Microsoft really has two options:
They can try to bolster their hardware to create a console and ecosystem which needs to be vastly superior to the competition in an attempt to encourage players to choose them.
Or they can invest in software and development studios to make exclusive games that attract players.
The issue with the hardware focused path they've been on is that it is hard to offer superior hardware when your competition has a product that is pretty much of equal quality, and cheaper. The Xbox One launch was pathetic, and is still behind, not just because of the crazy policies they had in mind, but because the system was more expensive than the competition.
The standard business model for companies has always been to create powerful systems, that often sell at a loss, then make up those losses with years of quality software.
So flipping that model without having the software to make up for your losses makes almost no sense. You'd either have to create a console that clearly greatly exceeds the competition, which would be pricey, or take a massive loss and find other ways to make money back though services. Being profitable with that model seems way more difficult.
If you just launch a console on par with the competition, and rely on third party support, there is essentially no reason for people to choose that console over the competition, since they'd get all the same games, and more thanks to the other companies first party efforts.
Yes, Microsoft's IPs have stuggled thus far this generation, but how much of that onus can be placed on the developers and the games. With the Xbox One lagging behind, and having the smaller install base, quality games like Sunset Overdrive were at a disadvantage. Had it been a PS4 exclusive, it would have almost undoubtedly sold better. Other IPs, like Gears and Halo, both of which have lost their original creators, are just getting a bit long in the tooth.
First party support and new IP are essential.
Nintendo is an interesting comparison because for a while now they've pretty much succeed with only first party games. Over decades they've build a diverse catalog of games, from various genres, that keep people coming back.
When Sony entered the picture, they didn't own IP, and they're still paying the price for not owning Crash and Spyro. However, they quickly began to search for talented developers, and continue to. They've scooped up Naughty Dog, Guerrilla, Sucker Punch, Media Molecule, and continue to keep strong partnerships with talented independent studios like Insomniac and Ninja Theory. They take risks, and cancel projects or close down studios occasionally, but overall they create a lot of IP that is both critically and commercially successful.
To make money, you have to spend money, and it just doesn't seem like Microsoft wants to spend enough money on the Xbox division to make it successful. They've basically reduced themselves to a point similar to where Sony was at the time of the PS1. I get that not taking risks on first party games and new IPs seems like the safer option, but in the long run, I don't see solely focusing on hardware working out well for them.
