Google, too, saw the signs and ramped up efforts to make Google Apps more business-friendly. In summer 2007, Google bought Postini for US$625 million -- the company's third-largest acquisition. Postini brings policy, security, and compliance rules to e-mail and the Web, a critical feature for large companies looking to leverage cloud-based computing applications. "We've taken a lot of [Postini's] functionality and integrated it with Google Apps over the last six months," says Rajen Sheth, senior product manager for Google Apps.

Earlier this year, Google's pitch hit a crescendo. It came out with a host of new products: Google Web Security for Enterprise, which uses Postini technology, and Google Sites for people to create a "team" Web site. Most notably, in late February, Google announced Google Apps Team Edition, which aims to give administrators visibility into Google Apps usage at their companies, as well as the ability to exert some control -- a sure sign that Google wanted to court big companies.

Microsoft chills out the cloud noise

The reaction from Redmond was swift. Less than a week after the Google Apps Team Edition announcement, Microsoft announced the public availability of Microsoft Office Live Workspace beta. Microsoft describes this as a Web-based extension of Microsoft Office that lets people access their documents online and share their work with others.

Unlike Google Apps that actually run in the cloud, Microsoft Office Live Workspace requires Microsoft Office applications to run on a person's computer in order to create documents and make changes to them in the online workspaces. Randall Kennedy, an InfoWorld Test Center contributor and long-time Windows performance expert, panned Microsoft Office Live Workspaces in a December review, citing its lackluster document-sharing features and its tardiness to the cloud computing party.

In addition to the Microsoft Office Live Workspace announcement, Microsoft revealed plans to release Microsoft SharePoint Online and Exchange Online in the coming months as a paid subscription service. Basically, companies can choose to have Microsoft host SharePoint and Exchange instead of hosting it themselves on their own servers. Much like Google Apps' online collaboration draw, Microsoft's new services will let business users access e-mail, calendars, contacts, shared workspaces, and video conferencing over the Web.

The Microsoft announcement was a tactical move. "Microsoft is telling companies that they're coming to market, so wait before making decisions about cloud-computing services," Austin says. "This is a great market freezer."

Microsoft believes the hosted services model will eventually play a major role at large corporations. "In five years, we think closer to 50 percent of Microsoft Office users will be using Microsoft [online] services, likely in conjunction with Microsoft software," says Alex Payne, director of product management in the Microsoft Office group. The difference: Microsoft is looking to add online capabilities to Office, not move Office online. Google wants to cut into Office with online services of its own.

Kennedy predicted Microsoft's embrace of cloud computing nearly two years ago. That's when Microsoft acquired application virtualization platform product SoftGrid. Kennedy says the renamed Microsoft Application Virtualization will stream Microsoft Office and other bulky client-server software to users over the Internet. That eliminates the current choice that Google's strategy seems to want to force between installed Office versus Web-delivered Google Apps.

Earlier this year, Kennedy made another bold prediction: A streaming Microsoft Office will clobber Google Apps in the cloud. He cites Microsoft Office's key strengths, such as full-fledged functionality and offline operation, as eventually winning the day.