...but they also are dominant enough to hedge all their bets. It's usually easy enough to figure out their strategy - just look at the companies they see as the biggest threat at any particular moment in time.

IE was used as a tool to put Netscape out of business. It is currently their hedge against Mozilla. MS doesn't really see Mozilla as a strong threat but neither can they afford to totally ignore them. IE7 is a defensive action, not really intended to be a serious "innovation". Do just enough to keep Mozilla from gaining any more ground.

On the other hand, Microsoft does see Google as the enemy to their hegemony and expansionism. A full frontal assault with MSN has yielded only a foothold in the search engine (read advertising) market. IE7 probably does nothing to help in that battle. If they could expand the desktop metaphor through Avalon, then they can gain leverage in terms of the technology. However, that's a long term strategy that requires a delicate balance between keeping competitors at bay (by incrmentally improving IE) and chucking it all with a whole 'nother delivery mechanism.

In my opinion, the best strategy against Google is one of driving down the price of the search engines - ala what they did to Netscape. But Google is gonna be harder to crack since they already have a market presence that doesn't rely on end users shelling out money (it's all about eyeballs). Avalon is ambitious, but it will have a hard time gaining traction. It is good about one thing though, and that is it smothers out other possible internet based protocols. SVG, XForms and all those other XML acronyms will have a harder time gaining acceptance, simply because people will wonder how it fits in with the Avalon stuff. IOW, IE7 and Avalon really will be as much about locking us into the current widely accepted standards and nothing much is going to happen in the near (or even long) term future. MS pretty much controls the status quo, so they won't see it as a loss.