I think Xbox will stay as a brand, but MS will fully move towards providing software via their studios. This is the only way forward for them.
I think the best thing to do is to make Xbox an OS and sell it to everyone. Make it easy and convenient for people to play games purchased with it. Give the option of using other stores, but in a less convenient/ui UI-friendly way, just like it happens on Steam Deck.
But you don't get backward compatibility, and most of your games will stay on a console. I get it sucks, but that's the price to pay. Maybe MS could do something about their backward compatibility program, but I doubt it would be as straightforward on PC, mostly for licensing.
I imagine the two handheld things are just because the software will be ready before the hardware, so they are partnering with people to beta test it. They might be waiting for some kind of custom chip they're developing with AMD. After all, that's what Valve did. This doesn't mean it won't be a PC.