The next version of Microsoft Office, code-named Office 14, will include lightweight but fully-functional versions of Word, Excel, PowerPoint and OneNote that can run in a browser.

Called Office Web Applications, the service will be in beta later this year, according to Microsoft, but the final versions of the Office Web apps won't come until the desktop version of Office 14 is also done. Steve Ballmer announced in February that this won't happen until 2010.

Office Web Applications follow through on Microsoft's promise to deliver "software plus services" and are a belated move to get productivity tools online to curb the threat of free, Web-based apps from Google, Zoho and OpenOffice.org. Microsoft currently has a free service called Office Live Workspace that lets users view and share — but not edit — Office documents. Office Live Workspace never took off in a meaningful way with most enterprise users.

<br/><a href="http://video.msn.com/video.aspx?vid=df827deb-db58-4595-9c58-981d18f8727a" target="_new" title="Microsoft Office Web Applications Demo">Video: Microsoft Office Web Applications Demo</a>

To keep more users from moving to Office alternatives, Microsoft is not tying the forthcoming Office Web Applications to Internet Explorer. The company has confirmed that Office Web Applications will work on the Firefox browser and Apple's Safari browser. It has also insinuated, though not fully confirmed, that Office Web Apps will work on the iPhone.

So via the Firefox browser, Microsoft Office will run on Linux machines, giving Office a route onto Linux-based netbooks and smartphones that it didn't have before. If Linux-based netbooks begin to increase market share, Microsoft will be losing OS dollars, but would at least be able to offer Office apps on Linux machines.

Microsoft Could No Longer Ignore Web-based Tools

Rob Enderle, industry analyst and president of consulting firm The Enderle Group, says that making Office an online service did not come lightly to Microsoft. Office Web apps could conflict with the revenue of the Office desktop suite, which still dominates the market. Nearly three in four North American online adults use paid Microsoft Office products, according to research firm Forrester.

"I'll bet this is being argued really hard within Microsoft," says Enderle. "They know this is the direction the market is going in but are worried about prematurely cannibalizing their existing revenue stream or delivering a product that doesn't meet expectations."

For Microsoft, the business impact of Web-based productivity tools like Google Docs has actually been quite small — to date. According to a recent survey by Forrester Research, only 3 percent of North American online adults use Google Docs, even though 84 percent use Web-based e-mail.

Yet despite such low adoption, online productivity tools are a category ripe for growth, writes Forrester analyst Nathan Safron in a recent report, citing momentum from the use of Web-based e-mail and free software that users found to be as good or better than purchased software.

"The value of the cloud computing, combined with disillusionment over paid software, creates latent demand among consumers that Web-based challengers can tap," wrote Safran.

One-Two Punch of Linux Netbooks and Google Docs

On paper, Google Docs and Linux-based netbooks — which make up about 10 percent of the netbook market, according to research firm the NPD Group — do not seem like a big threat to Microsoft, some analysts say.

But with Forrester's prediction of increased use of free, Web-based apps and the growth of Linux-based netbooks, the value of Microsoft moving Office to the Web becomes clear.

Office Web Apps will compete directly with the functionality of Google Docs and will run on Linux netbooks — an especially important option if netbooks should gain market share or move steadily into the corporate world.

How quickly netbooks will take off in the consumer and enterprise markets remains to be seen, but if Google decides to run its Android OS on netbooks, this could provide a trusty brand name at a lower price than Windows-based netbooks for consumers and businesses that are wary of Linux, Enderle says.

It's unknown at this point if the Microsoft Office Web Applications will be completely free — as are Google Docs — just that they will be available to consumers through the Office Live Web site with both free (ad supported) and paid (subscription) offerings.

Office Web Apps will be offered to businesses as a hosted subscription service and through existing volume licensing agreements. No pricing for businesses has been announced by Microsoft.