Doesn't it already work this way? Specifically, I can create and edit office documents using Microsoft's web-based editors, and then open the documents in my local editors and when I hit save they save back to "the cloud."
What else needs to happen?
Also, this is surreal, but if the documentation is to be believed, this new Google plugin supports more versions of MS Office than MS's own cloud apps do.
Silverlight will improve the experience, but is not a requirement.
> this new Google plugin supports more versions of MS Office than MS's own cloud apps do.
It's a mixed bag. Office 2003/2007 can't save to Skydrive, but this Google plug-in can't do document co-authoring (the merge story with this plug-in isn't pretty).
I haven't yet run into the concurrent editing problem, but it may well be a showstopper for some features. For note-taking (which is the common case I can think of), OneNote is arguably a better choice, and it supports concurrent editing.
The two things MS doesn't do is versioning and conflict management.
Not sure what you mean by conflict management--in general, unless you have full coauthoring support (the Office Web Apps have partial support: OneNote and Excel support it on the web, Word, PowerPoint and OneNote support it in the client) it doesn't make much sense to have a 'conflict resolution' story.
(Disclosure: I work on some of this stuff.)