For such sharp rivals, the contests between Google and Microsoft have been laughably lopsided. Even as they jostle for users and software developers, Google has run away with the search traffic market while Microsoft has kept a lock on desktop software--like they're hardly even playing the same game. That's about to change, as Google readies a long-rumored push to assemble its E-mail, word processing, and spreadsheet apps into a Web-based suite that sounds more like Microsoft Office with each addition.

Google this week will launch Google Apps for Your Domain, a software bundle aimed at small and midsize companies. The free, ad-supported package combines Google's E-mail, calendar, and instant messaging with Web site creation software. It will be hosted in Google's data center, branded with customers' domain names, and packaged with management tools for IT pros.

That's the first step. Later this year, Google plans to add its Writely word processor and Google Spreadsheets to the suite, build online collaboration features that work across its applications, and market the whole package to large companies for a fee. Google will include IT-friendly features such as APIs, directory-server integration, guaranteed performance levels, and telephone tech support.

Instead of trying to displace the hundreds of millions of copies of Office installed on business PCs, Google will try to snare users once they start sharing the Word and Excel files they've created. "The right way to view Writely and Google Spreadsheets, especially in the context of a larger business, isn't necessarily as a replacement for Word or Excel," says Matt Glotzbach, head of enterprise products at Google. "They're the collaboration component of that."

Collaboration, though, is exactly where Microsoft sees its best growth prospects for Office. It plans to sell higher-priced versions of Office plus add-on servers with built-in collaboration features when it launches Office 2007 later this year.

Google's plans include prompting people who send Microsoft Office documents using Gmail to translate those files into Google's formats for editing on Google.com, presumably in a forum where ad space is up for sale. Gmail messages that include attached files currently prompt users with links to download the documents or view them on the Web. Glotzbach envisions a third link to edit the documents online and generate E-mail to other users in a group when the edits are done. Writely can read files created by Microsoft Word, and Google Spreadsheets can read and create Excel files and formulas, though it's unable to handle more complex Excel functions such as macros.

"That's a brilliant idea, because it would allow them in a way to shanghai Microsoft's corporate customers into the Google fold," says Tim Bajarin, president of consulting company Creative Strategies. Google is increasingly using its applications to entice Internet users to store more personal and business data on Google's servers, Bajarin says. There, the company can correlate the information with online advertisements users are most likely to click on.

It already does this with apps like Gmail and the Google Desktop search tool. But there's much room for expansion. In June, it introduced the ability to store digital photos managed in Google's desktop Picasa software on company servers. Bajarin predicts hosted storage for digital music and other files can't be far off. "Their goal is to be the hosted back end for your digital life," he says. "Microsoft will fight tooth and nail to keep this from happening to their corporate apps."

Microsoft, Google, and other tech companies are racing to design tools that can uncouple data from PCs and store it on servers accessible by multiple users over the Web. The trend is affecting everything from consumer software to the design of business applications. Office 2007, which has collaborative work at its center, could come out about the same time as Google's full desktop suite, bringing with it new features for sharing Excel spreadsheets and other files in a way that doesn't involve E-mailing them back and forth. A showdown looms.

Collaboration Battle
Microsoft's Office products generated $11.7 billion in revenue for the fiscal year ended June 30 and nearly $8.3 billion in profit. The vast majority of sales came from the company's core desktop suite. Microsoft is trying to reap more revenue from Office-branded server software such as SharePoint Server for hosting project Web sites, and Live Communications Server for managing phone calls, E-mails, and instant messages from a common in-box. Jeff Raikes, president of Microsoft's business division, acknowledged at an analyst meeting last month that Google is "dabbling in Web-based productivity" and expanding its presence in corporate intranet search software. Microsoft's answer, he said, will be its upcoming Office SharePoint 2007 product.

Microsoft sees the integration of features among its products, and the vast network of independent software vendors that sell add-ons to its software, as advantages. For example, financial services companies that are heavy users of Excel have access to a niche market for plug-in applications that can analyze the performance of stocks, derivatives, and other securities. The Office apps also include many more complementary features than Google's software. And they offer the ability to work offline--a big drawback of Google's applications, which need to be exported to Word or Excel to go local.

"The Google solution is what I'd call patchwork, or Frankenstein, software," says Tom Rizzo, a director for Office SharePoint Server at Microsoft. "You have to put it all together yourself."

Microsoft's response to Google extends beyond Office, too. Windows Vista, due in January, includes a new Windows Calendar that users of the same PC can share. Under its Live brand of Internet software, Microsoft is developing an "Office calendar service" for business users who want to share their Outlook calendars on the Web. Microsoft also plans to expand its Office Live Web software to become a central place for small and midsize companies to share documents and host online meetings.

A Microsoft Weak Spot
Make no mistake, Microsoft is vulnerable in collaboration offerings, where its Live software has been underwhelming and poorly marketed. "That's the place Microsoft's weakest right now: co-developing document content," says Michael Saucier, CEO of startup Transpara, which makes business intelligence software for handheld computers based on Excel, SQL Server, and other Microsoft products, and which is part of Microsoft's ISV program. "Google is ready to come out swinging at Microsoft with hosted apps, and they're going right at the Live brand."

Still, as long as people need Word and Excel to work offline, Microsoft has a huge advantage. Google's connectivity requirement presents a problem for mobile users. Wireless broadband access is spotty and slow, and Wi-Fi- or WiMax-blanketed cities are years away at best.

Furthermore, business technology buyers could be reluctant to switch from standard Office software, even if Google's products are marginally better at some functions. That works in Microsoft's favor as it ramps up its online software, Saucier says.

Plenty of companies, including IBM, Sun Microsystems, and a host of startups, have tried--and failed--to chip away at Microsoft's imposing 95% market share for productivity software. But Google differs in a few important ways.

Its massive infrastructure of data centers could let it serve millions of users with little degradation in performance (see story, Google Revealed: The IT Strategy That Makes It Work). "We don't see any ceiling" to the number of potential users of Apps for Your Domain, Glotzbach says. A closed beta test of a more limited product, Gmail for Your Domain, has garnered hundreds of thousands of users since February, and Gmail serves tens of millions of ac- tive accounts. Google's computing capacity also could help it beat competitors on price and features--Apps for Your Domain will include 2 Gbytes of storage, and the paid big-business version will likely include more.

What's more, all the applications in Google's suite are based on Ajax technology--a combo of JavaScript and XML that makes their user interfaces nearly as snappy as applications that live on a PC's hard drive.

Finally, Google is starting to assemble a roster of tech company partners that can get its apps more exposure--taking a page from Microsoft's playbook. It's paying Dell to preload its Google Desktop and Google Toolbar software on PCs, and Google CEO Eric Schmidt said in May that the company plans to pitch Google Desktop For Enterprises, which includes admin controls, to Dell's small and midsize business customers. Last fall, Google unveiled a deal with Sun to include its desktop toolbar with downloads of Java, though other elements of the agreement, such as Google's agreement to promote Sun's OpenOffice suite, have yet to pan out.

In its latest deal, CRM vendor Salesforce.com last week unveiled the capability for its customers to create ads on Google and manage Google marketing campaigns from within their Salesforce environments. The online service, initially priced at $300 a month, is powered by software from Kieden, a startup Salesforce bought last week that specializes in linking Salesforce and Google apps. Salesforce's AppExchange online software store also distributes Writely, which Google got when it acquired software company Upstartle in March. Salesforce CEO Marc Benioff says he's lobbied Google to market Writely to business customers, and he says he's demonstrated it to execs at General Motors, GE, and DuPont. "They're handicapped because they don't have a way to market Writely into the enterprise," says Benioff, who hopes to provide that market access.

The Office stronghold makes this Microsoft's game to lose, but the company's been slow to embrace the Web's collaboration potential with the suite. Google has proven it can deliver captivating, cutting-edge online software, but most of it hasn't been tuned for business use. Who can patch up their weak spots best? With the companies moving quickly toward the exact same turf, the coming collision will tell.