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With SteamOS coming, Microsoft needs to up its game in the handheld gaming market
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They don’t “need” to. There are games that companies refuse to let people run on Linux, so there will be a market for Windows, no matter how shit the experience is.
For now. If enough of the market shifts to Linux those companies will support Linux. Particularly since the CrowdStrike fiasco has spurred Microsoft to crack down on kernel level access which means the days of anti-cheat rootkits are numbered. It's not going to be long before there's no functional difference between gaming on Windows and gaming on Linux.
The ace in the hole though is that while Steam is effectively cutting down what Windows OSes it decides it'll continue supporting, people will want an alternative to go to instead of feeling cornered with Windows 10 and 11. Because that's all that they have right now for gaming, with Linux being optional, but gamers can be awfully picky about what they want to run.
Can SteamOS be installed on a desktop or is it only for the handhelds?
SteamOS is based on Arch with customization by Valve to make it immutable and a few other tweaks. In theory Valve will release SteamOS Holo (the version used on SteamDeck) for usage on Desktop at some point, but that hasn't happened yet. In the meantime you can achieve very similar results to SteamOS a variety of ways. Depending on if you care about immutability or not there's a number of non-Arch distros and even a install script (astOS) that can install Arch configured in an immutable fashion similar to what SteamOS does. There's also a number of non-immutable gaming focused distros the most prominent of them being Manjaro. Any of them once you install Steam will function very similar to each other and SteamOS.