Gamepass was never the fundamental problem, but a desperate attempt of a broken Hail Mary to try to save an already broken business.
The traditional calculus of the games platform business model was the following for many decades:
1. Build and ship a great console (subsidised or even loss leading to embed market penetration & scale)
2. Engender a large corpus of 3rd party publishers to ship content on your platform (you take no risk and earn 30% to recoup HW + operating costs)
3. Your biggest margins are on 1st party content. Grow and ship a stable base of diverse content
Microsoft never quite figured out how to make 2 or 3 work. Their platform's US centricity & US "frat boy" sensibilities persistently made it hard to grow their installed base, especially into asian and emerging markets.
Couple that with poor respect for the divergence of cultural and corporate governance required for a success games business vs their traditional business, meant that through shitty corporate meddling, they never quite achieved real success with their studios, and every new studio they acquired got ground down into mediocrity over the years because of their deeply systemic corporate cultural rot (widely acknowledged across MS as well as about them across a wide spread of sectors they're engaged in).
With the mistakes made with Xbox Series from inception (did anyone need the shitty Series S? no exclusives for at least the first 2 years etc) they reach a point where it became clear to their leadership the business wasn't sustainable against the traditional business model:
1. Their supply chain and manufacturing complexity by having two separate consoles made it more expensive because they lost a lot more economies of scale vs Sony. They still couldn't land the right tone and messaging to get wider market traction, & had not e.g. spent the years prior that Sony did investing in it's China/etc Hero programmes to grow their sales bases in emerging economies
2. With increased gaming budgets there were less 3rd party releases. Lots of GaaS titles pivoting to PC focus, leaving no 30% margins for console. Also fears of Sony moneyhatting exclusives would cut off their 30% from sales from the biggest titles
3. Dysfunctional and broken studio management model, corporate "numbers-&-trends" lead sales and marketing strategy lead by corporate sales staff with no b/g or instincts for the industry, that decided what got greenly and how it was made, plus successively poor studio formation & governance (The Initiative, 343) all ultimately lead to either cancellations or a very poor slate of very poor tentpole releases (Halo Infinite, Perfect Dark etc)
They were desperate and needed revenue growth. So the best way to do that was to strong arm publishers by cannibalising their revenues through the GamePass sub model.
They knew it would mean less aggregate revenue per IP. But what it did was radically increased Microsoft's share of revenue from 3rd party content, as well as driving attention towards legacy 3rd party games to fund subscription uptake and hence more money directly to MS on a recurring basis.
They were happy to fundamentally break the traditional business model, as they'd hoped to see dramatic growth in ARR (essentially new money for old rope).
They ultimately failed.
GamePass never reached the scale they wanted, because it was always ultimately constrained by the visibility & reach of the Xbox brand, which in itself was limiting, despite pushing GamePass on PC too.
It broke their relationships with publishers, who focused more on Steam & PS platforms where they'd see the majority of their revenues.
It broke their relationship with gamers, who were now conditioned to not buy games, collapsing sales across their existing distribution model.
And with no new market push to drive further top line growth, because as a company they'd consistently failed to even bother to do the work, they instead opted to try to increase the value of GP by locking up more content to make it exclusive to it. Hence the 2020s studio + publisher spending spree.
In short, GP is a symptom of a rotten business with long standing rotten leadership that's been asleep at the wheel of the fundamental problems plaguing their business for decades. It's been in slow death decline for a very very long time.