Actually I don't think most MS execs think they build the same cloud product. I think they believe they have the feature set, but they realize, probably better than most, that they're not as well integrated. This is largely due to antitrust concerns.
MS has been hamstrung on doing deep integration for a lot of features. Live Mesh is a killer feature if built into Win7. As an optional download, no one ever even knows it exists.
With the rise of tablets and mobile phones as computers, they may finally begin to be able to start adding functionality typically seen in standalone apps to the OS (as they can argue they no longer have a monopoly in the personal computing space). Until they feel comfortable doing that they're going to continue to just have silo'ed apps that never get traction. And I think their execs know it.