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Microsoft has pretty much lost most of their experienced employees, they're sitting on a mountain of spaghetti code with tech debt that goes back to windows 3.1 to maintain compatibility, they've fired their QA team, and their absolutely out-of-touch leadership is trying to force the surviving employees to use AI anywhere they can for developing the OS to pump up the numbers of AI users to prop up their insanely huge AI gamble so shareholders don't lose faith.
They're acting confident because they haven't had to respond to a credible threat to their monopoly for 30 years, and that arrogance combined with everything mentioned above will most likely be their ultimate demise. The corporate system they have created and perpetuated is no longer capable of righting the ship, both technologically and organizationally.
They made a statement years ago now about how they were going to respond to the success of the steamdeck by creating a handheld mode for windows, but they never did, and Valve ate their lunch and allowed Linux to gain a foothold among gamers. They probably couldn't manage building that handheld mode (it's been so many years now, but I read a post from a Microsoft employee detailing how it could take something crazy like a week of work just to add a new menu entry to a drop-down without it introducing major breakages elsewhere).
They haven't been able to develop a killer app or feature for Windows in over a decade, and I don't think there's anything else under their sleeve. I believe we are actively witnessing the downfall of an ossified giant, just as the once great Commodore fell due to incompetence and extreme corporate greed.
They already use Linux for their server division (azure). Eventually, if Linux is able dominate on the desktop in the next decade, they may shift to selling their own Linux distro with a 100% windows compatible container/VM instead, an inversion of their current model of selling Windows with their optional WSL (windows subsystem for Linux).