CIO — With its recent software-as-a-service announcement, Microsoft shows that it's finally accepted the power and inevitability of the cloud—and also reveals just how big a threat Google really is.

Microsoft executives said on Monday that the world's biggest software company will begin offering online software services to "businesses of all sizes." The "software plus services" strategy, as Microsoft execs have referred to it, has been a long time coming, and it appears that there will be many months before the much-hyped vision becomes everyday reality for all corporate IT departments.

The new services, which will allow businesses to access e-mail, calendaring, contacts, shared workspaces, Web conferencing and videoconferencing over the Web, won't be generally available until the second half of 2008, according to Microsoft. Beta testing for small businesses with fewer than 5,000 employees opened this week.

Analysts such as Matthew Cain, a research VP at Gartner, say that the shift in Microsoft's strategy (adding a cheaper software-as-a-service option that could cannibalize its on-premise software cash cow) is huge. "This emphasizes a titanic shift in the way that enterprises buy, provision and consume software services," Cain says. "There really isn't much bigger news than this."

Back in September 2007, Microsoft announced the "roadmap" for its software services strategy and introduced its Online Services offering for businesses with more than 5,000 users. Cain notes in a recent Gartner report that while the SaaS model, in general, is in its infancy, "it holds considerable appeal, particularly for small and midsize businesses. This is because it offers fixed monthly fees, freedom from most operational management, elimination of upgrade responsibilities and, in some cases, lower costs."

Jeff Raikes, president of Microsoft's Business Division, kicked off the festivities in September by proclaiming that the "new era of connected computing is about empowering people and businesses to balance the power of the Internet with the rich interactivity and high performance of client and server software."

This was a new and different Microsoft. This was also a scared Microsoft.

The Cloud Hanging Over Redmond

Amid all of Microsoft's "enterprise customers will now have more choice" rhetoric as of late, it's critical to note the motives behind Microsoft's moves: responding to rising competitors and a need to play defense.

"If Google didn't exist, Microsoft wouldn't be doing this," Cain says. "Why would Microsoft want to change a great thing? They would rather prefer to get revenues from their on-premise [software] model."

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