But as this paradigm shift occurs, the story for Microsoft — as well as its customers and partners — remains complex, especially in the face of new competitors such as Google, Amazon and Salesforce.com, who built their business models almost entirely on the Web as their main platform for development and innovation.

The majority of Microsoft customers, both in the consumer and enterprise markets, have made investments in traditional installed software such Microsoft Office, Exchange (an e-mail server) and SharePoint, a collaboration application that allows users to build shared work spaces for document sharing. Because Microsoft has made billions of dollars in annual revenue from selling this on-premise software, the cheaper cost of cloud-based applications creates a disruption to their current business model.

But Microsoft executives insisted today that the computing environment will never run fully in the cloud, contending that some applications will be hosted offsite while other capabilities on a client desktop (like Windows) will be forever necessary.

"There's always going to be a mix," Stephen Elop, president of the Microsoft Business Division, told CIO in an interview after his presentation in which he launched the product before a small group of customers, partners, press and bloggers at the St. Regis Hotel in San Francisco today. "The reality that computing will take advantage of local power, as well as cloud-based capability, is going to carry on for a long time in our estimation."

Microsoft has been pressured by the emergence of Software as a Service (SaaS) companies such as Salesforce.com and Google, who have built their business models for delivering applications almost exclusively on the Web. SaaS-based vendors, which run on a subscription model of charging customers per user per month (or year), have generally provided cheaper models for purchasing software since it doesn't require up front capital for buying servers and the staff to maintain them.

Google Apps, for instance, is a Web-based software package that includes Web-based e-mail (Gmail), calendar, documents (word processing), spreadsheets and instant messaging for just $50 per user per year. Some companies who have adopted Google Apps have reported millions of dollars in savings as opposed to running an installed version of Exchange.