That didn't stop people creating hard-to-crack copy-protected software.
Since disk drives existed, games makers created floppy disks that industrial disk duplicators that standard computers could read, but couldn't write, and ensured their games had code to check for that. It generally wasn't feasible to replicate these special tracks with a normal floppy drive, so instead people had to reverse engineer the game and remove the copy protection checks.
This could be easy or hard, depending on how devious the programmers were. One of the legendary games for this was Dungeon Master on the Amiga or Atari ST which took crackers about a year to find _all_ the copy protection checks [0]
This wasn't the only form of copy protection.
* Games since their earliest day had things like "enter word 7 on page 5 of the manual". Some games had a red-on-red "copy protection sheet", designed so that it would be very difficult to replicate with a standard black-and-white photocopier. Monkey Island came with a two-piece "Dial-a-pirate" code wheel [1]
* To thwart third party software developers, and to distort fair trade and give themselves lucrative pricing monopolies, the Nintendo NES had a "lockout chip", the 10NES [2]
* Sony Playstation games had a "wobble" built into the groove of their pressed discs that normal CD-Rs didn't have, and the frequency of the wobble indicated which region the game was sold to, preventing free and fair international trade by foul means [3]
* Products like AutoCAD came with a dongle, [4] it connected to the parallel port because USB hadn't been invented.
But yes, for software like Windows, where the entire product has to be installed on a hard drive, it wasn't within customer expectations to have to permanently attach a dongle or have media in a drive, and there wasn't commonplace network access with which to "phone home", the serial key or CD key was used to limit distribution. As you say, Microsoft enforced this mainly with licence audits - the BSA not only offered a reward for employees to rat out their companies [5] but they also generally acted as a front for Microsoft; Microsoft would drop their lawsuit for your minor infringement of some of their software, if you agreed to stop using Microsoft's competitors' software and convert your business to becoming a Microsoft-only shop.
Microsoft also got paid by doing deals with OEMs. If you bought a PC in the 1990s, you likely paid a "Windows tax", where every PC sold, even ones which will only run Linux, gave a portion of the sales price to Microsoft. They illegally used their exclusive agreements with OEMs to prevent BeOS entering the PC operating system market. Microsoft was found guilty of using illegal anticompetitive tactics to crush their rivals in the x86 operating system market. [7]
[0] https://www.youtube.com/watch?v=VheNpiSZxf0&t=489s
[1] https://oldgames.sk/codewheel/secret-of-monkey-island-dial-a...
[2] https://en.wikipedia.org/wiki/CIC_(Nintendo)#10NES
[3] https://en.wikipedia.org/wiki/PlayStation_(console)#Copy_pro...
[4] https://en.wikipedia.org/wiki/Software_protection_dongle
[5] https://en.wikipedia.org/wiki/Software_Alliance
[6] https://en.wikipedia.org/wiki/Bundling_of_Microsoft_Windows#...
[7] https://law.justia.com/cases/federal/district-courts/FSupp2/...