The online version of Office (while not intended to replace office but simply compliment it) will compete directly against Google Docs.
The online version of the applications will allow for basic editing and manipulating but will not offer a full fledge replacement for the Office software. Targeting on the go and light users Microsoft will expand the already massive presence of its Office platform.
While this may work well for home use or small business users don’t expect these online apps to take over the business world. Security is a huge issue with these applications and not knowing who all will have access to your data is a huge risk for sensitive information. Microsoft says that these previews are not feature complete nor are they free of bugs. Expect continued improvement to the applications as Microsoft expands the beta testing pool and irons out any reported bugs.