Los Angeles this week awarded a $7.5 million contract to Google, which will provide cloud-computing email and productivity application services to the city's 30,000 municipal and state workers. The dollar amount of the deal is hardly significant given the quarterly revenues that both companies earn, but it still marks a major victory for the more cloud-savvy Google, which has been making inroads into Microsoft's core markets over the past year.

"The City of Los Angeles, the second largest city in the nation, made a world-class decision today to support a state-of-the-art email system," said LA Councilman Tony Cardenas.

LA's city council voted 12-to-0 to adopt the Google solution, called Google Apps, though numerous organizations around the city, and some privacy advocates, argued against storing crucial data online. But the city council contracted a system integrator to help mitigate the risks of online data storage; the data will be encrypted, always physically stored in the United States, and heavily protected against unlawful access. If data breach occurs, the city will be financially compensated, according to the contract.

The broader concern is the thematic battle between Microsoft's traditional services and the pure cloud services offered by Google. In truth, Microsoft offers both on-premise servers and cloud-based servers, as well as a hybrid approach in which customers can combine the two. And Microsoft's solutions are far more powerful and full-featured than anything that Google offers.

What Google does offer is lower pricing and simplicity. And it appears that these considerations swayed the City of Los Angeles after it overcame any concerns about data security. It's a decision that more and more companies and governments will make in the future, and something that Microsoft will need to address in its product offerings.