Washington D.C. has joined 500,000+ businesses and organizations in moving its communication and productivity tools into the cloud. Vivek Kundra, CTO for the District, signed an agreement with Google to migrate the organization's 38,000 employees to Google Apps, the search giant's web-based offering of communication and productivity tools. Washington D.C. is a not-insignificant win for Google, and yet another blow to Microsoft's incumbent Office suite, as a surge of web apps steadily replaces their desktop counterparts.

Kundra signed the contract with Google back in June, and it's estimated to be worth nearly $500,000 a year, according to Bloomberg. The deal will provide District employees with applications like Gmail for communication, Google Docs for word processing and spreadsheets, the recently launched Google Video for business, and Google Sites to wrap it all together with intranets and wikis.

Google Apps has seen an impressive level of adoption since launching over two years ago in February 2006 as Gmail for your domain. Six months later, Google Apps for Your Domain debuted and has since attracted customers from many industries, including GE, L'Oreal, Arizona State University, and Taylor Woodrow, a construction firm based in the UK. Over 500,000 organizations use one version or another of Google Apps, and Google claims that 3,000 more sign up every day.

Google isn't the only party encroaching on Microsoft's Office turf, though. Just over a year ago, Google's closest competitor in the online business application space, Zoho, introduced Zoho Business, a similar collection of apps for online word processing, spreadsheets, calendaring, and collaboration. So far, GE is probably Zoho's most significant win. The company first switched its 400,000 desktops from Microsoft Office to Google Apps, according to WebGuild. But in September, GE switched to Zoho due to privacy concerns, Zoho's broader application and feature base, and Google strangely pushing AdWords as a way to make money.

Zoho's release last week of a complete e-mail solution—including mobile and offline access via Google Gears (a feature Gmail has yet to support)—should make it an even stronger option. If you consider Zoho's recently launched marketplace where third-party developers can build customized applications for Zoho customers, the company now has a very broad, and more extensible, alternative to Google Apps.

In response to all this cloud computing competition, Microsoft hasn't done much and, some argue, it may not have to for a while. Office is still very much the 800 pound gorilla in this space, and a recent US study says that, while 20 percent of Americans have at least heard of online office suites, over 90 percent have never touched one. Plus, 2008 revenues from Microsoft's Business Division (in charge of, among other things, Microsoft Office) rose nearly 20 percent from 2007 to over $18 billion. To combat online offerings, Office Live Workspaces gets Microsoft's foot in the web-based productivity door, but it doesn't offer anything more than an online storage locker for sharing documents.

While Office Live Workspaces reached a notable milestone of 1 million users last month, it still requires desktop Microsoft Office software to be of much value—the very software and all the requisite overhead that an increasing number of customers—like GE—are trying to avoid.