While Google's latest foray into the corporate software market seems unlikely to topple the status quo right away, AMR Research analyst Jim Murphy said it's only a matter of time before the Mountain View-based company becomes a major player.
"This is just the beginning," Murphy said. "The real impact of what Google is trying to do probably won't be evident for another five years."
Google has been offering a free version of its online software suite called Google Apps for the past six months. More than 100,000 small businesses and hundreds of universities nationwide are using the free service, Google said.
The fee-based version, Google Apps Premier Edition, includes five times more e-mail storage -- 10 gigabytes per e-mail box -- as well as a guarantee that all services will be available 99.9% of the time with around-the-clock technical support. Google also is adding mobile access to e-mail accounts through the BlackBerry devices that tether workers to their offices.
"This is a big step for us, but I think it's a reasonable step," Google Chief Executive Eric Schmidt said in an interview Wednesday. "Our product is so cheap that it's sort of no-brainer to try it out."
By dangling its business software package at such a low price, Google is giving companies a greater incentive to delay buying Microsoft's Office 2007 as they assess the pros and cons of a less expensive alternative, said Nucleus Research analyst Rebecca Wettemann.
"The timing (of this offer) is just brutal for Microsoft. It's definitely a shot across their bow," Wettemann said.
As they usually do, Google executives downplayed the company's intensifying rivalry with the world's largest software maker.
"We are not in this to get Microsoft," said Dave Girouard, general manager of Google's business software division. "We are in this to offer more compelling choices for consumers and businesses."
Echoing that sentiment, Schmidt said he is trying to discourage people from viewing Google as the fly in Microsoft's ointment. "We don't operate that way," he said. "We are trying to solve very different problems."
Microsoft welcomes the competition, said Kirk Gregersen, the Redmond, Wash.-based company's director of the Office suite. "It helps keep us on our toes."
If it can sell more software to companies, Google could become less dependent on online advertising. Google already has been selling its search technology to companies, but that initiative has only had a modest impact so far. Software licensing accounted for slightly more than $100 million, or 1%, of Google's $10.6 billion in revenue last year.
Microsoft, in contrast, relied on software sales for most of its $44 billion in revenue last year.
While Google has been expanding into software applications, Microsoft has been trying to build a more formidable Internet search engine. That effort hasn't prevented Google from widening its lead in online search during the past two years, emboldening the company to branch into other fields like corporate software.
Just how much Google is undercutting Microsoft's price is unclear. The listed retail price for Microsoft's Office suite ranges from $149 to $679, but corporate customers generally negotiate substantial discounts based on the number of licenses that they buy.
In research released last year, Merrill Lynch analyst Kash Rangan estimated that the average corporate cost for Office works out to about $60 to $120 annually per user, assuming the software is used over a two- to three-year cycle.
Price is rarely the only concern of large companies when they are deciding which software products to buy. Security, reliability and performance also sway corporate buying decisions.
By Google's own admission, Microsoft's word processing and spreadsheet program provide more bells and whistles than Google's online alternatives.
But Google's package will still appeal to many companies looking to provide more software tools and e-mail access to workers who work in stores or production plants that may not have all the latest applications, Murphy said.
Two Fortune 25 companies, Procter & Gamble and General Electric , have already signed up for Google's software package. Google wouldn't disclose how many of those companies' employees are using the online suite.
Other early adopters include Salesforce.com -- a pioneer in the push to deliver more software over Internet connections instead of distributing the programs on discs that directly install the coding on a hard drive.
The notion of leasing software online once was derided as a kooky concept because it was widely believed that most companies would never allow their vital information to be kept on computers owned and managed by an outsider like Google.
But the resistance to the idea seems to be dissipating as the Internet becomes more ingrained in daily living. In a survey of 198 organizations, Nucleus Research found that 51% were using some online software applications.