An excellent treatise on the topic is discussed in Breaking Windows: How Bill Gates Fumbled the Future of Microsoft, by David Bank. It describes a lot of the tensions that existed inside Microsoft as they tried to figure out how to continue selling Windows as a platform, while still seeing the threat of the web as a platform on the horizon. IE was part of that threat response to stay in the game, ahead of the game, and in control of the game.
Microsoft is too encumbered by regulation to tie IE in closely with their core product; instead they're compelled to offer "browser choice", compelled to offer a startup wizard to help you set your search engine to Google, and incapable of effectively integrating the browser into products people actually pay money for.
Even if they were capable of developing the sort of product that might be good enough to win market share back from competitors, I'm really not sure what sort of return they'd be getting in their investment in developing and promoting IE, over and above what they'd get bundling some rapidly-developed webkit-based browser with Windows 7 and leaving it at that.
So then they funny result is that the more people use them the better they get; and the better they get, the more people use them. It's a perpetual motion machine, they feed on their own sucess so it almost seems impossible to catch up with them.
So are you saying that microsoft is trying to replicate this with the Bing, IE, Live/Hotmail ? Clearly that won't be enough. They're gonna need a huge innovative breakthrough to win this battle...
One thing for sure, Google coming in and messing up the rules is directly attacking Microsoft's bread and butter: Office and Windows. That's where Microsoft makes most of their money, particularly Office. Google has docs, AppEngine, and more. For many mainstream people these days, the browser is the only thing that they need; Microsoft is still powerful, but if the trends continue, they'll be irrelevant. So I'm just claiming that Microsoft's trying to do what they can to rewrite the rules of the game again and take back control while they still have the resources to do so.
It's a lot more urgent now than before, which is why Microsoft is so heavily and now visibly investing into things like mobile, cloud computing, and the like. The effort from Microsoft was always there before, but it always seemed half-hearted. 3 years ago, you never would have thought Microsoft would care about web standards to the extent that IE9 does. MS Office was still offline packaged software. Etcetera.
Anyway, I highly recommend the book. It's a fascinating read.
http://en.wikipedia.org/wiki/Mozilla_Corporation#Notable_eve...