Office wars: Google vs. Microsoft

The search giant and the software giant fight to dominate the market for online business software. Fortune's Michal Lev-Ram reports.

By Michal Lev-Ram, Fortune reporter

SAN FRANCISCO (Fortune) -- Competition in the online office software market is heating up as Google and Microsoft go head to head and a host of startups seek space on the virtual desktop.

Google (Charts, Fortune 500) made the first big entry into the corporate market earlier this year when it launched Google Apps Premier Edition, a collection of browser-based applications like spreadsheets, calendars and corporate e-mail.

Microsoft (Charts, Fortune 500), meanwhile, just announced it too would offer a similar product, called Office Live Workspace. Not to be outdone, Google responded Wednesday by beefing up its corporate e-mail offering - part of its Premier Edition package - by more than doubling the storage capacity of individual mailboxes and adding new security tools to help clients better control and filter their messages.

Unlike traditional office software, the online version of these products are usually sold by subscription, with companies paying an annual fee per user.

Microsoft and Google trying to one-up each other is nothing new - the two companies are neck and neck in just about every market: Online search, wireless applications, e-mail and even in-game ads.

But smaller players are also trying to make some headway in selling web-based office applications, which let people access, share and - in most cases - create or edit, their documents online.

Take Pleasanton, Calif.-based Zoho, which released a new product Wednesday called Zoho DB that lets people convert spreadsheets into online databases, reports and tables. The startup also offers web-based conferencing, online presentation and customer relationship management tools.

Raju Vegesna, Zoho's self-titled "evangelist," says the company has already signed up more than 350,000 individual users since it launched its first application in September 2005. Zoho's service is currently free to business users and consumers, though Vegesna says the company will soon start charging corporations about $50 per account each year.

"Google focuses on simplicity while we focus on depth and breadth," says Vegesna. "Business users want full-fledged features."

Startups like EditGrid, Central Desktop and Jotlet have also been rushing their own Web-based office tools to market. But it remains to be seen how big the corporate market is for these types of online applications.

"None of these tools today have even come close to providing all of the features found in Microsoft Office," says Melissa Webster, an analyst with research firm IDC. "Most of them don't do complex documents like an index or a table of contents."

There are other issues. People can't access their documents when they're offline on a plane, for instance.

Google has had some early success - companies like Procter & Gamble (Charts, Fortune 500) and General Electric (Charts, Fortune 500) are experimenting with its Premier Edition host of applications, paying $50 per user per year.

So far, though, Google's only pulled in pocket change from such subscription-based services. In its most recent quarter, 99 percent of the search giant's revenues came from advertising. So despite the flurry of activity, it could be a while before these sparring online office applications translate to real money.

In the meantime, says IDC's Webster, it's unlikely anyone's getting rid of their Microsoft desktop Office applications - yet.  Top of page