Apart from the unprecedented nature of it, the actual business behind this (potential) decision doesn’t seem so outrageous.

You charge a higher rate for players to get access to Game Pass on PS5/Switch, cloud-only. Or, if they buy the hardware from you directly, they can play the same great games they already enjoy on their other systems, but with the option of playing games locally, and at a discounted subscription rate.

Microsoft already has the infra for cloud gaming, and they have an incentive to get as many subscribers as possible. This proposal satisfies all of their objectives.