Microsoft's model has always been to sell software, and to push users to buy new versions of the same old thing every 18-36 months, by ladling on one new feature after another. By the time Microsoft heaved Office 2003 out the door the suite had become such a bulky product, with so many buried features and functions, that the company had to completely recreate the user interface to "expose the functionality" in the next version, Office 2007. This business model had served the company well until now: Office brings in $15 - $20 billion a year in revenues, second only to Microsoft's Windows franchise. But the sales curve has flattened, even as Google Docs gained traction.
Google's model is to sell contextually targeted advertising and to tie its products into its search engine. Microsoft, with its Bing search engine and the Web-based version of office, Office Web, is pursing that same "free" business model perfected by Google.
But Microsoft's corporate culture is still built around the idea of selling the user ever more features. Teasing users with a free, dumbed down Office online and then trying to upsell them with a "more is better" strategy could easily backfire.