In fairness to Microsoft, this argument should have been correct. It ought to be possible for Microsoft to offer products with better polish and better support than open source alternatives, and that ought to more than compensate for any licensing costs. Whether Microsoft actually managed to do this is debatable, but the principle is sound enough.
It sort of was especially with respect to desktop software. The licensing costs associated with Microsoft Office etc. were probably not really that much compared to the disruption with switching offices of people who just wanted to do their job to open source alternatives.