Microsoft is not old by corporate standards, but in the world of technology it is down-right staid. That’s why it takes a while for it to make major changes (or five years to roll out an OS). A few years ago when Bill Gates was still in charge, he recognized that Microsoft had to embrace the internet in a big way or get left behind. That’s one of the reasons he hired Ray Ozzie.

By now, nearly everyone has heard of the Ozzie Memo, a treatise that “leaked” out and outlined Microsoft’s plans to transform itself into a “modern” company. At the time, Ozzie, who has the title of Microsoft’s Chief Technology Officer, recognized that Microsoft had to shift its focus from traditional desktop and server-based deployment to an internet model.

Fast forward to 2008. Under pressure from free services like Google Docs, Microsoft surveyed the landscape and came up with an attempt to take Office online, sort of. But instead of introducing a pure software as a service like Google Docs, it decided to straddle the line between desktop and online and come up with a hybrid service. Aimed at the consumer market, the service, which is code-named Albany for Beta purposes, is the same old desktop client with a convenient installation program, automatic incremental updates delivered in a subscription model along with some online services such as Windows Live One Care and Windows Live Mail. Like so many of its latest efforts, the result appears awkward and a bit off-kilter. It’s as though Microsoft doesn’t get the whole idea of SaaS or lost its core value proposition in a haze of corporate compromises.

The beauty of software as a service, whether free or a subscription model, is not just the fact that updates get delivered to you automatically, although that is certainly a prime selling point. It’s that you don’t have to deal with deployment because the majority of the application is available online. Microsoft’s answer to this is the Microsoft Office Live Workspace Connector, an online storage space where you can upload documents, then share with friends or colleagues. Nice idea, as far as it goes, but shouldn’t my friend be able to edit this document online, not just access it and download it to the desktop?

Microsoft has a lot in common with IBM in the early days of the PC trying to protect its typewriter division. It recognizes that software is moving on the internet, but it can’t let go of its core packaged-software business. So it creates a hybrid solution that doesn’t really move the company forward in a meaningful way. If Microsoft really wants to take the company modern, it needs to come up with a solution that takes it all the way, not one that leaves one foot in the past.