Cloud showdown: Microsoft vs. Google?

June 28, 2011, 1:59 PM UTC

FORTUNE — It may not sound quite as sexy as search, web browsers or mobile phones, but there’s growing demand for moving all sorts of office applications to the cloud. That’s why, Tuesday morning, Microsoft took the wraps off of its long-awaited Office 365, a suite of online productivity tools (and one of the worst-kept secrets in the industry). And it is enlisting big phone companies, which have had a sometimes uneasy relationship with Google, to help it get the tools in the hands of customers.

That’s also why, earlier in the week, Google pre-empted the launch with a snarky blog post titled “365 reasons to consider Google Apps.”

Google Apps for Business includes Gmail, Google Calendar and Docs and other web-based applications geared for corporate customers and is the biggest threat to Office 365’s success. According to Shan Sinha, Google Apps product manager, his company’s applications work better across different operating systems and devices, and come with a simpler and more affordable pricing plan than Microsoft’s Office 365.

“You can’t just take legacy, desktop software, move some of it to a data center and call it ‘cloud,’” Sinha wrote in a company blog on Monday.

Ouch. But while Microsoft (MSFT) may seem old and stodgy and desktop-centric compared to Google (GOOG), it has a lot more experience catering to corporate customers than its Mountain View, Calif.-based rival. With Office 365, it’s making an aggressive push for small and medium businesses in particular.

Microsoft says 200,000 beta customers signed up for Office 365 over the last few months. About 70% of those customers were small- and medium-sized businesses. Paying for hosted, cloud-based tools (as opposed to managing on-premise servers) is attractive and cost-effective for many cash-strapped companies and government agencies. Microsoft’s Office 365 starts at $6 per user per month, while Google Apps costs a flat $5 per user per month.

So what’s Microsoft’s plan to attract more small and medium business customers (and halt defections to Google)? A strong reseller channel. The company is partnering with about 20 international telecommunications companies—including Vodafone Group (VOD), NTT (NTT) and Telefonica (TEF)—to bundle Office 365 with their communications offerings.

“What we do is dramatically different [than Google],” Marco Limena, VP of the operator channels group at Microsoft, told FORTUNE in a recent interview. “We’ve been doing business with these companies for many, many years. And telcos are becoming more and more central to general distribution channels for Microsoft as we move to the cloud.”

Vodafone, one of the companies that will resell Office 365, says it already bundles Microsoft Online Services (the first-generation of the company’s cloud-based apps) with its voice and data plans for businesses. The global reach and existing customer base of its reseller partners could help Microsoft in its fight against Google.

Then again, despite its best efforts to rebrand itself as a bonafide cloud player, it’s still early days for Microsoft’s foray into web-based applications. Office 365’s multi-tiered pricing plan is complicated (on the plus side, it could offer more choice for different sized businesses). And if it does succeed, Office 365 could risk cannibalizing its still hugely profitable traditional Office software suite.

“Technology inevitably gets more complicated as it gets older,” Sinha, the Google Apps product manager, wrote in the recent blog post on the Office 365 launch. “…At times like these, it’s worth considering a clean-slate: an approach based on entirely modern technologies, designed for today’s world.”

But here’s one challenge both Microsoft and Google will have to overcome–even in today’s web-centric world, some corporate customers simply aren’t comfortable porting their most sensitive documents to the cloud.