IaaS offers the most flexibility. Think of virtual machines as an IaaS offering. The user is responsible for managing and maintaining the operating system and applications. In the following diagram, we can see that the actual physical machines, databases, and networking are handled by Microsoft. As well, Microsoft handles the virtualization of the virtual machine (through the use of a hypervisor):
IaaS is a way of renting a server as opposed to buying a physical one. Common usages for IaaS is the migration of on-premises computing resources and for setting up testing and production environments.