Observers Mull Microsoft’s Free, Online Office

Microsoft will release a free version of its dominant Office software that users can access over the Web, catching up with products that archrival Google launched three years ago.

The world’s largest software maker will offer a word processor, spreadsheet, presentation software and a note-taking program with the same look and feel of their counterparts in the Office suites that it sells for personal computers.

It is the latest salvo in an intensifying war between the two technology giants. Google (NASDAQ: GOOG) announced plans last week to challenge Windows with a free operating system. Microsoft (NASDAQ: MSFT) introduced a new search engine, dubbed Bing, last month, that has taken a small amount of market share from Google.

A free version of Office could hurt sales of Microsoft’s top-selling and most profitable business unit. One of Office’s most popular titles is a home version that sells for $150. It includes the four programs that Microsoft will give away.

“Microsoft is in a tough spot. Their competition isn’t just undercutting them. They are giving away the competitive product,” said Sheri McLeish, an analyst with Forrester Research.

The Office division rang up operating profit of $9.3 billion on sales of $14.3 billion in the first three quarters of the software maker’s current fiscal year.

McLeish said she expects Microsoft to overtake Google in the market as the hundreds of millions of people who use Office flock to try out the Internet version.

Microsoft will seek to make money by using it to lead those users to its ad-supported websites, including the Bing search engine. Analysts have said that Bing’s early signs of success suggest Microsoft may be rounding the corner in efforts to turn around its money-losing Internet division.

Microsoft will release the free offering when it starts selling Office 2010, it next major release of the product, sometime in the first half of next year. Its current version came out in January 2007.

The software maker unveiled an early release on Monday at a conference for business partners in New Orleans. It will be distributed to tens of thousands of testers.

Company spokeswoman Janice Kapner said the free Web version will provide “a very rich experience” and probably have more functionality than Google.

Office 2010 is among a wave of upgrades to Microsoft programs planned over the next year. A new version of its ubiquitous Windows operating system is coming out in October and a new version of its widely used email server is also in the works.

Microsoft also plans two other Internet versions of Office for businesses.

It will host one of them at its own data centers, charging a yet-to-be-announced fee for that service. Businesses with premium service contracts will have the choice of running the Web-based version from their own data centers at no extra cost.