Over the past year, Microsoft Exchange Server has evolved from a traditional on-premise server to an online service, one that Microsoft itself will host, service, and support. That's quite an accomplishment, and it neatly answers complaints I and others have made about some of Microsoft's recent business-oriented products, including Small Business Server 2008. Such products are increasingly powerful, yes, but also increasingly complex.

Microsoft's decision to morph its traditional server products into hosted online services will be a huge win for its enterprise customers, especially, and I feel that this kind of solution will eventually outpace on-premise server installations in both revenue and licenses. But enterprises aren't where the growth is these days in the server business. And when you look at the small-to-midsized business (SMBs) that will most benefit from the lack of complexity in Microsoft's hosted solutions, you realize there's still a gap: Microsoft's hosted offerings are just too expensive.

Racing to fill this gap is Google, best known for its online search engine but increasingly encroaching on Microsoft's bread-and-butter business customers. If you're still of the opinion that Google's business solutions are cute but immature, it's time to stop chuckling condescendingly and pay attention. Sure, Google has a way to go in the enterprise, but its business wares are getting better all the time. And most of them are free, or nearly so.

Helping Google somewhat, of course, is the current economic downturn, but let's be serious here: Saving money is always in season. And as more and more SMBs look for ways to stay competitive while cutting costs, they're going to turn away from Microsoft's comparatively expensive solutions and increasingly toward Google's free and inexpensive solutions. That's especially true if what Google offers is functionality identical, or at least very similar, to what's available from Microsoft.

And that's exactly what Google offers. The Google Apps solution, although initially derided for its technical immaturity, has really taken off with educational institutions and small businesses, and Google says the business is making money to the tune of "a few hundred million" dollars of revenue per year. But its latest related initiative is a small utility announced via a barely read corporate blog. This utility, Google Apps Sync for Microsoft Outlook, is a deep advance into Microsoft territory, hitting the software giant right where it hurts by letting customers migrate from expensive and complex Exchange Server solutions to inexpensive or free Google Apps while retaining their Microsoft Office Outlook clients.

This strategy comes directly from the Microsoft playbook, which is why I find it so insidious. As Google puts it, the Google Apps Sync tool is part of a wider initiative designed to remove obstacles for enterprise deployment of Google Apps. (The company also offers sync services with various smart phones.) It's fairly primitive from a deployment perspective?you literally need to run the utility manually on each end-user desktop?but the end result will justify the effort for most small businesses. That is, you can replace an expensive Exchange server with a hosted Google solution. And to users, nothing has changed: They keep using Outlook with virtually all the same capabilities.

Google will never be able to compete with Microsoft's traditional software products on the server or desktop. But with the world moving toward cloud-based solutions, they might never have to.

In many ways, this technology transition resembles the rise of PC-based computing two decades ago. The only difference this time is that Microsoft is on the wrong side of the equation. But I do have a solution of sorts for the software giant. If it can take CEO Steve Ballmer's comments about the economy to heart?that is, that the economy will "reset" but come back smaller than it was before?the company should stop considering some of its core products?Windows, Office, Exchange, and so on?as top money earners but rather as ways in which to entice customers to play in its ecosystem. Like Google's offerings, these products should be profitable but perhaps much, much less expensive.

I know it sounds radical. But the alternative?a world in which Google constantly erodes at Microsoft's messaging and other server solutions?is even less attractive. Just ask IBM. Or what's left of Lotus.

An edited version of this article appeared in the June 16, 2009 issue of Windows IT Pro UPDATE. --Paul