MS Xbox, like Sony was never a strong 1st party developer.
And with Nadella, Xbox being wholly absorbed into Windows was a forgone conclusion, being purely software. I think the only thing keeping them in the living room is wanting to be the center of the living room.

I think there will be an XBox 2 (or whatever they call it) for fall 2018. They're already hiring for hardware engineers for the next-gen XBox so I don't think software only is in the cards. 

4K resolution, a fat wad of HBM2 RAM, 14nm GPU, the works.

5 years is a normal product cycle, especially since the XB1 has virtually no shot at being the market leader.

And yeah sure I think there will be more integration with Windows and the PC side and MS will probably try and push a Steam-meets-Netflix type subscription model under XBox Live's banner. But there will still be a physical console. 

The only reason the last gen went on so long is because Sony/MS lost so much money at the beginning of the generation that they needed the extra 2-3 years to recoup as much of those losses as possible.

XBox One hasn't had any issue like a billion dollar recall for RROD, so it doesn't need a 7-8 year product cycle.

A one year headstart would do wonders for MS, it worked for the 360, they will probably try it again. 

I think nearly the same arguments could be made for each console right now. Each are looking to expand beyond just consoles, and rightfully so. It's unwise to put all eggs in one basket.
I don't think they are looking to get out, but more so to strengthen their position.