I don't think they're even considering a new console anytime soon, same with Sony. You have to bare in mind that these consoles released during COVID and while they may be approaching two years old, in reality it's more like the first proper year.
Between chip shortages and games being delayed due to WFH I don't think anyone has come close to utilising the full strength of either console. I expect these two will be around for a year or two longer than you'd normally expect.
You just need to look at how many non-Xbox related devices have GP compatibility and how much mobile gaming is eating into the console space. The biggest jewel in Activision acquisition is King and the access to millions and millions of Candy Crush players. Their numbers, and probably their wallets dwarf anything either publisher currently have.
The early stages of this switch to handheld, mobile gaming is already prevalent in SE Asia and Japan in particular; a market that used to be guaranteed numbers, for Sony at least. These consumers are simply not buying home consoles en mass anymore. It's only a matter of time until that becomes more normalised in the West and I do think MS will be at the forefront of that transition.
The last generation was deceptive because we actually got new hardware half way through, it was sort of two mini generations lasting 3 or 4 years each. So I guess it'll depend on whether they do that again. If they do, it still represents a commitment to hardware for a longer period. If they don't I'd be amazed if they last longer than 7 years, but who really knows. Either way, unless they don't release another machine for a full 15 years (or more importantly, unless Sony don't), it doesn't really affect the main point. Microsoft will have to make a decision before the next gen of networking is ubiquitous.
In terms of handhelds, I don't see it makes any difference to the case in point. Its still the case that the next gen of hardware will probably arrive before the infrastructure is good enough to support near-flawless streaming. If anything I'd say we're even further away with handheld, since mobile internet on the go is very unreliable outside of the major cities, especially while moving. So irrespective of the direction of travel, Microsoft will still probably need to make another machine.
As for whether handhelds will replace set top boxes, it's hard to say really, but it's interesting to wonder about. I don't think mobile gaming will, but that's a totally different beast anyway, where Apple and Google are the dominant forces. But for handhelds gaming, sure, maybe. If it does, I wouldn't particularly say MS are best placed. Three of the top five best selling consoles of all time are Nintendo handhelds, you'd have to say their experience would put them in pole position to benefit.
I think the obvious question mark here for Microsoft is the dominant form factor of handheld devices. Will non-gaming devices of the future be the right size and shape to support handheld gaming to compare with dedicated handhelds? Sounds simple but right now the answer is a resounding no. Most phones are touchscreen only, most tablets are unwieldy and third party attachments mostly look goofy, have a tiny install base and little quality control. As an experience, the difference between an iPhone clipped onto an old Xbox controller via a connector off Amazon and a Nintendo Switch, with its many bells and whistles, is pretty large (ignoring one's preference for the actual games). Microsoft need the gaming experience to be as good as what their competitors offer, if their competitors are doing dedicated handhelds. They could easily end up in a weird space where their offering is more faff than simple mobile gaming, but falls well short of the quality experience of dedicated hardware. So they need things to change before they can succeed, but without making their own hardware, they have no control over that change. So definitely a tricky path to navigate, if that really is their direction of travel.
