I would expect it to be a loss leader. The cheap price combined with brand recognition, advertising, and a streamlined experience could make it a successful product I think.
Even the ROG Ally comes with a free month of GamePass Ultimate, and a new Xbox comes with 90 days. I don't see why a MS first party handheld wouldn't come with some.
(Note: I do a little bit ramble around, so read only if you don't value your time.)
Whats more important is, Microsoft has this buy once and play anywhere system for their games in Xbox console / Xbox Windows playstore. This is the most crucial part to me. Just like on Steam (or any other PC handheld) you buy the game once and then can play it on different devices. I have to wonder if this handheld Xbox would even be a PC. It could be very well a new hardware that is entirely Xbox compatible. Either way, they need some kind of compatibility filter with each purchased game from the library they already own.
Why would anyone want this? Well it would be the eco system and the ease of console play, like any other handheld. PC handhelds are not there yet; at least if we ignore the Steam Deck, because the deck is remarkable at being a console. And the price. Just like Valve, Microsoft can sell you the device at a low price and put the Sony "handheld PS5" to shame.
Also I expect that Xbox streaming service would be integrated and possibly with very low latency and good quality. If everything of the system is plug and play and cheap, then it would have a good reason to exist. Otherwise I would be skeptical, just as you.
Their competition is the Deck and other handhelds that run full versions of Windows, there's no reason to believe they wouldn't give it the same kind of capacities (i.e. a real handheld PC) in which case it's the Deck that will feel like a walled garden considering that not all games are compatible and not all launchers work on it.
I say that as a Deck owner that plays with it pretty much once a day.
I've heard from some others that there was a version of Windows (I'm blanking on which one) that worked great on tiny computers, so if they were to revive the project, it could be a really viable competitor.
The other handhelds that run Windows suffer from it being too much of a traditional PC first and not having enough "console" in them, from what I hear. Can't say from first hand experience, though, since I also own a Deck.
Either way, time will tell what eventually comes out of that brief sentiment.
I also mentioned in another comment that they could simply do the same thing as with the Deck, have it start with a handheld/controller friendly UI (hmmm where could Microsoft's Xbox division find that?) and give the option to switch to regular old Windows to do desktop stuff. It's not as if playing on the desktop without a mouse and keyboard attached to the Deck is a fun experience either!