Microsoft is OK with the S having a lower resolution and frame rate, that’s why it exists.
They aren’t OK with the X having a feature that the S does not, and that’s what’s blocking Baldur’s Gate 3. Split screen is possible on the X, it’s not (currently) possible on the S, that’s what they’re working on.
Removing split screen from both isn’t an option because the PS5 version supports it. The Xbox version would get murdered if they do it.
The reason why split screen doesn’t work on the S is, yes, due to the available memory. At it’s best, it has 8GB that runs 1/2 the speed of the X, + another 2GB that are so slow as to be essentially useless for gaming.