By Yi-Wyn Yen
April 3, 2008

By Yi-Wyn Yen

There’s no love lost between Google and Microsoft, but that hasn’t stopped the tech giants from getting into each other’s turf. Microsoft has spent billions to compete with the search giant in online advertising. Now Google’s moving into Microsoft territory by stepping aggressively into the office software market.

On Monday, Google (GOOG) launched its latest attack on the king of software with a product that will compete directly with Microsoft Word.

Google Docs, a web-based application to write, edit and store word-processing documents, can now be used as a desktop tool when there’s no Internet connection. Google launched the free service in late 2006, but until now, consumers could only use the program when they were online. Ken Norton, a Google product manager, says the new release, which is enabled by a plug-in browser called Gears, is for those times when you lose your Internet connection “on the airplane” or “in India.”

Google and Microsoft are fundamentally at odds on the way consumers want to use office software. Google says consumers want to use Web-based office tools so that they can collaborate. “One thing people do all the time is e-mail lots of documents. They send out a spreadsheet attachment, and everyone sends multiple e-mails to give their input,” Norton said. “People are feeling the pain and looking for easier ways to share and work together.”

Microsoft product management director Alex Payne says that’s not enough reason to simply switch from desktop to Web-based software. “It’s a little naive to use this one example and say that’s where all the customers are going. We see a little bit of everything with 500-plus millions users,” he said. “Whether it’s working on the desktop or browser, it’s about delivering rich functionality and choice.”

Norton argues that Google Docs is less about competing with Microsoft than it is about addressing what customers want. Norton says consumers are shifting towards “cloud computing,” the idea of working within a web browser. More and more, users want to power the Internet to collaborate on a document at the same time. But until everyone, including people on planes and in India, have reliable connections, Google is bringing offline options. Google says it eventually plans to make all its online software services like e-mail, calendar, spreadsheets, and presentations, available in an offline mode.

“This is the direction that software is going,” Norton said. “Increasingly, people are doing more and more essential work on Web sites and Web applications.”

Microsoft (MSFT) says when it comes to office productivity software, it has a better idea of what consumers and corporations want. Microsoft’s share in the office software market is more than 90%. Multiple times during a phone interview with Fortune, a Microsoft manager mentioned that Office has more than 500 million users.

“Google keeps saying how everything’s going to be in this cloud. Then they build this offline thing. So maybe [they] don’t buy into that,” said Microsoft’s Payne. “We’re not saying it must be the desktop. Or it must be the Web. We’re investing heavily in both.”

Microsoft prefers to tie the Web back to its desktop applications. Last month Microsoft launched Office Workspace Live, which allows consumers to share Word documents and make comments on the Web. However, to avoid cutting into its profitable desktop business, Microsoft’s Internet offerings have more limited functionality than Google Docs, which can be edited and changed within a Web browser.

Neither admits to competing against one another in the office tools market. A clash, though, is inevitable. “Microsoft clearly realizes that Google is encroaching on some of their businesses,” said Aaron Levie, the CEO of Box.net, an online storage company. “You will see this interesting pushback when both these products end up meeting in the middle.”

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