Without question this is Microsoft’s response to Google’s new and free operating system, Google Chrome OS, which will work with Google’s free online applications. Jon Fortt in Fortune:

One could argue that the software giant is late to the giveaway party. Folks like Google, Zoho and SlideShare have been offering free equivalents to Word, Excel and PowerPoint for years. Unlike those companies however, Microsoft already has a very profitable $20 billion business selling desktop versions of its Office software. It would have been foolish to jump into the free game too hastily and watch that business evaporate overnight.

What will such a bold move do to online applications that are basically free? After all, Microsoft makes lots of money selling Office, and zero money giving it a way.

And that’s what makes this bold move to the web either the dumbest thing the company has ever done, or a stroke of genius. If Microsoft gets this wrong, it will cannibalize its own Office business, and investors will howl. If it gets this right, Microsoft will crush Google, Zoho, and all the other rivals who are nibbling away at Office’s dominance.

This seems to be a response driven by fear more than opportunity.