"This is more a swing of the pendulum," said Rob Helm, director of research at analyst firm Directions on Microsoft.
"In 2000 the pendulum was swinging towards hosted services. Two years later it was swinging back. Now Microsoft is going to make another run at it."
Microsoft unveiled its Live Software initiative on Tuesday at a media event in San Francisco. The strategy will see the launch of the new Office Live and Windows Live products.
Both are mostly free and supported by advertisements, and are offered as an online service through a browser.
Users will be able to access the applications on any device with a browser, ranging from mobile phones to PDAs and desktop PCs.
In the short term, however, the initiative will mostly be a rebranding of existing Microsoft services including Hotmail and MSN Messenger.
The two will be released under the Live Mail (video demonstration) and Live Messenger (video demonstration) brands respectively. Similarly Microsoft's Small Business Centre will become Office Live.
"It's mostly a branding change and an overall statement of direction," said Helm. But by making the services available free of charge and supported by advertisements, Microsoft is stepping up the competition with Google and Yahoo.
However, unlike Google and Yahoo, Microsoft does not rely solely on advertising revenues to stay in business. This not only makes it a low risk best for the software provider, but offers a shot at ruining Google's and Yahoo's business.
"Even if Microsoft doesn't win, it's possible for others to lose," said Helm.
Microsoft launched a big push towards hosted applications in 2000, but the doomed Hailstorm project faced many obstacles.
Users did not trust Microsoft, and the low adoption rate of broadband connections limited the appeal of software that required users to be constantly online. As the internet bubble burst, Microsoft quietly folded the initiative.
Trust will be a major hurdle for Microsoft once again, according to Charlene Li, principal analyst for devices, media and marketing at Forrester Research.
