It seems to me that this is a situation similar to the one Dropbox found itself in when starting out - the key obstacle for getting a file hosting service to take off was universal device compatibility, and they spent a ton of time on it and nailed it.

For any startup or other competitors to Office, the one key feature they must get right is document compatibility. I know Microsoft doesn't play fair in that regard, but I'm sure a motivated enough team could crack it.

Office is actually decent for being MS software, but a simplified and streamlined web experience, reduced feature bloat, with online collaborative tools, and made available free or cheap could steal a lot of market share.