Hi, I called Apple and went thru some troubleshooting with them but we're unable to get it resolved. The guy I spoke to thought it could have something to do with Filevault preventing the update. He suggested I take it to an authorized repair center, which I did.
They had a look at it and connected it to one of their MacBooks to do the update. Same issue happened, except that in the System Report the Studio Display did show up - whereas in mine it didn't. They tried multiple things and went thru more testing with Apple Support, to no avail. Apple Support escalated it to Engineering, who were going to respond in a day or two.
The Repair Center gave me the choice of collecting it and taking it back to the retailer I bought it from (along with a report confirming the unit was faulty) so I could exchange it; or wait for Engineering to respond with a fix which may involve changing out the logic board. That's if parts are actually available, and the repair time was unknown.
I obviously chose to exchange it, which I did yesterday. When I got home I hooked it up and checked the software version, which was iOS 15.3. I was a bit worried about updating it just in case the same thing happened, but I tried it anyway. I got an error message saying it was unable to update software and to try again in an hour. I decided to leave it and was going to try again today but ran out of time.
If you are having exactly the same issue as I was, I'd take it back and get it exchanged if you can. It appears Apple does not have a solution as yet or may not be aware of the problem. Would be interesting to know how many others this has happened to. I really didn't expect to have a problem, especially considering the fortune I paid for it....