Microsoft may seem like a big scary competitor, but they've been dead for some time (1). If all they're doing it providing free hosting then they're not really competing with you.
Microsoft is nowhere near dead, not in the short to medium term anyway - and if you're a startup, that is all that matters. MS can put a 100 million dollars into a product sphere and not bat an eye if it fails within a few years (see Nokia). I wouldn't discount them anytime soon.