Why is it bad news for Microsoft?
Because fewer organisations will be compelled to upgrade to Windows Server 2016, especially given the increased per core licensing costs verses the native functionality you get with Linux much of it built into the Linux kernel, which is virtually FREE!
'Serverless' isn't actually serverless, it's just reference to a model where the existence of servers is hidden from developers, itself emanating from Microservices architecture the foundation for which are "Containers".
Amazon and Microsoft are not the only ones hyping so-called Serverless, there are also a number of companies replicating this model as on-prem solutions, again based on Container technology.
The reason you have to 'manage physical servers' is because 'software runs on hardware', so whether that's a public Cloud Service Provider doing it on your behalf behind the scenes or you doing it yourself on-premise (currently where the vast majority sits) thats the way it will always be.
Biting the hand that feeds IT
