Vivek,
Most companies that utilize CRM as a service platform, which is known as xRM development, use it in their own hosted model with CRM Partner Hosted Edition. In reality, these organizations are using the CRM platform to create their own managed "cloud" (if you want to use the term loosely). This gives partners and ISV's the ability to create and manage their own solutions, and the provisioning of such solutions to their customer base extremely efficiently. The reason they use the Partner Hosted edition of CRM (which is the same as On-Premise) is because it comes with the Deployment Manager, a tool that allows you to create multiple CRM installations on the same CRM server farm. More sophisticated partner implementations will actually use Microsoft's Hosting and Collaboration software to build-out instances on-the-fly with the "Deployment Services Platform" which allows for instantaneous creation of CRM instances without the need for human interactions (ie: customer buys an instances on the web, it is automatically set-up, provisioned, customized, etc.)
What Darren is referring to is that the CRM Online Cloud will open up later on for cloud based operations, but it is highly unlikely that Partners and other ISV's will be able to use the CRM Online Provisioning tools from their own web sites etc... so I would recommend you use CRM Partner Hosted edition to do your ISV solution.
-Paul
