Google is pushing further into the communication and collaboration applications market with a major upgrade of Google Apps, a hosted suite for organizations of all sizes that analysts say could soon become a real competitor to Microsoft Office.

On Thursday, Google introduced a Google Apps version that, for a fee, offers guaranteed uptime, IT management tools, technical support, increased e-mail storage and integration with the Docs & Spreadsheets word processing and spreadsheet applications, as well as BlackBerry support for Gmail.

With a cost US$50 per user per year, Google Apps Premier Edition becomes the third and most sophisticated version of the suite, which was launched in August with the free Standard Edition and Education Edition versions. Like the original editions, Premier will have services like Gmail Web mail, Calendar shared scheduling and Talk instant messaging.

The suite was until today called Google Apps for Your Domain, because organizations offer these Google hosted services using their own Internet domain and branding. The Standard edition is used by over 100,000 small businesses, and the Education edition by hundreds of universities.

SF Bay Pediatrics, which has two medical offices in the San Francisco area, implemented the Premier edition in January for most of its 25 employees, which until then had used individual e-mail accounts from providers like AOL. "We had no control over e-mail, and supporting it was a nightmare," said Andrew Johnson, the company's chief information officer. With Gmail, the performance and management e-mail problems disappeared, he said.

While SF Bay Pediatrics employees use Microsoft's Office suite, they also use Docs & Spreadsheets to store their files on a central server and collaborate on them, Johnson said. "I don't see us going fully software-as-a-service yet, but maybe in the future," he said.

Indeed, Google Apps represents a new, hosted approach for productivity suites, a market ruled by Office, which is mostly desktop software. Despite security and privacy concerns over storing applications and data on a third-party data center, organizations are increasingly adopting hosted models, because the vendor stores applications on its own data center and thus frees IT departments from spending time and money on hardware and software maintenance.

Forrester Research isn't telling enterprises to drop Office, but it is recommending that CIOs give Google Apps a serious look, in large measure because Office's price is high, said analyst Erica Driver. Today, Google Apps is a cheaper alternative to the core Office applications, but eventually it could be a replacement option, as Google grows its capabilities and CIOs get more comfortable with software-as-a-service, she said. "Microsoft has a chance to respond, but this changes the game," Driver said.

Microsoft says Office has steadily gained hosted service components for years, and it believes this combination with the core PC software is the right approach. Beyond native Office services, Office Live, with about 250,000 subscribers, offers a set of hosted services for small businesses, like Web site creation and hosting, while Office Online, with 70 million monthly unique users, offers Office online resources. "We're very committed to both [hosted] services and [PC] software," said Kirk Gregersen, director with Microsoft's Office team. On the issue of Office's price, Gregersen pointed out that Office customers have had less expensive alternatives, even free ones, for years, but that when deciding to buy Office, they have traditionally taken other factors into account beyond cost.

Still, some Office users, like Prudential Preferred Properties in Chicago, feel the price sting, which for this real estate firm in Chicago is between US$350 and US$400 per license. "We have instances in which the Office license was more expensive than the PC it's on," said Camden Daily, Prudential's technology director.

Google Apps found its way into Prudential, which has 450 employees, as the salvation for an outsourced e-mail service that constantly malfunctioned. Prudential has been using the free Standard version but Daily said that the Gmail service alone is worth the price of the Premier edition, which the company will adopt. "Everything on top of that is just a bonus," he said. Prudential will evaluate carefully how Docs & Spreadsheets compares with Excel and Word.

Google acknowledges that Google Apps doesn't match the broad set of features currently in Office, which has an installed base of about 450 million users. Google Apps needs a presentation application like Office's PowerPoint, and to boost its support for offline work beyond its basic capabilities to import and export files from Docs & Spreadsheets, analysts say.

Still, Microsoft must better articulate the value of Office Live, which lacks hosted versions of core Office applications like Word and Excel, said analyst Rebecca Wettemann of Nucleus Research. With the improvements in Internet connectivity, it's natural for organizations to evaluate hosted suites like Google Apps as alternatives to packaged software like Office, she said. In a recent survey, Nucleus found that 51 percent of organizations use some on-demand applications for things like CRM (customer relationship management), project management, content management, e-commerce and collaboration, Wettemann said.

Those that sign up for Google's Premier edition will get 10G bytes of e-mail storage per user, compared to 2G bytes in the Standard edition, a 99.9 percent uptime guarantee and phone support for IT administrators. It also includes APIs (application programming interfaces) to integrate the suite with business applications and data.

The Standard and Education editions are also getting enhanced with the Docs & Spreadsheets integration and the BlackBerry support for Gmail.

"This is a very big step forward for Google Apps," said Dave Girouard, vice president and general manager of Google's enterprise unit. The company plans to add several more applications to the suite before the year is out, and the JotSpot wiki service is a likely candidate, he said.

Google believes the Premier edition can be a good complement to Office, and it sees a big opportunity in organizations that haven't been able to justify the cost of offering e-mail to some employees, particularly in retail and manufacturing, he said. Google also plans to create an ecosystem of partners and developers around Google Apps.