The question now is: Can Microsoft continue to embrace and extend its way through a Web-centric world in which the traditional, fat client PC model of stand-alone applications and locally stored data seems almost anachronistic?

If you were to ask that same question while shaking your Magic 8 ball, I'm guessing the answer would be “Outlook Good.” Despite its legion mistakes, Microsoft still commands what is by far the most extensive software/hardware ecosystem in existence. From application servers to Zip file utilities, Microsoft's platforms are the primary targets for developers of all stripes. Many a commercial software development empire has risen on the tide that is Windows.

Case in point: Microsoft Office. Most people think of the big three -- Word, Excel, and PowerPoint -- as merely an integrated suite of stand-alone applications, albeit a wildly popular one. Take a closer look, however, and you see that Office is much, much more. Thanks to the inclusion of some robust integration APIs (Visual Basic for Applications, OLE automation, and various add-in interfaces), Office is a commercial development target in its own right. In fact, one of the easiest ways to break into the Windows development marketplace is by targeting Microsoft Office. Make it do something new or better and the world will beat a path to your door.

Of course, the Office “habitat” is just one part of the larger Windows ecosystem. SQL Server, Dynamics, Outlook, IIS (Internet Information Services) each generates its own gravitational field that helps capture the hearts and minds of commercial developers. And whether it’s IIS with SOAP and WSDL or SQL Server with metadata, each implements the embrace-and-extend philosophy in a way that strengthens each piece of the ecosystem, including Office.

One force that could disrupt this self-reinforcing ecosystem strategy is the Web. The combination of browser-based thin clients and ubiquitous connectivity are conspiring to usurp some of Microsoft's control over the industry. But Microsoft, as much as it appears to be a lumbering monster, has seen this threat and is using its tried-and-true strategy of embrace and extend here, too. Like the plodding creatures of horror flicks, it may in fact catch the seemingly faster victim.

First, the embrace: Microsoft is aggressively responding to inroads made by the likes of Google and startup Zoho, launching some Office Live thin client services for small businesses, such as a contact manager and Web site designer, in addition to its consumer-oriented Windows Live offerings, such as photo-sharing and blogging tools.

Now the extend: True to form, Microsoft is extending these Office Live and Windows Live services by tying each new offering into its traditional desktop OS and application platforms. Windows Live Mail, Office Live Workspaces, and Windows Live Writer are all targeted at the rapidly expanding market for applications that live within the cloud. All are very much Windows-specific, with hybrid architectures that tightly integrate Web and desktop in a decidedly Microsoft fashion.

Still, Office Live is at best just a placeholder for an even more ambitious endgame. Through application virtualization (SoftGrid, et al.), Microsoft could very well leverage the very same forces of ubiquitous connectivity that are enabling thin client Web apps to deliver the “real” versions of Word, Excel, PowerPoint, and the rest in their full, feature-rich, fat client glory through a massive, distributed network of streaming servers.