Linux is eating up their OS share in servers and soon on the desktop. Java has a 6 year head start on .NET and has already proved to be very capable middleware. Dot-NET is merely a copycat of Sun's vision of "The Network is the Computer".

Basically Microsoft is moving to cut off competitors so that they can rule the Internet. They have a 'window" of about 1-3 years in which to pull this off before the competition has the chance to restore innovation to the software industry. That is why they are pushing to get XP out so quickly (bugs be damned). They need to cut off the air supply of AOL's IM, Kodak and Real Player by bundling so they can focus more attention on destroying Linux and Java using other techniques (PR, threatening partners and customers, etc...)