There have been rumors for a while and today TechCrunch says they've been hearing that an offline version of Silverlight is coming to compete with Adobe AIR. Currently, despite a lot of comparisons in the tech media world, Silverlight and AIR have absolutely nothing to do with each other. Silverlight competes with Flash Player, a product that has been around for a very long time. But maybe that's changing.
What they'll most likely do is release an "offline" version of Silverlight that uses SQLite. It would be something like Google Gears where they install the database with the runtime then developers can write data to it and take their Silverlight applications offline. They still live in the browser so in this sense, it's not quite a 1-1 competitor with Adobe AIR, it's a competitor to Google Gears. There are definitely bits of competition there because one of the big value propositions of AIR is offline access, but there's a lot more too it as well because it's a cross-platform desktop runtime, something I can't see Microsoft doing.
The other angle here is something Michael alludes to and Nick Carr talks about, the "web-apps strategy". Nick says he's hearing that Microsoft will soon start to talk about how Microsoft will follow through on their Software plus Services strategy and bring some of their great desktop properties online. I'm surprised that people think this is news because anyone who's tracking the RIA space has seen this coming for 2 years. And don't think the timing is a coincidence. What does Microsoft's online strategy and MIX have in common? Silverlight.
There is one single reason Silverlight exists - because Microsoft needed a platform to deploy very rich, desktop-like applications in the browser that they controlled. You can talk about the "war" between Adobe and Microsoft all you want, but Microsoft simply couldn't afford to roll out rich, online versions of Office or their other properties on someone else's technology. They saw how powerful Flash was getting and they had to do something. That something was Silverlight. They got a first version that focused on video out to generate some buzz and get people talking while they worked on a version that was actually able to deploy applications like Flash can. By most accounts, Silverlight 2 is going to be it. They'll finally have a version for the public to play with at MIX and with that piece of the puzzle in place they can start really going after the online world with their wealth of properties.