Microsoft Business Division president Stephen Elop says he's been pleasantly surprised that enterprise customers' demand for cloud-based versions of Exchange and Office have exceeded Microsoft's expectations.From a Wall Street Journal article this week:

"People are embracing cloud computing faster than we anticipated," Stephen Elop, who heads Microsoft's business division - which includes the ubiquitous Office tools - said in an interview.

A week ago, stinging from the loss of a 30,000-seat email account to Google, Microsoft slashed prices on its cloud-computing apps, made them available in more regions around the world, and announced the names of some major clients that have signed large-scale deals for Microsoft's online products. As my colleague Mary Hayes Weier reported:

The software giant has lowered the price of its Business Productivity Online Suite (BPOS), which includes online versions of Exchange, SharePoint, Office Communications and Office Live Meeting, from $15 a month per seat to $10 a month. . . .

Microsoft BPOS has been generally available for just several months, and competes with Google Apps, Zoho Mail, Yahoo Zimbra, and the newest entrant, IBM Lotus Notes Hosted Messaging. Although Microsoft has disclosed the names of several large companies that are implementing BPOS or Exchange Online -- including its largest, GlaxoSmithKline, with 110,000 seats -- it has released 11 more names, including Aon Corp., Aviva PLC, McDonald's Corp., and Tyco Flow Control. Aon, which is transitioning all 36,000 employees to Exchange Online, is the largest customer win disclosed this week.

In that context, it's not surprising that Microsoft's heightened competitive intensity led to some impressive wins among big corporate clients. But what is surprising is Elop's contention that the uptake has been more rapid than Microsoft expected.

In his interview with the Journal, Elop said Microsoft was able to make those price cuts because it was achieving economies of scale due to a "wider take-up of services like hosted email."

That article also indicated that the increase in demand varies according to geography:

North American and European customers are slightly ahead of their counterparts in the Asia-Pacific in choosing cloud services, Elop said, largely because these regions tend to have better-developed technology infrastructure.

In Hayes Weier's InformationWeek.com story last week, she noted that while another Microsoft exec also attributed the price cuts to scale, it's still far too early to tell if those cuts will be enough to fend off the deep incursions Google has made in that portion of the market:

Ron Markezich, corporate VP of Microsoft Online, says the price drop is not in response to what happened in Los Angeles. "We've achieved a level of scale we didn't have a year ago, and have made a number of software investments that allow us to drive down costs and have more efficiencies," he said.

Still, are Microsoft's cost cuts enough? Google Apps, by comparison, which includes apps for documents, spreadsheets and presentations, in addition to email, costs only $50 per user per year. Markezich's response is that Microsoft offers a scaled-down version of Exchange Online, designed for employees who aren't frequent PC users, for $24 a year, and a scaled-down version of BPOS for $36 a year. What's more, "we're not seeing any inclination that Zoho or Google or Zimbra or any other of those offering fake Office capabilities can replace [Microsoft Office]," he said.

With these market dynamics at play-two powerful companies slugging it out with more capabilities for lower prices in the lighter-weight cloud format that customers are demanding-both Microsoft and Google are sure to chalk up some nice corporate-account wins. But the biggest winners of all will be the CIOs who are reaping the benefits of this enhanced and healthy competition.