Hardware sales matter but it's not the entire picture. Just a part of it. If for example, XCloud gets millions of people into the Xbox eco-system where as they never would have before since they weren't going to buy the console anyway, that's a massive win for Microsoft and Xbox.
I believe that the Series S is 100% real but in no way, shape or form do I believe that it will be a handheld/hybrid of any kind. Nintendo owns that market. Always have and most likely always will. No reason to enter the handheld market especially when XCloud will basically do it for them.
My prediction has always been the same - Xbox Series X as the superior power console for $500 while Series S will be the 1080P console but gives you better performance than the current being phased out Xbox One X for $300.
What I believe that Microsoft should do however is release Series X at $400 and in Fall 2022, release Series S for $200 once the Xbox One Slim/All Digital consoles are no longer manufactured and completely off store shelves. But since this is highly unlikely, I see both consoles launching on November 6th.
Sony has said they won't have as many PS5 consoles between launch and March 31st, 2021 as they did with PS4 so imagine if in December, PS5 is sold out and doesn't get restocked until January which is a definite possibility, a $300 Xbox Series S that can play all the next gen games with BC, Game Pass, Smart Delivery, etc. but at a lower resolution and visual effects but still giving you all the extra benefits like 60FPS, an SSD, etc. It would sell at least 2m in the month of December because casuals will go for the cheapest console and that would be Xbox Series S.
Plus, as of the end of 2019, only a reportedly 30% of gamers own a 4K TV. So even if you say 50% by the end of 2020, that's still 50% of gamers that don't own a 4K TV and don't need to spend the extra $200 on Series X when they can buy the cheaper $300 Series S.
I understand why people don't like the idea but it's no different than PS4/PS4 Pro and Xbox One/Xbox One X. The only difference is that instead of years later, they both launch on the same day. Hardcore like myself buy the Series X while the vast majority which are casuals buy the Series S. And if Sony decides to take a loss on PS5 and sell it at $400, Xbox has a $100 cheaper model and a $100 more expensive model.
Series S wouldn't be for me or those who own or will own a 4K TV this year but for those who won't but still want a next generation gaming console at a cheap as possible price, Series S will be for those consumers.