It’s too early to say Microsoft has checkmated Google in online documents – the latest version of Office hasn’t shipped yet. But the sleeping giant in Redmond has clearly woken up to the Internet threat.

Get this: Microsoft – the king of paid software – will announce today that it is going to give a version of Office away for free online. Both the online and desktop versions are scheduled to arrive in the first half of next year. Yes, you read that right. The latest version of its ubiquitous productivity software, dubbed Office 2010, will come as both a piece of software you can buy for your computer, and as a service you can access in your browser. [UPDATE: Microsoft says it will support the Firefox and Safari browsers as well as IE.]

For free. From Microsoft.

One could argue that the software giant is late to the giveaway party. Folks like Google, Zoho and SlideShare have been offering free equivalents to Word, Excel and PowerPoint for years. Unlike those companies however, Microsoft already has a very profitable $20 billion business selling desktop versions of its Office software. It would have been foolish to jump into the free game too hastily and watch that business evaporate overnight.

And that’s what makes this bold move to the web either the dumbest thing the company has ever done, or a stroke of genius. If Microsoft gets this wrong, it will cannibalize its own Office business, and investors will howl. If it gets this right, Microsoft will crush Google, Zoho, and all the other rivals who are nibbling away at Office’s dominance.

My hunch is that this is a stroke of genius from Microsoft. Why? Earlier this year when I talked to Chris Capossela, the executive who manages Office, he had clearly thought hard about how to do this right.

Capossela told me that Microsoft has studied it closely, and Office Web Applications, the free, ad-supported version of Word, Excel and PowerPoint, will probably appeal to tightwads who weren’t going to buy a copy of Office anyway. This way, rather than force those folks into Google’s arms, Microsoft can hook them into its online world and tempt them with its latest technology.

And Microsoft can also tempt them to upgrade. Office Web Applications will work better if you actually purchase Office 2010. Users with the latest Office software will be able to more easily share documents and keep each other’s changes in sync. Add in the fact that the paid version of Office will come with a brilliant feature that lets Office buyers broadcast their PowerPoint presentations over the web (like Cisco’s WebEx), and the Microsoft’s online giveaway looks less like an oops, and more like an upsell.

(Jon Fortt For Fortune CNN)