How? Using Silverlight. Here's the strategy as I see it.
First, the underlying Silverlight technologies (XAML and .NET) are encouraging client-side Windows developers to think beyond boring forms apps and delve into the wonderful world of vector graphics with 3D, sliding reflective surfaces. In short, Microsoft is encouraging developers to use the power of the client-side to ensure that Windows apps to continue to make web-apps look like boring documents.
Second, having raised the bar on client-side user experiences, the Silverlight runtime enables developers to maintain that high bar of multimedia user experience in the browser. But Silverlight is not like flash. Developers can use the exact same development assets, metaphors and tools they know and love. Objects, Controls, Visual Studio and more. Users will come to expect web-based experiences that match their newly enhanced client-side ones.
Third, if Silverlight makes it possible to essentially deploy client-side style applications through the browser, which Microsoft product can now become truly web enabled?
You guessed it. Office.
Silverlight represents a way for Microsoft to not just complete in the online office space, but blow it out of the water with a product that is as good (or better) than its client-side counterpart. There was no way Microsoft was going to bet their web-based application strategy on Flash or try to hack together an Ajax word processor. Silverlight, and its true Object Orientated .NET foundation, are a perfect platform for the web-enablement of their traditionally client-side suite.
Fourth, Silverlight is positioned as the new application platform. It exists in places Microsoft has never existed before. On Nokia phones (the land of Symbian), Linux workstations and OSX. Even iPhone could conceivably run Silverlight since it runs the full fledged Safari browser. And now there is an announcement that Silverlight will be shipped with millions of HP computers.
With Silverlight now coming out on Nokia phones, delivered as part of the Olympics coverage and embedded throughout MS properties and content deals popping up everywhere, Microsoft is gaining enormous distribution potential. If they can somehow skirt the anti-trust issues, they could even bundle it with IE8.
Silverlight is a critical and masterful piece of technology and strategy from the Redmond giant. It allows them to leverage their tools and technologies from the client, raise the bar on web-based experiences, deploy their client-side apps through a browser and broaden their platform reach into every device and screen in a user's life.