I don’t think it’s hardware. It’s a differentiator. Tell me why I (or whoever) should pick an Xbox over a PlayStation?
They know it's a losing battle to try to build the same product as an entrenched competitor after they burned themselves with the Xbox One, which is why they much prefer you're a subscriber to Game Pass, with an Xbox or not.
Some people may love Game Pass, but most people I know either never subscribed to it or only tested it when it was like 1,-€ for a month or whatever.
They've got like 25-30 million subscribers, so it's quite popular. Probably half or a third as popular as Microsoft would like, but it's popular. I myself have plenty of friends who want to play more games than they can afford, and now they can afford them because of Game Pass. Especially the flash in the pan zeitgeist stuff like Exoprimal or Rainbow Six: Extraction that they can say they've played but will never touch again.
What else differentiates it from the PS5 in a positive way?
Quick resume. To be honest, what sets the PS5 apart from the Xbox hardware in a positive way? The SSD speeds that ended up not even mattering much for Ratchet & Clank, from what I hear of the PC port.
The controller is…well, a decent controller. It doesn’t do anything special like adaptive triggers, yet it costs almost the same as a DualSense, and if you count in the optional (!) battery pack, it’s quite a bit more expensive even.
By contrast, I know tons of people who hate the PS5 controller, not the least of which for its short battery life and inability to swap batteries like you can for Xbox. As a fighting game player, I know competitive players who hate the d-pad, and Sony did everyone dirty by requiring the use of a PS5 controller only even though the entire scene has had controllers for a decade that would work just fine, and even work on the PS5 when running a "PS4 game" on a PS5. Xbox's controllers are backward and forward compatible. If Sony had some kind of reason for requiring the functionality of the new controller, sure, have at it, but they put this requirement in place for games that make no use of the new controller's features at all, which is a dick move.
If you want to win market share, deliver a better product. With better services. With better conditions. For lower prices.
I think they did exactly that, but as far as which console sells more units, it's still PlayStation, because they have a couple of games that, at least for a couple of years, you can only play on PlayStation. But I think Microsoft saw that they were never going to be able to compete with that directly, at least before their acquisition spree, so the Xbox is just a low-cost machine that gets you into Game Pass, long-term.