You're entirely right, but they need to maintain Windows in order to promote those services. The OS and their various applications have a symbiotic relationship where they prioritize each other.

If Microsoft discontinued Windows and switched to just providing web apps, the competition would be a lot stiffer.

True but it is still their moat. Without windows they will lose a lot of appeal to their cloud products like Intune, Azure AD, M365 etc

At one point the product is getting so bad that the cost of switching becomes a real consideration. It seems that every other year I hear about businesses and governments making the move.

The business version of Windows doesn't have ads in the start menu. That's the consumer/home version. The "Pro" flavors of Windows are quite a bit more pleasant and I don't think there is any downside even on a home computer.

Windows for personal computers and Office are the only products that make Microsoft relevant. No one on god's green earth is choosing Windows Server on its own merits: They're picking it for software compatibility reasons stemming from software being written on, and exclusively targeting, Windows Desktop. Hell, most of the office suite is chosen because it's easier to buy more stuff from somebody you're already buying stuff from than to find someone new. No one has ever chosen Teams as the best product in its space.

Very few products Microsoft sells would be worth buying by themselves. They exclusively make mediocre products that are merely the default choice once you've been hoodwinked into buying into Windows or XBOX. If the break Windows, all the money disappears.

If you aren't running Windows, you probably aren't using Office. Half the reason for Office is Exchange, and half the reason is the integration of Exchange with Active Directory.

Without any of that, does Office make sense anymore compared to something like GSuite?

No, they have choices, but many people just want to turn on their computer, watch a few videos, read some emails, pay some bills and then go do something else.

Those people won't fuss with installing linux and getting rid of Microsoft even though Windows is doing nothing for them that Linux cannot do just as easily.

If there are people in your life that do not use computers to make money or play video games or edit photos and videos but they do use computers, swap them to linux and let them get on with their lives.