There are many factors that you're not taking into account such as people buying DLC for a game that they wouldn't have otherwise played, people buying the game with a discount through Gamepass that they wouldn't have otherwise bought. It also hastens the move from physical to digital which eliminates the second hand games market as well. All in all there are a lot of other revenue streams that Gamepass enhances. Also, Gamepass succeeding doesn't mean that other standard game sales models have to die. Everyone loves a cheap "all you can eat" buffet (Gamepass) but that doesn't mean there isn't also a place for a fast food burger chain when you want a quick meal on the go (mobile) or a fancy restaurant that charges a premium for the best quality food (Playstation first party), it's possible for all these to exist.It's obviously not, especially not with a deal like this. MS's plan is to outspend the competition and destroy it, like they usually do in most fields.
People are celebrating now, and yeah, this is a pretty amazing deal in the short term, but what will the gaming market look like once MS succeeds and they're the only major player remaining?
I think you are looking at this in a binary way when it's way more nuanced and complicated than that.