Paul Graham has posted a clarification of his earlier statement about Microsoft demise:

Whatever it is that he is taking, that is good stuff.

We have to make a separation here from Microsoft as a platform builder and Microsoft as a service / application provider. In this case, I do believe that he is talking more about the service/application provider side of Microsoft. Assuming that I would decide to build a Web 2.0 for Social Bathroom Painting(TM), do I really need to fear Microsoft? Or to worry about Microsoft moving into my market and gobbling it all?

Probably not, but not for the reasons that Graham's paints. The issue with Microsoft is their size, what a startup sees as a viable market to cater to is not something that Microsoft is even seeing on their radar, unless you can present someone at Microsoft with a number with a lot of zeros in it, they aren't interested in trying. But, wait until the market is big enough to do appear on their radar, and you have another matter. Go ask Telligent (community server) what they think of Microsoft's moving in to their territory.