SAN FRANCISCO -- Google may dominate in search, but it's the company's free consumer e-mail service, Gmail, that it sees capable of teaching the enterprise some lessons.

Google (NASDAQ: GOOG) shook up the e-mail world in 2004 with the release of Gmail, it's free e-mail service. Microsoft's Hotmail and Yahoo ruled the roost, but their standard online storage limit was 10 megabytes -- if you wanted 100 megabytes or more you had to pay.

But when Gmail debuted with a gigabyte of free storage, competitors scrambled to respond. And while it's unclear how they're fairing -- both Microsoft (NASDAQ: MSFT) and Yahoo (NASDAQ: YHOO) have larger user bases, but don't break out revenues for their e-mail offerings -- Google has been known to crow about its successes.

"We're making money," Matthew Glotzbach, product management director for Google Enterprise, told Internetnews.com.

Added a Google public relations spokesman, "Gmail is absolutely profitable."

The secret? A very favorable market for commodity storage hardware and the economics of scale -- two trends that it sees encouraging enterprises to similarly trade up to software-as-a-service (SaaS) offerings like hosted e-mail.

While Google's audacious offering was great for consumers, it was less immediately clear it would be a successful business, particularly as storage costs initially increased. As its popularity rose, the increasing amount of large multimedia files users were sending and storing on its servers meant their needs soon grew beyond the once "massive" gigabyte of storage it originally offered.

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Market dynamics enabled Gmail's free storage to keep pace, growing at such a pace that it's essentially open-ended.

At present, Gmail storage is "up to six to 7.5 gigabytes per user on average," Glotzbach said during his keynote address here at the Software and Information Industry Association (SIIA) NetGain conference today.

In his presentation, Glotzbach showed a graph of how storage costs have plummeted since 2004, even as Gmail's ad revenue has risen, with the two axes crossing in 2008.

"We get 10 hours of video uploading to Google every minute," Glotzbach said. "As you scale, the cost trends towards zero."

"One of the things driving that is what you can do in the cloud," he added.

Moving to the cloud: Are enterprises ready?

Services in the cloud are experiencing tremendous growth thanks to the same benefits Google is realizing -- scale and the ever-decreasing costs of storage hardware. As a result, it may seem like SaaS approaches to delivering enterprise software may be poised to beat out traditional deployed models on pure cost-savings basis.

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