The new era of online applications is drawing Microsoft in to take its share of the spoils alongside companies like Google, Salesforce.com, NetSuite and RightNow.

Software as a Service (SaaS) has the advantage of freeing up the need to provide a local application server and the maintenance and upgrade headaches that this involves. The software is hosted remotely by the service provider who provides remote access, technical services and data backup for its customers. The downside is that a reliable broadband link to the internet is required but the upside is that secure access is available from anywhere the customer or their offices happen to be.

Microsoft’s first pitch in this growing market is Office Live and it is based primarily on the company’s collaborative SharePoint Portal and Exchange Server applications, rather than the other Office Suite products like Word and Excel. Tim Kimber, Office Live business and marketing lead for Microsoft UK, describes the company’s strategy: “We’re primarily targeting very small startup and established businesses with around 10 employees. These organisations might not be comfortable to go out and buy a server because they lack the IT experience to set up and maintain it. We can give them many of the benefits that stem from having a server and with broadband speeds today you get almost the same experience you would get with a server on site.”

Office Live has been in beta in the US since February and the full release was on November 15. Simultaneously, a new set of betas began in the UK, Germany, France and Japan. See http://officelive.microsoft.com/Misc/ManagedContent/uk.html for the UK beta.

The services come in two flavours: a free Basics version and a subscription-based Essentials offering extended services. During the beta period, estimated by Kimber as five or six months, the subscription fee for Essentials is waived.

The Basics package offers web hosting with 500MB of storage space and site design templates to ease the process of setting up the site. As part of the free service Microsoft will also register any available domain name the user chooses or migrate an existing domain name to its own domain name registrar. This means that the customers all have their own identity on the web.

Basics also offers Live Mail, which is similar to the current Hotmail or Windows Live Mail services, for up to 25 email addresses. There is also shared calendar capabilities, instant messaging and task lists available.

As a paid-for service, the Essentials users get more features on top of the Basics services. In addition to double the web space and email post boxes, there is also an extra 500MB storage space for documents and other uploaded files. This storage is primarily occupied by shared sites based on SharePoint. These can include customer and supplier workspaces that can be securely accessed by business partners to share uploaded information, such as brochures and bulletins. Similarly, sites can be set up for internal staff to use such as a Human Resources area and Small Business Accounting where a copy of the Microsoft Office Small Business Accounting file can be shared with the company’s accountant. The limit is 10 users but this can be increased at extra cost.

Microsoft’s supplied applications are built around SharePoint templates. They cover basic horizontal applications that apply to most businesses but there is also room for other companies to produce further templates for vertical markets.

A further doubling of storage spaces, email boxes and workspace users is available as Office Live Premium.

Kimber says that pricing is not yet decided but will probably be the same as in the US which, at current exchange rates, should be between £10 and £12 per month for a site licence. The Premium service will be between £20 and £22.

Strictly speaking, Office Live is not an on-demand service like Salesforce and the others because it is not an application built to a multi-tenanted architecture. Multi-tenanted applications have a common core and customisable elements which may just be the user interface, or dashboard, but can also run to user-developed applications and applets running on top of this abstraction layer. The advantage is that the host program can be upgraded without upsetting the user customisations. Office Live is more akin to individual web services.

In the main, the current SaaS companies are welcoming Microsoft’s entry. Salesforce and RightNow mainly target the larger business -- though they can be used by smaller companies -- but NetSuite spans the SMB market and should feel more threatened.

NetSuite offers customer resource management (CRM), enterprise resource management (ERP) and web site hosting. Zach Nelson CEO of NetSuite, says: “Microsoft pushing the on-demand message certainly will be a boost to NetSuite. Larry Ellison once told me the best thing that happened to Oracle was IBM’s announcement of a relational database. It legitimised the market and Oracle already had a huge lead in that technology. Our feeling about Microsoft is the same. The Office Live solutions are, in effect, 1.0 releases while NetSuite is a 12th generation business application suite.”

David Vap, vice president of product management at RightNow Technologies, also welcomes the move. He explains: “We’ve being selling uphill for the last seven years because we’ve been establishing the SaaS model and convincing people it’s the way to go. Microsoft saying that this is the wave of the future eliminates that part of our conversation and makes things easier.”

Clarence So, chief marketing officer for Salesforce UK, said, “Having Microsoft, SAP and Oracle jumping on the bandwagon and beating their chests about their SaaS product offerings is really doing more than our mere marketing dollars can do. Long term, who knows, the market may not be big enough and they'll have to go head-to-head with us."

Are these companies merely turkeys looking forward to Christmas? Microsoft has a habit of gobbling up competitors and the planned release of a multi-tenanted version of Microsoft Dynamic CRM next year may make them think again.

So does not see Salesforce as Microsoft’s current mark. He says: “I think their core strategy with Office Live is aimed 100% against the Google hosted services like Gmail, Pages and Calendar. The only overlap with us is that Microsoft talks about contact management but that’s only a very small part of the CRM picture.”

Teresa Jones, a senior research analyst at Butler Group, is sure who Microsoft is targeting. She says: “From the odd conversations I’ve had with Microsoft, it’s clear they see Google as quite a threat. At Oracle OpenWorld in October, a presentation showed Google Document running in a Firefox browser to show that you don’t even need Microsoft Office at all. You don’t even need Windows.”

David Bradshaw, principal analyst at Ovum, does not think Google is Microsoft’s only problem. He says that the company appears to have its own problems with the SaaS model which it needs to solve. At a Microsoft partner briefing in Boston this year and it was clear that the company is looking deeply at the market

“They showed how you run Software as a Service under the sophisticated multi-tenanted model using Microsoft infrastructure,” he says. “They accept the SaaS model but they are edging cautiously. It's a difficult transition for them, particularly with their own traditional software products. They don't want that revenue to disappear overnight.”

It is also no coincidence that Office 2007 is finished and is just going to market. Its main selling point is its collaborative capabilities and this may alienate smaller businesses who will stay with their current versions of Office because of the financial and technical investment required. Office Live offers collaboration without any hassle. This may convince some small customers to bite the bullet and leap back into on-premise software.