Last week's announcement that the city of Los Angeles was moving to Google Apps was quite a blow to Microsoft. The $7.2 million contract would have given Microsoft legitimacy in the "cloud computing" arena. Instead, Microsoft will find itself essentially paying L.A. to switch to Google.As part of a 2006 settlement between Microsoft and the state of California alleging overcharges for software, the city of Los Angeles received several million dollars. The city will use $1.5 million of that Microsoft money to pay most of the $1.9 million cost of the Google contract's first year. Ouch. That is not a cloud with a silver lining for Microsoft.

One of the most interesting aspects of this win for Google is that the city appeared to have lingering concerns about the security and privacy of data in the cloud. Google addressed those worries by promising to develop a "Gov Cloud" that segregates the documents and data of government organizations from other Google Apps users. The data will not only be on different servers, but actually in physically separate data centers.

Microsoft bid on the contract, but its bid was pricey at about $15 per user per month. The bid was largely based on cloud-hosted versions of Microsoft's existing products, primarily Exchange and SharePoint. This should have been a reassuring thing as far as compatibility is concerned. However, the price may have been hard for Los Angeles to swallow, since Google's bid with Google Apps was only about $4 per user per month.

It's likely that the pricing of these bids is somewhat anomalous. Microsoft is new to the cloud computing game; Google has something to prove and the buzz of a truly cloud-born offering. Microsoft has to walk the fine line of protecting their profit margins; they couldn't bid fire-sale prices for the Los Angeles contract because it would give their other customers a reason to negotiate for much lower rates as well. Google has nothing to lose and a lot to gain by lowballing the bid.

Although Microsoft Office will still be used by Los Angeles, the city plans to reduce the number of licenses it has and move many non-power users to the simpler Google Apps alternatives. The biggest danger here for Microsoft is that if Google Apps proves itself a viable workplace solution for an organization the size of the city of Los Angeles, it pretty much lays to rest the argument that cloud-based computing solution like Google Apps can't replace the ubiquitous Microsoft infrastructure.