Even if they go down the purely cloud-based service route, Microsoft still needs some differentiating exclusive software (so-called killer apps) otherwise what are they going to do if/when Amazon realizes it also cannot compete on exclusive game content and just decides to permanently partner with Sony to offer the Playstation equivalent to whatever Microsoft wants to do with Xbox but with the added benefit of a lot more exclusive content (first party games and exclusive third party deals).
The likely failure of the ActiBliz acquisition suggests that Microsoft can not really rely on simply acquiring its way to victory, and it doesn't seem like any third parties want to make games exclusively for Xbox (or maybe Xbox just isn't offering that option?).
People seem to complain about Sony/Playstation having all these amazing exclusivity deals (like FF16 as a timed PS5 exclusive) but, as I've explained countless times already, Microsoft (and by extension Xbox) has far more cash than Sony to throw at this problem so it's obviously not a money issue. It's probably a "people" issue. More specifically, game companies (especially Japanese ones) would rather collaborate with Playstation than with Xbox, and it's up to Xbox to figure that out, not up to Sony to squander its lead.
Also, before people say "oh Japanese companies just don't like Xbox", that might be part of it but remember that only one member of Sony Interactive Entertainment (ie Playstation)'s 9-strong board of directors is even Japanese.
