Redmond squaring up to Google's web apps

In another clear sign that Microsoft sees the threat posed by its traditional business moving online, the company is readying a rival to Google's Documents and Spreadsheets.

The software maker is announcing Office Live Workspace, a free online tool for viewing, sharing and storing - but not editing - Office documents online. (It's existing Office Live efforts will be rebranded as Office Live Small Business.)

It's not quite ready - starting from today customers will be able to put in their name to be part of a beta testing programme expected to begin later this year. Still, the effort is a recognition that competition is heating up in the productivity arena, an area that large rivals had basically ceded to Microsoft a few years ago.

In addition to Google's effort, which as of earlier this month also includes presentation software, IBM announced its free Lotus Symphony productivity software, which prompted 100,000 downloads in its first week of availability.

Adobe, meanwhile, is set to announce it has acquired Virtual Ubiquity, a start-up that has built a web-based word processor, called Buzzword, using Adobe's Flash and AIR technologies. Adobe is also introducing a service, code-named Share, that allows people to share and store documents via the web.

For Microsoft, Office Live Workspace is also the next step in what the company touts as its "software plus services" strategy, essentially the notion that online services can serve as a complement to locally run software but not necessarily fully replace software running on a consumer's own desktop machine or on a businesses server.

In some cases, though, Microsoft is also offering its traditional server software entirely as a hosted service. To start with, Microsoft is launching hosted versions of its Exchange email and calendar program, its SharePoint portal software and Office Communications Server, its product for handling corporate instant messaging and telephony. Microsoft CEO Steve Ballmer and other executives had previously said such a service was coming.

Initially, the offer is aimed at large businesses that plan to use the software for more than 5,000 people. Microsoft Online Services, as that project is known, is born of a two-year-old effort in which companies such as Energizer Holdings and XL Capital essentially outsourced their desktop computing efforts to Microsoft.

Microsoft is moving cautiously with both efforts. By limiting the software hosting to the largest customers, it hopes to give partners that already offer hosted services some time to find a new niche and allow Microsoft to test itself with a smaller number of customers, before broadly offering the service directly. Partners will still be able to offer their own hosted service if they choose, or resell Microsoft's hosted service.

On the Office Live Workspace front, Microsoft will initially offer the product with no advertising, though Microsoft executives said it has been architected so ads can be shown in the future

The company is also not allowing people to edit their documents online but executives stressed that Microsoft is committed to being the leader in productivity software and that includes online editing.

Another key project down the road is integrating Office Live Workspaces with other "Live" products such as Windows Live Hotmail and Windows Live Messenger, so people will be able to view Office attachments they get via email or IM. Google currently allows Gmail users to open attachments in Google Docs.

Microsoft has already said it has big plans for Office Live. At its partner conference in July, COO Kevin Turner said the product has the potential to be one of the company's top three or four most-used products.

Nor is the company stopping there. It is also planning an ad-funded version of Microsoft Works, has trialled prepaid cards for time-limited versions of Office and is exploring other approaches to offer Office in as many ways as it can without overloading customers.

Corporate vice president Chris Capossela said in an interview at the partner conference: "We've put more of our marketing IQ behind alternative business models and alternative distribution strategies in the last two years."

Ina Fried writes for CNET News.com