The assumption here is that development costs are linear.
If you spend a thousand dollars developing an operating system and your competition spends a million dollars, theirs won't be a thousand times better than yours, it will be infinitely better because theirs might actually boot and yours won't.
But if you spend a billion dollars and they spend a trillion dollars, theirs won't be a thousand times better than yours, it will be 2% better. Maybe. Because your billion dollars already caused to exist an operating system that does everything people need from an operating system and there is a point of diminishing returns. Which is where all the major operating systems already are.
What you would expect in a market like this is price competition. 80% as good for 20% of the price wins. 98% as good for 0% of the price wins even more. We're already there -- Microsoft has been giving away the Windows 10 and Windows 11 upgrades for free. They now need that to be competitive.
They can add new APIs all they want, but if Valve is providing ones that are just as good and will allow your games to run on their consoles which have any non-zero market share in addition to Windows, developers will prefer those.
Price competition on the OS doesn't actually matter, as you have noted the market has moved towards additional services. When you say "98% as good for 0% of the price" you're not factoring in all the additional paid services that the company wants (and needs) to sell. I can tell you that Canonical certainly does not charge 0% of the price for everything, if they are taking a customer from Microsoft then they would probably like to gain 100% or more of that price from any given customer.
I have seen nothing to show that developers will prefer any Valve APIs, a lot of the games still seem to be running in Proton which actually shows that most developers still prefer to use the Microsoft stack and tooling. I should have mentioned this earlier but Visual Studio (the original, not VS Code) is also extremely important and entrenched, game developers are not just going to all switch to Vim and Emacs because Valve sold a product with Linux on it.