It’s long been obvious that Microsoft’s vast installed base of Office users gives the firm, in theory, a big advantage in fighting the threat posed by Google Apps, Zoho, the brand-new Adobe Share and other online personal-productivity programs. It’s also long been obvious that the best way to capitalize on that advantage is to provide a rich set of free software services that require ownership of Office – to introduce online document storage and various productivity and collaboration tools as features of the existing Office suite rather than as a competing set of services. By providing customers with a hybrid Office, running locally or on the web as need be, Microsoft would be able to offer functionality unmatched by the web-based upstarts while also giving itself the ability to manage customers’ long-term shift to the software-as-a-service model. It would also be consistent with Microsoft’s long-time practice of using new features to neutralize competitive threats.

That’s the strategy, anyway. Whether Microsoft will be able to execute it remains a question, and whether it will be able to execute it while maintaining Office’s historically rich profitability remains an even bigger question.

Today, we move closer to answering those questions, as, at long last, Microsoft is unveiling many of the details of its “web as feature” strategy. I wish I could give you a simple explanation of what the company is offering, but, this being Microsoft, what we have is a witch’s brew of balkanized services, elaborate brand hierarchies, and jargon out the wazoo. Here are the basic components, as I’m able to decipher them:

For smaller companies, Microsoft will extend Office through Office Live Workshop, a not-quite-in-beta-yet service which, according to a canned interview with Jeff Raikes, head of the company’s business division:

will provide anywhere-access to Office documents, including Word, Excel and PowerPoint files … People will be able to work on documents from any Microsoft Office-equipped computer with an Internet connection – or review and comment on documents on devices that only offer Web access. People also will be able to collaborate on documents and share information with friends, colleagues or classmates simply by sending an e-mail and inviting them to a password-protected online workspace. This will help people avoid the pain of trying to find the latest version of a document, or having to pull together multiple versions of documents. They can also easily post files to their dedicated password-protected online workspace directly from the Office application in which they’re working. [emphasis added]

In other words, Office Live Workshop provides a Google Docs-style online document hosting and editing environment that is integrated with the familiar, installed version of Office. (Users will at the outset be limited to storing no more than 1,000 documents online.) The online workspaces will also be accessible off-line through a deployment of Groove, the software service Microsoft acquired (along with its inventor, Ray Ozzie) a few years back, reports Mary Jo Foley.

For larger companies, Microsoft is rebranding its set of hosted services for messaging and collaboration under a new “Office Online” brand, as Raikes explains:

For the past two years, Microsoft Managed Solutions (MMS) has been piloting a program targeted to a select group of customers. Today, MMS officially falls under “Online” services and is available for customers with 5,000 seats or more. Online service offerings from Microsoft are for organizations with more advanced IT needs where power and flexibility are critical. These services will give businesses the ability to control access to data, manage users, apply business and compliance policy, and meet high availability standards while providing performance, scalability, security, management features and service-level capabilities to support mission-critical applications and systems … Our announcement today illustrates how software such as Exchange Server, Office Communications Server and SharePoint Server will be available for customers to run on-premise or hosted in the cloud by Microsoft or hosted by value-add partners. [emphasis added]

The ability to control data and impose policy-based rules on access and use may be anathema to Web 2.0 revolutionaries, but it’s essential to big companies, which have to deal with a thicket of regulations regarding corporate information. The availability of data control mechanisms will be a central consideration for them as they enter the “cloud.”

Microsoft’s emerging online strategy, argues Richard MacManus,

seems messy and nowhere near as coherent as Google’s online office strategy. I can’t see many Microsoft customers getting excited about Office Live Workspace, given there are many startups offering better solutions – not to mention Google. And positioning this as a “web-based feature” of Microsoft Office makes it even more confusing. Is this what Microsoft’s answer to the Web Office is – tacked on features to its all-powerful desktop suite?

Well, yes, that’s precisely what Microsoft’s answer is. And while MacManus is right that Microsoft’s offering is “messy” and even “muddled,” one should not underestimate the company’s ability to shape the market by tacking features onto its “all-powerful desktop suite.” It’s a strategy, after all, that has served the company well many times in the past. Microsoft’s online offering does not have to be better than, say, Google’s; it just has to be (a) more convenient for typical business users with (b) good enough functionality.

In the short term and even medium term, it is very likely that mainstream business customers will be more comfortable viewing the cloud as an add-on to rather than a replacement for their traditional Office programs. The competitive battle, in other words, will be fought largely on Microsoft’s turf, and on that turf a certain amount of messiness is both allowed and expected. “Google and other Office competitors will be breathing a sigh of relief this morning,” writes Mike Arrington. If so, it’s a sigh they may come to regret.