Design wise, I think a Microsoft fighting game would work better as a game in the vain of Marvel Vs. Capcom or Mortal Kombat. The game would take a cartoony approach to the fighting, but it can get very brutal with the more serious characters, but still very whimsical and fun.
With Microsoft acquiring Actvision, I wanted to throw my hat in a ring, in potential fighters I would add if I was in charge of a roster.
1. Master Chief (Halo)
2. Marcus Fenix (Gears)
3. Raz (Psychonauts)
4. Banjo-Kazooie (Banjo-Kazooie)
5. Arbiter (Halo)
6. Conker (Conker)
7. Fable protagonist (Fable)
8. Fulgore (Killer Instinct)
9. Steve (Minecraft)
10. Doomslayer (Doom)
11. Vince (Voodoo Vince)
12. Lucy (Whacked!)
13. Blinx (Blinx the Time Sweeper)
14. Commander Jaxon (Crackdown)
15. Gruntilda (Banjo-Kazooie)
16. Rash (Battletoads)
17. General Raam (Gears)
18. Ori (Ori)
19. Joanna Dark (Perfect Dark)
20. Orchid (Killer Instinct)
21. Crash (Crash Bandicoot)
22. Spyro (Spyro the Dragon)
23. Winston (Overwatch)
24. Zerg (Starcraft)
25. Guitar Hero Rep (Guitar Hero)
26. Senua (Hellblade)
27. Dark Queen (Battletoads)
28. Flood (Halo)
29. Mumbo Jumbo (Banjo-Kazooie)
30. Dragonborn (Skyrim)
31. Commander Jaxon (Crackdown)
32. Avatar (Xbox)
My reasoning for the choices:
Master Chief was an obvious choice, and Arbiter is one of Halo's other popular characters.
Gears is Microsoft's second most popular franchise.
Fable because it is one of Microsoft's other premier franchises.
Banjo, Conker, Crash, Raz and Spyro are all platforming icons.
Blinx, Lucy and Vince were all chosen cause I thought having 3 obscure and retro characters featured on the roster would be cool. Vince makes for an interesting fighter cause he is a Voodoo doll, Blinx can control time, and Lucy is here just because the roster needs more female characters and cartoony ones.
The Xbox avatar is important to the Xbox ecosystem, while they have slowly fell into irrelevance, being able to make your own fighter with your likeness is a nice idea carried from Smash.
Rash is here because he was in Killer Instinct, and everyone loves the toads.
Commander Jaxon was picked because how outlandish it would be for Terry Crews to be here and shout catchphrases. What he's best known for.
Gruntilda, General Raam, Zerg, Dark Queen, Flood, were all chosen cause game needed villains.
Mumbo Jumbo to just round out the roster a bit more, also his ability to transform stuff makes him a unique fighter.
Steve is very popular, so of course.
Ori and Senua both come from well received games so it's an obvious choice.
Winston was chosen cause I think the game would need more "big" characters. I originally wanted Tracer, but with Blinx here, I didn't want them to feel too similar.
Fulgore and Orchid were chosen because they are actually from a fighting game, and Killer Instinct is a loved series. Orchid was chosen over Jargo cause the game needed more female characters.
Dragonborn and Doomslayer are both from iconic video game franchises.
Joanna Dark is a spy, and that could make for an interesting moveset.
Guitar Hero, because a character who revolves around music makes for an interesting moveset.
Other characters that could potentially be added as DLC
Skylanders - Because they could swap between 3 characters.
Dr. Neo Cortex - Another villain, and adds another Crash character.
Riptor - I wanted an "animalistic and feral" character and Killer Instinct is cool.
Third party:
A character from the Sonic series - I'd pick Shadow, because with Sonic in Smash Bros, it would be the more realistic choice. And he fits in with all the dark and edgy, albeit whacky cast of characters. Sonic been on Xbox consoles for 20 years, so this isn't a out of nowhere decision.
Sam Fisher - Splinter Cell was also on Xbox consoles for a very long time, and Sam is one of the most iconic video game characters of all time.
Roblox - Roblox is currently exclusive to Xbox consoles. Having Steve and Roblox duke it out in a game together would be awesome. With a bunch of gears and weapons, Roblox in my opinion has more interesting potential as a fighter than Steve.
Enzo - Because Assassin's Creed is successful and cool.
Rayman - To add to the platforming heroes.
A Mortal Kombat character - There are a bunch, but I'd pick Sub-Zero, cause no one uses ice powers.
That was everything, it's a weird list. But, I think it fills a bunch of niches.