What I don't understand is, what led Microsoft down this path to begin with? Don't they have 90% penetration in desktop OSes and are fighting with established and trusted players like AWS, GCP in the data center and PlayStation and Nintendo in the living room? Why make it harder on yourself by shooting yourself in the foot?

The problem with Windows was never that it didn't have enough features, it was that it wasn't reliable enough. So instead of making it more reliable, they've doubled down on the features.