"Unlike Google, which is trying to take AJAX/browser apps and make them look like they're running on the desktop, Ozzie is making the point that the combined value of the Windows OS and assets on the Web -- including, but not limited to, [Windows] Azure and Windows Live -- is Microsoft's play, and a winning play at that," he said.

AJAX, or asynchronous Javascript plus XML, is a development language for creating interactive Web applications. Windows Azure, which Microsoft revealed at PDC, is its cloud-based application development environment that competes with Amazon's Elastic Compute Cloud.

Still, there is no denying Microsoft knows Windows must change as the industry moves away from running software on the client to using Web-based applications. The company's decision not to include Windows Photo Gallery, Windows Mail and Windows Movie Maker as part of Windows 7 in favor of Web-based versions of those applications is part of this trend.

Microsoft is even planning to release a hosted version of the Office productivity suite, which is Microsoft's top software seller next to Windows -- another acknowledgement of the move to hosted services, as well as a nod to competition from Google's Web-based productivity suite, Google Docs. Google Docs is beginning to gain some traction not only with consumers, but also enterprises.

Microsoft plans to release a lightweight hosted version of Office called Web Applications for Office around the same time it releases the next version of the productivity software code-named Office 14, Microsoft revealed at PDC.