Has Microsoft Stopped Worrying and Learned to Embrace Free?

Just a week after the announcement of Google Chrome OS, Microsoft has struck back, announcing its plan to provide a free, web-based version of its Office 2010 suite, to be called Office Web Apps.

So, will Microsoft win the cloud document war, defeating Google Docs? I’m not so sure. Microsoft is certainly well-positioned for this. Microsoft Office is the dominant office application, holding a practical monopoly on corporate users, while Google Docs has barely made inroads to the consumer space. And, with the mix of both online and offline tools, Microsoft can offer benefits that no one else (including Google) can match today.

Yet, with its business model and culture, I think that Microsoft will have a difficult time balancing the needs of users with the desires of their sales & marketing organization. There’s a tough balance required for success in a freemium model. Looking at Google’s position, they are free to do anything they want with Google Docs. They can build in all kinds of bells and whistles and integrate that with the Gmail email platform, all without ruffling internal feathers. But Microsoft will be pulled in two directions. While their product teams will want to build the best possible Office application, it’s likely that they will run into constraints out of fear that expanding the online feature set could cannibalize sales of the traditional business.

Another big challenge for Microsoft is its development organization. Microsoft has used long development cycles, typically creating large, bloated applications. The lone exception has been Bing, where the team behind it as seemed almost nimble (even beating Google to showing tweets in the search results). But I assume that the dev team for Office Web Apps will be part of the Office 2010 group, which would not bode well for a light, simple application.

While it’s unlikely that a cloud-based Office app would steal users from large corporate systems, Microsoft generates significant revenue from small business, nonprofits, home office and individual users. These users would all be strong candidates to move to a free cloud-based application.

I believe that Microsoft will feel constant pressure to cripple its free version to slow the erosion of its traditional sales.

Will that create enough of a window for Google to win the (cloud) Office wars? That’s tough to project, especially considering the new Office Web Apps are still a year away . But while Microsoft may have all kinds of advantages in this competition, Google will have the freedom to build whatever it sees as the best product, which in the end just might give them the edge.