For free.

Which says quite a bit about the competitive pressures Microsoft (MSFT) is feeling right now, particularly from Google (GOOG), which first challenged Office two years ago and is now taking on Windows as well. “The fact that Microsoft is developing it at all is a response to Google,” said analyst Matt Rosoff of Directions On Microsoft. “This is a move that they probably wouldn’t have made if they didn’t have to, but there is enough competition bubbling up that they thought they needed a response.”

And a measured response that trumps Google’s offerings, which Office Web Apps will do on a few levels. First, it’s free of user-separation anxiety. Companies attached to Outlook, Word and whatnot will find in Office Web Apps the same familiar interfaces and functionality. No need to grudgingly replicate the Office experience as Google recently had to do with it Outlook synchronization tool for Apps, because Office Web Apps is Office.

Second, Microsoft’s approach offers enterprise an on-premises hosting option. Which means companies that aren’t comfortable running the suite on Microsoft’s remote data centers can run it on their own servers. And, as Gartner (IT) fellow Tom Austin notes, that could do much to distinguish it from Google Apps in the marketplace. “The hybrid hosting model removes a barrier to entry that Google cannot remove, so it is somewhat of a big thing,” Austin told Digital Daily.

“Interesting question is whether this hybrid hosting model is the Lockheed Prop-jet Electra of the era. Lockheed brought out a propjet at the same time Boeing and Douglas were coming out with turbojets (the 707 and DC-8 respectively). Boeing and Douglas won out, of course, but it didn’t help that the Electras had a problem with staying in the air….I am not saying that Microsoft Cloud-Office offering is a prop-jet Electra. I am saying firms will likely opt out of choosing the hybrid model because it’s less effective (like the electra).”

Seems that Google (GOOG) has finally realized that it wasn’t doing itself any favors in enterprise by essentially advertising Apps as an immature product suite. IT managers are easily spooked at the mention of the word “beta.”

“We’ve come to appreciate that the beta tag just doesn’t fit for large enterprises that aren’t keen to run their business on software that sounds like it’s still in the trial phase,” Matthew Glotzbach, Director of Product Management for Google Enterprise, wrote in a post to the company blog. “So we’ve focused our efforts on reaching our high bar for taking products out of beta, and all the applications in the Apps suite have now met that mark.”

That mark presumably being the point at which Google is ready to guarantee uptime and reliability to end users….

The availability of an offline component for Google Docs might not convince businesses to standardize on Google Apps, but it will undoubtedly get them thinking about it a bit more. Certainly, Docs’ lack of offline access has been one of the biggest objections to the Web-hosted application. Allowing Docs users to work on their word processing documents without an Internet connection, gives them one less reason to export them to Microsoft Word.

In terms of Google, not to overstate it, but they really don’t understand the special needs of business. Today, their economic model is based on consumer search. They have done an incredible job there and obviously we’re investing in challenging them in that space. … If you’ve seen … the Google tools that have tried to do productivity type things, they really don’t have the richness, the responsiveness. You can see that relative [to] the success they have had there. Most of these Google products, to be frank, the day they announce them is their best day and then after that …”

–Microsoft Chairman Bill Gates pans Google Apps