It seems Microsoft's primary intention is not to directly compete with what VMWare is offering, and instead take the next “technological step”, moving to a management infrastructure that is both physical and virtual. They put a lot of emphasis on managing virtualization deployments, and see that as more important than the actual implementation. This is definitely true, at least from a business standpoint, as one of the goals of any virtualization suite is to become seamless.
If anyone knows how to operate a monopoly and control large market share, that would be Microsoft. VMWare could be in danger here. Even with a technically superior product, they might find themselves in a serious hurt if they do not react to Microsoft's plans, on top of several other vendors like Sun and Cisco competing for VMWare's current domain as well.