how would backwards compatibility work?
and would MS make a machine where users could potentially spend $0 on their games and services?
Yeah, the ARM platform thing is probably going to be more cloud than anything. You can recompile modern stuff I'm sure with more ease, but how far back you go might complicate things further.
Unless, they do what everyone else normally does and piggybacks off the emulators.

But also remember, every Xbox branded device that isn't directly from MS is probably going to pay the Windows license fees, so they'll make cash on the initial sale at the very least. They sell the data. They'll make some cash off these devices provided they use Windows or w/e spin they might roll out.
Well, they should have been leveraging the tie in with PCs since forever ago. The last try was what, GFWL? At least them being backed into a lowly 3rd place has them analyzing what they have and potentially putting it to use.
They need to drop that custom XB focused Windows derivative. They got the time for shytty Windows S builds, give the players something. SteamOS has been cooking so they got a blueprint.