People in Microsoft know that the PC is coming to an end. The future for software makers lies in web applications, and people will use whatever browser-like platform they have available to access their data and software on-line. This has been done in the enterprise market because its the most effective way to manage data and deploy software (in most cases, at least), and will be embraced also by home users who have, by now experienced the difficulty of maintaining software and avoiding data loss (their emails, pictures, documents, etc).
Where Microsoft is wrong is in fearing that Google will manage to leverage its dominance in search engines to threaten Microsofts software sales. Those sales will decline, whatever Microsoft does. But Google, or any other company based on a search engine, is not necessarily well positioned to take Microsofts place as a software provider. Within large companies (interested in protecting their business data) software will either be internally developed (the easier applications, and those with very specific business logic) or ordered from a few large suppliers, for the complex but relatively standard software packages. Microsoft is already busy securing this with the on-line collaboration built into its latest Office version (including Office Live).
Smaller companies and individuals will use on-line services for standard needs, or hire local software development companies for other, more specific, needs.
Google really cant make money from selling software on-line. It can only sell information, and even from that it has been forced to get its revenue mostly form advertisement charging directly for the information would drive users away and raise inconvenient questions about ownership of information. Yahoo is in the same situation.
This move seems to me a huge mistake by Microsoft, almost like TimeWarners merger with AOL (except that this at least is not Yahoo buying Microsoft).
