If the price, scale and power envelope is right, they can absolutely be mediocre. Server CPUs are core for core clocked much lower than consumer chips, cooling and power are huge issues.
If you can fit 500-1000 mediocre arm cores in the same space as 128 x86 cores at half the power/heat, it absolutely makes sense for something like Azure. They don't have to beat Intel/AMD on a core for core basis as long as they can compete on compute/space/power requirements horizontally.
It's not the best option for some loads, but is a good enough option for enough loads that the diversification can really work out. There's plenty of software/systems/services that don't need x86 per core performance and a single ARM core is enough per node.
Microsoft is just as rich as Apple. They can do whatever they want.
I highly doubt they would get into the trouble of designing their own chips only to settle for something mediocre.