Xbox CEO Laments Similarity With PS5, Wants True Innovation For Next-Gen Console

We've previously heard Microsoft CEO Satya Nadella say that "Everything is an Xbox," alluding to the fact that its Game Pass service can be played on many platforms (like a smart TV). Phil Spencer shared some more insight, and points to innovation as a vital element to be "World class." This comes in two flavors, the first being a combination of great games and software. The second is in hardware, so we're likely to still see future Xbox consoles even with the cloud gaming growth occurring.
Xbox Game Pass has been popular, and Microsoft has quickly been buying up game studios such the Blizzard- Activision. Microsoft has even made it a point to provide its popular titles on other platforms, such as its Sony PlayStation 5 competitor. The ability to stream and play games on the cloud that would typically need high-end hardware opens up the landscape for Xbox's future focus, undoubtedly.
Phil Spencer said in response to the PlayStation availability that "Good Games shipping on multiple platforms is a good thing for Xbox, it makes Xbox stronger."

His point is how engines are scalable, and many of these handheld optimized games work on consoles such as the Series S. The Series S allows Xbox to keep optimization in mind for the lower common denominator, as not every piece of hardware will be a more powerful GPU-equipped rig.
This basically means that lower powered consoles won't go away, especially with other handheld devices available. This means that developers will need to optimize games for the hardware, and not necessarily focus on just high-end specs. Spencer also wants the Xbox to compete on power, so we're likely to also see a future high-end Xbox to compete with the PlayStation 5 Pro level systems.
While cloud gaming is experience a big surge, it does not seem like Microsoft is completely abandoning the Xbox hardware platform. While they may certainly divert attention to Game Pass and making the Xbox Multiplatform, I'd bet we're still likely to see a next-generation set of hardware from Xbox as expected.