Google Docs & Spreadsheets, as the service is now called, offers much of the basic functionality of Microsoft 's Word and Excel office applications -- with the advantage that they're free and online.

Over the weekend, Google upgraded its Google Pack download bundle to include Sun Microsystems' StarOffice, a full-featured competitor to Microsoft Office. The bundling is the result of deal the companies announced in 2005, but has been slow to bear fruit. "They announced this a long time ago; the surprising thing is they didn't do it sooner," said Greg Sterling, principal analyst with Sterling Market Intelligence.

Sun sells the software for $70 but the New York Times reported that Google is paying Sun to be able to offer it for free. Google said in a statement that it's making StarOffice available for free because it "always believed that users should have choice in their online and PC experience."

Collision Course with Microsoft

"It's getting harder and harder for Google to say it's not competing directly with Microsoft in terms of the office suite," Sterling said. "They will continue to say Google Docs has different functionality, and in some ways it does," he said, but Google clearly sees the enterprise as a big revenue producer.

"Google is moving onto a collision course with Microsoft," Sterling added.

The addition of StarOffice to Google's offerings indicates that the company is targeting small and midsize enterprises, which might need more sophisticated features and the better performance of a desktop app. "Google's spreadsheet is not as rich as Excel," Sterling noted. "But it offers collaboration and being able to get your information from any computer, which has a certain value. People like the idea of a plug-and-play application," he said.

For the moment, offering Sun's StarOffice likely will not put a serious bite in Microsoft's Office market share. But clearly, Google is putting together the pieces for the same sort of software-plus-service offering that Microsoft is readying.

Tighter Integration Coming

"In the future (Google Docs and StarOffice) will be more tightly tied together," Sterling said. "You'll see more integration of Internet- and desktop-based applications." A key enabling technology for this integration is Google Gears, an open-source browser extension that lets applications run offline. Using JavaScript APIs, developers can write applications that cache and serve local application resources and store data locally in a relational database.

Microsoft has announced it will launch its own hosted, collaborative service, although no dates have been offered. Speaking at Microsoft's Worldwide Partner Conference in July, CEO Steve Ballmer said, "The fundamental transformation to software-plus-service ... is upon us."

And he left no doubt that Microsoft is well aware of the importance of that transformation. "I guarantee you Microsoft will lead during this next generation of computing and user interface," he said in his speech. "We will be out there with betas, previews, and feedback. It's time to engage."