I imagine some of the smarter people at Microsoft are seeing the Steam Deck unfold and are realizing it’s a potential threat. Desktop is dying, and gaming is one of the few segments still doing alright in the space. Microsoft wants to make sure games continue to be made for Windows even as mobile and consoles take over the lion’s share of profits. They haven’t been buying up studios just to prop up Xbox 😉. The Deck runs Windows games, and if compatibility ever reaches a point that the average gamer doesn’t need to know they aren’t running Windows, Microsoft is in big trouble. With the progress made just in the last five years alone, it’s an eventual possibility.

Licensing is a cost in an already razor-thin market. If gamers won’t care that a device isn’t running Windows - they won’t install Windows on it, and the OEM will just pocket the difference. Valve also has an advantage traditionally enjoyed by console manufacturers. They can sell it at no profit or even a loss, because Steam Store sales will make the money back.

So long as Valve keeps steady progress and improving compatibility, they will carve out their niche. If they can somehow get studios with major multiplayer games to provide official support, the chicken and egg problem will solve itself.