More recently, they've also said they are happy to work with any manufacturers who want Steam OS for their devices, and encouraged them to reach out to Valve and they'll work together to get things working.

My assumption is that the real reason we aren't seeing more movement on it, is that a lot of the other handheld makers are using full Windows compatibility as a marketing point, and I also doubt Valve is going to help get other game stores working on Steam OS. It's not that weird if Valve makes a handheld that only officially supports Steam, but it might seem a little weird if Asus or Lenovo released a handheld that only officially supported buying games on Steam.

I suppose a device that could dual boot Windows and Steam OS could be a solution, but knowing how Windows updates can sometimes randomly bork dual boot setups, I could see that being a potential problem as well.

Ideally Epic, Humble Games, GOG, and the remaining publishers that have made their own stores and launchers should get their games and launchers working under Linux/Proton, but I think the current plan is for hardware companies to make a bunch of mediocre Windows handhelds, and hope Microsoft gets off their ass and makes a version of Windows tailored for the form factor. But there really isn't much motivation for Microsoft to do that, because they'd probably rather just launch their own Xbox handheld and keep that for their own gaming walled garden. Gamepass already gets them onto pretty much every other platform, so why should they care?