The govt comes by with a subpoena (secret, classified, or public) and requires Microsoft or the customer company to produce communication records that exist in a form that may be used as evidence. Failure to do so is best contempt of court and worst obstruction of justice. No 5th amendment privilege for other people's crimes. So everyone who chooses to store or process messages makes it so the encryption is reversible and they can honor court requests. Nothing is private as a result.
EDIT: I should make it clear I don't agree with the current status quo. Let me answer two very good questions.
> Would they also do that if logging failed during the period requested?
If it can be shown that there is a willful neglect of collecting logs then the govt in the past has gone after companies for some form of conspiracy (most famous: MegaUpload, but Microsoft customers have had their fair share for accounting and securities fraud) or criminal negligence. There is a prevailing theory that companies are responsible for employee actions, and failing to log is seen as unacceptable.
It's only recently (within the last year) that the courts have ruled whether compelling passwords is protected by the 5th amendment, and most systems in place were designed and built using previous assumptions from 10 years ago.
> If this is true, why is OTR offered at all?
It's a checkbox feature required for HIPAA, PCI, and similar. "Must have encryption" -- the standards and IT departments don't say how the keys are managed.