Doubtless feeling somewhat intimidated by companies like Google toying with the idea, Microsoft is making a few hints that it may consider doing web-based office suites. Fitting in better with a “software as a subscription” model that MS wants to move towards, they may be looking to have ad-based “Free” suites for people to use via the web(doubtlessly requiring IE7). Being the undisputed champion of desktop office software to begin with, they have a huge leg up in getting people to try it out. Google definitely has their work cut out for them if that is what they want to do.
But hey – if it's free, who can complain?