Google has unveiled a major upgrade of Google App that analysts say could soon become a real competitor to Microsoft Office.

Yesterday, Google introduced a Google Apps version that, for a fee, offers guaranteed uptime, IT management tools, technical support, increased email storage and integration with the Docs & Spreadsheets word processing and spreadsheet applications, as well as BlackBerry support for Gmail.

With a cost of $50 per user per year, Google Apps Premier Edition becomes the third and most sophisticated version of the suite, which was launched in August with the free Standard Edition and Education Edition versions. Like the original editions, Premier will have services such as Gmail Web mail, Calendar shared scheduling and Talk instant messaging.

Until today the suite was called Google Apps for Your Domain, because organisations offer these Google hosted services using their own internet domain and branding. The Standard edition is used by more than 100,000 small businesses, and the Education edition by hundreds of universities.

Google Apps represents a new, hosted approach for productivity suites, a market ruled by Office, which is mostly desktop software. Despite security and privacy concerns over storing applications and data on a third-party data centre, organisations are increasingly adopting hosted models, because the vendor stores applications on its own data centre and thus frees IT departments from spending time and money on hardware and software maintenance.

Forrester Research isn't telling enterprises to drop Office, but it is recommending that CIOs give Google Apps a serious look, in large measure because Office's price is high, said analyst Erica Driver. Today, Google Apps is a cheaper alternative to the core Office applications, but eventually it could be a replacement option, as Google grows its capabilities and CIOs get more comfortable with software as a service, she said. "Microsoft has a chance to respond, but this changes the game," Driver said.

Microsoft says Office has steadily gained hosted service components for years, and it believes this combination with the core PC software is the right approach. Beyond native Office services, Office Live, with about 250,000 subscribers, offers a set of hosted services for small businesses, such as website creation and hosting, while Office Online, with 70 million monthly unique users, offers Office online resources.

"We're very committed to both [hosted] services and [PC] software," said Kirk Gregersen, director with Microsoft's Office team. On the issue of Office's price, Gregersen pointed out that Office customers have had less expensive alternatives, even free ones, for years, but that when deciding to buy Office, they have traditionally taken other factors into account beyond cost.

Still, some Office users, like Prudential Preferred Properties, feel the price sting, which for this real estate firm in Chicago is between $350 and $400 per licence. "We have instances in which the Office license was more expensive than the PC it's on," said Camden Daily, Prudential's technology director.

Google Apps found its way into Prudential, which has 450 employees, as the salvation from an outsourced e-mail service that constantly malfunctioned. Prudential has been using the free Standard version but Daily said that the Gmail service alone is worth the price of the Premier edition, which the company will adopt. "Everything on top of that is just a bonus," he said. Prudential will evaluate carefully how Docs & Spreadsheets compares with Excel and Word.

Google acknowledges that Google Apps doesn't match the broad set of features currently in Office, which has an installed base of about 450 million users. Google Apps needs a presentation application like Office's PowerPoint, and to boost its support for offline work beyond its basic capabilities to import and export files from Docs & Spreadsheets, analysts say.

Still, Microsoft must better articulate the value of Office Live, which lacks hosted versions of core Office applications like Word and Excel, said analyst Rebecca Wettemann of Nucleus Research. With the improvements in Internet connectivity, it's natural for organisations to evaluate hosted suites such as Google Apps as alternatives to packaged software like Office, she said. In a recent survey, Nucleus found that 51 percent of organisations use some on-demand applications for things such as CRM (customer relationship management), project management, content management, e-commerce and collaboration, Wettemann said.

Those that sign up for Google's Premier edition will get 10GB of email storage per user, compared with 2GB in the Standard edition, a 99.9 percent uptime guarantee and phone support for IT administrators. It also includes APIs (application programming interfaces) to integrate the suite with business applications and data.

The Standard and Education editions are also getting enhanced with the Docs & Spreadsheets integration and the BlackBerry support for Gmail.

"This is a very big step forward for Google Apps," said Dave Girouard, vice-president and general manager of Google's enterprise unit. The company plans to add several more applications to the suite before the year is out, and the JotSpot wiki service is a likely candidate, he said.

Google believes the Premier edition can be a good complement to Office, and it sees a big opportunity in organisations that haven't been able to justify the cost of offering email to some employees, particularly in retail and manufacturing, he said. Google also plans to create an ecosystem of partners and developers around Google Apps.

Click here for our coverage of the free alternatives to Microsoft Office.