companies are tiny, but in early December, Google announced that
even companies with fewer than 10 employees, which used to get
Google Apps free, would have to pay.
Google's revenue from Apps, according to a former executive who asked not to be identified in order to maintain good relations with Google, amounted to perhaps $1 billion of the $37.9 billion Google earned in 2011.
Shaw Industries, a carpet maker in Dalton, Georgia, with about 30,000 employees, switched to Google Apps this year for communication tools like e-mail and videoconferencing. Jim Nielsen, the company's manager of enterprise technology, calculated that using Google instead of similar Microsoft products would cost, over seven years, about one-thirteenth of Microsoft's price.
Shaw is a subsidiary of Berkshire Hathaway, run by the billionaire investor Warren E. Buffett. But the close friendship between Mr. Buffett and Microsoft's founder, Bill Gates, did not sway Mr. Nielsen. "When you add it up, the numbers are pretty compelling," he said.
In addition to the lower price, Google has simplicity in pricing. Mr. Nielsen said he had had to sort through 11 pricing models to figure out what he would have paid Microsoft.
But his prime motive in choosing Google, he said, was online collaboration. "As people in their daily lives become more electronically social, they want to bring that into the office," Mr. Nielsen said. "Video is more appealing than a written letter."
Google, he said, is "constantly making it better for teams to work, inside and outside the company, with controlled access."
Microsoft says it does not yet see a threat. Google "has not yet shown they are truly serious," said Julia White, a general manager in Microsoft's business division. "From the outside, they are an advertising company." In 2011, 96 percent of Google's revenue came from advertising.
Even though Microsoft sells a similar product, she said most companies did not want to depend exclusively on the cloud for documents and communication. Microsoft now has some of its own workers entirely online, she said, while others use both local computers and the cloud, to get a feel for how various companies work.
Although she would not provide numbers, Ms. White said Office 365 was "on track to be our fastest-growing business." She said that Google, to be a threat, would need to "provide a quality enterprise experience" in areas like privacy, data handling and security.
But according to the U.S. General Services Administration, of 42 U.S. government contracts for which Google and Microsoft competed in 2012, Google won 23 deals and Microsoft 10. The rest went to another company, Zimbra, which is owned by VMware, a maker of cloud software.
Microsoft's biggest and most profitable sector, its business division, brought in nearly $24 billion in the year that ended in June. Almost none of that came from Office 365, but from the familiar older-style software that resides on computers within the corporation.
As the two behemoths slug it out in the enterprise market, their cloud-computing software is changing the way businesses operate. Internet-based computing makes it easier to communicate both within and outside a company. Software can be fixed and features added automatically, in the same way consumers get the latest version of Facebook when they go to its site.
"People were looking for cheap e-mail at first, but now it's about collaboration, calendaring and data storage online," said Ms. Webster of IDC. Over time, her firm says, at least 50 percent of software revenue will be from the cloud, which could challenge the complex way Microsoft prices and discounts its products.
Ms. White, the Microsoft manager, said Google had "helped amplify a lot of the conversation around cloud productivity." That is a far cry from last February, when Microsoft put a video on YouTube, which is owned by Google, lampooning Google with a parody of the television show "Moonlighting."
Google, the video suggested, would automatically change a buyer's software. But cloud-based software is supposed to issue automatic updates and feature changes. Microsoft has issued several updates to Office 365, although unlike Google, it lets customers delay the changes for as long as a year.
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