Microsoft (MSFT) is still fumbling as it tries to navigate its way out of the innovator’s dilemma. The business was built and nurtured on its lucrative suite of Office products— unfortunately, that reliance on Office is now complicating its full migration to cloud computing. Today, we spoke to Senior Vice President Chris Capossela, who acknowledged the challenge of growing profits without pay-to-install software.

Microsoft is gearing up for the launch of Office 2010 (available to businesses on May 12 and to the casual consumer in June), marking the first time the software giant will release free web versions of Office applications like Word and Excel bundled into Windows Live.

Now that consumers can get these basic applications for free, the company is hoping that pay add-on features will be enough to override the loss. Last week, the president of Microsoft’s business division, Stephen Elop, optimistically told us that while profit margins could (let’s be honest, they will) shrink, overall profits could be supported by new add-ons.