So is Microsoft paying Nvidia untold millions for this to make financial sense to Nvidia?
No but Nvidia isn't a threat to their platforms. They are hurting specific platform competitors with these acquisitions. They are strengthening the platforms they operate, xbox, windows, gamepass. Their remedies weren't offered for real competitors of those.
Right, so it's actually a nothing burger? NVIDIA hosts the VM and they make money off people paying to play their owned games that are certified by say Microsoft's Game Pass API or such? Well that makes sense then why Microsoft gets the profits from internal game purchases like DLC etc., as they own the VM that NVIDIA is hosting.
It's not a nothing burger when you're talking about competition concerns.
MS has 3 platforms it's trying to give an advantage to and protect. Windows, gamepass (multigame subscriptions /xcloud/mtx), xbox. Nvidia is a possible threat to xbox, it may be a possible threat to xcloud but xcloud itself isn't the moneymaker. It isn't a threat to gamepass or its mtx and it isn't a threat to windows, it's a boost to both.
Frankly I believe MS ultimately don't see
consoles as their main strategy but just another point of entry for gamepass. Only PS is their main concern there and they don't see Geforce Now as a threat to it.
MS see a future where gamepass dominates on any devices. Where they have most of the publisher power through acquisitions and third parties are paying them a percentage for mtx through that platform. They don't see money in the devices but money in the subscription and mtx. If they have power over that then it doesn't matter to them on other platforms.
They don't see Nvidia Now being a threat to their subscription because it's still the $70 buy your own game model and nvidia are getting no percentage for mtxs which would still 100% go to MS. It's not really a store or content subscription competitor. Not only that but it is still using windows so they get that revenue from nvidia too during MS' transition to subscription based platform, which they plan to dominate. They could even allow gamepass through nvidia now hosting where nvidia are footing the equivalent xcloud bill through their subscribers and MS still get their $9.99 and mtx on top. Subscribe for gamepass and Nvidia now separately and play PC gamepass games via Nvidia Now.
MS should have concentrated on deals that alleviated the CMAs concerns for competition in multigame subscriptions and cloud gaming providers (in particular OS). Instead they just made deals with cloud providers which were actually ultimately just MS customers. The CMA had mentioned the main concerns already too in phase 1.