out an alternative OS to begin with. That OS release would gain very little traction and would die faster than windows phone as a business, even if they tried to push a store with it.
It's far better to support your games/apps/xcloud/gamepass on what is there or maybe even release your
own handheld with a walled garden than trying to create another OS business that wouldn't really get off the ground. They're more likely to just stick to supporting tablet mode in the current windows release than doing a separate windows version to sell to OEMs.