I personally wouldn't say that all of MS's 1P sucks: they do have some good games there. FH5 is a good game, Flight Sim is a good game (well, simulator), they have the Age of Empires series for RTS which are well-regarded and while it's not to a lot of people's tastes Sea of Thieves is a good game as well.
Really the problem with MS 1P is that they don't have a lot in terms of big games that are clearly appealing to the mainstream audiences. They barely have any 1P games that are industry-leading in some perceivable context (FH5 and Flight Sim are maybe the only ones that come close but are specifically relegated to open-world racers and flight simulators), and they don't have any 1P games with stories or characters that the majority clearly care about at the level of, say, stories or characters in films like Infinity War, X-Men, Batman, Top Gun, John Wick or shows like Breaking Bad, Cobra Kai, Stranger Things, Game of Thrones etc.
Sony has characters and stories/worlds at those levels. Nintendo does as well (though the stories in their games tend to be barebones). Microsoft doesn't have any. They USED to; Halo used to be at that level, but now look at it. Gears of War used to as well; it's better off than Halo ATM but the recent stories & characters clearly haven't been as invigorating to the masses as the original games were.
I think currently their best chance at building up such a property again is probably through Bethesda but the way Bethesda games tell their stories isn't conductive to the focused approach I think you need to provide the resonance and impact of stories & characters in the way Sony's big story games do, and the character & world aesthetic/design of Bethesda games aren't wholly unique in the way Nintendo's games are to stand out that way, either. That said, stuff like TES can have some complex lore and have strong writing elements there that could be used for some fantastical stories with more oomph and flair, maybe if another developer did some type of offshoot with it though.
At worst the Xbox division would've been spun off into its own company, which is what some shareholders wanted going back to 2014. Some funds from Microsoft, maybe MS owning a minority stake in the company, but otherwise it would've been independent.
In that timeline, you don't get GamePass but, IMHO you'd probably have gotten a more competitive Xbox in terms of going for exclusivity deals. You wouldn't have as much media blowback since now it'd be a genuinely smaller brand (no Daddy MS money to save them); I think the brand would've also been more or less completely rebooted. Maybe they'd of stayed making consoles, maybe not, but the PC push would've came regardless.
I also think the smaller acquisitions would've still happened, FWIW.
Quantity != Quality. Also how do you know how many 1P games Sony or Nintendo have in development, really? The Xbox leakers, possibly with MS's own help, have pretty much leaked out every game their studios have planned for the next five years. Sony & especially Nintendo, don't have leaks at that scale and definitely don't throw bones at leakers to keep their name in news cycles. I wouldn't be surprised if both companies have at least a handful of of exclusives they are working on that simply no outsider knows about yet, be they 1P internal studio projects or in tandem with 3P developers.
Plus also let's be honest games like Pentiment and Grounded aren't going to do much to move any needles; they can be fun games but they absolutely aren't the type to gather a lot of cache within the gaming zeitgeist.
