I'm not even sure if the performance race is going to endure - Sony continues to hold the home console crown, Nintendo prints money with their hugely outdated Switch, and Microsoft appear to be pivoting to publishing more than a console exclusivity race they will probably never win ("going Sega")
As you said, the future of x86 isn't guaranteed, but if I were calling shots I'd look at Arm designs with embedded graphics like Exynos and Snapdragon before trying to build a fully custom design based on POWER and graphics from elsewhere (probably still AMD, and that single-source has been compelling enough to adopt even while the CPU performance was lackluster)
The Xbox Series consoles are capable of playing a select portion OG Xbox and Xbox 360 games almost natively, while presumably playing Xbox 360 games via an emulator, but they stopped adding new games to their backwards compatibility program for some god unknown reason despite the fact they were some of the best selling on the platform, but to me it seems like Microsoft wants to shift literally everything to the cloud, starting from Xbox and eventually getting to Windows somewhere down the line, which scares me honestly. Sun said the network is the computer, but I'm sure they meant a network you controlled, not goddamn Microsoft.
The 360 games I've played BC on a Bone have downloaded the whole game onto disk, even with the original DVD in the drive so I'm not sure how much they're changing behind the scenes.
Regardless, I share the sentiment that running everything on Microsoft's infrastructure is a troubling trend. I like xCloud for managing JRPG inventory on the bus, or demoing a game before I commit to the full download, but it's no replacement for local gaming and it shouldn't be pushed as such.