Running after the facts... again!
Solely looking at numbers here there is a good reason why Amazon's EC2 has more users than Googles application cloud. Its not about "good" vs. "bad", its simply that having a full OS under your fingertips is much more versatile (thus appealing) than merely hosting applications. The latter has its uses too, sure, but the people interested in such services won't hold the same amounts.
IMO Microsoft should have realized this up front. Especially since Microsoft entered a market in which they were hardly noticeable yet. Speculating here: could it be that MS aimed at the "application cloud" because that's what Google was doing and Google is the 'mortal enemy' of Microsoft? If so it shows a major flaw in their business model right there. Google already had a massive Internet presence (dunno why, but somehow they are hard not to notice) yet Microsoft's key strengths lies with operating systems (lets ignore the problems with Windows for now). They have a Net presence, sure, but hardly comparable. Heck; people even use Bing to "google a topic". "Google? Yeah, I googled it with Bing!".
And although I think MS is on the right track here I have to wonder; why Linux ? This is once again a market which others have already explored and exploited. MS would once again enter a market where they have little to no presence...
Why not focus on key strengths? Put Windows servers in their Azure cloud instead, and then provide these for the (SOHO) market? MS is already supplying some (IMO:) excellent clouding services, just take a look at how Skydrive is fully embedded with their Office 2010 product.
So why not provide virtual "Azure powered" Windows servers for, say, the SOHO market? Sure, there are also more players here; many hosting providers already provide virtual Windows. But Microsoft has one advantage here which the others don't. I dunno why, but for some reason "Microsoft" seems to be an important name with this "Windows" thing.
If you can't trust Microsoft to host a virtual Windows server, then who can you? I know; dangerous statement and probably not fully true at this time. But I am sure that should MS provide virtual Windows servers for a decent price then /this/ is where they /WILL/ get a certain upper hand.
Stop running after the facts and take some initiative guys!