$399 Series X would leave Microsoft with a lot of problems. Sony would almost certainly be eager to pricematch them, and would just release the PS5 at $399. The PS5 will undoubtedly make a big loss at that price, but the Series X would end up losing more. Bigger die, bigger cost - no way around it.
But that leaves the Series S in no man's land.
What would they price the Series S at? $299 is far too close to the Series X or PS5, which would both offer much more performance and longevity for only $100 more. $249 or lower would probably make it a reasonable choice, but it would have to be sold at a loss at that price.
There would therefore be two options. Either bin the Series S entirely and just focus on a direct head to head war with the PS5 with the Series X, or consign themselves to losing money hand over fist on both systems. Microsoft can certainly take the losses - they have the money for it. But those losses won't make it easy to run the business.
Sony will for a long time continue to make more money hand-over-fist through its network services alone, to bear the brunt of a loss-leading console. As much as they'd love for every PS4 owner to instantly make the switch to PS5, they won't. It'll take a few years. And all the while they'll be raking in billions of dollars in game and network services from all the existing PS4 owners who have yet to make the switch, as well as the new PS5 owners.
You can talk about a warchest all you like, but when you have a gaming division that churns out more revenue from its network services segment alone, than either of your two principle competitors can muster from their entire gaming portfolios, means you don't need a warchest.
Given the current climate, it won't be perfect for either Sony or Microsoft during the transition, but the PlayStation brand in quite simple terms makes more money than the entirety of Xbox and Nintendo
combined.
In the face of that, you don't want to just be pissing money away selling two SKU's at a loss, instead of just one. But then, they've already sunk a lot of money into R&D for two parallel SKU's so perhaps they won't be willing to kick a dead weight to the curb.
Personally not a big fan of having two SKU's at launch in general, because it muddies the water in a segment of the gaming industry which has long claimed simplicity as the key to its success.
Now we have different performance and different prices.
EDIT:
Why the fuck did I write this...?