Office Live, a collection of ad-supported web services aimed at small businesses, would boast more than 20 application services such as sales and collateral management, customer management and external collaboration.

But it wasn’t so much Office Live, which is expected to start rolling out as an invitation-only beta early next year, that seemed to rattle other web hosted players as much as it was Bill Gate’s comments about Microsoft’s intentions in that space.

Gates said CRM and other applications could be added to Office Live as a premium paid service at some future point.

With typical flair, Marc Benioff, chief executive of hosed CRM vendor Salesforce.com Inc in San Francisco, scorned Microsoft’s play in the space.

We couldn’t be happier that on the Day of the Dead, Microsoft admits that software is dead, Benioff said, referring to Microsoft’s November 1 announcement coinciding with Mexico’s traditional celebration.

After all, isn’t that the implicit message in product names like Windows Live and Microsoft Office Live – that their shrink-wrapped analogues are dead? Endorsement of our model only helps us; their half-hearted impersonation of it only hurts them.

Benioff also said a new generation of little-used internet-based applications is filling a gap that Office had left.

Just look at on-demand internet based applications is filling the gap that Office has left, Benioff said. Just look at on-demand applications like Writely, NumSum and Zimbra. They do what Microsoft can’t and they do it now.

As for CRM, Benioff said Microsoft has been a non-starter in both its on-premise and hosted versions. They haven’t introduced a new version since their launch in 2003, and they recently said they were spiking version two and skipping to version three, he said.

Office Live also boasts free online collaboration that enables ad hoc file sharing. The application, code-named Mojo, is similar to components of paid products offered by online collaboration leader WebEx Communications Inc based in Santa Clara, California.

But as WebEx chief executive Bill Heil pointed out, free online screen-sharing products are nothing new and have been on the market since WebEx launched.

He also pointed to WebEx gaining 300,000 paying customers for its first WebOffice products, which launched early in October as hosted online collaboration applications aimed at SMEs. Customers are willing to pay for best-of-breed collaboration, customization, greater transparency across the enterprise and reliability, Heil said.

But a subscription-based online collaboration service from Microsoft also is expected, which would enable a more secure space for companies and third parties to communicate than Mojo.

Heil said Microsoft’s approach is quite divergent from WebEx’s. While Microsoft is focusing on hosted collaboration within the enterprise, Heil said WebEx’s strategy is enable collaboration outside the office, to include enterprise partners and customers, for example.

[Microsoft’s] approach is to take their powerful franchise … in their operating system environment and extend that out within companies, Heil said. They’re trying to protect their Office applications, before someone comes along and threatens it.

Heil also pointed to WebEx being focused on the enterprise market as a starting point and designing its online products with the Internet in mind from the ground up.

Microsoft has been trying to figure out the Internet since the last 10 years, Heil said. And he said he doesn’t see the company’s latest move as revolutionary.

Sun, meanwhile, which backs the OpenOffice software that competes with Office, said it took the Live launches as an endorsement of its own software-as-service vision, but criticized Microsoft for moving too slowly in that direction.

It’s pretty clear they’re not going far enough, Sun’s vice president of software Tom Goguen said. From my perspective they really don’t understand the concept.