1. They were making a plan for the future, but there were problems. One is that it involved a physical console with hardware inside of it. If they went towards a full digital experience with full streaming they wouldn't have had these problems.

2. They forced kinect to be involved to the point that it gimped the hardware itself. Too many launch games were held back and as a result the entire launch suffered.

3. Price for console. If they had ditched the console altogether they wouldn't have had to sell the whole thing for $500. They could have sold it for $99 and included a controller. They also could have taken away the XBL requirement since every system requires internet. It would also be part of the perceived value.

It looks like Sony will be doing this with PS5 before MS can finish their vision for the digital future. I think MS unveiled their console dream 2 years early. By this point in november I bet that a console-less machine would have been perfectly feasible and even acceptable by then.

I don't think anything would have happened except them leaving the console business. The only way it would have hurt the industry is if people chose the Xbone. I seriously doubt that would have happened. Everyone would have bought PS4's instead and Sony would have allowed used games to continue like they are which would have left MS with ZERO leverage. 

They would have reversed course, or gone out of business.

Winning the US which is the hardest and most prized market made them arrogant. Think about it. They beat the Wii for gods sake. That's no small feat.