The Series S was a bad idea from the start. Sure, it seemed like an amazing alternative at a cheaper price, but now that 3 years are about to pass since release, it is obvious that that decision is now biting them in the ass. Baldur's Gate 3 is a perfect example of it.
Series S is a fantastic machine on its own, but it's not very good when it's the lowest common denominator for game development. It gimps the games. They should just released a discless version of the Series X or sold the Series X for $400 and take the losses (they could of easily afford it, this is MS were speaking about) and never have released the Series S.
I am not sure what or how they will deal with it. Microsoft cornered themselves with this one for the long term imo. The sooner new gen starts, the better it is for MS so they can start on a clean slate again. But mistakes have already been made for this generation and now they are paying the price for it. In all honesty though, if the games likes Gears 6, Fable , State of Decay 3 are really good, then i don't think it will matter as much. All hope is on the first party for the positive press and outlook at this point.