Stephen Elop, president of Microsoft's $18.9 billion Business Division, this week reiterated a bold prediction about the future of Microsoft's software-as-a-service business. Microsoft foresees half of Exchange, SharePoint, and Dynamics CRM revenue coming from online versions of those products within five years.Elop was in New York meeting with analysts and customers, following Microsoft's announcement three weeks ago of general availability of Exchange Online and SharePoint Online. Microsoft's Office Communications Online service goes into testing early next year. Its Dynamics CRM Online has been available for several months.

Microsoft has been criticized, and rightly so, for being late to the game in cloud computing. After dragging its heels, Microsoft introduced its Windows Azure cloud operating system and the related Azure Services Platform in October. But Microsoft is noncommittal on delivery dates for its Azure technologies and services, an indication that, although its strategy has firmed up, much of the development work lies ahead. Elop had nothing new to share in terms of an Azure timeline that would help customers with their own planning.

But while Azure plods along, Microsoft's SaaS business is chugging ahead. Within two weeks of announcing availability of Exchange Online and SharePoint Online, 10,000 customers had signed up on a trial basis. In addition to those toe-in-the-cloud early adopters, Microsoft says it has sold more than a half-million seats of Exchange Online, SharePoint Online, and Office Communications Online. One customer, global shipping company Maersk, based in Denmark, is moving "tens of thousands" of users to Exchange Online, Elop says.

If you put Elop's prediction of 50% of Exchange/SharePoint/CRM revenue coming from online services into the context of Microsoft's current business, Microsoft's cloud should become a billion-dollar operation in short order. SharePoint alone is a $1 billion business today, growing at 35% annually. At that growth rate, SharePoint in the cloud would be a $1 billion business within three years, if Elop's forecast holds true. Add in revenue from Exchange, Dynamics CRM, Office Communications, and other online services and Microsoft gets to the $1 billion cloud revenue mark within, say, 24 months.

That back-of-the-envelope calculation doesn't include a penny of cloud revenue from Windows or Office. Once Microsoft gets its Azure and Office Web services going, the numbers get bigger, faster.

Why such an aggressive outlook at a time when businesses are clamping down on IT spending? The rationale, and I hear it from virtually all cloud vendors, is that subscription-based online services are an attractive alternative to spending on servers and software in tough economic times. "There's no question that the degree of interest in online services is greater than I expected, and it's the economy that's causing that," says Elop. Customers can lower total cost of ownership by 10% to 40% with online software, he says.

Whether Microsoft can deliver on its ambitious cloud revenue projection remains to be seen, but it's not the first time I've heard the "50% in five years" forecast. Senior VP Chris Caposella made the same projection earlier this year, so company management is on the same page. Given the sheer size of Microsoft's application business -- the Business Division is expected to grow to $20 billion this fiscal year -- even modest success will translate into a rainfall of cloud revenue.