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This is a very complicated question. Many Microsoft employees would have a very heated debate over the answer to this question. It was the cause of a ton of internal conflict. Many Windows developers saw the Xbox ecosystem as a cannibalization of their existing product.
The move was political. Microsoft wanted to get some of that PlayStation money. They were afraid of losing the living room to Sony. Sony had TVs, VCRs, DVD players, and now this other thing, PlayStation, that also plugged into the TV, that all the kids were essentially demanding have equal place among the other Sony gadgets.
Microsoft already had PCs in homes. Well, operating systems. And many developers would have agreed it makes more sense to blow open the emerging market they were already champions of/adjacent to. But what they didn't have was real estate beneath consumers televisions. And their competitor had all of it.
It paid off. They were able to secure a fight over the living room rather than allow a competitor to take it on wholly. Pivoting to PC gaming wouldnt have solved this threat. Their goal was to secure a place in "Home Entertainment" markets beyond "Personal Computer" markets. They succeeded.
Edit: It's the same reason they created the Zune. It's the same reason they did Windows Phones. They wanted that iPod, iPhone money. They didn't want Apple to get it all. They... failed here. Miserably. If they had forked android and made compatibility layers for windows instead of forcing the windows experience into a touch screen pocket sized device, steamOS wouldnt be a thing that legitimately threatens Microsoft's existence.
While I'm cooking here... How long until Adobe realizes that the steamOS route would be genius for them? They already got customers paying stupid money monthly.
I loved my Zune. I think I was the only one that had one.
So a fan of squirting?
Yeah the product was fine, it just didn't do well. The windows phones, however... 😬
Foggy made it quite clear