They had been recently sued for having a monopoly from bundling IE with Windows. The chain of events you describe was in many ways not a choice of Microsoft.
This is a good point, it’s easy to forget about how closely watched Microsoft was by regulators.
But IMO it makes it all the more surprising that Microsoft doubled down on the centralized OS+API+apps leverage combo that had brought upon them the antitrust scrutiny, instead of dispersing their influence?
Dispersing their influence where? Windows was all that mattered then. No one cared about the “beleaguered” Mac that was losing marketshare and Apple was close to bankruptcy. No one cared about Linux. It’s not like now where there are four platforms that matter for consumers - Android, iOS, Windows, and Macs.
But IMO it makes it all the more surprising that Microsoft doubled down on the centralized OS+API+apps leverage combo that had brought upon them the antitrust scrutiny, instead of dispersing their influence?