The smartest thing Microsoft can do to combat Google is to come up with ways to quickly get as much Office application performance into a suite of web-based services users will love. Google has just hinted at encroaching on Microsoft’s application space and the media and financial analysts have turned on Microsoft saying they will potentially be the victim of the Google juggernaut.

The last time the industry went through this sort of change, the analysts and reporters were saying Microsoft was going to get steamrolled by the Internet. They didn’t because they reacted quickly and retooled the company. The same thing seems to be happening now as Microsoft has reacted quickly to the Google threat by launching Windows Live which is currently in Beta.

The service in its current incarnation reminds me a bit of the Google Sidebar application in that it is a flexible way to view lots of information. In this case the application lives in a web browser and is not a separate program.

I have used it for about 15 minutes and like the service as it is very flexible and allows you to build a customized page from scratch. You can select news types, stock quotes and anything else you can think of to add to your personal portal. The user interface is slick and uses AJAX for near desktop-like performance. Eventually all Microsoft software will be available as a service according to Gates. It seems the business model for these services will be a combination of advertising support and subscription fees.

They say the best defense is a good offense and this hosted portal is a great idea.

My two cents are that that the hoopla surrounding this announcement has been muted. Microsoft for all the advances and innovations it has given us has trouble exciting the markets the way it once did. In fact this announcement today is more of a reaction than a vision.

All of these things should have been done in 2000 – just after the ASP market was born. If you want to innovate you have to be first. Google still is small enough to announce things that will scare Microsoft into counter-announcing. The question is will FUD (fear uncertainty and doubt) keep people from using new Google services or will people experiment with Google apps because they are free? In the free world I think FUD doesn’t hold much water so Microsoft will have to deliver quickly on it’s vision to get people to adopt its new strategy of using live software.

Don’t ever count Microsoft out. They have tremendous critical mass in the information technology space and dislodging them from the top of the software heap is easier said than done. Even if Google doesn’t become a leader in desktop applications and services, its ability to get Microsoft to innovate rapidly is something no other company (including Microsoft) has been able to do for a number of years. For this alone we need to all thank Google.