That's what XPS is, except how no-one uses it. I don't think Microsoft "got it" when it came to XPS because it sure isn't going to supplant PostScript any time soon.
Re: opening PDFs: you shouldn't be able to. PDFs are meant to be a "final" medium. The full-price £400 Acrobat Professional only lets you make minor "touch-up" changes to PDFs and not any large-scale editing as though it were a Word Document or anything.
So not being able to open PDFs in Office Live is perfectly fine. My question, however, is wether or not it lets you create them. Does it? (I honestly don't know).
This is very sad but true. I think the concept of XPS is relaly good, but I am stuck using PDFs all the time because there are no tools comparing to Acrobat today.