For example, Office 365 Home Premium -- the subscription option for families and individuals -- will still require users to install full-featured versions of the Office applications on each machine. Documents can be stored online, however, and the product comes with 20G bytes of SkyDrive storage.

Eventually, browser-based applications will reach a level of functionality that's on par with locally installed applications, said Rob Koplowitz, a Forrester Research analyst.

That future is closer in certain types of applications, like Web-based email, but further in others, like spreadsheets, he said.

"For the time being, Microsoft is leveraging the cloud in a clever way to bring the best of both worlds together," he said.

Although the beta launch was focused on the consumer market, Microsoft also addressed the SMB and enterprise markets by stressing that the upgrade effort extends to the collaboration and communication server products like Exchange, Lync, Yammer and SharePoint, and by announcing new Office 365 subscription options for workplace use.