I think MS's biggest problem with first-party studios are instability. They've never had devs outside of Turn 10 who have been around for a while and consistently released good games. Their best studio, Bungie, left, FASA and Ensemble were closed. Rare has been a complete mess since MS purchased them. Lionhead hasn't made a good game since 2008. 343 released a Halo game nobody wants to play. They didn't handle third-party partnerships well with devs like RTW who wanted to make a Crackdown 2 but were turned away, only for MS to have another studio do it later with only 8 months of dev time. Most of this happened under Mattrick's watch, and it will be interesting to see how much changes since he's gone.
They also could have thrown money at devs they had good relationships with like Cliffy B and Itagaki and had them build new studios at MS, but they didn't. They also haven't handled the studios they've built well. Black Tusk was at one point Zipline studios, a team working on a military Kinect shooter. Good Science was initially a team called Spawnpoint with a bunch of Gears of War devs. Big Park isn't making games anymore, just apps. Studios like Lift London, Soho Productions, and MS Los Angeles aren't even making games. Then they have new studios like MS Victoria and MS Osaka we know absolutely nothing about. It's kind of a mess over there.