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Microsoft's strategy has never really been to compete on quality, it has always been to be the only game in town. Microsoft loves to buy out the competition and kill it so they're the only real game in town and then passively milk it forever as a captured market. Zune never really took off because microsoft didn't actually care about music players, they just didn't want the iPod to be the defacto option. Microsoft didn't make Bing to be the best search engine, they just didn't want google to be the default. They don't really care about making edge the best browser, they just want chrome to not be the default. The list goes on.
When Sony made the PS2, some countries had import laws where a game console as a luxury item would be prohibitively expensive, but computers were not. So Sony made a PS2 linux version so it could "Technically it's a computer, not a game console" to sidestep the law. Didn't really work, and they dropped it pretty hard. They didn't really want to be a computer. They tried again with the PS3, but they didn't really care about making a linux console, so it had basically zero support.
Now Microsoft saw Sony making a game console, but it could sorta be a computer. They were scared that Sony may make office applications as "games" and threaten the PC market. Microsoft couldn't just buy out Sony to make them stop, so they decided to enter the market with a far superior machine that was priced super cheap for what it was to try to bully Sony out of business. It was never really about the games, it was about trying to bully potential competition. It didn't matter they didn't make money, it was a bill to pay to block competitors.
They're just competing to make sure that future PlayStation systems don't just add PC features until people wonder if they should even buy a computer and a PlayStation if the console does everything they'd need a computer for. Also people tend to favor the xbox name and branding over windows, so they have incentive to keep the brand alive even though they really do not care at all about gaming.