Google’s (NASDAQ: GOOG) Apps software, which offers spreadsheets, word processing, and presentation features has signed up 500,000 customers by some accounts. The product is popular because it runs off of Google’s servers, saving storage space and processing power on the user’s PC. The product can also be accessed from just about everywhere.

Apps competes with many of the functions of Microsoft’s (NASDAQ: MSFT) Windows. But, Windows does run directly on the PC where it is downloaded and takes advantage of the machine’s memory and chip power.

Microsoft has decided to strike back with its own online, server-side software hoping that it can blunt any edge that Google might develop with Apps. Redmond is building huge server farms to power its products. According to The Wall Street Journal “Microsoft Chairman Bill Gates is expected to announce online services to handle e-mail, calendars, contact lists, video conferencing and other functions for small and medium-size businesses.”

While it is not clear that the Google applications products will hurt Microsoft’s core Windows franchise, the world’s largest software company is not taking any chances.

The question that remains to be answered it whether the online Microsoft applications will have to be sold at a discount to the normal Windows products. If so, Google is effectively weakening its rival by taking away some of the margins in its most important businesses.

No wonder Microsoft wants to buy Yahoo! (NASDAQ: YHOO). Maybe it can bleed Google a little.

Douglas A. McIntyre