MICROSOFT ESCALATED its battle with arch rival Google yesterday, reacting to an assault on one of its core businesses with the announcement of a free online version of its widely used Office software, to be launched next year.

While likely to take only a small bite out of Office revenues in the short term, the move represents one of the most radical steps yet by Microsoft as it tries to refocus its software business around the internet, according to analysts.

Users of the free online Office will be able to create and edit documents, spreadsheets and Powerpoint presentations by using tools they are familiar with from the desktop software. Although only a “lightweight” version of the software, to make it more suitable for use in internet browsers, it would still provide a fuller service than online rivals such as Google Apps, said Stephen Elop, head of Microsoft’s business division.

“Google represents a serious threat,” said Tom Austin, an analyst at Gartner, who compared the rivalry to the browser wars that shaped the early internet.

Google already claims more than 15 million users of its free suite of applications, although paying customers for the premium version number only hundreds of thousands. By contrast, Microsoft says about 500 million people have Office on their PCs, though half of these use pirated copies.

The free version of Office will do little to hurt Microsoft’s overall business. Microsoft makes most of its money selling to corporate users and only a relatively small number of home users are likely to abandon the PC version of Office in the short term, said Matt Rosoff, an analyst at Directions on Microsoft, a research group.

With virtually all of its sales coming from Office, the Microsoft business division made $12.4 billion in operating profits last year, or 42 per cent of the total for the company.

Mr Elop said Microsoft would experiment with placing advertising on the online applications before making them publicly available in the first half of next year.

In an attempt to boost the attractions of its applications to corporate users, Google last week removed the “beta”, or trial, label from its applications after five years, and has made it easier for workers to sync information from Microsoft’s Outlook software with its service. – Copyright The Financial Times Limited 2009