By making it free again, as it was before PS4. But since players are happy to pay always more for things they don't have to pay, that won't happen.

Assuming PS will spread this sub money to more than just online services, and use some of it for hardware purposes going forward, if there were 2 possible outcomes for PS5 hardware based on PS Plus subs, which would you prefer?

1. PS4 having free online this entire gen, leading to a $399-$499 PS5 that cost $399-$499 to make. (imagine another PS4 type launch basically)

or

2. PS4 having paid online as it has all gen, leading to a $399-$499 PS5 that cost $599-$699 to make. (imagine a PS3 type launch but affordable)

I think PS would be crazy not to use some of this money for extra manufacturing costs to make the next gen hardware better than it otherwise would be, while also using some of those sub funds, as well as the next gen subs, to offset the cost of the subsidy for that better more affordable hardware.

It's possible that PS just offers choice 1 no matter what and only uses the sub funds for online since that's where it came from, but I think that would be foolish of them. Using it partially for better more affordable hardware to get as many people into the ecosystem as quickly as possible would help justify the sub cost for many people. Others won't care regardless though and would just rather have free online.

Get rid of 3 games per month and replace it with NOW. Then in NOW add AAA games. Keep all the other stuff currently on PS4.

Option 1, by a long shot.  I am not into the whole power thing.  I grew up playing NES, the Switch is amazing to me.  The ps4 is mind blowing.  I am sure whatever the ps5 will do is plenty.  

Why PS4 and not the XB1? If it's the quality of their first party games, would those be possible on XB1 hardware?

PS isn't just catering to gamers, it's competing with XB while catering to gamers, so while option 1 may be best for some like yourself, it may not be best for PS overall if it loses sales to XB Scarlett, due to hardware performance deficiency and what that means for the games. It's possible it wouldn't matter much, but look at what has happened to XB since overall. Just something to think about.

Until MS produces first party exclusives, the Xbox isn't even on my radar.

Offer early access to first party titles.

If you have Plus and purchase/pre order through the PlayStation Store or participating retailer, you get a digital license of the game up to 2 weeks earlier than accounts without Plus.

If you prefer to buy from a retailer, the receipt would have your code to redeem on the store.

Add at least a stripped down version of PS Now

Lower the price or make online free.
I do not see enough value for me in getting PS+ for $60/year at this time and I will likely not renew my subscription for the time being.
The monthly free games do not do much for me, the discounts are OK, but not enticing enough for me to commit buying the majority of my games digitally, and, in all honesty, the experience of online multiplayer on PS4 is not that much different compared to my online experience on the Switch.
I know the last part is controversial and may label me as a fanboy, but I am just basing it off my experience. You can argue my ear off until the cows come home, but it is what it is for me.

I've also heard of the complaints of the actual online and people have been complaining why they are paying $20/year for the service when the online is incompetent to today's standards.