TBH it's not an inherently bad idea as long as it remains an option. Subsidized sub service tiers via ads has been a thing for a while now. It's the method of implementation that can be called into question.
If MS figure a way to make the ads not screw over a player's input (I'd assume they'd have to create a save state of the very moment before the ad plays, then resume afterwards. Like Quick Resume, but not as a buzzword), I can see it working. More platform holders, even Sony/SIE I'd imagine, could potentially look into subsidized subscription models via ad support.
I also imagine that these platforms will try offering incentives for users who actually engage with the ads (i.e buy a product) through the service acting as an affiliate, like free reward points or gift cards towards other games, or entering sweepstakes, etc. Again, it's just another option; if you don't want the ads just sub to a tier without them and be done with it.
My issue with it is the "option" part. MS is also the company that put a full-page, pop-up ad on system boot for CoD. It's a different scenario, but MS has an established history with pushing anti-consumers bs in their products. On a larger scale, I don't think it's any secret that many companies would love to entwine ads with paid games or services. Any traction on this, imo, has the possibility to lead to problems down the road. If this, for example, was successful - it would only encourage others to start following suit. I also don't have any faith that MS would keep it as simple as what's stated by the CFO.