The Steam Machine is a very niche product, but PC gaming is the main gaming platform outside of phone games.
That's not what happened, Sony's decision is more about the poor saels of its single player titles on Steam, they are now focusing their PC releases for online multiplayer games instead
Microsoft sells less consoles each month than the previous gen Nintendo Switch sells today
A lot of publishers are skipping Xbox, citing not enough players/sales
They have nothing to worry about Xbox
1.5 years ago, the developer announced that SM2 had sold 10MM copies on PS5 and the franchise had sold 50MM copies overall:
https://x.com/insomniacgames/status/1757662718604013868
https://steamdb.info/app/1817070/charts/
As you’ve said, Microsoft is basically toast. They’ve been sinking for multiple generations.